This article was taken from the February 2014 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content by subscribing online.
Entrepreneurship and smart growth are what every policymaker today wants to foster. It's not just about startups, venture capital and "garage tinkerers", but the willingness and ability of economic agents (public and private) to take on risk and real Knightian uncertainty to create new products and services.
Attempts at such innovation usually fail -- otherwise it would not be called innovation.
This is why you have to be visionary and crazy to engage with innovation. Even Henry Ford was told, by JP Morgan, that cars would only be "at the best a rich man's toy". Indeed, traditional cost-benefit analysis will stop innovation from the start: the probability of failure is just too high. But whereas Steve Jobs spoke in his 2005 Stanford commencement speech of the need for visionary innovators to stay "hungry and foolish", few have admitted how much visionary foolishness has been riding on state-funded investments.
Yes, most of the radical, revolutionary innovations that have fuelled the dynamics of capitalism - from railways to the internet and nanotechnology - can trace even the most courageous, early and thus capital-intensive "entrepreneurial" investments back to the state. Indeed, all the technologies that make Jobs's iPhone so "smart" were government funded: the internet was financed mainly by Darpa in the US Department of Defense; GPS by the US military's Navistar satellite programme; touchscreen display by a CIA grant at the University of Delaware; even Siri voice recognition traces its funding back to Darpa. Jobs and his team put these together into the innovative phone, with an eye for design and simplicity - but without the early-stage high-risk public investments, he and his Silicon Valley counterparts would have had little wave to surf. And the few taxes they are paying to governments is putting that wave under massive threat today.
The examples of government leading the way in high-risk innovation are not limited to defence. Health and energy are other areas where the state has done most of the hard work, with the private sector entering only later. Most new medical drugs have benefitted from the billions invested by public institutions such as the US National Institutes of Health: $792 billion (£497 billion) in 2011 dollars from 1936-2011, and $31 billion (£18 billion) in 2012 alone. Venture capital entered into biotech only after such investments paved the way. Agencies like ARPA-E today fund some of the highest-risk projects in energy, while oil giants sit on the side, investing more on stock buybacks (to boost stock options which drive executive pay) than on renewables.
Economists have ignored this or talked about the state fixing "market failures" -- and stimulating private investment. And it is this silence that is today stunting intelligent debate across Europe and in the US Congress. Countries such as Spain have been forced to cut public spending on R&D by 40 per cent since 2009.
Will this allow weaker European states to achieve "smart" growth?
How different the Obamacare debate would have been had the above facts been known: the state is not "meddling" in your healthcare but a key engine in creating it.
Mariana Mazzucato is RM Phillips Professor in the economics of innovation at SPRU University of Sussex. Her latest book The Entrepreneurial State: Debunking Private vs Public Sector Mythsis out now on Anthem Press.
This article was originally published by WIRED UK
