The Exchange

Book Review: ‘The Entrepreneurial State’ by Mariana Mazzucato

The Exchange

Review by Fred Block, Department of Sociology, University of California at Davis

On July 13, 2012, during the heat of the presidential election, President Barack Obama was making the point that entrepreneurs are always dependent on investments by the public in infrastructure, education, and science and technology. Describing a highway that enables a small business to ship its goods to market, the president memorably declared: “You didn’t build that.”

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The Republicans instantly seized on the ambiguity in Obama’s phrasing to suggest he was expressing a disbelief in entrepreneurship. They said he was arguing that entrepreneurs had not built their own companies. As the Kenyan Socialist they imagined him to be, the president had let slip his true belief that entrepreneurs do not create businesses; governments do.

Mariana Mazzucato easily could have titled her splendid new book “You Didn’t Build That,” because she comes much closer to making the argument that the Republicans imagined the president to have made. In "The Entrepreneurial State," she demonstrates that risk-taking by government agencies has nurtured almost all of the key technological advances of the last hundred years. Her goal is to turn the conventional wisdom on its head. Instead of lazy and inept government officials constraining and inhibiting the entrepreneurial initiatives of the private sector, it is timid and short-sighted business people whose incessant arguments for the free market undermine the proven capacity of public sector officials to take the bold risks that bring transformative new technologies.

The Apple case

Mazzucato amasses an impressive amount of evidence in support of her heterodox claim, much of it drawn from the case of the United States. [Full disclosure: some of that evidence comes from my own research and a book that I edited with Matthew R. Keller called "State of Innovation," published by Paradigm.] She looks in depth at the history of the computer industry, the biotech industry, and green technologies, to show the centrality of government initiatives in developing key breakthroughs.

Perhaps Mazzucato’s most stunning evidence centers on Apple’s (AAPL) hugely successful family of iProducts – the iPhone, iPad, and iPod – which are usually held up as crowning achievements of private entrepreneurship. But Mazzucato patiently shows that 12 different technologies that were indispensable to the creation of these products were developed through public research and development efforts that involved conscious and deliberate initiatives by public employees to get these technologies into the marketplace.

For example, one of the big selling points of later models of the iPhone has been SIRI, the personal assistant that is able to search the web in response to voice commands. Mazzucato shows that this particular technology grew out of a contract between the Defense Advanced Products Research Agency (DARPA) and the Stanford Research Institute (SRI) to develop a computerized assistant for military personnel. This agreement, which was reached in 2000, facilitated a collaboration that involved researchers at 20 different universities. SRI spun off a small firm to commercialize the technology, and Apple bought that firm in 2010 for an undisclosed sum. The taxpayers who made SIRI possible got nothing in this transaction. But Apple has reaped billions.

Mazzucato, of course, recognizes that Steve Jobs did ultimately put all of these technologies together in a package that was powerfully appealing to consumers around the world. But her intention is to alter our understanding of his particular genius. Jobs was not comparable to Thomas Edison, who made dozens of key inventions and presided over one of the most productive private laboratories in history. On the contrary, Apple has gotten where it is with relatively modest expenditures for R&D. Jobs’ distinct genius from the start was to know how to harvest the fruits of the government’s technology initiatives and then package them into user-friendly and attractive devices.

All corners of technology

We recently have been reminded of the first phase of this drama with the news of the death of Douglas Engelbart, the inventor of the computer mouse (New York Times obituary, July 3). Engelbart had been employed at the same Stanford Research Institute, with ongoing funding from DARPA, the Air Force, and NASA, when he gave a transformative demonstration of the computer’s power in 1968.

“In little more than an hour, he showed how a networked, interactive computing system would allow information to be shared rapidly among collaborating scientists. He demonstrated how a mouse, which he invented just four years earlier, could be used to control a computer. He demonstrated text editing, video conferencing, hypertext, and windowing.”

These same technologies were refined further with extensive government support at Xerox’s Palo Alto Research Laboratory during the 1970’s. In the 1980’s, both Steve Jobs and Bill Gates would go on to successfully commercialize many of the key innovations developed by Engelbart and his collaborators.

Mazzucato’s analysis of Apple and other private sector firms is inspired by an image that John Maynard Keynes used in a letter that he wrote to President Roosevelt in 1938. Keynes emphasized the insecurity and temerity of business leaders and counseled the President:

“You could do anything you liked with them, if you would treat them (even the big ones), not as wolves or tigers, but as domestic animals by nature, even though they have been badly brought up and not trained as you would wish.”

The same Keynes who had used the term “animal spirits” to characterize those who invested, was here suggesting a distinct lack of courage and ferocity in the business species. It follows that government has a big job to do to create the conditions for optimal levels of business investment. Since these business tabby cats and puppy dogs are far too timid to finance risky and expensive new technologies, government must oversee the process of lowering the risks. Only when the risks have been considerably reduced, can Steve Jobs and other entrepreneurs be counted on for the remaining work of product development and marketing.

Risk vs. reward

For Mazzucato, the real danger of the conventional “free market” wisdom is that technological progress could now grind to a halt. The false idea that the state is always all thumbs and will waste any resources sent its way poses an existential threat to government technology programs. In the U.S., the diverse government programs that have effectively nurtured technological innovation have already been hard hit by the sequester cuts to federal spending, and deficit hawks are champing at the bit to slash further. At the same time, ongoing cuts to research funding at universities endanger new technology breakthroughs. Moreover, the false “free market” rhetoric also means plummeting morale in the critical government agencies and laboratories and greater difficulty in recruiting people with the needed skills.

But Mazzucato is particularly incensed by the backward relationship between risk and reward in the current system. While it is the government that incurs the risks involved in developing new technologies, the private sector walks away with all of the rewards. What’s more, a huge portion of these rewards are skimmed off by top corporate managers who use share repurchases as a mechanism to assure that their stock options are extremely lucrative even when corporate results are disappointing. To make matters even worse, while these firms are actually timid kittens, they pretend to the public that they are formidable lions and tigers that deserve big tax breaks to incentivize their “animal spirits.” They then use these tax breaks, and loopholes in the tax code, like the ones that enabled Apple to hide profits overseas, to drive their tax bills to nothing. And then, shockingly, the government does not have the needed revenues to fund the technology programs that have made those corporate profits possible in the first place.

Mazzucato’s most fundamental point is that the prevailing “free market” economic ideas are keeping us from seeing a way out of the economic crisis that began with the financial collapse in 2008. If all governments in developed countries were to make significant increases in spending on green energy—both for new R&D and to accelerate the shift away from fossil fuels—we could have a strong global economic recovery while simultaneously mitigating the enormous threat posed by climate change. That old quip, often attributed to Mark Twain, remains apropos: “It ain't the things you don't know that hurt you, it's the things you know that ain't so.”

Broad circulation of Mazzucato’s book will help enormously to debunk the dangerous dogmas that continue to exercise undue influence both in the U.S. and abroad.

Fred Block’s new book, written with Margaret Somers, on Karl Polanyi’s social and economic theory will be published by Harvard University Press next year.

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