A much-maligned engine of innovation

Review by Martin Wolf of The Entrepreneurial State: Debunking Public vs Private Sector Myths, by Mariana Mazzucato, Anthem Press: “…what determines innovation? Conventional economics offers abstract models; conventional wisdom insists the answer lies with private entrepreneurship. In this brilliant book, Mariana Mazzucato, a Sussex university professor of economics who specialises in science and technology, argues that the former is useless and the latter incomplete. Yes, innovation depends on bold entrepreneurship. But the entity that takes the boldest risks and achieves the biggest breakthroughs is not the private sector; it is the much-maligned state…
Why is the state’s role so important? The answer lies in the huge uncertainties, time spans and costs associated with fundamental, science-based innovation. Private companies cannot and will not bear these costs, partly because they cannot be sure to reap the fruits and partly because these fruits lie so far in the future.
Indeed, the more competitive and finance-driven the economy, the less the private sector will be willing to bear such risks. Buying back shares is apparently a far more attractive way of using surplus cash than spending on fundamental innovation. The days of AT&T’s path-breaking Bell Labs are long gone. In any case, the private sector could not have created the internet or GPS. Only the US military had the resources to do so.
Arguably, the most important engines of innovation in the past five decades have been the US Defense Advanced Research Projects Agency and the NIH. Today, if the world is to make fundamental breakthroughs in energy technologies, states will play a big role. Indeed, the US government even helped drive the development of the hydraulic fracturing of shale rock.”