MYTHS AND FACTS, THE ENTREPRENEURIAL STATE

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1 1 PRESS RELEASE MYTHS AND FACTS, THE ENTREPRENEURIAL STATE Do States have an essential role in the processes of innovation and entrepreneurship as Italian economist Marianna Mazzucato suggests? Should these processes be centrally planned? In our new report, Mitos del Estado emprendedor: realmente es el Estado el impulsor de la investigación básica y la innovación? (The Entrepreneurial State: Is the State Really the Promoter of Innovation and Basic Research?), we challenge these statements and conclude that the free market is the driving force of innovation. Traditionally, the capitalist economic system has been associated with creative destruction and disruptive innovation. In fact, if there is one characteristic feature of the capitalist system, acknowledged even by its most fierce critics, it is the promotion of technological development. Recent examples, such as Apple s iphone, Google s search engine, or Netflix s content aggregator, illustrate how capitalism continues to revolutionize our daily lives. There are parallels between Mariana Mazzucato and the economist of inequality, Thomas Piketty, for both have achieved prestige and popularity after accompanying their research, very critical of capitalism, with successful promotional campaigns. Since 2013, Mazzucato has allegedly rejected the idea that capitalism is the essential driving force of the most important innovations of the last decades. Thus, in her acclaimed book, The Entrepreneurial State, she contends that those technological breakthroughs are actually the result of state research programs. According to the Italian economist, societies therefore owe their present economic progress to the State and its research, development, and innovation policies. Apple s iphone and Google s search engine are supposedly products of state planning. Mazzucato s work has had a vast impact worldwide and has helped to modify the way many politicians, economists, and journalists understand the process of innovation. Mazzucato, for instance, defends the creation of State-owned banks to finance the research process, as well as public control over the companies benefited by State aid to

2 2 research, development, and innovation. In particular, Mazzucato s statist rhetoric sets the basis for legitimizing tax increases and growing economic interventionism, always under the excuse of long-term benefits to society. After decades of States appropriating half the wealth generated by capitalist economies and regulating the other half, it is impossible not to trace any technological progress back to state intervention. Having invested colossal amounts of money in pharaonic research programs, it would have been quite unlikely for the State to have nothing to show for it. ALTHOUGH THE STATE HAS BEEN INVESTING HUGE AMOUNTS OF MONEY DURING THE PAST DECADES, THE INNOVATIONS WE ARE CURRENTLY ENJOYING ARE THE OUTCOME OF THE FREE MARKET. Nonetheless, what would the extent of progress have been had the State not taken those resources away from society? It is impossible to account for all the genius creation that could have emerged within an environment in which millions of human beings had acted free from the obstacles and difficulties brought by the rise of the entrepreneurial State after the Second World War. Hence, it is necessary to bear in mind that the entrepreneurial State cannot come at no cost: Opportunity cost: Due to State R&D financial aid, taxpayers are forced to pay for projects whose outcomes are uncertain. Furthermore, those projects lack the information provided by market prices to determine whether the means used to deploy them are creating or destroying value. Likewise, a crowding-out effect is induced when diverting resources away from the economy through fiscal policies, causing private entrepreneurs to lack the resources to undertake their own projects. High-risk bet: the decentralized and incremental experimental process (trial and error) characteristic of the free market is overridden when R&D plans restrict research to one specific state-approved path. This is a very risky strategy, as in the event of failure society will have wasted valuable resources in useless, inefficient projects. It will also find itself devoid of more suitable and competitive market-generated solutions to the detriment of the general welfare. Perverse incentives: The proliferation of rent-seekers becomes inevitable. That is the case with the new body of bureaucrats that seek to protect their statu quo at all costs attempting to discredit and boycott outsiders who compete for the provision of original solutions away from mainstream production models. This is also the case

3 3 with spurious entrepreneurs who, instead of devoting themselves to offering ever better goods and services, resort to lobbying in order to take advantage of regulations and public subsidies that can guarantee them a monopoly position. Disruptive innovations are thus curbed and, along with it, the breach of old productive patterns (energy, means of transport, personalized medicine, new materials, personal and labour autonomy, etc.). Only a few privileged are benefited while creative opportunities for free-market entrepreneurs vanish, and society is deprived of the outcome of those disruptions. In a context in which Spain mst redefine its productive model for the coming decades, many call for the State to lead that transformation through public investment and regulation of R&D policies. The purpose of this report it to refute Mazzucato s theories in order to keep politicians, journalists and intellectuals from getting a distorted understanding of this crucial issue. The entrepreneurial State: is it the State the actual promoter of basic investigation and innovation? seeks to dispel the myths that Mazzucato has contributed to spread: Myth 1. The State is the essential driving force of innovation and scientifictechnical progress. Reality: The process to develop new innovations is evolutionary, decentralized, cooperative and competitive. There are not identifiable actors to receive credit for it. Traditionally, the private sector has led technical progress. The only event in history that truly marked a change in the trend of long-term economic growth, the Industrial Revolution, was brought about with hardly any state support. Myth 2. A unified entrepreneurial effort drives the States technological policies. Reality: States are entities consisting of various agencies, hence there cannot be a question of unified will. Research conducted at specific public universities may not be necessarily determined by the same plan that regulates the activity of state laboratories. In particular, the state expenditure on innovation within the US is strongly decentralized. Myth 3. State intervention on research, development and innovation policies is always beneficial. Reality: every economic action entails an opportunity cost and can result in unplanned consequences. State investment on innovation can distort innovation progress and direct it towards fields that are removed from consumer demands, which withdraws resources from consumer-oriented projects and decelerates innovation in those areas.

4 4 Moreover, public expenditure on research, development and innovation policies may not cause more technological progress, but simply income redistribution towards scientists and engineers. Myth 4. It is necessary for the State to lead the national innovation system in order for it to work properly. Reality: the coordination function of the State can be taken over by society itself in a way that is more suited to its needs. State attempts to lead technological change tend to fail. Myth 5. The iphone, Google, and similar enterprises and inventions are the result of public investment on research, development and innovation. Reality: The iphone and Google are attributable to their inventors. A thorough study of the origin and evolution of the technologies that make the iphone and search engines possible show that progress in both fields occurred before any State intervention, and that many agents contributed to it without any central planning.

5 Instituto Juan de Mariana (IJM) is a non-partisan think-tank devoted to research in public affairs. In order to be fully independent, IJM does not accept grants or financial aid from any government or political party. Its goal is to become a leading voice in the debate of ideas and public policies for a freer society through the study and promotion of markets. The name of the Institute comes from the most prominent thinker of the School of Salamanca, imprisoned in the early seventeenth century for having opposed king Philip III. Contact Gustavo Vargas Communication Coordinator gvargas@juandemariana.org comunicacion@juandemariana.org Instituto Juan de Mariana C/ del Ángel, 2, 28005, Madrid (+34)

Policy Brief on Institutional Reform for Enhanced Innovation and Entrepreneurship in Europe

Policy Brief on Institutional Reform for Enhanced Innovation and Entrepreneurship in Europe Niklas Elert, Magnus Henrekson, and Mikael Stenkula Document Identifier Annex 1 to D2.1 An institutional framework