The state doesn't need the private sector to be entrepreneurial

It is widely accepted that business is more dynamic -- but in fact, the state is crucial to innovati

The government's economic strategy isn't working. The post-crisis hangover remains, with growth subdued and recovery elusive and there's little on the horizon to stimulate the optimism and confidence needed to kick start the vibrant economy needed to secure sustainable growth and future prosperity. As Keynes claimed, investment is not driven by simple tax cuts but by the much less predictable "animal spirits" of investors, and such spirits are not currently running high.

Why? Current economic policy is based on the false premise that innovation-led growth will only happen if we pull back the role of the state and unleash the power of entrepreneurship in the private sector. This feeds a perceived contrast that is repeatedly drawn by the media, business and libertarian politicians of a dynamic, innovative, competitive private sector versus a sluggish, bureaucratic, inertial, "meddling" public sector. So much so that it is virtually accepted by the public as a "common sense" truth. In the March 2011 Cardiff Spring Forum, the Prime Minister, David Cameron, brought this view to an extreme when he called "bureaucrats in government departments" the "enemies of enterprise".

It is not a view that is unique to the UK government. The Economist, which often refers to the government as a Hobbesian Leviathan, recently argued that government should take the back seat and focus on creating freer markets and the right conditions for new ideas to prosper, rather than taking a more activist approach. In painting this contrast, it is assumed that the private sector is inherently more innovative, able to think "out of the box" and lead a country towards long-run, innovation-led growth.

However, countless examples in the history of innovation reveal a different picture: one of a risk-taking innovative state -- especially in the most uncertain phases of technological development and/or in the most risky sectors -- versus a more inertial private sector which only enters and invests once the state has absorbed most of the uncertainty, before walking off with all the gains. In pharmaceuticals it is the state, through the NIH in the USA or the MRC in the UK, that has funded most of the priority rated new molecular entities (innovative drugs) with private pharma concentrating on slight variations of existing ones ("me too" drugs). From the development of aviation, nuclear energy, computers, the internet, the biotechnology revolution, nanotechnology and green technology today, it has been the state, not the private sector, that has often engaged with the most high-risk entrepreneurial activities, kick-starting and developing the engine of growth.

It has not done so not just by funding basic research, or "fixing" market failures. It has created new markets; formulating a vision of a new area, investing in the earliest-stage research and development, identifying new pathways to market and adjusting rules to promote them, creating networks that bring together business, academia and finance, and being constantly ahead of the game in areas that will drive the next decades of growth. Ironically, although the US economy is often discussed as a market-based system compared to Europe, in fact, the US federal government has been one of the most active agents in creating new sectors and related technologies: it was civil sector workers in the US Department of Defence that dared to think up the internet. The same is true of nanotechnology, where publicly funded scientists convinced both Congress and the business community that nanotechnology was a key sector. The National Nanotechnology Initiative invented the very idea of nanotechnology.

Of course there are plenty of examples of private sector entrepreneurial activity, from the role of new, young companies in providing the dynamism behind new sectors to the important source of funding from private sources like venture capital. But, generally, it is only this story which is told. Silicon Valley or the biotech revolution are usually attributed to the geniuses behind small, high tech firms like Facebook or the plethora of small biotech companies in Boston or Cambridge. How many people know that the algorithm that led to Google's success was funded by a public sector National Science Foundation grant? Or that many of the most innovative, young companies in the US were funded not by private venture capital but by public venture capital (Small Business Innovation Research, SBIR)?

The most successful economy in Europe, Germany, understands the need for an entrepreneurial state. While fiscal expenditure, like elsewhere, has been cut (from €319.5bn last year to €307.4bn this year), the Ministry of Education and Research's budget is rising by 7.2 per cent; which includes €327m for university research excellence alone. Support for research and development at the Federal Economics Ministry is also increasing. The German government is one of the lead spenders on green technology, stimulating business to do the same. Thus, while Angela Merkel wants Greece to reduce state expenditure, in her own country she claims " the prosperity of a country, such as Germany, with its scarce mineral resources, must be sought through investment in research, education and science, and this to a disproportionate degree." China is following in Germany's footsteps, with the Chinese National Sciences Foundation (equivalent to the UK research councils), increasing its budget this year by 17 per cent, which will mean its budget will have doubled from 2009 to 2011. It is this long run growth strategy that should be feared, rather than the usual talk of the flood of low cost Chinese goods.

This is not the time for our public sector to step back. Now, more than ever, we need an assertive, entrepreneurial state, identifying areas for new growth and investing strategically in early stage innovation. Major growth opportunities are there. Green technology is poised to be the next great technological revolution, and being first will really matter, as the global race for pole position is well underway. This is within our grasp, but only if the government makes it a priority and provides that daring, forgiving investment. The Green Investment Bank is a start but it is not enough. Despite the Prime Minister's pledge to lead the UK's "greenest government ever", there is currently no break from the long trend of below-average business R&D in this sector. Under 1 per cent of UK Gross Domestic Product is being invested in green technologies; half of what South Korea currently invests and less than what the UK spends annually on furniture.

Making the right investments means a new philosophy about what the state's role is in the economy. It is not about just creating the right conditions for innovation, but also having the courage to make direct investments that are subject to high failure rates, which the private sector notoriously shies away from. It is the risk associated with new innovations which challenge the status quo that the UK should specialise in, not just risk-management in the financial sector: risk-taking for creative destruction, not for destructive destruction.

Mariana Mazzucato is Professor in the Economics of Innovation at The Open University. Her book, The Entrepreneurial State, is published today.

Photo: Getty
Show Hide image

Jeremy Corbyn sat down on train he claimed was full, Virgin says

The train company has pushed back against a viral video starring the Labour leader, in which he sat on the floor.

Seats were available on the train where Jeremy Corbyn was filmed sitting on the floor, Virgin Trains has said.

On 16 August, a freelance film-maker who has been following the Labour leader released a video which showed Corbyn talking about the problems of overcrowded trains.

“This is a problem that many passengers face every day, commuters and long-distance travellers. Today this train is completely ram-packed,” he said. Is it fair that I should upgrade my ticket whilst others who might not be able to afford such a luxury should have to sit on the floor? It’s their money I would be spending after all.”

Commentators quickly pointed out that he would not have been able to claim for a first-class upgrade, as expenses rules only permit standard-class travel. Also, campaign expenses cannot be claimed back from the taxpayer. 

Today, Virgin Trains released footage of the Labour leader walking past empty unreserved seats to film his video, which took half an hour, before walking back to take another unreserved seat.

"CCTV footage taken from the train on August 11 shows Mr Corbyn and his team walked past empty, unreserved seats in coach H before walking through the rest of the train to the far end, where his team sat on the floor and started filming.

"The same footage then shows Mr Corbyn returning to coach H and taking a seat there, with the help of the onboard crew, around 45 minutes into the journey and over two hours before the train reached Newcastle.

"Mr Corbyn’s team carried out their filming around 30 minutes into the journey. There were also additional empty seats on the train (the 11am departure from King’s Cross) which appear from CCTV to have been reserved but not taken, so they were also available for other passengers to sit on."

A Virgin spokesperson commented: “We have to take issue with the idea that Mr Corbyn wasn’t able to be seated on the service, as this clearly wasn’t the case.

A spokesman for the Corbyn campaign told BuzzFeed News that the footage was a “lie”, and that Corbyn had given up his seat for a woman to take his place, and that “other people” had also sat in the aisles.

Owen Smith, Corbyn's leadership rival, tried a joke:

But a passenger on the train supported Corbyn's version of events.

Both Virgin Trains and the Corbyn campaign have been contacted for further comment.

UPDATE 17:07

A spokesperson for the Jeremy for Labour campaign commented:

“When Jeremy boarded the train he was unable to find unreserved seats, so he sat with other passengers in the corridor who were also unable to find a seat. 

"Later in the journey, seats became available after a family were upgraded to first class, and Jeremy and the team he was travelling with were offered the seats by a very helpful member of staff.

"Passengers across Britain will have been in similar situations on overcrowded, expensive trains. That is why our policy to bring the trains back into public ownership, as part of a plan to rebuild and transform Britain, is so popular with passengers and rail workers.”

A few testimonies from passengers who had their photos taken with Corbyn on the floor can be found here