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.

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Forget planning for no deal. The government isn't really planning for Brexit at all

The British government is simply not in a position to handle life after the EU.

No deal is better than a bad deal? That phrase has essentially vanished from Theresa May’s lips since the loss of her parliamentary majority in June, but it lives on in the minds of her boosters in the commentariat and the most committed parts of the Brexit press. In fact, they have a new meme: criticising the civil service and ministers who backed a Remain vote for “not preparing” for a no deal Brexit.

Leaving without a deal would mean, among other things, dropping out of the Open Skies agreement which allows British aeroplanes to fly to the United States and European Union. It would lead very quickly to food shortages and also mean that radioactive isotopes, used among other things for cancer treatment, wouldn’t be able to cross into the UK anymore. “Planning for no deal” actually means “making a deal”.  (Where the Brexit elite may have a point is that the consequences of no deal are sufficiently disruptive on both sides that the British government shouldn’t  worry too much about the two-year time frame set out in Article 50, as both sides have too big an incentive to always agree to extra time. I don’t think this is likely for political reasons but there is a good economic case for it.)

For the most part, you can’t really plan for no deal. There are however some things the government could prepare for. They could, for instance, start hiring additional staff for customs checks and investing in a bigger IT system to be able to handle the increased volume of work that would need to take place at the British border. It would need to begin issuing compulsory purchases to build new customs posts at ports, particularly along the 300-mile stretch of the Irish border – where Northern Ireland, outside the European Union, would immediately have a hard border with the Republic of Ireland, which would remain inside the bloc. But as Newsnight’s Christopher Cook details, the government is doing none of these things.

Now, in a way, you might say that this is a good decision on the government’s part. Frankly, these measures would only be about as useful as doing your seatbelt up before driving off the Grand Canyon. Buying up land and properties along the Irish border has the potential to cause political headaches that neither the British nor Irish governments need. However, as Cook notes, much of the government’s negotiating strategy seems to be based around convincing the EU27 that the United Kingdom might actually walk away without a deal, so not making even these inadequate plans makes a mockery of their own strategy. 

But the frothing about preparing for “no deal” ignores a far bigger problem: the government isn’t really preparing for any deal, and certainly not the one envisaged in May’s Lancaster House speech, where she set out the terms of Britain’s Brexit negotiations, or in her letter to the EU27 triggering Article 50. Just to reiterate: the government’s proposal is that the United Kingdom will leave both the single market and the customs union. Its regulations will no longer be set or enforced by the European Court of Justice or related bodies.

That means that, when Britain leaves the EU, it will need, at a minimum: to beef up the number of staff, the quality of its computer systems and the amount of physical space given over to customs checks and other assorted border work. It will need to hire its own food and standards inspectors to travel the globe checking the quality of products exported to the United Kingdom. It will need to increase the size of its own regulatory bodies.

The Foreign Office is doing some good and important work on preparing Britain’s re-entry into the World Trade Organisation as a nation with its own set of tariffs. But across the government, the level of preparation is simply not where it should be.

And all that’s assuming that May gets exactly what she wants. It’s not that the government isn’t preparing for no deal, or isn’t preparing for a bad deal. It can’t even be said to be preparing for what it believes is a great deal. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.