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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The 11 things we know after the Brexit plan debate

Labour may just have fallen into a trap. 

On Wednesday, both Labour and Tory MPs filed out of the Commons together to back a motion calling on the Prime Minister to commit to publish the government’s Brexit plan before Article 50 is triggered in March 2017. 

The motion was proposed by Labour, but the government agreed to back it after inserting its own amendment calling on MPs to “respect the wishes of the United Kingdom” and adhere to the original timetable. 

With questions on everything from the customs union to the Northern Irish border, it is clear that the Brexit minister David Davis will have a busy Christmas. Meanwhile, his declared intention to stay schtum about the meat of Brexit negotiations for now means the nation has been hanging off every titbit of news, including a snapped memo reading “have cake and eat it”. 

So, with confusion abounding, here is what we know from the Brexit plan debate: 

1. The government will set out a Brexit plan before triggering Article 50

The Brexit minister David Davis said that Parliament will get to hear the government’s “strategic plans” ahead of triggering Article 50, but that this will not include anything that will “jeopardise our negotiating position”. 

While this is something of a victory for the Remain MPs and the Opposition, the devil is in the detail. For example, this could still mean anything from a white paper to a brief description released days before the March deadline.

2. Parliament will get a say on converting EU law into UK law

Davis repeated that the Great Repeal Bill, which scraps the European Communities Act 1972, will be presented to the Commons during the two-year period following Article 50.

He said: “After that there will be a series of consequential legislative measures, some primary, some secondary, and on every measure the House will have a vote and say.”

In other words, MPs will get to debate how existing EU law is converted to UK law. But, crucially, that isn’t the same as getting to debate the trade negotiations. And the crucial trade-off between access to the single market versus freedom of movement is likely to be decided there. 

3. Parliament is almost sure to get a final vote on the Brexit deal

The European Parliament is expected to vote on the final Brexit deal, which means the government accepts it also needs parliamentary approval. Davis said: “It is inconceivable to me that if the European Parliament has a vote, this House does not.”

Davis also pledged to keep MPs as well-informed as MEPs will be.

However, as shadow Brexit secretary Keir Starmer pointed out to The New Statesman, this could still leave MPs facing the choice of passing a Brexit deal they disagree with or plunging into a post-EU abyss. 

4. The government still plans to trigger Article 50 in March

With German and French elections planned for 2017, Labour MP Geraint Davies asked if there was any point triggering Article 50 before the autumn. 

But Davis said there were 15 elections scheduled during the negotiation process, so such kind of delay was “simply not possible”. 

5. Themed debates are a clue to Brexit priorities

One way to get a measure of the government’s priorities is the themed debates it is holding on various areas covered by EU law, including two already held on workers’ rights and transport.  

Davis mentioned themed debates as a key way his department would be held to account. 

It's not exactly disclosure, but it is one step better than relying on a camera man papping advisers as they walk into No.10 with their notes on show. 

6. The immigration policy is likely to focus on unskilled migrants

At the Tory party conference, Theresa May hinted at a draconian immigration policy that had little time for “citizens of the world”, while Davis said the “clear message” from the Brexit vote was “control immigration”.

He struck a softer tone in the debate, saying: “Free movement of people cannot continue as it is now, but this will not mean pulling up the drawbridge.”

The government would try to win “the global battle for talent”, he added. If the government intends to stick to its migration target and, as this suggests, will keep the criteria for skilled immigrants flexible, the main target for a clampdown is clearly unskilled labour.  

7. The government is still trying to stay in the customs union

Pressed about the customs union by Anna Soubry, the outspoken Tory backbencher, Davis said the government is looking at “several options”. This includes Norway, which is in the single market but not the customs union, and Switzerland, which is in neither but has a customs agreement. 

(For what it's worth, the EU describes this as "a series of bilateral agreements where Switzerland has agreed to take on certain aspects of EU legislation in exchange for accessing the EU's single market". It also notes that Swiss exports to the EU are focused on a few sectors, like chemicals, machinery and, yes, watches.)

8. The government wants the status quo on security

Davis said that on security and law enforcement “our aim is to preserve the current relationship as best we can”. 

He said there is a “clear mutual interest in continued co-operation” and signalled a willingness for the UK to pitch in to ensure Europe is secure across borders. 

One of the big tests for this commitment will be if the government opts into Europol legislation which comes into force next year.

9. The Chancellor is wooing industries

Robin Walker, the under-secretary for Brexit, said Philip Hammond and Brexit ministers were meeting organisations in the City, and had also met representatives from the aerospace, energy, farming, chemicals, car manufacturing and tourism industries. 

However, Labour has already attacked the government for playing favourites with its secretive Nissan deal. Brexit ministers have a fine line to walk between diplomacy and what looks like a bribe. 

10. Devolved administrations are causing trouble

A meeting with leaders of Scotland, Wales and Northern Ireland ended badly, with the First Minister of Scotland Nicola Sturgeon publicly declaring it “deeply frustrating”. The Scottish government has since ramped up its attempts to block Brexit in the courts. 

Walker took a more conciliatory tone, saying that the PM was “committed to full engagement with the devolved administrations” and said he undertook the task of “listening to the concerns” of their representatives. 

11. Remain MPs may have just voted for a trap

Those MPs backing Remain were divided on whether to back the debate with the government’s amendment, with the Green co-leader Caroline Lucas calling it “the Tories’ trap”.

She argued that it meant signing up to invoking Article 50 by March, and imposing a “tight timetable” and “arbitrary deadline”, all for a vaguely-worded Brexit plan. In the end, Lucas was one of the Remainers who voted against the motion, along with the SNP. 

George agrees – you can read his analysis of the Brexit trap here

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.