The limits of Mazzucato’s thesis in the The Entrepreneurial State

Economist Mariana Mazzucato has a full spread in the Wired UK humbling suggesting that she “has a plan to fix capitalism.” The plan is an outgrowth of her 2013 book The Entrepreneurial State, which contends that government involvement in research and development (R&D), loans, and other business subsidies are the true drivers of innovation, not the private sector. Her plan is simple: governments need to do better on funding innovation.

It goes without saying that the government is massively involved in innovation and for good reason. Open any introductory economics text and you’re likely to see an argument for why. Private actors are short sighted and often fail to plan for the long term by investing in R&D that will lead to technological progress. Basic research also might lead to advances or products outside of the company’s niche. Knowing that they won’t be able to capture all of the gains from research, private entities will choose a lower level of investment than is optimal, leading to a market failure. Governments solve this market failure by allocating resources to expanding scientific and technological knowledge.

While Mazzucato might be finding an audience with policy makers in the UK and doers in Silicon Valley, innovation economists are a little more wary of her state first theory of innovation. Here are some things worth considering when reading her work:

  1. Innovation and invention are distinct concepts. Bringing a product to market (innovation) involves very different skill sets than ideation (invention). In the 1950s and 1960s, large companies were deeply involved in basic research, but today, businesses have shifted toward their competitive advantage, which lies in supply chain management, marketing, and customer acquisition. As I noted in 2014 of this change: “Increasingly, however, firms are becoming flexible assemblies, connecting skills, capacities, and funding from sources around the world. In this regard, US firms continue to dominate in business model and process innovation.”
  2. A key chapter in this book dissected all of the patents that went into the iPhone. It is unclear if Mazzucato has a theory as to why Apple, not Nokia, RIM or Motorola, became the innovator in the smartphone space. All had access to the same government supported patents, but it was Apple that sparked the revolution. Apple practically commercialized an idea that had been out there for some time.
  3. Mazzucato’s work aims to bash the Great Man Theory of Innovation, which is needed, but puts in its place the Great State Theory of Innovation. As Artir explains in beautiful detail: “The State was one more actor, like IBM, Bell Labs, Sony, Goodenough, Brody, or Lechner.”
  4. Mazzucato chides companies for appropriating so much of the total value of government investment, but as William Nordhaus calculated, innovators only capture 2.2 percent of the total surplus. Consumers are the real beneficiaries.
  5. Is Mazzucato sampling on the dependent variable?

There is a lot more out there if you want to read up. For starters, I would check out: