What is the role of the state in fostering innovation and economic growth? Mariana Mazzucato’s book, The Entrepreneurial State, reveals the role of the public sector in risk taking and the development of new technology, and argues that the state should receive more of the rewards. Research Assistant Franziska Mager reviews the book for Oxfam.
Why I read it
This book is perhaps a less obvious Oxfam read than a ‘classic’ guide to inequality like Deaton’s Great Escape. The foremost reason I picked it up was to learn more about the basics behind the alleged divide between the private and public sectors and why they may actually work together more than we think. Mazzucato mostly writes about technological and industrial innovations (iPhone, pharmaceuticals, wind turbines), which vividly illustrates particular ways in which the two sectors are played out against each other. I was hoping this book would inform the way I, as a non-expert, think about links between both spheres and perhaps better grasp how tax avoidance and inequality fit into the picture. I was not disappointed.
Why you should read it
To challenge black and white thinking
I’ve learnt that the links between the private and public sectors are much closer and more complex than both ‘sides’ want to admit – and most people seem to have a side. For me, this meant fundamentally challenging the way I think about how the public sector functions – which is important in my day to day job.
To better understand financialization and extreme wealth
Given how concerned Oxfam is with the wealthiest 1% of people and their disproportionate influence, we have spent relatively little time understanding this group in depth. The book lays out how private sector ventures or individuals – in particular, shareholders – have claimed a disproportionately big slice of the ‘risk pie’ on the returns from a product or service, meaning income and wealth gains are often more concentrated among those groups.
Key points to take away
the book is full of interesting examples of highly risky public investments made without any guaranteed returnsReframing risk
The state is often regarded as inherently scared, reluctant to take risks and invest in new things – credit for which usually goes to the private sector. But this is not always true, the book is full of interesting examples of highly risky public investments made without any guaranteed returns. The iPhone is a catchy example – the American public sector made a range of investments into research and development of different technologies that enabled visionary individuals at the right place and the right time to develop the iPhone. For the reader, and especially from an international development perspective, this triggers lots of questions. Is this a dynamic that we can learn from, that takes place in other policy areas? How much is the public sector consciously ‘snubbed’ when it comes to recognizing outputs?
Language really, really matters
The fact that the public and private sector work together much more closely than commonly acknowledged is both a cause and a consequence of using language in a mutually antagonizing way. The state in particular ‘has not had a good marketing/communications department’. This in turn contributes to a self-fulfilling prophecy. Less and less, the state is recognized as a dynamic actor interacting with the private sector in a complex risk landscape. Rather, if at all, it is acknowledged as the bad cop correcting market failures. In fact, our overblown linguistic focus on correcting by definition denies the state a leading role. The reality is more complex than that in areas way beyond industrial innovation.
there are many other ‘radical and path-breaking’ risks… that the state is involved in for which it is not getting a big enough slice of the risk rewards piePrivatized rewards and link to inequality
Mazzucato does not argue against the principle that the Steve Jobs’ of this world should earn substantive wealth as a result of their efforts and vision. Rather, she argues that there are many other ‘radical and path-breaking’ risks beyond venture capital and entrepreneurial visionaries that the state is involved in for which it is not getting a big enough slice of the risk rewards pie. This happens through different mechanisms – intellectual property rights, talent retention, tax evasion, time lags, legal contracts, to name just a few. This tendency towards socialized risks but privatized rewards means there is a link between industrial and innovation policy to growth and to inequality. The private sector generally manages to extract more value, partly thanks to shareholder culture. Mazzucato argues the public sector has a right to part of these rewards– rewards that it could and should reinvest in sustainable policy solutions and public services.
I wish there was more about…
Rewards and taxation
For me the last section of the book was of most interest. In particular, I was fascinated by the short description of how the taxation system interacts and compares with returns from state investments, and how much more the public sector could collect through closing the tax gap (tax income not collected), returns on public investments, or both. I would have liked more detail on this. At Oxfam we assume that calling attention to tax avoidance is one of the most effective and important ways to raise missing billions that can then be spent on essential services, but this is an important reminder that there are in fact lots of counterfactuals.
More diverse examples
I found myself caught out by the statement that ‘investments into programme areas that increase productivity have been less fashionable than simple spending on welfare state institutions such as education or health’. This book does a great job of explaining how some of the productivity that in fact powers an economy comes about. Essentially, I understand the points the book makes, but I craved even more practical examples to cement my thinking and from other areas than tech, Pharma and energy. It’s by no means a flaw – I just wish it was longer.
The Entrepreneurial State is published by Anthem Press.