The Creative State
LONDON – The
conventional view in mainstream economics today is that governments have
little capacity to spark innovation. The state should play as limited a
role in the economy as possible, the thinking goes, intervening only in
cases of “market failure.” This is far from the truth.
In fact, governments
can and do play a critical role in spurring innovation – actively
creating new markets, instead of just fixing them. To be sure, advocates
of a limited economic role for government believe that market failure
justifies some funding of infrastructure and basic science. But such
limited intervention can hardly explain the billions of public-sector
dollars that have flowed toward downstream applied research, even providing early-stage financing for companies. Indeed, in some of the world’s most famous innovation hubs, the state has played a key “entrepreneurial” role, envisioning and financing the creation of entire new fields, from information technology to biotech, nanotech, and green tech.
In Silicon Valley,
for example, the government has acted as a strategic investor through a
decentralized network of public institutions: The Defense Advanced
Research Projects Agency, NASA, the Small Business Innovation Research
program (SBIR), and the National Science Foundation.
The sums involved can
be staggering, and not just in IT; large amounts of funding have also
been channeled to energy and life sciences. In 2011, for instance, the
US National Institutes of Health (NIH) invested $31 billion in
biomedical research. Marcia Angell, a professor at Harvard Medical
School, has shown that this financing played a crucial role
in the development of some of the most revolutionary new drugs in
recent decades. Similarly, for some of the most innovative American
companies, financing from the SBIR has proved to be more important than private venture capital.
Examples outside the
US include Israel, where the public venture-capital fund Yozma has
provided early-stage funding to some of the country’s most dynamic
companies, and Finland, where Sitra, the public innovation fund,
supplied early financing for Nokia. In China, the state-owned
development bank is offering billions of dollars in loans to some of the
country’s most innovative companies, including Huawei and Yingli Solar.
These types of public
investments are critical in creating and shaping new markets. Indeed,
government investment played a central role in developing nearly all of
the technologies that make the iPhone a smart phone: the
Internet, GPS, touchscreens, and the advances in voice recognition
underlying Siri. Similarly, in many countries, it is the public sector
that is leading the way in making green technology possible.
Recognizing the
importance of government investment in promoting innovation and growth
implies the need to rethink the conventional wisdom about state
intervention. Instead of focusing on picking individual technologies or
firms, public organizations should act like investors, betting on a
diversified “portfolio” of choices.
Like any other
investor, the state will not always succeed. In fact, failure is more
likely, because government agencies often invest in the areas of highest
uncertainty, where private capital is reluctant to enter. This means
that public organizations must be capable of taking chances and learning
from trial and error.
If failure is an
unavoidable part of the innovation game, and if government is crucial
for innovation, society must be more tolerant of “government failure.”
But the reality is that when government fails, there is public outcry –
and silence when it succeeds.
For example, the
bankruptcy of the US solar energy firm Solyndra, which received a $500
million government-guaranteed loan, triggered partisan protests. Yet few
have paused to consider that the government provided nearly the same
amount to Tesla to help it develop the Tesla S car, a product that is
considered an archetype of Silicon Valley innovation.
What, then, might make the public more accepting of government failure?
Private venture
capitalists cover their losses from failed investments with their
profits from those that succeed; but government programs are rarely set
up to generate significant returns. While some argue that the
government’s return comes through taxes, the current tax system is not
working, owing not only to loopholes, but also to rate reductions. When
NASA was founded, the top marginal tax rate was over 90%. And capital
gains tax has fallen by more than 50% since the 1980s.
In order to build
support for public investment in higher-risk innovation, perhaps
taxpayers should receive a more direct return, by channeling profits
into a public innovation fund to finance the next wave of technologies.
When investments are in upstream basic research, the spillover effect
across industries and sectors is sometimes enough of a social reward.
But other cases might require creating alternative incentives.
For example, some of
the profits from the government’s investment in Tesla could have been
recovered through shares (or royalties), and used to cover the losses
from its investment in Solyndra. Repayment of public loans to business
could be made contingent on income, as student loans often are. And the
prices of drugs that are developed largely with NIH funding could be
capped, so that the taxpayer does not pay twice.
One thing is clear: the current approach suffers from serious shortcomings,
largely because it socializes the risks and privatizes the rewards.
This is hurting not only future innovation opportunities, but also the
government’s ability to communicate its role to the public.
Acknowledging the role that the state has played – and should continue
to play – in shaping innovation enables us to begin debating the most
important question: What are the new visionary public investments needed
to drive future economic growth?
Mariana Mazzucato, Professor of the Economics of Innovation at the Science Policy Research Unit of the University of Sussex.
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