Mariana Mazzucato's The Entrepreneurial State is a book with an ambitious goal: to take our understanding of our government's role in the economy and turn it on its head. Mazzucato argues that the state is an innovative, entrepreneurial actor in ways that the private sector cannot be, because only the state possesses the vision, resources and long-term commitment necessary to facilitate large-scale or speculative innovation. Private actors, in contrast, step in only once the state has laid the technological and legal framework to establish a viable market.
Why does government have an advantage at innovation? It's because competitive markets are not actually a very good system for fostering innovation, which is risky, costly, and easily copied, distorting market incentives. Patents and trademarks help align those incentives but they can only do so much — and they create their own distortions.
Perhaps even more importantly, because of their scale and because they are accountable to voters instead of shareholders, government agencies can play a visionary strategic role that companies cannot. As Mazzucato explains, "the development of the Internet or the emergence of the nanotech industry did not occur because the private sector wanted something but could not find the resources to invest in it. Both happened due to the vision that the government had in an area that had not yet been fathomed by the private sector."
This is not to say that firms are never visionary or never innovate. But the scale and long-term commitment that the government can provide have been crucial ingredients in many successful innovations. In such situations the competitive pressures of the market can be a hindrance instead of a catalyst: A firm that set out to create the internet in the 1960s would have failed quickly and ignominiously, but the government had the vision, the resources and the patience to see it through.
While the book provides compelling evidence of "why" states can succeed where private firms fail, it makes little attempt to answer "how" states succeed at innovation. Compared to the private sector, state-led innovation has the ability to take on more risky projects, ones that are by definition more difficult. We can therefore expect bigger payoffs but also a higher number of failures. But this shift on the risk spectrum does not mean we should simply accept all failures as inevitable: We still need to pay attention to the design of our innovation programs. Mazzucato gives us a wealth of historical examples but she offers little coherent theory about what state-led policies might work better than others.
This is unfortunate because the primary critique of state-led growth is not that "state-led innovation never works." Rather, it is that state innovation is less efficient and responsive to demand than private innovation. Presuming that policymakers take this book to heart, it's all too easy to imagine that in 30 years they will be just as frustrated with ineffectual state-led growth policies as they were in the 1980s. In answering the more fervent of the private-sector advocates, then, it would be helpful to have some guidelines for ensuring that governments are doing the best they can to promote real innovative progress — a theory of not just why, but how, the state can innovate. Having such a theory does not mean reducing risk or uncertainty; it simply means placing our bets as intelligently as possible.
Governments have poured large sums of money into innovation projects that have failed, and they will continue to do so. This is not waste but rather the experimental, entrepreneurial nature of innovation — the necessary price of success. It is one thing to legitimize the state as a driver of innovation and give credit where credit is due — something this book does masterfully. However, it is another thing altogether to craft effective innovation policy that deals with risk in a politically acceptable way. Mazzucato has opened up space for us to have that conversation, so let's start talking about it.
Atkinson is president of the Information Technology and Innovation Foundation (ITIF). To read reviews on additional books covering innovation and technology policy, please see ITIF's 2014 Summer Reading List.