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Apple, Google and shale gas – all thanks to the government playing venture capitalist

Apple, Google and shale gas – all thanks to the government playing venture capitalist

21-01-2016 | Research

Economist Mariana Mazzucato, Professor of Economics of Innovation at the University of Sussex and author of 'The Entrepreneurial State' cannot repeat this often enough. Major innovators like Steve Jobs and Elon Musk are the heroes of their generation and yes, they have undeniably made a huge contribution, but the story we keep on telling each other isn't necessarily accurate.

Speed read

  • The government’s role as risk-bearing investor is essential in innovation
  • The risks of investment are socialized, the rewards are privatized
  • Public and private sector have neglected innovation

In the much-vaunted biography of Jobs, there is not a chapter, page or even a paragraph dedicated to the enormous boost that Apple received from the public sector. And that bothers Mazzucato. “If we keep trying to convince ourselves that the government is boring and stupid, then we restrict our future potential for innovation”, explains Mazzucato in her presentation at the Robeco Outlook 2016 event. Because, in a very large number of cases, innovation is primarily subsidized by governments. And not just indirectly via tax breaks, but also via direct, risk-bearing investments.

Apple is a textbook example of this, argues Mazzucato. All the latest trends, from GPS to touch-screen technology have their origins in government projects, for example, those of NASA. “And we talk about the shale gas revolution as if it just appeared from nowhere, when in fact it’s the result of more than 40 years of government investment.” Innovation, says Mazzucato, requires patient long-term investors (in other words governments), that are prepared to take risks.

This last statement clashes somewhat with how we view governments worldwide. “The traditional view of governments is that their contribution is limited. Ideally they are just there to iron out flaws in the market. They have to create an environment in which companies can do fantastic things. I see the role of the government as an entrepreneurial party that takes risks by investing in technology and companies, even before the corporate sector is prepared to do so."

In practice, we would rather have the government facilitate matters and remove the risks, says Mazzucato. “But what happened in Silicon Valley is that a network of decentralized public entities took on the risk and invested directly – not indirectly by offering tax cuts.”

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Tax payer pays twice

Of course, much innovation comes from the private sector, but because everyone keeps quiet about the role of the public sector, it never gets to reap the fruits of its own endeavors. “In fact it all comes down to socializing the risks and privatizing the rewards”.
The pharmaceutical industry is a good example of this, according to Mazzucato. "Tax payers pay twice. First, they make a contribution to the huge quantity of research subsidized using tax income, but the prices of the drugs this results in are not capped in any way. It would be more honest for drug prices to reflect the efforts of all the parties involved."

The same applies to more trendy products. According to Mazzucato, Apple and Google are "products of public sector investment throughout the entire innovation chain." If we only regard the government as a facilitator – financing universities and science – we will not create the next Apples and Googles, she says. “Investing in science in the broadest sense does not create innovation.”

‘Fifteen sectors were involved in the project to go to the moon; even the textile sector for the special clothing for the astronauts’

In many countries governments invest far too little in innovation and adopt the wrong approach when they do invest, adds Mazzucato. “In the Netherlands and in other countries too, the government invests in innovation in a limited number of sectors, the ‘top sectors’. But real innovation has always happened in mission-oriented projects.” The overall goal, not the sector that is the flavor of the moment, should determine where cash flows for R&D are directed. “Fifteen sectors were involved in the project to go to the moon; even the textile sector for the special clothing for the astronauts.”

The whole is greater than the sum of its parts

Currently Europe is way behind the US on this and it doesn't seem likely that they will have the opportunity to make up ground in the foreseeable future. Mazzucato points out, for example, the austerity measures implemented by many European governments in recent years to reduce their debt burdens. This happens at the expense of R&D financing. “And the rational is wrong because the financial crisis was the result of private not public debt.” This approach results in two serious threats to innovation: the government cuts spending on innovation and companies are overly financialized, more focused on buying back their own shares than on investing in R&D.

“Innovation is not ‘public sector versus private sector’, it is the sum of both. But the public sector is economizing innovation away while the private sector looks in many cases primarily at short-term gains for management through share buybacks. Then you don't get any innovation." In a situation like this we’re going to need an awful lot of Elon Musks if we are going to get anywhere.

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