The Need For State-Based Innovation

onegoodthingleadstoanotherPoliticians and pundits constantly call for the government to step out of the way and let entrepreneurs and “job creators” build the industries of the future. New Left Project argues that this current conventional wisdom is all wrong, and more often than not, game-changing innovation is funded by the government, not the private sector:

The current debate, in the UK and abroad, on the need to cut back the state in order to unleash the power of entrepreneurship and innovation in the private sector, builds upon a stark contrast that is repeatedly drawn by the media, business and libertarian politicians: a dynamic, creative competitive private sector versus a sluggish, bureaucratic, inert, `meddling’ public sector.

It is assumed that the private sector is inherently more innovative, more able to think out of the `box’ and to lead a country towards long-run innovation-led growth. But many examples in the history of innovation, entrepreneurship and competition, in different sectors and across different countries, paint a very different picture – of a risk taking innovative state – especially in the most uncertain phases of technological development and/or in the most risky sectors – versus a more inert private sector, which only invests (in innovation, in new start- ups, in networks) once the state has absorbed most of the uncertainty.

In the pharmaceutical industry it is the state- run labs that have been responsible for the discovery of the most radical new important drugs, with private pharma focused on the less risky slight variations of existing, `me too’, drugs (such as Viagra in different colours and dosages). In the USA and Europe, state funding has been responsible for most, if not all, general purpose technologies, i.e. those technologies that help achieve economy- wide growth (aviation, computers, electricity, internet, nanotechnology). The biotech revolution owes its success not to venture capital (as is commonly assumed) but to major inventions within the UK’s Medical Research Council and the US’s National Institute of Health, as well as pro-innovation regulations that have made it easier for these inventions to be commercialised. This has not been just a question of `research’, but of the state having the courage to think about completely new areas of development, invest its resources into uncertain territory, open multiple windows of exploration, fund early-stage risky research, create organisations dedicated to funding and supporting new start-ups, and formulate dynamic `networks’ between science, business and finance.

In most cases of the development of general purpose technology it has been the state that has gone against the grain, thought `out of the box’, risked large amounts of money; while the private sector has more often been wedded to the status quo, where short-run returns are inevitably more secure. Similar examples can be found in the creative sector, where, for example, innovative first-time directors can `enter’ the industry only through risky state-backed funds or state- owned broadcasters. In this sense, the state has played a role that goes beyond the Keynesian emphasis on taxation, subsidies, spending and regulation, and the Schumpeterian emphasis on creating the `right conditions’ for innovation and growth. It has played an active entrepreneurial role – envisioning new technological opportunities in high-growth areas; undertaking the very early risky investments that lay the groundwork for future exploration of these areas; funding new start-ups that commercialize the innovations; and in some cases even bringing the product to market.

The state has been fundamentally involved in generating radically new products and processes that have changed the way that businesses operate and citizens live – transforming economies forever, from the internet revolution to the biotech revolution to what (it is hoped) will be the green-tech revolution. A key way to tackle together smart and inclusive growth is to ensure that the gains from innovation are as collective as the risk-taking underlying it. In seeking innovation-led growth, it is fundamental to understand the important roles that both the public and private sector can play. This requires not only understanding the different ecologies between the public and private sector, but, especially, rethinking what it is that the public is bringing to that ecology. The claim that the public sector can at best incentivise private sector led innovation (through subsidies, tax reductions, carbon pricing, green investment banks and so on) is currently being propagated heavily in the UK, especially but not only in the face of the recent crisis and ensuing deficits. But this fails to account for the many examples in which the leading entrepreneurial force came from the state rather than from the private sector.

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  • Liam_McGonagle

    Undoubtedly there is a role for state-based assistance for certain, capital-intensive nascent technological paradigms, until they acquire an installed base.

    But the wider problem, more pervasive and characteristic of the society as a whole, including both the private and public sectors, is a type of sclerotic intrenchment of old paradigm elites who are using whatever electoral, legislative, administrative and judicial means necessary to preserve their fiefdoms.

    There is not even a modest amount of capital available for mom-and-pop, garage-based entrepreneurs to experiment with.  Anyone with capital wants a sure thing, and that can only happen when markets are rigged.

    Good Lord, the most exciting IPO America’s been able to come up with in the last decade is FACEBOOK?!!!  It’s the g*ddamned ham radio of the 21st century.

  • Okarin

    it’s not that people don’t innovate, but where can people innovate and be protected from big business

  • Misinformation

    “and more often than not, game-changing innovation is funded by the government”

    Wait, wait, “funded by government”? So, like, by the taxation of citizens through coercion and the threat of violence? Or has government gotten a job so that it can pay for it’s projects by itself?

    • Liam_McGonagle

      You’ve got a point about a nascent police state.

      But don’t overplay your hand.  Where do you think railroads, interstate highways, the internet and Tang(tm) came from?

      The point should be that government policy in taxation and spending should serve the people, not the elite.  The elite get served almost as well by regressive taxation regimes as they do by pork barrell projects.  They elites become a sort of de facto private government when they’re allowed to soak up all  the financial capital.

      What is required is a mature, balanced sense of priorities, which is NOT served by ridiculously wide-of-the-mark polemics.

      • Misinformation

         I believe that at this point in history, at least in the U.S., there is no longer a need for gov’t to build railroads, highways, etc. I believe, that if the indoctrination, through public schooling, of the myth of authority were replaced with cognitive liberty and critical thinking, communities would come to the natural conclusion that things like roads would benefit them and be maintained by them.

        Taxes will always serve politicians most. By allowing them, as non-producers, to live, and live well, while contributing nothing to society, by extracting the labor of others. The elites soak up financial capital because of the unfair advantages that have been bestowed upon them by politicians.

        If you put your faith in the fallacy of authority, your capital will always end up being used against you. It is time to evolve beyond the belief in higher powers, be they government or religious. I for one, do not feel that another human, let alone a psychopathic, violent stranger, has the knowledge to know what is best for me or my community.

        I admit, a gap, and a very large one exists in moving from here (appeal to authority fallacy), to there (realization of liberty). I wouldn’t pretend to have all the answers to this but I know and history shows ample evidence, that government (and along with it taxation) is the answer to anything.

  • zedted

    More crap.

    If everyone works for the govt, who is being taxed to pay for the govt workers?

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