Politicians 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.