The State Is Not A Competent Entrepreneur – Huge Distinction Between Awarding Grants And Running Companies A recent review of the book "The Entrepreneurial State" may engender confusion between the two, quite separate, activities

By Paolo von Schirach

August 5, 2013

WASHINGTON – “The state is the real engine of innovation“. Under this strange FT headline (August 5, 2013) we read a review by economics commentator Martin Wolf extolling the brilliance of a book by Sussex University economist Marianna Mazzucato titled “The Entrepreneurial State“. Wolf tells us that, while it might sound preposterous, it is in fact true that public –as opposed to private–  investments are at the foundation of major technological revolutions that have transformed our world. Think of jet engines, teflon, the internet, and so on.

The critical role of the state in funding R&D

Indeed, contrary to what free market capitalism dogma would like you to believe, the state does good things. In fact, the state performs a role that the private sector would routinely shun: investing in open-ended basic science projects that do not have a compelling economic rationale.

Fine. This is all true. We know that most of the electronics and IT discoveries were made through the aid of government grants. And, yes, there was and there still is an irreplaceable role for open-ended basic R&D that is not tied to a marketable product that will bring in a cash return for the investors.

Entrepreneurial State?

But, while Martin Wolf  does not say so, some readers may inadvertently confuse the quite separate roles of grant making and running an enterprise. I have not  read the book. However, the title “The Entrepreneurial State” conveys the notion of enterprises run by public bodies. I believe that it is important to draw a sharp distinction between “funding” and “managing”. Funding research is one thing. Running an enterprise quite another.

Washington is not running GM

In the US experience, the Federal Government played and still plays a critical role in funding R&D. But Washington, with very few and limited exceptions, has no record in running anything. Even in the most extraordinary case of the recent, (and truly gigantic), General Motors bail out, while providing the massive liquidity injection that saved GM, Washington  did  not send Department of Commerce and Transportation bureaucrats to run the company. It left management in the hands of professionals.

The Soviet Union should have been a real leader

More broadly, think of this. If the state were a natural entrepreneur, then the Soviet Union should have been the most successful economy. During Communism the state run everything, from car factories to barber shops. And surely the Soviet Government ability to direct scarce resources into mostly military R&D was in some measure quite successful. Russia did build impressive tanks, jet fighters and ICBMs.

But, overall, despite its technological successes the state proved to be a lousy entrepreneur and a horrible manager. In the end, the whole country collapsed under the weight of colossal inefficiencies.

And even in mixed Western economies, like France or Italy, on balance the state proved to be a mediocre to bad entrepreneur. Otherwise, exploiting the advantages of abundant state funding for R&D, all state-run conglomerates should be world-class sector leaders. 

Awarding Grants and Enterprise: not the same

I fully agree with Wolf that it is important to debunk the ideologically biased and false notion whereby the state is by definition  incompetent, and therefore it should stay out of any and all economic activities. We know that the state did and still does perform an invaluable function by funding research in areas that the private sector would not touch.

But there is a huge distinction between awarding grants and being an entrepreneur.


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