Thursday, July 23, 2015

The Entreprenurial State

It has become common to believe that the government should keep its hands off business and job creators.  This idea is amplified by the right wing.  It is very true that individuals have intelligently, persistently, luckily and perhaps above all courageously brought civilization forward in an economic sense.  Real innovation is often against the status quo.  It also is true that when people band together they can accomplish more things.

There will always be a delicate balance between individuals and the collectivity.  It is true that we are all pressurized by our peers not to step too far out of line.  Status quo is comforting for many people.

I first saw Mariana Mazzucato on TVO's The Agenda with Steve Paikin.  Her comments stood in stark contrast to what I consider blow-hard opinions.  The blow-hards are basically self righteous individuals who have achieved success or visualized it, as separate from government.  They overlook their good fortune and the support they received from many quarters including government.

She links herself to John Maynard Keynes and Joseph Schumpeter.  Keynes is the one known for advocating increased government spending when the economy is depressed and Schumpeter is the one known for advocating innovation as the key to growth.  When times are tough private businesses curtail their spending including research leaving the government, if willing, to pick up the slack.  In good times Mariana finds that private business is really only interested in the short term.

Risk is a term used a lot, particularly to justify higher returns.  Another term Mariana likes to draw attention to is "uncertain."  There are many factors (including risks) that can be gauged as probabilities, but there are many other factors (unknown unknowns) that are not at all predictable.  These other factors can have a positive or negative impact on success, but in the field of basic research they can lead in new directions.

World War II provided an opportunity.  During the war scientists were gathered together to work on many military tasks perhaps culminating with the the Manhattan Project.  Working together and across disciplines they pointed the way to maintain military superiority.  After the war, groups developed to maintain competitive strength.  Defense Advanced Research Projects Agency known as  DARPA was one result.  Sputnik spurred even more research funds as the whole country felt threatened.  The Japanese were a few steps ahead regarding semi-conductor research and this was also a concern.

Their research provided the basic building blocks for iPhone, iPad, GPS, many pharmaceuticals, etc. etc.  After the expensive and risky steps had been taken some sharp people like Steve Jobs and many others were able to put products together that were commercially viable.  In fact most businesses and even venture funds shied away from expensive risky research, especially where they could not see a quick commercial application.

Today many see climate change as the number one priority.  Usually successful new technologies are disruptive to old technologies, i.e. creative destruction. The fossil fuel industry (oil, natural gas and coal) have had a long development (entrenchment) with large very significant sunk costs.  They have all the power to resist and the comfort of consumers on their side.

Bottom line:  do innovators give back to the community that supported them when it was needed?  Apple is used as an example--much of the basic research and development was done through government resources. But jobs go where they can be done cheapest and the company has developed strategies for minimizing taxes.  They are not unique.

A few conclusions.  The government can have a critical role in innovation and is in a position to take necessary risks on behalf of its citizens.  The government needs to recover some of its costs from developing innovations in part to continue its role in innovation.  Taxation is one way and even equity positions might be another.  The government above all needs to be recognized for its role.  Marianna makes many too often overlooked points and some useful suggestions.

I would add one more detail that the government provides towards innovation and that is education.  Some will point out innovators who dropped out of school and to be sure there are plenty to be found.   There are just as many innovators who were inspired by a teacher (in the formal system or outside).   To communicate their discoveries someone needs to read, write and understand, skills most often acquired in formal education.

The lion and the pussy cat on the cover were inspired by some words of John Maynard Keynes who was talking about animal spirits with regard to business.  The question is which animal represents business and which the state.

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