Mariana Mazzucato is an economist whose research focuses on the role of the state in modern capitalism. Currently the RM Phillips chair in the Economics of Innovation at the University of Sussex, she is also author of the book The Entrepreneurial State: Debunking Private vs. Public Sector Myths.

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Where do the boldest innovations, with the deepest consequences for society, come from?

Many business leaders, entrepreneurs, and libertarians claim that the private sector leads the way always, and government at best follows by decades and at worst impedes the process with bureaucratic regulations.

Mariana Mazzucato proves otherwise.  Many of the most profound innovations—from the Internet and GPS to nanotech and biotech —had their origin in government programs developed specifically to explore innovations that might eventually attract private sector interest.  Ignoring this entrepreneurial risk taking role of government has fuelled a very different story about governments role in the economy, and also fuelled the dysfunctional dynamic whereby risk is socialised—with tax payers absorbing the greatest risk--- but rewards are not. Mazzucato will argue that socialization of risk, privatization of rewards is not only bad for the future of innovation eco-systems but also a key driver of inequality. What to do about it? 

Mazzucato is a professor of the Economics of Innovation at Sussex University and author of The Entrepreneurial State: debunking private vs. public sector myths.

Government as radical, patient VC

The iPhone, Mazzucato pointed out, is held up as a classic example of world-changing innovation coming from business.

Yet every feature of the iPhone was created, originally, by multi-decade government-funded research. From DARPA came the microchip, the Internet, the micro hard drive, the DRAM cache, and Siri. From the Department of Defense came GPS, cellular technology, signal compression, and parts of the liquid crystal display and multi-touch screen (joining funding from the CIA, the National Science Foundation, and the Department of Energy, which, by the way, developed the lithium-ion battery.) CERN in Europe created the Web. Steve Jobs’ contribution was to integrate all of them beautifully.

Venture Capitalists (VCs) in business expect a return in 3 to 5 years, and they count on no more than one in ten companies to succeed. The time frame for government research and investment embraces a whole innovation cycle of 15 to 20 years, supporting the full chain from basic research through to viable companies. That means they can develop entire new fields such as space technology, aviation technology, nanotechnology, and, hopefully, Green technology.

But compare the reward structure. Government takes the greater risk with no prospect of great reward, while VCs and businesses take less risk and can reap enormous rewards. “We socialize the risks and privatize the rewards.” Mazzucato proposes mechanisms for the eventual rewards of deep innovation to cycle back into a government “innovation fund”---perhaps by owning equity in the advantaged companies, or retaining a controlling “golden share” of intellectual property rights, or through income-contingent loans (such as are made to students). “After Google made billions in profits, shouldn’t a small percentage have gone back to fund the public agency (National Science Foundation) that funded its algorithm?” In Brazil, China, and Germany, state development banks get direct returns from their investments.

The standard narrative about government in the US is that it stifles innovation, whereas the truth is that it enables innovation at a depth that business cannot reach, and the entire society, including business, gains as a result. “We have to change the way we think about the state,” Mazzucato concludes.