The Entrepreneurial State: Debunking Public vs. Private Sector Myths
..the respected Northwestern economist Robert Gordon reiterated the conventional view in a talk at the New School, saying that he was “extremely skeptical of government” as a source of innovation. “This is the role of individual entrepreneurs. Government had nothing to do with Bill Gates, Steve Jobs, Zuckerberg.”
Fortunately, a new book, The Entrepreneurial State, by the Sussex University economist Mariana Mazzucato, forcefully documents just how wrong these assertions are. It is one of the most incisive economic books in years. Mazzucato’s research goes well beyond the oft-told story about how the Internet was originally developed at the US Department of Defense. For example, she shows in detail that, while Steve Jobs brilliantly imagined and designed attractive new commercial products, almost all the scientific research on which the iPod, iPhone, and iPad were based was done by government-backed scientists and engineers in Europe and America. The touch-screen technology, specifically, now so common to Apple products, was based on research done at government-funded labs in Europe and the US in the 1960s and 1970s.
Similarly, Gordon called the National Institutes of Health a useful government “backstop” to the apparently far more important work done by pharmaceutical companies. But Mazzucato cites research to show that the NIH was responsible for some 75 percent of the major original breakthroughs known as new molecular entities between 1993 and 2004.
Further, Marcia Angell, former editor of The New England Journal of Medicine, found that new molecular entities that were given priority as possibly leading to significant advances in medical treatment were often if not mostly created by government. As Angell notes in her book The Truth About the Drug Companies (2004), only three of the seven high-priority drugs in 2002 came from pharmaceutical companies: the drug Zelnorm was developed by Novartis to treat irritable bowel syndrome, Gilead Sciences created Hepsera to treat hepatitis B, and Eloxatin was created by Sanofi-Synthélabo to treat colon cancer. No one can doubt the benefits of these drugs, or the expense incurred to develop them, but this is a far cry from the common claim, such as Gordon’s, that it is the private sector that does almost all the important innovation.
The rise of Silicon Valley, the high-technology center of the US based in and around Palo Alto, California, is supposedly the quintessential example of how entrepreneurial ideas succeeded without government direction. As Summers put it, new economic ideas were “born of the lessons of the experience of the success of decentralization in a place like Silicon Valley.” In fact, military contracts for research gave initial rise to the Silicon Valley firms, and national defense policy strongly influenced their development. Two researchers cited by Mazzucato found that in 2006, the last year sampled, only twenty-seven of the hundred top inventions annually listed by R&D Magazine in the 2000s were created by a single firm as opposed to government alone or a collaboration with government-funded entities Among those recently developed by government labs were a computer program to speed up data-mining significantly and Babel, a program that translates one computer-programming language into another.
For all the acclaim now given to venture capital, Mazzucato says, private firms often invest after innovations have already come a long way under government’s much more daring basic research and patient investment of capital. The obvious case is the development of the technology for the Internet, but the process is much the same in the pharmaceutical industry.
Mazzucato observes that less and less basic research is being done by companies today. Rather, they focus on the commercial development of the research already done by the government. One shouldn’t underestimate the degree of imagination and funding necessary to transform a major scientific idea into a product that can be used by millions of consumers. The money paid by investors for some young unproven companies can be astounding, even when they are only beginning to make profits.
Facebook had hardly turned a profit when it went public in 2012 at a share price that made it worth more than $100 billion. Earlier this year, Facebook in turn bought for $19 billion WhatsApp, a messaging service that reaches 450 million people and has only fifty-five employees. The possibility remains that competition could wipe out WhatApp’s advantage, just as the once-popular Blackberry mobile communication service was made to seem archaic by Apple’s iPhone. It’s not yet even clear whether Facebook itself can maintain its newfound profitability. We can only imagine the possible benefits if such money were spent earlier in the basic research cycle.
Both government research and entrepreneurial capital are necessary conditions for the advance of commercial innovation. Neither is sufficient. But the consensus among many economists and politicians doesn’t seem to acknowledge an equal role for government. Resistance to acknowledging government’s fundamental contribution to American scientific and technical innovation became especially vigorous when the federal government’s solar energy project, Solyndra, to which it had lent more than $500 million, went bankrupt. The investment was part of President Obama’s 2009 stimulus package, which included a substantial program of loans for clean energy, run by a successful former hedge fund and venture capital manager. But the solar energy company was undermined when the high price of silicon, on which an alternative technology to Solyndra’s was based, fell sharply, enabling competition, especially from China’s solar companies, to underprice the American start-up.
nybooks.com |
