A critique of Mazzucato's Entrepreneurial State.

• Author: Mingardi, Alberto
• Position: Mariana Mazzucato - Critical essay

Mariana Mazzucato's The Entrepreneurial State (2013) vigorously argues that industrial policy, rather than market forces, is the key factor in fostering innovation. For Mazzucato, the RM Phillips Professor in the Economics of Innovation at the University of Sussex, profit-seeking companies do little more than free-ride on government-funded research and development activities.

Though Mazzucato claims she is building on existing evidence of the effectiveness of government research and development spending, in actual fact her evidence is shaky. She adopts a very extensive definition of industrial policy that includes the unintended consequences of government intervention, and focuses only on 20th century America in making her case for what she deems to be a general law. Moreover, she ultimately fails to prove that the specific government interventions that she hails as beneficial were purposefully directed to achieve the particular outcome in question.

This article shows why Mazzucato's claims for the necessary role of government in promoting an innovation-oriented economy are unconvincing. The fundamental problem is that her work is based on a peculiar line of economic thinking that does not consider the inevitability of tradeoffs while dealing with scarce resources, and does not acknowledge the role of demand and of consumers in a modern market economy.

The Idea of the Entrepreneurial State

Books tell stories, and stories do not necessarily need to be well crafted or carefully told to become immensely popular. Sometimes it is enough that they resonate with deeply rooted preconceptions. This might be the case with The Entrepreneurial State. Mazzucato's influential and award-winning work has been widely acclaimed as a turning point in scholarship on innovation (e.g., Upbin 2013 and Madrick 2014). Martin Wolf (2013) argued that the book provided a successful justification for the role of government in promoting innovation, which he claimed had unduly "been written out of the story." Based on The Entrepreneurial State, Wolf deduced that our "failure to recognize the role of the government in driving innovation may well be the greatest threat to rising prosperity." Lack of adequate government funding for research and development (R&D), he suggested, could slow the pace of innovation. (1)

Mazzucato is an effective public speaker and an accomplished writer, and her reputation rests on debunking the alleged myth of innovation emerging from market interactions. She argues that profit-seeking private entrepreneurs get too much credit for innovation, whereas the government is routinely blamed for stifling technological progress by overregulating the private sector.

Mazzucato believes this narrative is highly ideological and lacks empirical grounding. To the contrary, she argues that much path-breaking innovation is due neither to flashy start-ups nor to farsighted venture capital investors. In fact, she maintains, government is often the most farsighted and the least risk-averse of investors. Industrial policy, rather than free markets, deserves to be credited with the development of some of the most exciting contemporary technologies--from life-saving drugs to the iPhone.

In singing the praises of industrial policy, Mazzucato focuses on the United States. This is a strategic decision: The United States embodies the idea of a free-market economy to many people, so proving that its industrial success owes more than is commonly acknowledged to government policy would, in Mazzucato's eyes, show that we need government to provide "mission-oriented directionality" to R&D activities. By contrast, Mazzucato shies away from confronting the numerous cases of self-styled industrial policy experienced in Europe.

The supposed success of American-style industrial policy is meant to prove that it is government that bets heavily on new technologies, thereby shaping the markets of the future. This thesis, strictly speaking, is far from new. Others have argued that "the Federal government has encouraged innovations and their diffusion throughout the private market economy throughout most of our history" (Uselding 1993: 163). But Mazzucato's work is distinguished by her stated belief that government intervention is not only propitious, but actually necessary for innovation to emerge.

Given the publishing success of, and critical acclaim for, Mazzucato's work, it is worth examining her arguments closely. Do they hold up to scrutiny? Does she succeed in making the case for industrial policy as the engine driving innovation? Or is she simply telling a story that resonates with ingrained prejudices?

In 2012, President Barack Obama claimed that the private sector owed government more gratitude than it typically grants, in what came to be known as his "you didn't build that" speech (Obama 2012). Indeed, it could be argued that none of us, not even the most creative individuals, would come to much without the cooperation of others. Nevertheless, to assert that every innovation owes its existence to the government is a very bold claim, and in this article I will contend that Mazzucato's book may inadvertently demonstrate its absurdity.

I will argue that Mazzucato's work is filled with self-contradictory statements. She presents an idyllic vision of industrial policy, yet she refuses to claim success for industrial policy where it was proudly implemented--that is, in most European social democracies. Instead, she aims to prove that industrial policy was decisive in the United States, including in cases when there was no openly stated industrial policy being pursued.

I will place her efforts within the context of the "discursive battle" she wants to fight, and subsequently examine her key claims that should--if her core argument is to succeed--prove the providential nature of industrial policy. I will show that she mistakes unintended consequences for intended ones, and will highlight the way her vision of the modern economy unjustifiably excludes any role for the consumer.

The Myth of the Entrepreneurial State as an Answer to Austerity

Mazzucato's critics must acknowledge, at least, that she does not hide her motives. Her work is intended as a contribution to the battle of ideas on the role of government in society--and, in particular, as intellectual ammunition for the opponents of fiscal austerity. Her key assertion is that the current European crisis is not a fiscal crisis. Contrary to those advocating austerity, she argues there is no need for retrenchment in public spending. Indeed, she holds that the commonly held vision of the European crisis as a fiscal crisis is basically a construct of ideologues interested in fostering a narrative of government "as cumbersome, and only able to correct 'market failures'" (Mazzucato 2013: 6).

Accordingly, Mazzucato aims to correct this narrative by providing "an exciting vision of the State's role" (Mazzucato 2013: 4). If the public sees the state as a major source of innovation, it will not support what she considers an unwarranted rollback of public functions. It is noteworthy that Mazzucato sees a government that corrects market failures--a category ample enough to include interventions in health care, education, competition policy, environmental regulation, energy, and much more besides--as tantamount to a minimal state.

The Entrepreneurial State is an expanded version of a monograph originally published by the British think tank Demos (Mazzucato 2011). In her book, Mazzucato sets out "to convince the UK government to change strategy: to not cut State programs in the name of making the economy 'more competitive' and 'more entrepreneurial,' but to reimagine what the State can and must do to ensure a sustainable post-crisis recovery" (Mazzucato 2013: 2). The problem, as she sees it, is that in recent years "the State has not had a good marketing/communications department" (Mazzucato 2013: 20).

In Mazzucato's view, economists tend to adopt an ideological approach that places an excessive emphasis on government failures, while forgetting that state intervention can be motivated by "visions" and "ambitions" that may foster a more innovative economy. These economists, Mazzucato writes, also assume that the legitimate role for government is limited to the correction of market failures. This framework, which she associates with the public choice school, is deemed to be ill-suited to providing a historical account of how innovation developed, or to offering normative guidance on how our societies can continue to innovate. (2)

In a recent article, Mazzucato (2014: 8) neatly summarized her argument:

The market failure framework is problematic for addressing societal challenges because it cannot explain and justify the kinds of transformative mission-oriented investments that in the past "picked" directions, coordinated public and private initiatives, built new networks, and drove the entire technoeconomic process, thus resulting in the creation of new markets--not just in the fixing of existing ones. It is worth noting that the way Mazzucato describes opposing schools of thought is sometimes rather curious. For one tiling, she broadly equates the market-failure approach to government policy with free-market economics, which is not obviously an apt comparison. (3) Moreover, while it is true that public choice theory does not persuasively explain innovation, that goal is plainly not what public choice theory sets out to achieve. On the other hand, public choice theory offers a very good way of understanding how policymaking actually works.

In order to succeed in her own argument, Mazzucato needs to prove two things: first, that there is a treasure trove of examples showing that government intervention is ubiquitous in the history of modern capitalism (a point that won't be controversial); and second, that a particular kind of government intervention--industrial policy--has, consistently with its...