What Drives Innovation? The State

Magazines like The Economist mock industrial policy while piling praise on the private sector. But the more one knows about the intertwining of state and market in health care, defense, telecommunications, energy, and banking, the less realistic any strict divide between “public” and “private” appears. Moreover, even the internet sector, that last bastion of venture capital and risk-taking, is more a creature of state intervention than market forces. As Mariana Mazzucato argues:

Whether an innovation will be a success is uncertain, and it can take longer than traditional banks or venture capitalists are willing to wait. In countries such as the United States, China, Singapore, and Denmark, the state has provided the kind of patient and long-term finance new technologies need to get off the ground.

Apple is a perfect example. In its early stages, the company received government cash support via a $500,000 small-business investment company grant. And every technology that makes the iPhone a smartphone owes its vision and funding to the state: the Internet, GPS, touch-screen displays, and even the voice-activated smartphone assistant Siri all received state cash. The U.S. Defense Advanced Research Projects Agency bankrolled the Internet, and the CIA and the military funded GPS. So, although the United States is sold to us as the model example of progress through private enterprise, innovation there has benefited from a very interventionist state.

VC’s and other financiers exaggerated their role in promoting innovation in order to get capital gains tax breaks. And while they retreat ever further from taking risks on game-changing advances in productivity, the tax breaks endure, starving the state of the revenues it needs to continue subsidizing innovation. The California Ideology gradually undoes its own material foundations, but its adherents are unfazed. They are content to reap the benefits of past decades of government investment. From Silicon Valley to Wall Street, seed corn is the tax-cutters’ favorite meal.

X-Posted: Madisonian.

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