The Entrepreneurial StateThe United States government confronts a trade conflict.  You can be sure that it will accuse its opponent of subsidizing technological innovation.

You would assume that the United States government does not do the same thing. You would be wrong. Mariana Mazzucato in her book The Entrepreneurial State demonstrates this. She shows that the U.S. government has subsidized every advanced technology of the late 20th and early 21st century.

Not only did the U.S. government subsidize innovation. Often, government officials initiated and directed innovative projects.

Why Don’t We Know That the U.S. Government is the Source of Most of Today’s Technological innovations?

The notion that one or a few people get together in a garage or dorm room and invent the desktop computer or other new technology is no more than a myth. But it is a myth that serves a purpose. It props up the lie that the government can only stand in the way of progress. It can never be a contributor to progress.

That lie is very useful to the wealthy “conservatives” who have dominated government policy at least since the presidency of Ronald Reagan. Their prime concern seems to be paying fewer taxes They also want to be “freed” from all requirements that their products not harm users. That is, they want no government “regulation”.

Anything suggesting the government is useless plays right into their hands. They can argue that the government is dead weight. They thus have more ammunition to their endless campaign to get rid of government functions. After all, a strong government requires money. And that requires taxes.

The companies that got rich from governmentally developed innovations don’t publicize it either. What if their customers knew? They might question the high prices they pay. And they might wonder why the companies that benefit from such gifts do not pay something for them.

On top of that, the founders of these companies may not be held in such high esteem. The taxpayers might just wonder if their billions of dollars of wealth is justified.   

What is the Truth about Technological Innovation?

The truth is true innovation, the kind that creates the internet, the GPS system, the components of the smartphone and so much more, cannot take place under the capitalist system.

Such innovations require that the entity making them have two basic characteristics. They must be willing to spend large amounts of money and have no idea if they will lose it all. Simply, they must be willing to invest when the risk to their investment is unknowable.

And they must be indifferent to the time required for success. Going “where no man has gone before” might take decades or a generation.

Profit-making businesses do not exhibit either of these characteristics. This includes venture capital firms that usually want a pay-off in 5-7 years.

What they can do, what they do every day, is to adapt these innovations to make them marketable. They arrange the mass production of these adaptations. And they sell them to the mass market.

Governments can create specialized agencies with set budgets to pursue projects with unknowable risk. These agencies can freely evaluate military or societal needs and seek technologies to meet those needs.

The agencies will likely experience failures. But when they succeed, they may create new, unthinkable, even world-changing technologies.  
These technologies are then transferred to private businesses that can perfect, commercialize, manufacture and sell them.

Government does what it does best. Business does what it does best. We all benefit.

How Does the Government Create Technological Innovation

Within a few technologically oriented government departments, there are small well-funded and semi-autonomous agencies. These agencies are given a budget and are encouraged to hire some of the best scientists and engineers available on 4-6 yr contracts.

These agencies are focused on working with firms to develop novel product and process innovations. The program managers in these agencies do not distinguish between public and private. Their job is to is to work with universities, private research enterprises and firms to define technological challenges that must be surmounted.

Program managers then enlist and finance groups drawn from university researchers, businesses of various sizes and industry associations. They work closely with the groups, monitoring their progress, redistributing financing to the more successful groups, and assuring that ideas and people are shared among all groups.

As the project produces a product or process that overcomes the challenge, the Agency also facilitates its commercialization. This can include finding firms to produce and market it. It can also include financing at least some of the costs of commercialization.

Has This Approach to Technological Innovation Succeeded?

Mazzucato’s answer to this question is an unqualified “Yes”. Throughout her book are examples of innovations that were created or vastly accelerated by these programs. They financed a vast expansion of university computer science programs in the 1960s. This diffusion of knowledge accelerated the digital revolution.

In the 1970s, the Granddaddy of these agencies, The Defense Advanced Research Projects Agency (DARPA), facilitated the standardization of the silicon chip. DARPA also played a major role in developing the internet.

Between 1993 and 2004, 75% of novel (as opposed to “me-too”) drugs were created by the National Institutes of Health (NIH).

To emphasize her point, Mazzucato devotes a chapter to the government’s role in creating Apple Computer, Inc., Apple’s first iteration as a computer manufacturer  She finds that government financing played a large role.

Mazzucato then looks at the form that “invented” the iPod and changed its name to Apple to signal a new direction as an entertainment and later a smartphone company.

She identifies 12 major technologies that enabled the iPod, iPad, and iPhone to work or distinguished then from competitive products.

Stunningly, every one of these technologies was invented by government-sponsored research, development and commercialization programs described above.

This is not to denigrate Apple. Its brilliant engineering, design, and marketing prowess made its success possible.

The lesson here is not that the government alone is responsible for technological innovation. It is rather that the “free enterprise can do nothing wrong and government can do nothing right” is profoundly invalid. The contemporary economy needs both to work together doing what they do best.