Tuesday, April 1, 2014

The Entrepreneurial State -- Is Apple "dependent on the public purse"? Part 1

This post deals with The Entrepreneurial State, a book by Mariana Mazzucato. See this post for an introduction.

Apple computer is the primary corporate example used by The Entrepreneurial State so it seemed reasonable to examine Ms. Mazzucato's claims about Apple and state funding. In particular, page 11 states that Apple "requires the public purse". In this post I examine the claim that Apple was state supported early in its existence..

The claims about Apple and government funding early in Apple's existence as a corporation are on page 94, "From Apple I to the iPad: The State's very visible hand". This section begins with some general statements about Apple turning state financed technologies into products, then goes on to claim that personal computing was made possible by various "public-private partnerships established largely by government and military agencies". This essentially claims that all computer, integrated circuit, etc. technology was dependent on the government. I'll leave these claims to another post as they will take a fair amount of space and because they don't apply specifically to Apple, rather to all technology companies.

The first specific claim of government support for Apple is that Apple secured a $500,000 equity investment via the Federal government's SBIC program prior to its IPO in 1980. A bit of investigation finds that yes, Apple did secure this investment, though it isn't clear that Apple had any idea there was government involvement (see The Little Kingdom by Michael Moritz, p. 220). Let's look at this money in more detail.

First, what is the SBIC? It stands for Small Business Investment Companies, and as the name implies, SBIC funding is made available through private companies. These companies are licensed by the government and invest using a combination of their own money and money provided by the government through the Small Business Administration. Note that SBIC money is for any type of small business. Companies such as Federal Express and Costco received SBIC money, as have other technology companies. Note that the government doesn't choose the companies which receive SBIC investments, that's done by the SBIC licensed investment companies.

In the summer of 1978 Apple Continental Illinois investors asked about investing $500,000 in Apple. This is the SBIC money. So Apple did receive government money. But was it "dependent" on this money? In January of 1978 Apple raised over $500,000 from private sources, and later in the year received at least one other investment of $100,000 (The Little Kingdom p. 219-200). In the year ending September, 1978 Apple had sales of almost $8 million, a profit of almost $800,000, and total assets of over $4 million. While the SBIC money of $500,000 was certainly useful to Apple, this was not a company desperate for money. The company was profitable and had numerous big name private investors putting money in.

So in summary:

  • Private investors had been putting money into Apple all along.
  • Apple was profitable throughout this period.
  • Apple was growing rapidly (sales were about $800,000 in 1977, $8 million in 1978, $48 million in 1979), with profits each year.
  • One investor, partially government funded, put money into Apple, at most 40% of the money Apple raised in 1978.
So is this the Entrepreneurial State? Or did one group of private investors use government money and guarantees to reduce their risk and increase their profits by investing in Apple?

Personally, I think this is more an example of a government subsidy to private investors than the State being entrepreneurial.


Is There an Entrepreneurial State? Analysis of "The Entrepreneurial State" by Mariana Mazzucato

I recently saw reviews of Mariana Mazzucato's book "The Entrepreneurial State". For instance, see the review here. In it the author argues that contrary to the usual belief that private industry is innovative and risk taking, it is actually the government which takes the risks and innovates new technologies, with private industry getting a "free ride", exploiting and profiting from the government's efforts.

Having spent 40 years in the technology industry, I found this claim a bit outrageous. I've certainly never worked for a company which took government developed technology and just profited from it. Everyplace I've worked engineers have been hard at work trying to create original or improved products.

So I got a copy of the book and have been studying its arguments. In doing so I found that there are a number of academics making the same argument, an academic "cottage industry" creating the story of an innovative government and risk averse private sector. Since this doesn't match my own experience, I started looking into the book's claims to see how well they stand up to the evidence.

As a result of this investigation, this is the first of what might become several posts examining The Entrepreneurial State and its arguments.

I'll start with an overview of the book's claims:

Like Barack Obama's famous "you didn't build that", The Entrepreneurial State argues that the government has "nurtured almost all of the key technological advances of the last hundred years" (quoting the review above).

In one sense, the book is an argument against the conservative view that all government spending is waste. In this sense the book is correct -- the government has made significant contributions to innovation, especially during the last 100 years. Nothing in my comments is meant to deny government's contributions to innovatoin.

However, the book goes much further, painting a picture of a timid, risk averse private sector. The private sector is presented as almost parasitic, letting the government take all the risks then reaping the rewards. Regarding much of the new technology in the iPhone, the introduction asserts "It was the visible hand of the State which made these innovations happen. Innovation that would not have come about had we waited for the 'market' and business to do it alone" (p. 3). Apple is the example technology company of the book, which is "dependent on the public purse" for its success (p. 11 of the book).

So here is the book's primary thesis: If government were not spending money to create new technologies, innovation would drastically slow down or even stop. Companies would not spend the money for innovative R&D and technological advances would stagnate.

I will attempt to analyze these claims in the book. In particular, especially for innovations which have clearly been driven by the government, I am going to ask a few questions about the book's claims:

  1. If government drove an innovation, was it because the private sector refused to invest in a new technology? Or did the government drive the technology because it was the first to need it or because it had the deep pockets to pay the high initial costs? Would the technology have existed without government investment?
  2. What was the government's role in the innovation? Did it merely fund the underlying science or did it fund development of a practical product? Was the government a deciding factor?
My analysis will focus on electronic and computer technologies. The book also discusses nanotechnology, biotechnology (including drug development), and green energy. Since I'm most familiar with electronic and computer technologies, I'll stick to areas I know and leave it to others to analyze other fields.