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.

Politics over good government

Recent news stories feature claims that congressional Republicans have voted to force the deportation of spouses of US soldiers (see here and here). As is often the case in stories of this sort, there is actually nothing in the vote relating directly to immigration, let alone military spouses, but the bills could make it easier for Republicans to force such deportations.

Let's look at the two bills quoted in the first source above and see what was really being voted on. Both bills illustrate the dysfunctional and often childish efforts of today's politicians.

The first bill is HR 3973, the "Faithful Execution of the Law Act of 2014." This two page bill says nothing about immigration and doesn't directly deal with the immigration sections of the law. What does the bill do?

The existing law says that the Attorney General must report any time he or the Justice Department choose not to enforce a law because they think it is unconstitutional. The bill makes two changes. It adds "any other Federal Officer" to the people who might choose not to enforce a law and changes "unconstitutional" to "state the grounds for such policy." This bill does not force any deportations. It would require that the Attorney General report to Congress that the government has chosen not to enforce the law. So if the law today says that military spouses who are not in the United States legally can be deported, the Attorney General would have to report this and give Congress a reason for no enforcing the law. Given that administration officials have generally announced to the public that they aren't enforcing laws of this sort, the main effect of this bill will be to generate more paperwork (reading the full current law, the Attorney General ought to be able to generate thousands of pages of trivia by mentioning every time any government official chooses a less than literal treatment of a law, overwhelming Congress with only a small effort.

The second bill is HR 4138, the ENFORCE the Law Act of 2014. While a bit longer, this bill also says nothing directly about immigration. Instead, this is a bill to make it easier for Congress to sue the government in civil court to demand enforcement of a law. It allows one or both houses of Congress to sue in court and sets up streamlined procedures -- the case goes to a three judge panel of a district court, then is appealed directly to the Supreme Court. This bypasses the normal appeal process and will shorten the time before the case is resolved.

This second bill really does two things. First, it gives Congress standing to sue. Courts only take a "real" case, meaning somebody has to have been harmed. A law could be blatantly unconstitutional but if it's never enforced, the courts would have no reason to review it. Members of Congress have been frustrated in the past trying to challenge a law in court because they don't have "standing" to sue. Second, it tries to speed up the process since a case can take years or decades to work its way through the courts.

So these are the two bills. Neither directly relates to immigration but both try to reduce the president's use of executive discretion to enforce or not enforce a law.

So is this a good idea? Obviously, Republicans think it is today. But today the Republican majority in the House is thinking of a Democratic president. What happens if these laws are on the books and a Republican is elected President? Suddenly the Democrats (assuming they control either the House or Senate) have the ability to turn the tables if the Republican President doesn't enforce every law to its literal limit. However, this law doesn't really matter since the Senate will just ignore it. So it's another House political statement vote on legislation which isn't designed to pass, but instead make a statement.

So our short sighted, politics over good government Congress continues its course. Republicans use these bills to enforce arguments that President Obama is not enforcing the law (going so far as to complain because Obamacare, which they oppose, has been illegally delayed). Democrats meanwhile argue the President is using legally allowed discretion when deciding how to enforce the law. In a few years, if the roles are reversed, we'll see the Democrats making the same complaints about a Republican President.

The Meaning of a Word

I have been involved in a comment thread in another blog (http://neweconomicperspectives.org/2013/09/money-created-overcome-barter.html). Some of the discussion revolves around whether barter economies ever existed and whether barter is used in some areas. One side of the discussion emphatically says that barter economies don't exist and that barter occurs very infrequently if at all. The other side says that of course barter exists as we have many examples societies which don't use money yet exchange goods or examples today where goods are exchanged without the use of money. As in many discussions, I found that both sides are right. The problem is that they define the term "barter" differently.

One group uses barter to mean "the exchange of goods without the use of money". The other group defines barter as "The immediate exchange of goods without the use of money". The difference is that the second definition requires that the barter exchange happen immediately while the first allows delayed delivery of a good.

Thus, if two kids eating lunch at school agree to trade one kid's cookies for the other's apple, that is barter. But if they agree to trade one kid's cookies today for the other kid's brownie in tomorrow's lunch, that is not barter (because the second half of the exchange happens the next day).

I've observed the same thing with other terms. Economics has the concept of "commodity money", meaning money which is based on the value of some commodity. Gold coins are commodity money if the value of the coin is based on the value of its gold content. Cigarettes are used as an example of commodity money in POW camps or prisons, where they are exchanged for goods.

Again, there are people who claim commodity money doesn't exist. They point out that the value of a coin is generally not exactly the value of the gold or silver in the coin (since gold and silver values can vary). They similarly argue that as soon as the commodity (e.g. cigarettes) start being used as a unit of value (e.g. IOUs are written stating how many cigarettes you owe somebody) then they are no longer commodity money but instead become an accounting unit. So this group uses a very narrow definition of commodity money -- the value must be based solely on the commodity content and all transactions must be made using the physical commodity.

Others use a more relaxed definition of commodity money, considering commodity money to be anything which is primarily based on the value of the underlying commodity, even if the value of a gold coin is not exactly the value of the underlying metal or the commodity turns into an accounting unit. After all, many monetary terms originated as units of weight, from the shekel to the pound sterling.

So why the differing definitions? One reason is to facilitate arguments against some past work. Adam Smith argued that societies first engaged in barter, then

So why the controversy? In the case of barter and commodity money, it is because there are two basic schools for how money originated. One says that people first traded using barter and that certain intermediate items (e.g. a specific weight of gold or silver) became accepted as a standard unit of value, with other goods gaining a value or price based on this standard. Numerous materials have been used as this standard unit of value (e.g. cowrie shells through much of Africa and south Asia) but eventually gold and silver coins became the standard.

The other theory for the origin of money is based on the "credit theory of money". This says that money first arose as an accounting technique, with trade done in some standard unit of value. Money has never been based on quantities of some commodity (e.g. a weight of gold) but instead is defined in terms of credit and debt.

The problem I see is that both schools of thought are correct. Any time trade exists there needs to be a method of measuring value. There is good evidence that certain commodities became used as a standard of value. There is also good evidence that this standard of value was used as an accounting unit, specifying a debt between two people.

The Sequester and Economic Disaster

This note reflects a few quick comments on the US economy and where it is going. No formal analysis, no formal theory, just my own impression based on a few economic events.

Historically, I did anticipate the tech bubble (companies with strong buy ratings and P/E ratios of 30,000 tell me something is wrong). I also anticipated upcoming credit problems in 2007 or so (bank offers for gold credit cards to people with $350/month social security income indicate something is wrong). So with that “stellar” record, here goes:

The Sequester: I don’t see The Sequester as a disaster. I’m guessing with The Sequester in effect the economy is either going to grow faster or show little response.

Jobs: Many lamented the “poor” March jobs report of only 85000 odd new jobs. I suggest the opposite. The Sequester gloom and doom predictions said we should have seen a drop in total employment and jump in unemployment. Instead we’re seeing continued (slow) growth. And the early April unemployment numbers (when layoffs are supposed to be happening) indicate that disaster isn’t around the corner.

Interest rates, QE, etc: I think one of the problems in the economy is that interest rates aren’t doing what they are supposed to. The Fed is giving us near zero interest rates to try to increase growth. I think instead that we need higher rates.

Interest rates today provide rather perverse incentives. Savings accounts pay essentially zero. I have one savings account that did pay 0.00% for a few months. In this environment, why save? Part of the problem with the Financial Crisis was the search for high, safe returns by large investors (thus jumping on AAA rated high yield mortgage bonds). Today under the mattress gives as good a return as a safe bank account, so either spend it or put it someplace risky.

I can’t give a formal reason, but I think that near zero interest rates are a recipe for a stagnant economy. We have seen this in Japan, which has had 1% or lower central bank rates for about 20 years along with a stagnant economy. Now the United States is seeing interest rates of almost zero and a stagnant economy. If the Fed pushed rates up to a more traditional few percent, and bank savings rates got back to a few percent, I think we’d see increased growth in the economy.

Twisting Obama's words

As the political campaign heats up, we see both sides doing their best to twist the words of the opposition while apologizing for their own side.  I found a recent case in point in a recent post by Roger L. Simon in PJ Media entitled Barack Obama, Segregationist.

Calling Mr. Obama is rather a strong statement.  So what is the basis of this statement?  Mr. Simon says its a recently released 2007 speech to a black audience by Mr. Obama.  And what is the damning statement?

How else do you explain a statement like “We don’t need to build more highways out in the suburbs. We should be investing in minority-owned business, in our neighborhoods”?

What can we conclude from this statement?  First, after listening to the full speech, Mr. Simon edited the quote - it isn't even accurate.  And in the context, Mr. Obama is saying that the poor (largely minority) have trouble holding jobs because they have trouble getting to and from those jobs.  People without a car can end up spending 2 hours walking or taking busses to a job because there are too few jobs in the places the poor live.

I've been hearing politicians of both parties making statements in favor of neighborhood jobs for decades and none of them have been called segregationist.  Mr. Simon seems to think that by acknowledging that inner city neighborhoods are largely minority and thus wanting to increase the number of jobs there, plus encourage the minorities who live in those neighborhoods to start businesses, Mr. Obama is encouraging segregation.

I certainly didn't agree with all of Mr. Obama's speech, and I'm sure I'd disagree with the methods he proposed to encourage minority owned businesses, but arguing that this statement is somehow meant to encourage or sanction segregation is too much of a stretch.

The presidential debate transcripts and media bias?

Looking for a transcript of the first presidential debate, I've discovered that the transcript changes depending on the source.  So far I've found three versions, and the variations appear to support claims of media bias.  The transccript versions are:

1. An apparent full transcript.  I found these at CNN, the New York Times, and labeled as from NPR.
2. A transcript minus portions of President Obama's remarks from Fox News.
3. A transcript missing Mr. Romney's initial remarks from the Washington Post and CBS.

The other odd thing is that the Washington Post link above (to a "running transcript" of the debate) itself contains a link to the full transcript on a different Washington Post web page.

What struck me is that the conservative news outlet (Fox) omitted portions of President Obama's remarks while two more liberal sites (Washington Post and CBS) omitted portions of Mr. Romney's remarks.  These seem to be ammunition for bloggers on both sides trying to argue bias by the opposing side.

Note:  I only checked the first portion of each transcript (initial remarks by both candidates) so it's possible that the "full" transcripts I found differ in later portions of the debate.

Don't trust headlines about the Supreme Court

A news story today shows the problem with summarizing Supreme Court decisions based on the surface facts.  The headline reads:  "Court won't hear anti-gay marriage group appeal".  However, on reading the article, the court didn't decide anything about gay marriage.  Instead it rejected the appeal of a campaign finance law in Maine.  The proper headline should have read "Court won't hear appeal of Maine campaign donor disclosure law".

The case involves a Maine law requires "groups that raise or spend more than $5000 to influence elections to register and disclose donors."  The anti-gay marriage group did not want to disclose its donor list.  So this is a campaign finance decision, not a marriage decision.

This type of deceptive headline shows up several times a year.  The Supreme Court decides a case on some technicality unrelated to the primary issue, but the news media looks at it as a decision based on the primary issue rather than the technicality.

I'm sure justices are sometimes swayed by the issue behind some technicality they are deciding, but having spent over 15 years following the court's decisions, this is not normally the case.