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The driving force of innovation is the free market, not the State, according to a report by Instituto Juan de Mariana

Madrid, 30th November, 2016.-

  • The driver of technological progress is the free market, and not State programs
  • R&D public policies result in disastrous outcomes
  • Innovations such as the iPhone or Google are a by-product of the market, not of public investment

Do States have an essential role in the processes of innovation and entrepreneurship as Italian economist Marianna Mazzucato suggests? Should these processes be centrally planned? In Instituto Juan de Mariana's report, Mitos del Estado emprendedor: ¿realmente es el Estado el impulsor de la investigación básica y la innovación?  (The Entrepreneurial State: Is the State Really the Promoter of Innovation and Basic Research?), we challenge these statements and conclude that the free market is the driving force of innovation.

Traditionally, the capitalist economic system has been associated with creative destruction and disruptive innovation. In fact, if there is one characteristic feature of the capitalist system, acknowledged even by its most fierce critics, it is the promotion of technological development. Recent examples, such as Apple’s iPhone, Google’s search engine, or Netflix’s content aggregator, illustrate how capitalism continues to revolutionize our daily lives.

There are parallels between Mariana Mazzucato and “the economist of inequality,” Thomas Piketty, for both have achieved prestige and popularity after accompanying their research, very critical of capitalism, with successful promotional campaigns.

Since 2013, Mazzucato has allegedly rejected the idea that capitalism is the essential driving force of the most important innovations of the last decades. Thus, in her acclaimed book, The Entrepreneurial State, she contends that those technological breakthroughs are actually the result of state research programs. According to the Italian economist, societies therefore owe their present economic progress to the State and its research, development, and innovation policies. Apple’s iPhone and Google’s search engine are supposedly products of state planning.

Mazzucato’s work has had a vast impact worldwide and has helped to modify the way many politicians, economists, and journalists understand the process of innovation. Mazzucato, for instance, defends the creation of State-owned banks to finance the research process, as well as public control over the companies benefited by State aid to research, development, and innovation. In particular, Mazzucato’s statist rhetoric sets the basis for legitimizing tax increases and growing economic interventionism, always under the excuse of long-term benefits to society.

After decades of States appropriating half the wealth generated by capitalist economies and regulating the other half, it is impossible not to trace any technological progress back to state intervention. Having invested colossal amounts of money in pharaonic research programs, it would have been quite unlikely for the State to have nothing to show for it.

Nonetheless, what would the extent of progress have been had the State not taken those resources away from society? It is impossible to account for all the creative genius that could have emerged within an environment in which millions of human beings had acted free from the obstacles and difficulties brought about by the rise of the entrepreneurial State after the Second World War.

Hence, it is necessary to bear in mind that the entrepreneurial State cannot come without costs:

  • Opportunity costs: Due to State financial aid to research and development, taxpayers are forced to pay for projects with uncertain outcomes. Furthermore, those projects lack the information provided by market prices to determine whether the means used to deploy them are creating or destroying value. Likewise, a crowding-out effect is induced when resources are diverted away from the economy through fiscal policies, which means that private entrepreneurs lack the resources to undertake their own projects.
  • High-risk bets: The decentralized and incremental experimental process (trial and error) characteristic of the free market is overridden when research and development plans restrict research to one specific state-approved path. This is a very risky strategy, because in the event of failure society will have wasted valuable resources in useless, inefficient projects. Society will also find itself devoid of more suitable and competitive market-generated solutions to the detriment of the general welfare.
  • Perverse incentives: The proliferation of rent-seekers becomes inevitable. This is the case with the new body of bureaucrats that seek to protect their status quo at all costs, attempting to discredit and boycott those who compete for the provision of original solutions outside of the mainstream production models. This is also the case with spurious entrepreneurs who, instead of devoting themselves to offering ever better goods and services, resort to lobbying in order to take advantage of regulations and public subsidies that can guarantee them monopoly positions. Disruptive innovations are thus curbed and, along with them, the renovation of old patterns of productivity (energy, means of transportation, personalized medicine, new materials, personal autonomy, self-employment, etc.). This benefits only a few privileged individuals, whereas creative opportunities for free-market entrepreneurs vanish and society loses the outcomes of those disruptions.

In a context in which Spain must redefine its productive model for the coming decades, many call for the State to lead that transformation through public investment and regulation of research and development policies. The purpose of this report it to refute Mazzucato’s theories in order to keep politicians, journalists, and intellectuals from getting a distorted understanding of this crucial issue.

The Entrepreneurial State: Is the State Really the Promoter of Innovation and Basic Research? seeks to dispel the myths to which Mazzucato has contributed:

Myth 1. The State is the essential driving force of innovation and scientific and technological progress

The process of developing innovations is evolutionary, decentralized, cooperative, and competitive. There are no identifiable actors to receive credit for it. Traditionally, the private sector has led technological progress. The only historical event that truly marked a change in the trend of long-term economic growth, the Industrial Revolution, was brought about with hardly any state support.

Myth 2. A unified entrepreneurial effort drives the State’s technological policies

States are entities consisting of various agencies; hence they have no unified will. Research conducted at specific public universities may not be necessarily determined by the same plan that regulates the activities of state laboratories. In particular, state expenditure on innovation within the U.S. is very decentralized.

Myth 3. State intervention in research, development, and innovation policies is always beneficial

Every economic action entails opportunity costs and can result in unplanned consequences. State investment in innovation can distort progress and direct innovation toward fields that are removed from consumer demands, thus withdrawing resources from consumer-oriented projects and decelerating innovation in those areas. Moreover, public expenditures on research, development, and innovation policies may not cause more technological progress but, rather, simply redistribute income toward scientists and engineers.

Myth 4. It is necessary for the State to lead the national innovation system in order for it to work properly

The coordination function of the State can be taken over by society itself in a way that is more suited to society’s needs. State attempts to lead technological change tend to fail.

Myth 5. The iPhone, Google, and similar enterprises and inventions are the result of public investment in research, development, and innovation

The iPhone and Google are attributable to their inventors. A thorough study of the origin and evolution of the technologies that make the iPhone and search engines possible shows that progress in both cases occurred before any state intervention, and that many agents contributed without any central planning.

 


Additional resources (in Spanish):

  • Download the Press Release in Spanish here.
  • Download the Report (in Spanish) here.