Is government direction the best way to achieve innovation?

See  A Critique of Mazzucato’s Entrepreneurial State by Alberto Mingardi. Excerpts: 

"The fundamental problem is that her work is based on a peculiar line of economic thinking that does not consider the inevitability of trade offs while dealing with scarce resources, and does not acknowledge the role of demand and of consumers in a modern market economy."

"It is worth noting that the way Mazzucato describes opposing schools of thought is sometimes rather curious. For one thing, she broadly equates the market-failure approach to government policy with free-market economics, which is not obviously an apt comparison. Moreover, while it is true that public choice theory does not persuasively explain innovation, that goal is plainly not what public choice theory sets out to achieve. On the other hand, public choice theory offers a very good way of understanding how policy making actually works.

In order to succeed in her own argument, Mazzucato needs to prove two things: first, that there is a treasure trove of examples showing that government intervention is ubiquitous in the history of modern capitalism (a point that won’t be controversial); and second,that a particular kind of government intervention—industrial policy—has, consistently with its own declared goals, been effective in fostering innovation."

"The reference to railways is astonishing and yet perfectly emblematic of her approach. For while contemporary grand projets such as high-speed trains are indeed financed by government, railways as an“innovation”—or, rather, when they were an innovation—were very much the creation of the private sector. At a certain point, railways in Italy, the United States, and England, where they were pioneered,were nationalized. This fact alone should suggest that government was not an early investor in railways companies.

This digression points to one of the major problems with Mazzucato’s book. She claims to have found a new regularity, a ubiquitous generalization: it takes a strong government to produce an innovative economy. However, it is difficult to claim the status of a regularity with evidence from only the last 50 years.

To put it bluntly, government expenditure expanded at such apace during the 20th century (from about 10 percent of GDP to more than 40 percent in virtually all Western democracies) that it would be surprising if it didn’t happen to produce some innovative ventures along the way. With such extraordinary growth, it is improbable that public spending wouldn’t end up in the neighborhood of innovation-producing business at one point or another.

But what about the 19th century? Wasn’t industrialization fueled by innovations and discoveries, and yet largely independent of huge public investments in R&D? The Industrial Revolution took hold in Britain first, and there government spending was basically centered on providing national defense and on servicing the debt contracted to wage wars (Hartwell 1981). Indeed, as Mokyr (1999: 46) notes,“Any policy objective aimed deliberately at promoting long-run economic growth would be hard to document in Britain before and during the Industrial Revolution. . . . In Britain the public sector by and large eschewed any entrepreneurial activity."

"Her book offers many examples of the role public policies played in promoting innovation. And yet, these innovations may often be considered as positive externalities of public intervention, as opposed to carefully designed outcomes of such industrial policies. This is problematic if you are eager to defend a government that picks winners"

"Mazzucato is rather parsimonious with administrative and organizational details and doesn’t explain what the criteria for distributing grants were, what DARPA’s assistance really entailed, or how offices were organized. She aims to convince us that “the key is that the government serves as a leader” (Mazzucato 2013: 79), but this is stated, rather than explained."

"Did the American government ever envision something similar to what turned out to be the commercial Internet?"

"The fundamental idea behind the Internet is that of“packet switching,” a digital networking communications method inwhich data is transmitted in suitably sized blocks, called packets. This concept was developed by two MIT researchers, Joseph Carl Robnett Licklider and Leonard Kleinrock, who eventually worked on ARPANET, the network that became the basis for the Internet. With the benefit of hindsight, perhaps DARPA just picked the right guys for the job"

"The relevant question is thus whether the development of the Internet took place as the result of some “mission-oriented directionality” on the part of government, or if it is better seen as merely a positive externality of public intervention."

"In defending DARPA and claiming the government did indeed invent the Internet, Mazzucato gives the impression that she views American universities as homogeneous and ready to march on the government’s orders."

"Mazzucato simply assumes that if something goes right, government must be responsible. But in the real world the mere existence of government money doesn’t account for the different nuances of institutions. Government money channeled through a competitive setting may have very different effects than government money spent following a strictly hierarchical, top-down logic."

"That SBIR [Small Business Innovation Research] has a “unique role” and “has fostered development of new enterprises, and has guided the commercialization of hundreds of new technologies” (Mazzucato 2013: 80) is something Mazzucato’s readers must take on a leap of faith. The Entrepreneurial State fails to offer a single example of a new technology that took off because of a SBIR grant. Furthermore, it is difficult to understand how the SBIR program can fit any reasonable definition of industrial policy: Requiring federal agencies with extramural R&D budgets that exceed $100 million to spend money does not signal “mission-oriented directionality "though Mazzucato proclaims the “mission-oriented diretionality” behind government-driven innovations, she sometimes confuses unintended consequences, or by-products, with intended ones"

"As Mazzucato sees it, the fact that the SBIR program is now larger and finances more projects than it did some 20 years ago is due to the retreat of private venture capital"

"This is tantamount to arguing that whenever a public program gets bigger, this is because it is needed"

"To show how touchscreen devices are something we owe to industrial policy,7Mazzucato argues that it was government funding that allowed a young PhD student at the University of Delaware, Wayne Westerman, to complete his degree and go on to cofound Finger Works, which “revolutionized the multi-billion dollar mobile electronic devices industry”

"Can we really argue that if somebody at a certain point transforms his own doctoral thesis (Westerman 1999) into an entrepreneurial idea, the latter is the product of industrial policy? Is this really the case just because his university was government-funded and his PhD was partially funded by a scholarship from the National Science Foundation, like some 2,000 others every year?"

"In the United States, the incentives [for orphan drugs] primarily amount to a slight extension of the market exclusivity provisions that apply to all approved drugs and to tax credits for R&D spending. The market exclusivity extension (which is not a patent extension) gives the manufacturer the exclusive right to sell the orphan drug for seven years after FDA approval, even if the patent has expired. This compares to an existing five years of market exclusivity for non orphan drugs.However, if the remaining patent life of the orphan drug after FDA approval is longer than seven years, the market exclusivity is essentially worth nothing.

On the top of that, there is a relatively small amount of direct research funding from government available. For fiscal year 2014,the U.S. government allocated a mere $14.1 million for orphan drug research grants, with the typical grant to an individual developer being around $100,000."

"the Orphan Drug Act, is actually a very clear case of an attempt to overcome a market failure"

"McCloskey ([2010] 2011: 52) has argued that “the path to the modern” economic world “was . . . about discovery, and a creativity supported by novel words.” Entrepreneurship played a central role in the development of the modern economy. According to Kirzner (2000: 96), a certain “propensity for entrepreneurial discovery and innovation” finds fertile grounds in a market economy, where proper incentives, a certain set of institutions, and a welcoming culture allow it to develop"

"Until 1991, the Japanese government “was funding less than 20 percent of its R&D and, remarkably,less than half of its country’s academic science—an extraordinary exception to the average OECD government, which was funding around 50 percent of its R&D and 85 percent of its country’s academic science”

"In the Soviet Union, over 70 percent of R&D spending was allocated to the military and space sectors. In Japan, those two business sectors accounted for less than 2 percentof R&D (Mazzucato 2013: 39). Such a radically different proportion may have something to do with the fact that the recipients of government grants in Japan were private enterprises"

"Mazzucato apparently considers this “last mile” of innovation extremely banal.

The Entrepreneurial State points out a number of instances in which innovations that ultimately ended up being used by Apple in its devices crossed the great river of public spending. Mazzucato asks,“Did the U.S. Government ‘Pick’ the iPod?” (Mazzucato 2013: 109),and answers in the affirmative.

"But this is hard to accept. On the one hand, the technologies behind those products may have benefited from public spending, but they were at best an unintentional consequence of government-funded research and development. “Luck” and “design” are not synonyms, and they do not become synonyms just because we are talking about industrial policy. On the other hand, Mazzucato does not and could not demonstrate that the development of some particular technologies (like GPS) happened because government planners forecast their eventual point of arrival."

"Breakthrough innovation doesn’t happen in a vacuum and is seldom realised just because of brilliant ideas and new technological achievements. “Gadgets” alone are not the be-all and end-all of innovation. To be successful, they must also create excitement among buying customers, meet a demand, and thus cause a readjustment of the factors of production."

"Government is typically a bad entrepreneur not because some economists or political philosophers deem it to be, but because the conditions under which it operates are radically different from those facing private entrepreneurs. Market-driven economies are dynamic; they have to be to survive. State-driven economies, or what Nobel laureate economist Edmund Phelps (2013: 127) calls “social economies,” are “fatally lacking in dynamism.”"

"to persuasively demonstrate that government is key to innovation, Mazzucato should discuss how government planners and engineers are selected and appointed, as well as the incentives that enable a government bureaucracy to “crowd in” innovation in the economic process.Unfortunately, she doesn’t touch upon these problems at all."

"Mazzucato carefully avoids looking into any counterargument or potential falsification of her thesis"

"Many commentators have seen in the Solyndra bankruptcy a spectacular demonstration of government’s inability to make complex investments in new technologies by picking winners—that is, a dismal failure of industrial policy (Jenkins 2011, Taylor and Van Doren2011). By contrast, Mazzucato is convinced that the fault lies with the rats escaping the sinking ship: the problem appears “when the business community [runs] out of patience or tolerance for risk”(Mazzucato 2013: 130)."

"But don’t trade offs exist for government too? Plainly, if government is supporting a certain innovation or a certain company, it won’t be able to use the same resources to support other activities or companies—nor will the private sector, where those resources inevitably originate. Mazzucato’s arguments float around in a rarefied atmosphere in which private investors allocate scarcities in an imperfect way, while government doesn’t care about the existence of scarcity at all. But this is just another sense in which Mazzucato’s entrepreneurial state is not really entrepreneurial at all."

"Mazzucato gives little consideration to the impact the taxes needed to support these “collaborative ecosystems” might have on private enterprise or consumer demand. Yet taxes are a production cost for business. Can we assume that the price of a certain good is completely independent from its production costs? If not, higher taxes may eventually become higher prices for consumers, with a dampening effect on the consumer demand that drives private innovation. Similarly, is it realistic to imagine that private businesses will continue to fulfill their central role in innovation, even as their profits are squeezed by higher taxes? Incentives matter, in innovation as in everything else."

"Mazzucato does not attempt to quantify the social cost of any deficiency in government R&D. In this sense, Mazzucato belongs to that group of thinkers who, to quote McCloskey (2014: 77), never think it necessary to offer evidence that their “proposed state intervention will work as it is supposed to” or that “the imperfectly attained necessary condition for perfection before intervention is large enough to have much reduced the performance of the economy in aggregate.”"