Entrepreneurship versus the state
I really like this Slate article written by Mariana Mazzucato and entitled It’s a Myth That Entrepreneurs Drive New Technology.
In it she makes the point that lobbyists for tech companies have overemphasized the role of the entrepreneur in our nation’s technological advances, and likewise underemphasized the role of the state. From the article:
Whether an innovation will be a success is uncertain, and it can take longer than traditional banks or venture capitalists are willing to wait. In countries such as the United States, China, Singapore, and Denmark, the state has provided the kind of patient and long-term finance new technologies need to get off the ground. Investments of this kind have often been driven by big missions, from putting a human on the moon to solving climate change. This has required not only funding basic research—the typical “public good” that most economists admit needs state help—but applied research and seed funding too.
One of her examples was the internet itself, which brings me back – my mom was involved with that project.
Some of my earliest memories are going with my mom to fix something at BBN where she had superuser access on the internet back when it was populated by very few people – the president and some army generals. And no, she didn’t have any kind of clearance, they didn’t think very hard about computer security back then, but on the other hand my mom is scrupulously honest and would never read anyone else’s mail. And it was all done through DARPA or other Department of Defense funding.
Funny story. When I was little, my mom was in charge (with some other people, on a rotation) of keeping the internet running, which she would refer to as “being on call”. She’d leave, sometimes in the middle of the night, to get these massive computers booted back up. I’d go with her if nobody else was around to watch me, and I remember she’d sometimes get underneath these massive metal boxes, and I’d just see her feet sticking out at the bottom, not unlike a mechanic under a car at a garage.
Anyway, the story is that one time she was on call on Christmas Eve and got called in on an emergency, and in my stocking the next morning I got “IOU” notes. That makes for a pretty crappy Christmas morning when you’re 8! My personal sacrifice for the internet.
Going back to the “state vs. entrepreneur” debate. One thing Mazzucato didn’t mention, but that I will, is the issue of waste. People talk all the time about how wasteful the state is – how there are too many people, and they don’t do much, and they never get fired – but they don’t appreciate how very wasteful the world of start-ups is. Most new companies fail entirely and never do anything at all constructive. I personally have seen hundreds of people working on projects for years in the realm of “entrepreneurs” that everyone knows will do nothing. Talk about waste!
Next, let’s go to why this all happens. It’s all about taxes. From the article:
In this era of obsession with reducing public debt—and the size of the state more generally—it is vital to dispel the myth that the public sector will be less innovative than the private sector. Otherwise, the state’s ability to continue to play its enterprising role will be weakened. Stories about how progress is led by entrepreneurs and venture capitalists have aided lobbyists for the U.S. venture capital industry in negotiating lower capital gains and corporate income taxes—hurting the ability of the state to refill its innovation fund.
Totally agreed. It’s a beautiful story aimed at confusing people about whether Apple or Google or GE should pay any taxes at all.
But here’s where I don’t follow her, when she suggests a possible solution:
It is time for the state to get something back for its investments. How? First, this requires an admission that the state does more than just fix market failures—the usual way economists justify state spending. The state has shaped and created markets and, in doing so, taken on great risks. Second, we must ask where the reward is for such risk-taking and admit that it is no longer coming from the tax systems. Third, we must think creatively about how that reward can come back.
There are many ways for this to happen. The repayment of some loans for students depends on income, so why not do this for companies? When Google’s future owners received a grant from the NSF, the contract should have said: If and when the beneficiaries of the grant make $X billion, a contribution will be made back to the NSF.
It’s not that I don’t like the idea in principle. But a problem with the corporation/ people debate is that one critical way that corporations are not like people is in terms of long-term liability. People work at corporations, and when it’s convenient for them, they leave and go somewhere else or start a new company (whereas it’s harder to change bodies). That makes sense in many situations, but it wouldn’t be consistent with her tax-me-when-you-get-rich plan.
In other words, say I form a company that gets NSF funding, comes up with something brilliant, and starts to make huge profits. Then, in order to avoid losing any of my hard-earned dough, I dissolve my company, fire most of the workers, and then start up a new company that doesn’t owe anything to the NSF. I can’t see how this doesn’t happen, and I can’t see how the NSF fights back against it. Lawyers, please explain why I’m wrong.
Personally, I think the real solution is to stop listening to lobbyists and raise taxes, or at the very least make the tax rates effective rather than nominal.
mathbabe 
This old (2000) paper http://www.ifs.org.uk/bns/bn12.pdf concludes that R&D spending has a higher social return than private return. That could be interpreted as a justification for public sector investment spending (though the paper takes a different turn and argues for greater government incentives for private R&D).
I also recall some analysis suggesting that certain industries (particularly the auto sector) have a very low social return on R&D spending. I believe the claim was that a meaningful amount of private investment is actually just marketing spend in disguise that doesn’t lead to any actual innovation (think changing this season’s colors from red to green, then back to red next season). Feel free to take this skeptically until I can find the citations.
Whether public or private, investment spending has some structural opponents: (a) the cost is clear and near, while the benefit is uncertain and future, (b) what deserves to get funded is a big debate. Overall, I’d say the US has done a surprisingly good job relative. Maybe that’s because so much of the funding comes through DOD and both mainstream parties seem to agree that killing people in increasingly sophisticated ways is worth funding. How I learned to stop worrying and love the drones?
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haha nice. Thanks for the reference!
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I think you should look up the history of the internet, and by that I mean the evolution of the TCP/IP protocol – as electronic data networks were nearly a century old at that point not to mention phone networks (both private developments). While the “state” played a role, as Obama would say “you (the state) did not build that” in the sense of both the critical infrastructure and the protocol itself. The internet would have come into existence even if Al Gore never lived (oh if only that were the case).
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I’m no historian, and I am not saying it was like, one guy who did it. In fact I’m saying it’s _never_ one guy who did it, and research over time really does stuff.
But having said that, my mom worked with _the guy_ who invented the concept that the “@” sign should mean “at”. That’s pretty cool.
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It seems like this is a solved problem in finance: it’s called an equity stake, and has lots of legal history and procedure to (imperfectly) prevent insiders from screwing arms-length claimants when an enterprise seems to bear fruit. Other than a taboo against “state ownership of firms” (that might be mitigated by classes of shares without control rights or indirection through venture/sovwealth funds), I’m not sure why “equity stake” isn’t the answer here.
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I hear you, and you’re probably right that it’s the closest near solution. One major difference though, which I think makes a big difference, is that if I join up with people to work on an idea in finance or tech, and they screw me, then I go start my own company doing the same thing down the street.
In other words, there’s a real threat of fucking me over, which hopefully keeps them from doing it, namely competition. I don’t think the government has the same threat to offer, since they’re not in the business of starting small and agile companies. I could be wrong, and there’s nothing that prevents them from building that threat/ capability explicitly.
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@Cathy: The proposed universal exchange is one way our govt. is stepping in to level the big business heath-care-pharma-insurance playing field. At a time when private corporations are hoarding cash to the tune of 1.5 trillion dollars, we cannot help but recall FDR’s words “if the private sector cannot or will not hire millions of workers, then there is no alternative but for the federal government to do it”.
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Start-ups are wasteful with their own money, the state is wasteful with MY money.
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But my point is that they’re really not wasteful.
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‘They’ the state or the entrepreneurs?
Also I think there is a distinction in the two different kinds of wastefulness you mentioned. We expect a huge portion of start-ups to fail. Most ideas aren’t good (or at least marketable) and execution is tricky but at least we learn that what they tried doesn’t work, or shouldn’t be done their way, etc. Some lessons are expensive, which includes large groups of people working on long-shot projects which end up going nowhere but we have something to show for it and despite the general failure we can still derive some benefit from the situation.
The other kind of wastefulness, exemplified by the state, is one where everything is slowed down by ridiculous bureaucracy and politics and nothing gets done or gets done egregiously slowly. This is a different kind of waste and one from which we derive no benefit.
And like ax42 said, there are sometimes disincentives to running a clean operation at the state level. The largesse with my money (waste from my POV) is a boon to the politician who dispenses with it in a way to maximize votes in the upcoming election, knowing full well I don’t really have a way to hold him accountable in any way that matters. Why would he or she clean up the pork?
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I agree that the Slate proposal wouldn’t work but for a much more fundamental reason than the one you raise. it misunderstands the nature of research and innovation. The connection between the long-term research and innovation is much more diffuse and indirect. It is not as if the government sponsored specific research that directly led to the products people are making money from. The government research developed infrastructure and ideas that people entirely unconnected with that research were subsequently able to use to make money. Also, the social value is much broader than company products. I certainly benefit from the internet (and therefore in some sense owe the government something) but I have never built anything or sold anything based on the internet.
At the same time, I don’t think this is a problem in need of a solution. having helped to foster the internet, the government has raised its tax revenues and recouped its investment. It didn’t need to tax the specific companies that it supported.
I do agree that capital gains should not get preferential treatment but mostly for other reasons. Most capital gains are earned on investments that have little to do with entrepreneurship or even R&D at all. Also, if anything today the US has a problem of too much capital relative to labor. Why should we tax labor at a higher rate?
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cf. Paulina Borsook’s arguments in Cyberselfish: the article http://www.motherjones.com/politics/1996/07/cyberselfish and the book http://www.amazon.com/Cyberselfish-Critical-through-Terribly-Libertarian/dp/1586480383
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Steve Blank on the Israeli Government helping startups:
To date, Israel is only country that has engineered a successful entrepreneurship cluster from the ground up. It’s Yozma program kick-started a private venture capital industry with government funds, (emulating the U.S. lesson of using SBIC funds.), but then the government got out of the way.
In addition, the Israeli government originally funded 23 early stage incubators but turned them over to the VC’s to own and manage. They’re run by business professionals (not real-estate managers looking to rent out excess office space) and entry is not for life-style entrepreneurs, but is a bootcamp for VC funding.
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This, to me, is the key issue. What’s more, the people dispensing the state’s largesse (ie my money) are not genuinely held accountable (and are, in fact, often rewarded at a personal level for funneling more money to their own pet projects/constituents).
BTW there’s an article in this week’s Economist discussing the issue as well.
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You should not like this idea, even in principle. And using Google as an example is particularily silly.
Yes, Brin and Page’s advisor at Stanford surely had an NSF grant. But society has been amply rewarded for this money many times over. The main way Google brings value to us is NOT by any taxes it pays. It’s through the services it provides to the public. Just the value of the search services (provided gratis!) far exceeds (by orders of magnitude) the value of any taxes Google could possibly pay. Now add to that the advertising services (provided for money, but nevertheless quite valuable to Google’s customers), the data-archiving services, and everything else Google does.
In fact, this is a general pattern. Treating companies as if the main way the generate value to society is by paying taxes is backwards. The companies generate value by conducting their business. That I paid money for the laptop I’m using to type this doesn’t mean that I lost and the Lenovo gained by the transaction. Rather, we both gained (for example, I can now type this post). Moreover, if Lenovo used the fruit of NSF-funded research to improve this laptop, then I’m now benefiting from that.
Finally, the fundamental research results that started Google — the part that was funded by the NSF — was published in academic journals. In other words, while Brin and Page had a first-mover advantage, anyone whatsoever (say, Altavista and Yahoo!) was free to adopt PageRank. Suppose Brin and Page lacked their entrepreneurial spirit and were content to get their PhD and continue in Academia, and that someone else had read their technical report and developed a successful search engine using PageRank. Would you have billed that person $X billion? If not, why treat Brin and Page any differently?
I’d say that just the added value to society of Google’s gratis search service is, by itself, greater than the NSF budget. Of course, only US taxpayers fund the NSF, but then Google’s search service is not the only benefit they get which has its roots in an NSF grant.
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Lay person question: is there any empirical evidence that advertising generates any value for the society as a whole?
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I think your assessment of the value of Google relative to the value of other activities with some federal funding involved in the research behind them is terribly naive.
Surely disparate things like lasers or genetically engineered grains have generated, by orders of magnitude, much more value than even the best search engine?
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“it is vital to dispel the myth that the public sector will be less innovative than the private sector.”
Didn’t they already try that in the Soviet Union?
Yeah, those stupid Germans & Koreans & Cubans who lost family trying to escape the genius of the public sector…I hope you will be the one to tell them that they risked everything based on a myth, because I wont.
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You are exactly right. What incentives do they have for efficiency? They are buying themselves votes with my money. Unless it’s something really atrocious, however many votes I can take away by raising a stink about what they’re doing they’ll go buy back, and more. Using my money.
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Reblogged this on analyticalsolution and commented:
Whether an innovation will be a success is uncertain, and it can take longer than traditional banks or venture capitalists are willing to wait. In countries such as the United States, China, Singapore, and Denmark, the state has provided the kind of patient and long-term finance new technologies need to get off the ground. Investments of this kind have often been driven by big missions, from putting a human on the moon to solving climate change. This has required not only funding basic research—the typical “public good” that most economists admit needs state help—but applied research and seed funding too.
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Well imagine that DARPA/NSF could charge something ridiculous small like .0000001 of a cent for every packet sent via TCP/IP as a patent fee ad infinitum (they paid for the research on the protocol after all). The money flowing back into their research budgets an an endowment . MY back of envelope calculation suggests this would NSF an awfully nice endowment and pay for all future research it would ever do. no??? The point is blue sky research is unbelievably wasteful as Cathy says but the wins are so big they dwarf what VC expect. Tenure is a similar animal, many profs waste tenure but the one who make fundamental discoveries more than pay for the wastrels… I’ve often defended tenure as teh ultimate form of venture capital…
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Everyone has some creative on taxing, and let’s face it the government is slow to change tax codes so going around it with new ways of taxation can’t hurt a bit. I have my campaign that would benefit both consumers with privacy and create funds to help the FDA/NIH or whatever entity one would want to designate by taxing the data sellers, grab that cold hard cash every quarter while it’s hot:) It just goes into their stash of cash, easy money as there’s no IT infrastructure built to regulate and that being said, all privacy laws and bills are set up to fail without that element. I write to the FTC on this on a regular basis and send them my blog posts, worst they can do and it’s what I’ve seen so far is ignore me:)
You can’t think that Congress is going to fix anything soon either as 84% of the Senate, 84 senators that is use all paper methodologies for their work and do not take advantage of the digital capabilities they have available, and we will continue to get low tech band aid solutions which are partial answers for hi tech problems. Reinstating Glass Steagall, and I like Elizabeth Warren and she’s about all we have is a good example of a low tech band aid for high tech problems.
I ran across this interesting video about how the accountants are taking over the regulators as relates to tax and how big corporations go about separating their CEOs from this element so the two don’t get associated. Interesting…video says you don’t get a tax haven that works they say without one of the big 4…S and P, Price Waterhouse, Ernst & Young and Deloitte…anyway one more element out there to deal with on the runaway tax issue:)
http://ducknetweb.blogspot.com/2013/08/the-tax-free-tour-documentary-on-how.html
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Interesting — Cathy, you make the same point I just made in a response to a letter to the editor, in response to my article about the Mazzucato book at this site: http://advisorperspectives.com/newsletters13/Did_Steve_Jobs_Really_Build_That.php.
A reader wrote in as follows (misspellings not corrected): “Michael Edesses fails to even discuss the billions and billions of dollars of government waste. Sue there has been some good to come from government funding but that pales in comparison to government waste
and interference. As such his one sided, liberal view of Mazzucato’s misguided view of government’s role in innovation is sorely lacking. Hey, maybe every congressmen needs those 25 paid aids and assistants to bring true entrepreneurial enlightenment to us all. Maybe we need more governmental agencies and IRS agents to chace political foes, etc., etc., etc.”
My response was: “The writer’s sarcasm aside, I think Mazzucato has a good point about government “waste”. It’s conventional wisdom that venture capital hits paydirt in only one in ten of its investments, so the others are “waste”. Why should government investments be held to a different standard?”
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Nice. Yes someone forwarded me your letter. We’re on the same wavelength clearly.
Cathy
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Cathy I think it’s so cool your mom was an internet pioneer. you should share her contributions with more people, it would be very inspirational for young girls. What’s her name?
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