The Entrepreneurial State

One of my favorite serial articles in the Economist is Schumpeter. Each week the editors that write this column apply the economic philosophy of Joseph Schumpeter to an event or idea. The foundation of this philosophy is the idea of creative destruction. This involves current entrepreneurial forces that destroy previous market activities. The horse and buggy is replaced with automobiles, and land line telephones are replaced with hand held wireless phones. This week’s article discusses the role of the state within this process.

The writers quote Mariana Mazzucato, from Sussex University, as she explores in her book “The Entrepreneurial State”  how the state can support innovation an economic growth. In fact, she argues that without the state’s role commerce just may not be as successful as it could.

I for one usually fall on the Jeffersonian side of the argument concerning the size of government. “Americans have traditionally been devided between Jeffersonians (who think that he governs best who governs least) and Hamiltonians (who favor active government).” However, I do see the validity of an active role by government in the creation of entrepreneurial opportunity.

Mazzucato argues that Apple would not have been as successful without the role of government in the creation of the internet.  “Consider the technologies that put the smart into Apple’s smartphones. The armed forces pioneered the internet. GPS-positioning and voice activated virtual assistants. They [meaning the government] provided much of the early funding for Silicon Valley.” So maybe we are being a bit harsh when it comes to wanting to keep government out of business?

Schumpeter makes another interesting point. “Economists have long recognized that the state has a role in promoting innovation. It can correct market failures by investing directly in public  goods such as research, or by using the tax system to nudge businesses towards doing so.” This can help create the forces required by Schumpeterian theoriests to creatively destroy less efficient processes while replacing them with higher performing processes.

Before I jump on the Hamiltonian bandwagon I have to raise the red flag. The government is not known for its ability to run things efficiently and effectively. In fact, due to its ability to raise money, it can escalate is commitment to bad decisions quite easily. And secondly, government does not do a good job of picking winners and losers. They usually pick their friends, or campaign contributors, thus leading to a cronyistic system.

That said, I do think Mazzucato makes a good point. The state, or government, has an opportunity to create infrastructure that can support creative and innovative opportunities for business. This means making sure our information and physical highways are top notch. This means creating tax structures that support small and medium size companies to thrive. This means government spending on research.

There is a reason why the United States economy has grown to the largest in the world. Our businesses have had the opportunity and support necessary to grow. If Mazzucato means an entrepreneurial state can continue this then I am all for it.

And that is my thought for the day!

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