From Concorde to the iPhone, state intervention drives technological innovation
History tells us that state involvement is the best route to prosperity. Our politicians need to think big and accept the risk of failure
By Paul Mason
Jul 27 2014
If you wanted to radically alter the economy, making a country such as Britain as dynamic as China or Brazil, what would the state have to do? Intervene, obviously, but how?
That has become a hard question to answer since the onset of free-market economics. Much of the old apparatus of state control has been dismantled. Plus, the political culture in which planners, engineers and technical innovators inhabited the same offices has been shattered.
If a modern-day civil servant wanted to place the proposal to build, say, Concorde on a minister’s desk, there wouldn’t even be an obvious ministry to go to. It was the UK’s Ministry of Supply that set up the supersonic airliner project: it commissioned a prototype aircraft, immediately, at its first meeting.
When state innovation projects worked, they did so because their owners were politicians, who were allowed to think big and who accepted the risk of failure. In the freemarket model, the private sector is given the task of driving innovation. But though the individual results look spectacular – from info-tech, genetics and materials science to neuro-medicine – we have not experienced the same “lift-off” as in previous industrial revolutions, where all the innovations synergise, producing high-dynamism and rising wealth for all.
Instead, in the developed world, amid rapid tech innovation, we sway between low growth and stagnation. If the information revolution creates the possibility of a “third capitalism” – as different from the industrial era as it was from the age of Sir Francis Drake – then it is, so far, a possibility unrealised.
And a growing number of economists believe it will remain so unless we rethink the role of the state. The Sussex University professor Mariana Mazzucato, whose calls for an “entrepreneurial state” were greeted with incomprehension four years ago, recently put together a conference attended by ministers, central bankers and serious investors. The buzzwords were: think big, and do “mission-oriented finance”.
Mazzucato points out the state played a role in financing nearly every key technology in an iPhone, from GPS to the touch screen. She says that, even now, the lion’s share of funding for climate change technologies comes from state investment banks and public utilities, with just 6% coming from private capital. The problem is, the modern state sees this as accidental and residual. It avoids major projects, and their associated risks, seeing its role as mainly to act where the market “fails” – as with the near evaporation of venture capital funding for technology startups in the UK.
Mazzucato, in a paper with LSE professor Carlota Perez, points out the danger of leaving tech to the private sector. In an economy bloated with printed money and cheap credit, if capital can’t find real-world, high-growth, high-profit opportunities to invest in, it will pool into the finance system, creating one bubble after another.
Seen from this angle, the financial crisis looks less like the product of bad practices in the City, and more like a structural crisis. At all previous takeoff points, capital in the finance system flowed out into the real economy, where a paradigm had been established making it easy for businesspeople to invest in tried-and-tested models, with predictable and growing demand.