Support for The Entrepreneurial State

The synthesis in economic theory presented in this weblog includes the crucial role for National Investment Banks (NIBs), see DRGTPE or the Economic plan for Europe entry.

The role of the NIBs is a matter of logic and experience. During an economic downturn companies cut back investments and then NIBs implement prospects that they might sell off in a later upswing. Experience has shown government involvement in major changes in society, such as railways, electricity and so on. Such an approach towards investments is also part of the Rehn Meidner model for the Scandinavian economy.

You may be interested in the report by professor Mazzucato “The Entrepreneurial State“, see the PDF there, or the video’s on her website. I strongly recommend and support this. (Dutch readers may be interested in the article in NRC Handelsblad March 14 that caught my attention.)

What Mazzucato adds to the analysis on investments is a deeper discussion of (1) the US experience with the Defense Advanced Research Projects Agency (DARPA) and the Small Business Innovation Research (SBIR), (2) the confusions and myths of investment policies in the EU.

Thus, DRGTPE restricts itself to the main argument and assumes that this is clear enough both for who has studied economic growth and read Keynes’s General Theory about the animal spirits, and for who knows what to avoid from the failures of industrial policy. Now however “The Entrepreneurial State” provides details that many people may require to become convinced.

The main current confusion and myth is that the state should step back and leave investments to the market. There however is the sound alternative of state involvement that combines freedom with efficiency. DRGTPE uses the banking label and Mazzucato uses the network label.

Mazzucato recalls the argument in The Economist of April 28 2011: “(…) grappling with entrenched joblessness deserves to be far higher on America’s policy agenda. Unfortunately, the few (leftish) politicians who acknowledge the problem tend to have misguided solutions, such as trade barriers or industrial policy to prop up yesterday’s jobs or to spot tomorrow’s. That won’t work: government has a terrible record at picking winners.”

Mazzucato refers to the record and finds: “A look at the massive impact that government’s targeted large investments in industries such as steel, railways, air travel, silicon microchip manufacturing, automotive manufacturing, computer, biotechnology and the internet, and nanotechnology shows this is just not true. Without the government pursuing a targeted investment strategy, none of these industries would have come into being. And being first matters because of the strong economies of scale.” (p91)

The distinction between the USA and the EU is not clearcut by the way. America seems to forget that it invented efficient network models. Mazzucato: “Many of the problems being faced today by the Obama administration are indeed due to the fact that US taxpayers are virtually unaware of how their taxes foster innovation and growth in the USA, and that corporations that have made money from innovation that has been supported by the government are neither returning a signifcant portion of the profts to the government nor investing in new innovation. They are sold the idea that this growth occurs as a result of individual ‘genius’, to Silicon Valley ‘entrepreneurs’, to venture capitalists, to what they think is a ‘weak’ state compared with the European system. These battles are also being played out in the UK where it is argued that the only way for the country to achieve growth is for it to be privately led and for the state to go back to its minimal role of ensuring the rule of law.” (p110)

State involvement in investments is tricky, if only because of the ambiguity in the word “state”. The USA has an overall state but one vested in freedom. The former USSR had a state but vested in dictatorship and bureaucracy. If it is necessary to have state involvement in investments (insight 1) the crucial question is: are there forms that combines freedom and efficiency ? The answer is: yes, there are such forms (insight 2).

PM. That article in The Economist has a curious statement on Dutch disability pensions: “And there, strange as it may seem, America could learn from Europe: the Netherlands, for instance, is a good model for how to overhaul disability insurance.” Well, the system around 1990 was abused by employer and employee unions to label unemployed as disabled. Individual employers enjoyed the ease of dismissal and turned the costs over to the community. It was a silly system and we can learn nothing from its abolition. The current system for the disabled still is not targetted at keeping them employed, so still leaves much to be desired.

PS. See also the entry on the Keynesian years 1981-2007 for how much stimulus has been required in the conventional approach to generate investments.

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