Home Economic Trends Capital Accumulation, Not Government, Is the Key To Technological Innovation – Frank...

Capital Accumulation, Not Government, Is the Key To Technological Innovation – Frank Shostak (11/27/2019)

According to Mariana Mazzucato, the RM Phillips Professor in the Economics of Innovation at the University of Sussex, government is an important factor in the promotion of innovation and thus economic growth. In particular, she challenges the popular view that innovation happens in the private sector, with governments playing a limited role. Many commentators regard her as a revolutionary thinker that challenges the accepted dogma regarding the role of government in promoting innovations and economic growth.

In her 2013 book The Entrepreneurial State: Debunking Public vs. Private Sector Myths, Marianna Mazzucato argues that the United States’ economic success is a result of public- and state-funded investment in innovation and technology. In his critique of the book Alberto Mingardi writes:1

The Entrepreneurial State. Mazzucato’s award-winning work has been widely acclaimed as a turning point in scholarship on innovation (e.g., Upbin 2013 and Madrick 2014). Martin Wolf Wolf, M. (2013) “A Much-Maligned Engine of Innovation.” Financial Times (4 August 2013) argued that the book provided a successful justification for the role of government in promoting innovation, which he claimed had unduly “been written out of the story.” Based on The Entrepreneurial State, Wolf deduced that our “failure to recognize the role of the government in driving innovation may well be the greatest threat to rising prosperity.” Lack of adequate government funding for research and development (R&D), he suggested, could slow the pace of innovation.

Mazzucato holds that understanding the difference between the “myth” and the reality of this success is particularly important: “If the rest of the world wants to emulate the US model, they should do as the United States actually did, not as they say they did.”

Professor Mazzucato is on the mission of changing the perception of the government from a bureaucratic machine that stands in the way of innovation, to government being the lead risk taker in terms of investing in innovations.

She then details the history of how the US government is actually in many ways responsible for much of the large-scale innovation, which drove the country to economic success such as the internet. She also gives the example of how the US National Science Foundation funded the algorithm, which helped create Google’s search engine.

Mariana Mazzucato holds that the real driver of innovation isn’t lone geniuses but state investment. She is of the view that “Steve Jobs has rightly been called a genius for the visionary products he conceived and marketed, but this story creates a myth about the origin of Apple’s success.” “Without the massive amount of public investment behind the computer and internet revolutions, such attributes might have led only to the invention of a new toy.”

According to Mazzucato it seems that if not for the government investment we would not have all the technological advancements that most people take for granted and mistakenly attributing to the private sector. In this respect, she follows the footsteps of John M. Keynes that wrote in the paper in 1926, “The End of Laissez Faire,”

The important thing for Government is not to do things, which individuals are doing already, and to do them a little better or a little worse; but to do those things, which at present are not done at all.

How the Government Funds Itself

It is all well to suggest that the government bureaucrats’ initiative was responsible for US economic growth, but the question arises of how all these government actions were funded? After all, the government is not a real wealth generating entity.

For the government to implement a particular project it must obtain the funding from the real wealth generating private sector. So, in this sense, projects such as the internet and the Google search engine were funded by the private sector and not the government as such.

The diversion of real funding from the private sector toward government projects — no matter how important these projects appear to be — in fact disrupts the process of real wealth generation.

As an analogy, it is all well to suggest that it would be a good idea that every individual should be driving a luxurious Mercedes, however at present this would not be realistic if individual’s income can only support a bicycle. A policy, which will force people to have a Mercedes is going to undermine their important priorities, i.e., being able to feed themselves.

Contrary to Mazzucato, the fact that the private sector appears to be passive in its willingness to invest in new technologies does not suggest that the businesses are shortsighted and therefore governments’ bureaucrats must replace the private sector entrepreneurs.

It means that the private sector entrepreneurs have reached a conclusion that investments in new technologies are likely to be on the lowest priority list of consumers — given the consumers’ state of real wealth. This means that such investments are likely to be not profitable.

With the expansion in real wealth, entrepreneurs are likely to discover that some time in the future investments in new technologies could be the right decision.

What Mazzucato is in fact endorsing is central planning, which failed badly in economies such as the former Soviet Union. She is on the mission to improve the free market. But what we have today is not a free market but what is largely a government-controlled economy. True reforms could be achieved by removing the government bureaucrats input from the decision making process of the private sector.

  • 1. A critique of Mazzucato’s “Entrepreneurial State,” Cato Journal 35, No.3 (Fall 2015).


Contact Frank Shostak

Frank Shostak‘s consulting firm, Applied Austrian School Economics, provides in-depth assessments of financial markets and global economies. Contact: email.