Thursday, August 08, 2013

State is the primary driver of innovation

Everybody associates innovation with private entrepreneurship if not individual genius; the state is the great stifler of innovation. Rubbish, says a recent book reviewed in the FT by Martin Wolf.

It is known, but not widely recognised, that most of the great innovations of our time have come out of public funded research at private institutions, notably universities. The book goes further and contends that public institutions themselves have driven research in a big way :
Mazzucato notes that “75 per cent of the new molecular entities [approved by the Food and Drug Administration between 1993 and 2004] trace their research ... to publicly funded National Institutes of Health (NIH) labs in the US”. The UK’s Medical Research Council discovered monoclonal antibodies, which are the foundation of biotechnology. Such discoveries are then handed cheaply to private companies that reap huge profits.

A perhaps even more potent example is the information and communications revolution. The US National Science Foundation funded the algorithm that drove Google’s search engine. Early funding for Apple came from the US government’s Small Business Investment Company. Moreover, “All the technologies which make the iPhone ‘smart’ are also state-funded ... the internet, wireless networks, the global positioning system, microelectronics, touchscreen displays and the latest voice-activated SIRI personal assistant.” Apple put this together, brilliantly. But it was gathering the fruit of seven decades of state-supported innovation.

This book, needs to be read with Chinese economist Justin Lin's book, which argued that industrial policy or targeting of particular sectors by the state, has played a key role in growth. What emerges is a different view of the state from what we have been asked to believe in recent years: the state as the primary engine rather than mere facilitator or provider of law and order and defence.

Wolf's conclusion is worth quoting and worth remembering the next time somebody brays about 'rolling back the state':
The failure to recognise the role of the government in driving innovation may well be the greatest threat to rising prosperity.

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