October 21, 2014
The European Union has opened a debate on how to stimulate the European economy. In the meantime, preparations are under way for negotiations over the European climate and energy policy. In both cases, the debate is about how to encourage entrepreneurs to invest.
The European Commission is working on a way to compel unwilling businesses to invest, using the carrot by offering public funding in the first case, and the stick in the form of stricter climate policy targets in the second one. The actions proposed by the EC are in each case underlain by legitimate objectives. The EC has resolved to take matters into its own hands, seeing that time is pressing and businesses are hesitant, and also because this is a matter of security, which it is the responsibility of the state (which is what the EC represents at the EU level) to ensure.
Since the grave financial crisis of 2008, whose effects are still weighing down on the European economy, the role of the state has progressed to a point where it is difficult to envisage an economy in which the market holds more sway than the state, which used to be the dominant tendency in more stable and peaceful times, when economy and prosperity, rather than security, were considered to be of primary importance. Because economic integration and the liberalised flow of goods, capital, services and people have tied individual economies closely together, modern crises are global in reach, irrespective of their origin. Modern conflicts likewise entangle more and more countries and international organisations, shattering our sense of security. Against such a backdrop, the importance of the state, charged with ensuring security, is growing, also in the economic field.
Daniel Yergin’s ‘The Commanding Heights: The Battle for the World Economy’ is a veritable treasure trove of knowledge about the role of the state and the market in the economy, and a repository of solid arguments which should be raised in any debate on the subject. The book has been recently translated into Polish and published under the patronage of PKN ORLEN. The title’s ‘commanding heights’ are key segments of the economy for whose control the state and the market have been fighting for over one hundred years, shaping the modern world in the process. The book contains an exhaustive account of the intellectual battle between John Maynard Keynes, an exponent of state intervention and father of macroeconomic policy, and Friedrich von Hayek, an advocate of the free market and democracy and 1974 Nobel laureate. With close to 700,000 search engine results and a six-hour documentary made by America’s Public Broadcasting Service based on the book’s expanded edition in 2002, the publication attracts considerable interest, because it touches on the ever current subject of the limits of state influence on the economy, present in any political debate. The book provides the reader with examples of what can happen when the state is given too much sway. It also examines certain beliefs, which are something everyone has, and I think that many, myself included, would like to confront those beliefs with the current state of knowledge.
New research findings are always changing what we know about the state’s role in the economy. An interesting speech on the matter can be found on the website of the Peterson Institute for International Economics, an influential American think tank (http://www.piie.com/publications/papers/paper.cfm?ResearchID=2679). The author, professor and businessman Avinash D. Persaud, cites research findings recently published by Prof. Mariana Mazzucato of the University of Sussex (‘The Entrepreneurial State, Debunking Public vs. Private Myths in Risks and Innovation’, Anthem Press, 2013) and remarks that out of the hundred of the most important inventions to make the annual R&D Magazine list in this millennium, only 27 came from projects which did not use state funding. The following fragment best reflects the essence of Persaud’s speech:
„The cold reality is that innovation is highly uncertain, and businesses and venture capitalists are risk averse. The vast majority of technological advances do not bubble up on their own; they are given a helping hand by the state.3 They are simply too risky to attract internal investment or bank finance. In the United States this happens behind the veil of a $550 billion defense budget, five times bigger than China’s, and big enough to quietly cloak failures as well as successes. The US Defense Advanced Research Projects Agency, established in the panic after the Russians launched the first satellite in 1958, not only helped to establish the internet but numerous other digital technologies then and now. If I were to piece together the real mechanism of entrepreneurism uncovered by this new research… , the entrepreneur that dare not speak its name is the state. Innovation begins with the state setting a goal. In the United States this goal was defense oriented, and if you are paranoid enough almost anything can be considered a matter of national security… Drones are not a private sector invention. Defense also included the goal of beating the Russians to the moon, making sure America was not dependent on Japanese microchips and backing Google, Facebook, and Yahoo as they provided more national security data than the Central Intelligence Agency. While American entrepreneurs tend to be immigrants and internationalists, the US defense department is a fierce economic nationalist.The national security element means that in the US model of the entrepreneurial state, open procurement and trade rules that others must follow do not apply. A state agency, often within the defense department, pulls together a consortium of leading researchers based at universities or in the private sector. Professor Mazzucato shows that some approaches are better than others—especially those where the agency is decentralized and expert driven.This consortium doesn’t then spend an inordinate amount of time writing business plans and trying to fund itself. It has a budget to get beyond proof of principle. The budget is not overflowing, but it is enough to experiment, and most importantly it dispenses with the inhibitions inherent in financial risk. That is why it works. I apologize for the lack of romance, but pathbreaking research is not carried out by hungry, sleep-deprived researchers, beavering away in an old garage with smells of unknown provenance. The further draw for private sector involvement is that the private partners get to own the intellectual property to commercialize to their hearts’ content. Evidence suggests that the manufacturing and distribution of state-funded innovation plays to the private-sector’s strength and the state’s. Both are lost without each other.”
When discussing the innovation economy on this blog, I sensed that the key must lie in the entrepreneurial state. Now there is scientific evidence to support this premonition. Innovation needs an objective, considerable funds and freedom, which only the state can supply. We already have an objective: security. The state can ensure freedom of activity in the same fashion it does it for science – by providing funds and expecting nothing specific in return. However, the matter of money still remains. Where to find it?
It is research again that offers an answer. According to ‘Subsidies and costs of EU energy’ (http://www.euractiv.com/sections/energy/report-eu-renewable-energy-first-recipient-state-aid-309137), an EC-commissioned report published on October 10th, the EU-28 countries subsidised the energy sector with a total EUR 122bn in 2012, a substantial amount which included as much as EUR 113bn in direct support. As we can see, the money is there. What we should do now is change the mode of the state’s involvement in the economy: we need less state in production and more in development.