The Entrepreneurial State: Debunking Public vs. Private Sector Myths

This is a phenomenally wrong- headed book. As this is a review and not a graduate thesis, I am going to keep my points brief. I hope to publish a more detailed critique in a more appropriate location soon.

The author’s thesis in brief is that government funded research is good (i do not disagree), but that government fails to charge the private sector an adequate amount for taking advantage of the fruits of government research (this latter proposition is an intellectual embarrassment — the author does not understand how taxation works.)

In support of the latter proposition, Mazzucato argues both that profits from taking advantage are inadequately taxed and also that, to make up for this, government should charge higher royalties to those who exploit its research.

Both are wrong. Mazzucato strives to prove the first with several anecdotes about technology companies going untaxed or being taxed at low rates. All are misplaced because she does not understand how taxation works. Let’s take one of her examples, Tesla, to show this. She complains that, while US taxpayers funded both Solyndra and Tesla, they bore the former’s 1/2 billion in losses “yet got hardly any of the latter’s profits. (12).” She follows this with a page on tech companies’ use of loopholes to not pay taxes.

This is ignorant on two levels. One, she is oblivious to the fact that the US tax system taxes both corporations AND shareholders. Shareholders of Tesla have seen, and many have reaped, enormous appreciation, some of which has certainly been taxed. As she herself notes, “Tesla went public ... at $17 a share” and shortly before publication in 2013 “traded above $200.” In the aggregate, its market cap rose roughly $20 billion to year end 2013 (it has further tripled since then). But that $20 billion is 40 times taxpayers’ losses on Solyndra. If capital gains tax took only 2.5% of that increase — an absurdly low number — then enough profits were captured to cover the Solyndra losses — six years ago! Under more reasonable assumptions, the government has reaped billions from Tesla’s success.

And that is just from the profits of investors, which brings me to the second major flaw in Mazzucato’s framing of the topic. She argues that government should charge royalties to those who use its technology, as do private sector owners of intellectual property. But, as the Tesla example illustrates, the government has multiple mechanisms to extract revenue via taxation. It taxes the shareholders’ profits, as shown; it also taxes the employees’ wages; it taxes the vehicles sold; it taxes the firms in the supply chain, etc. Then there are the knock-on taxation opportunities when the employees go out and spend, and so forth. In other words, the government taxes most of the types of economic activity generated by the company that exploits its research. In contrast, private owners of IP can only reap revenue through the royalty stream. They can’t charge the licensee’s workers or other constituencies as the government does. They have to pack all the money into one thing called a royalty, not several different taxable revenue streams. Then, there is also the point that IP rights eventually expire, while the government’s tax power, you know, goes on forever.

Thus, it is quite smart of governments to put their research out for little or no charge to the immediate users. This tends to maximize the economic activity that is generated off of it, and thus the return on the technology through the taxation system. Much like the legendary ”razors and razor blades” pricing strategy.

So the author is fundamentally ignorant and the book fundamentally misguided and wrong. Don’t waste your time or money.

In this book, Mazzucato makes the argument that the state is the best actor to be the one to make long-range investments in technology, as private actors under capitalism are too focused on short term rewards to really be able to focus on real blue ocean development.

In fact, she argues, some of the more celebrated examples of private innovation can be linked to research and investment the state has made. This process of celebrating the private corporation has a way of erasing what the state has done and allows political rhetoric to attack research the state does. Her best example in the book is the Apple iPhone, where she looks at the basic research from the internet to mobile telephony to interface design that goes back to work governments did starting thirty or more years ago. I think as a reader that this example is strong enough to support her basic argument, but she also continues in the book to look at solar power as another example. Because this isn’t as widespread as the iPhone and its clones, it feels like a weaker example, even if down the road it will be more prevalent than the iPhone.

The importance of the public sector as a key player in an innovative ecosystem is not often acknowledged nor well understood. In a brilliant book, the author has made the case for the public sector role persuasively. In a world that glorifies individual entrepreneurs and venture capitalists as the risk takers who drive the innovative economies, readers of this book will be led to realize that it is quite often the public sector investors who have been the true risk takers with respect to the innovations that have made the most impact on society. Another key insight provided is that when the rewards for innovation and risk taking are disproportionately allocated to those whose risks are relatively modest (i.e. venture capital) this creates an innovation system that increases inequality and is less sustainable than one which rewards risk takers (public and private) more fairly. Unless the public sector can reap rewards that recognize its role in the creation and regulation of new markets, the innovation system will be less likely to create major breakthroughs like the internet, nanotechnology, etc. The clear message of this book is that a true innovation system that is sustainable and that will create transformational change requires the full participation of the private sector and the public sector working together to do what each does best.

Well written and I learned quite a few things. Large corporations are getting free R & D from US government, and paying very little in the way of taxes. That means taxpayers are subsidizing them. In the 50's that was OK because US Corporations were in the 90% tax bracket. At the time I though a 90% tax bracket to be excessive. At the time I couldn't figure out how they were doing so well while they were paying so much in taxes. Now I know it was because tax payers were paying for the development of new products, and in some cases drugs. Since their tax bracket was so high, it seems fair that the government did so much for them, but now the highest tax bracket is 35% and most company pay only 16% at most..

Mazzucato's analysis is absolutely brilliant and this is extremely well written. Anyone who believes that governments are useless should read this book. It really opened my eyes to the innovative aspects of government institutions, and the extent to which they are not only entrepreneurial themselves, but enable other entrepreneurs to build fortunes off of government innovation and investment. Every single online entrepreneur, for example, owes the US government a ton of gratitude - and those who will inevitably make fortunes on alternative energy will as well.

Not a balanced examination of public spending and innovation. Ms. Mazzucato is clearly a cheerleader for public investment and a general critic of the idea of (free) market innovation. Several of her examples purportedly showing that private industry does not innovate betray her lack of substantive understanding of the particular industry itself rather than support her public-investment-is-better assertion. In particular, skim her argument about "me too drugs" in Chapter 3 -- she clearly does not understand the difference between first-in-class drugs, which are the novel first-to-arrive innovative medicines, from best-in-class, which are the later refined and optimized entrants to the market. She glibly dismisses the later, best-in-class medicines as "me too" and unnecessary and solely driven by profit motives. In fact, the best-in-class, later arriving medicines are by definition more efficient, have fewer side effects, more selective, and generally better tolerated by a patient. All valuable innovative developments that she completely dismisses. Several of her other arguments suffer from a similar lack of detailed knowledge of the particular industry she criticizes. She does make some good points, but the thesis as a whole crumbles with critical reading and fact checking her glib assertions. The book does give insight into the Progressive academy and the hive mind.

Something is strange here, Negative reviews have been removed, you can see some of these on the kindle Voyager reader but Not on the Amazon site.

As the current discussion regarding the Biden infrastructure budget is concerned, this is a very relevant read. Essentially it describes how all this technological development the republicans tell you was done by private enterprise and venture capitalist, well wasn't. It, like the internet itself, was initially developed by the US government who took the initial risk until it was well enough established for the the money makers, private enterprise, to take over and sell it back to the people, tax payers, who paid for it initially with their taxes and took the initial risk. It will, or should, make you aggravated and in turn support this "liberal" infrastructure plan before we have to buy all of our technology from China.

It's time people understand the truth about how much the government help industry innovate, instead of uncritically believing the libertarian critiques.

This report really points out just how much government does for the private sector billionaires---or, conversely, how much these guys take the taxpayer for a ride. From space research to energy research to military research on health/human-technology integration/autonomous operations, etc., the government/taxpayer leads the expensive early research which leads to many "AHA!" moments of discovery. Then, too often, a $$B company like Apple, Monsanto, even Uber swoops in to hire away the research staff and their now-precious ideas. A must read for any student of business, research, consumer activism