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Saturday, August 10, 2013

Prize Discussion

    In discussion elsewhere about the role of government prizes Mariana Mazzucato’s The Entrepreneurial State has been mentioned. Her opinion is that government has regularly played a major role in promoting new technology.

This book, which builds on the author’s work for a high-impact DEMOS report (substantially developed and extended), debunks the myth of the State as a large bureaucratic organization that can at best facilitate the creative innovation which happens in the dynamic private sector. Analysing various case studies of innovation-led growth, in particular examples from Silicon Valley – from the Internet to the technologies behind the iPhone – it describes the opposite situation, whereby the private sector only finds the courage to invest after the entrepreneurial State has made the high-risk investments. It argues that in the history of modern capitalism – and today in what might soon become the ‘green’ revolution – the State has not only fixed market failures but also shaped and created markets, actively investing in new technologies and sectors that private investors only later find the courage to move into. 

    Though generally libertarian I don't necessarily disagree. After all that is what a government supported X-Prize foundation would do.

    On the other hand since, at least in current western societies, the state spends around 40% of national income it would be astonishing if there weren't some instances of it creating innovation. If it were to be shown to play more than 40% of the role in innovation, or directly responsible for more than 40% of inventions that would be an achievement.

   And I suspect, with sufficient investment in X-Prizes it would.

   The DARPA road prize is one such; Christopher Columbus was state funded. I have previously dicussed how the WW2 American building of industries capable of producing aircraft, cars, radios and even ships in hitherto unseen numbers meant that the industrial base for a post war boom existed.

    The space programme has been almost entirely state funded and shown both the strength and weakness of being so. Because it was state funded it was possible to throw money at the problem. Because it was state funded it quickly became fixated on one method, ignoring the far greater possibilities available from the Orion programme. Probably most important of all, because it was state run it made little or no concessions to doing it inexpensively and commercially and commercial industry is only now starting to reinvent space development. Indeed to some extent, just because government took control, there have been legal and semi-legal restrictions in America and Britain which prevented development of a commercial space  industry.

    And yet governments DO have immense resources they can put into new industries before they exist. In theory a government with perfect understanding of new technology needs would create the  optimum new technology. But the whole failure of central planned socialism was because governments don't and can't have that perfect knowledge. As Hayek among others (even Trotsky) have pointed out

    The best knowledge of an industry is likely to be among those who have made their careers in that industry (and certainly not politicians if they only studied PPE and take advice from people who boast of not understanding economics) and the most diligent in making sure resources are used efficiently are investors who own the resources (and certainly not politicians who are likely to make decisions on how they will play to their own constituency/special interest group). As Hayek pointed out.

PS By coincidence after I started this I found the estimable Tim Worstall had also written about Ms Mazzucato's claims and was unimpressed.

I did send Tim's contribution to the Guardian writer I had been in correspondence with over her article claiming X-prizes weren't that economically useful but she replied that she didn't really understand it because she didn't understand economics.

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