The Entrepreneurial State: Debunking Public vs. Private Sector Myths

The state should be more involved in the process of innovation. This is the argument in the Entrepreneurial State. The author points to many examples of state-funding basic research that has been appropriated by private companies and made the founders rich. The government typically gets very little from this. Venture Capital firms often rake in money from their investments, but the government often hopes for nothing more than taxes. In these it is often frustrated with companies using various tax havens to avoid taxation. Companies also use things such as stock buybacks to enrich executives and stockholders rather than employees or customers.

Many of these arguments could easily be turned around. Even when company's avoid income tax, the government gets plenty of revenue from the employee's tax - especially the capital gains on stock sales. Most startups give stock liberally to all employees. Increased stock valuations benefit employees (and can be one of the primary source of employee wealth.) Retirement accounts and pension funds are invested primarily in stocks, thus increased stock valuation benefits pretty much everyone.

The question of value creation is more nuanced. The author focuses on Apple. They are, for practical purposes a design company. Apple products rarely have in-house created innovative technology. Instead, Apple typically packs together existing technologies with minor improvements in a unified slick interface that appeals to the public. The author mentioned that the government earned nothing from the Page Rank algorithm that had been partially funded by a government grant. (Stanford, however, did make a nice killing on it.) What is not mentioned is that while the algorithm was extremely popular and served as the base for Google, it was the advertising keywords that turned that into valuable company. 

There is value in having more knowledge that can then serve as a base for further innovation and products. What is the ideal level of government involvement? Too much and there is little incentive to build on. Not enough and there is nothing that can be used to build. One concern is the huge sums made. If companies can turn people to billionaires, does that mean the government is giving away too much? Should the government collect royalties on technology used? Or perhaps just take a stake in companies as part of the funding.

The government causes the biggest issues when it picks winners. Regulation for something that "seems better" is often stifling. People liked Incandescent lights. The government stepped in to force people to switch to compact fluorescent lights. However, there were a multitude of problems (cost, disposal, etc.) with CFLs. A few years later LEDs came out. They had few of the problems of CFLs and economically made sense. Had the government not jumped in, we would probably still switched to LEDs. 

Significant government innovations often end up having a use outside their original purpose. The internet and GPS both were launched with specific national defense missions in mind. Changes and improvements happened over time. Arpanet was never envisioned as a means to allow kindergartners to attend remote classes. Yet, it gradually expanded to the internet and enabled the myriad of applications we have today. 

Today we often try to jump ahead. Putting a lot of government research in technologies such as solar power or electric vehicles has the danger of "picking winners". (Tesla is profitable only via the multitude of credits and carbon offsets.) Special government support can be difficult to remove, even if it is now detrimental. Fossil fuels, highways, suburban-sprawl and long-distance trucking are all encouraged by government policies while at the same time, the government is funding research and implementing policies to discourage them. Rather than pick winners, the government would be better off focussing on basic research and enact more simple policies.

Government has the advantage of being able to look at the long term. However, it is also subject to short term changes of elected officials. It can be challenging to keep a long term focus. Corporate research labs used to have a long term focus. However, many of these labs have gone away. Ironically, monopolistic power and strength helps justify the existence of these labs. In software development, the open source movement has been a boon. Big companies dedicate significant resources to develop software that is freely available and modifiable by everybody. This is a form of research and development that has been growing significantly and has produced significant innovation.

The author argues that government innovation and support are key for growth. I half buy the argument. In the current state, government tends to be overwhelmed with process and politics. Perhaps the simple solution would be to hand out money and ask smart people to "do stuff".