- The Entrepreneurial State: Debunking Public vs. Private Sector Myths
New York NY: Anthem, 2013
- Doing Capitalism in the Innovative Economy: Markets, Speculation and the State
William H. Janeway
Cambridge, UK: Cambridge University Press, 2012
Once upon a time, a great country decided to build an mammoth highway system, construct an huge number of postsecondary institutions and expand most of the existing ones, engage in great scientific research projects, build an enormous military establishment and undertake a policy of perpetual war against enemies small and large (but mainly small). These projects cost money.
To pay for these and other expenditures, this great country chose to tax its richest citizens up to and above 90% of their high-end earnings. As a result, although the gap between rich and poor was large, it was not insurmountable. The great country also taxed corporate profits and, at the same time, allowed labour unions to thrive and to fight for wages that allowed ordinary blue-collar workers to move out of the urban slums and purchase modest homes in the suburbs.
In the process, government grew a great deal and began to regulate all sorts of things from food and drugs to industrial health and safety. At one point, the great country’s leader even proclaimed a “war on poverty” and began “model cities” programs that were intended to redevelop urban ghettoes and restore dignity to all their inhabitants. In short, government aggressively insinuated itself into almost every corner of the great nation’s business and controlled more and more of the country’s ample gross national product.
So, in the long run, because of all this government activity and its high level of taxation and spending, the economy collapsed, right?
But not while government taxed and spent. The near-collapse came later and for different reasons.
I am sure almost everyone has figured out that the “once upon a time” great country is real and current. It is the United States of America. And the time of all this taxing and spending was happening was in the 1950s and early 1960s, generally known as the “good old days,” before the USA was temporarily taken over by “liberals.” Counter-intuitively, tax rates of more than 90% on the top incomes were imposed by the Republican Party. The president at the time was former General Dwight D. Eisenhower, who also built the Interstate Highway System. It was a time of increasing prosperity, vast public expenditures, “traditional family values,” Norman Rockwell pictures on the cover of Life magazine and the reassuring presence of Ronald Reagan as huckster-in-chief for the General Electric Company. The future president told people every Sunday night on the CBS television network that “at GE, progress is our most important product.”
Even more ambitious initiatives such as the Model Cities program, the War on Poverty and the declaration of the Great Society came a little later, under Democratic President Lyndon B. Johnson; but, the basis for a mixed economy, a constructive partnership between the private and the public sector were well in place at the time when television comedies such as “Ozzie and Harriet,” “I Love Lucy,” “Father Knows Best” and “Leave It to Beaver” combined to attest to the inherent virtues and stability of American middle-class life. And, come to think of it, even the disgraced president, Richard Nixon, had his hand in, for it was Nixon who broke with tradition and recognized “Red” China and also created the Environmental Protection Agency, now the bane of the fossil fuel industries that are desperately trying to obtain petroleum from “tar sands” and natural gas through “fracking.” And it was Nixon to whom we sometimes attribute a phrase actually coined by free market economist Milton Friedman. This is it: “We’re all Keynesians now!”
The collapse, when it came in 2008, was not the result of free-spending, welfare-coddling, money-wasting liberals. Although vastly aided by President Bill Clinton’s ill-advised repeal of the Glass-Steagall Act (formally known as the Banking Act of 1933, which helped President Roosevelt get the US economy under control in the Great Depression), the Great Recession was largely the result of deregulation and shrinking government. It came at a time of very low taxes and harsh cuts to social programs. Under presidents Reagan, Bush the elder, Clinton, Bush the younger and Barack Obama, the concept of “tax-and-spend” was reviled and replaced by the ideology of “neoliberalism.” It pushed for monetarism in fiscal policy, “supply-side” economics and policies based on the claim that prosperity could be maintained if the rich were allowed to get richer and to permit their excessive wealth to “trickle down” to the poor. The poor, meanwhile, were to be stripped of social services and welfare “entitlements.” Instead of being dependent on government largesse, the poor were to be “incentivized” to sober up, buckle down, break the culture of poverty and get a job! Precisely where these jobs were to come from was a question that was not as rigorously addressed.
It was this economy―a deregulated, market-driven economy in which people were expected to take care of themselves―that almost brought the great country to ruin (and much of the rest of the world with it).
Of course, as we all should recall, the collapse wasn’t total. It was harsh and hideous, but the great country found the resources to recover. It did so by attempting to restore a few of the previously well-functioning government controls, but mostly by pumping borrowed dollars from China into failed corporations―mainly in the bloated financial sector. (Was Nixon prescient in making friends with China? Probably not.) In any case, in the time of crisis and turmoil, the authorities took from the middle and working classes (or at least stuck them with the bill) and gave to the rich, who were said to be crucial to long-term success even though they had created the short-term failure.
Throughout the entire process, one thing was made perfectly clear by government and business alike: government had no business in business―apart from the generous “bail-outs”; in the alternative, only the private sector could be trusted to be good money managers, job creators and energetic engines of a robust economy. The cure for the passing troubles was generosity to those economic institutions deemed “too big to fail” and austerity for everyone else. Balancing government budgets and slashing spending on education, health, social services, infrastructure, and the environment became the top priority. Job creation, of course, meant employment instability, low wages and part-time work. It also meant tax reductions for large money earners, despite the fact that major corporate entities were awash with cash, but unwilling to invest it unless money could be made through government subsidies and tax breaks. These matters and much, much more are carefully explored by the books under review. Meantime, firms such as Boeing, Verizon and General Electric took profits of between $20 and $30 billion dollars and not only paid no income taxes, but also managed to get substantial tax refunds.
However desperate the economic circumstances and however unfair the allocation of the rewards for human labour, there are a number of claims made that seek to justify the disproportionate amount of wealth that is being taken by those who own and control the tools of finance and industry. Chief among them are arguments that allege that to share wealth more equitably according to some theory if human equality is to fly in the face of human nature. We are all, it is said, self-interested and to urge communal, egalitarian values is to stifle the natural competitiveness of the best among us and to reward the incompetence of the foolish and the slothful. Put in the crude terms of Herbert Spencer to whom (not Darwin) we owe the phrase “survival of the fittest,” since it is plain that the poor are more likely to have children, any crumbs dropped from the high table merely encourages the degradation of the gene pool. We do no favours for the poor by allowing more of them.
Avoiding taxes has become a hallmark of America’s business icons; Apple, Google, GE, and many more of the Fortune 500. The nation’s largest corporations are sitting on more than $2 trillion in cash while revenue from corporate income taxes have plummeted from just below 40 percent in 1943 to just below 10 percent in 2012.
Bill Moyers, Journalist &
Former White House Press Secretary
If this particular gambit doesn’t work, there is another favoured line of reasoning. Like any other human endeavour, the economy is best managed by people who have demonstrated economic success. Investors and executives are deemed to be the best designers of production and managers of distribution. Motivated by self-interest, their decisions are rational and uncommonly wise. On the other hand, decisions by collectivities―whether mobs, trade unions, consumers organizations or governments―tend to be irrational, compromised and corrupt. Governments, we are told, are bad at “picking winners,” because they are beholden to losers.
In this ideological contest, few leaders inflame the sensitivities of the rich more than those who undermine their belief in their own superiority. So, when politicians such as Barack Obama state the obvious; namely, that successful entrepreneurs didn’t “get there” on their own and owe a debt (if only of gratitude) to their entire society for creating the conditions that made their success possible, howls of derision can be anticipated from the apologists for wealth (Isfeld, 2012). In one particularly befuddling piece, Greg Pollowitz (n.d.) of The National Review labelled Obama’s message “class war rhetoric.” More appropriate is a comment from multi-billionaire financier Warren Buffett: “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning” (qtd. in Stein, 2006).
Mariana Mazzacato’s The Entrepreneurial State examines one of the arguments in support of contemporary capitalism carefully and concludes that it is mistaken. The argument is that, from large venture capitalists to small inventors, risk is best made and best borne by those with a direct relationship to innovation. Governments and associated institutions such as arms-length agencies or, in Canada, “Crown Corporations” are influenced more by political considerations than by economic opportunities. They tend to play it safe, thus ensuring mediocrity at best and lethargy leading to failure at worst.
At some point in the more passionate screeds, an allusion is made to such fiascos as the biological programs headed by Trofim Lysenko. For reasons that need not detain us here, the authorities in Stalinist Russia rejected Darwin’s theory of evolution (random mutation and natural selection) in favour of an older version championed at the turn of the nineteenth century by Jean-Baptise Lamarck. Put simply, Darwin believed (and the majority of biologists have agreed) that evolution is very much a matter of environmental adaptation involving what came to be known as genetic mutation; Lamarck and, later, Lysenko believed that “acquired characteristics” could be passed on as well. So, in a makeshift example, if my grandfather learned to play the violin, and my father learned to play the violin, I would be born with a better chance of becoming a competent violinist.
Because Stalin was ideologically committed to Lamarckian theory, the entire Soviet agricultural program was distorted, compromised and ultimately destroyed by this stupidity. Lysenkoism failed in the labs and it failed in the fields. Promises of agricultural improvement went unfulfilled and the failed experiments cost numberless lives due to crop failures. Dissenters within the scientific community lost their careers and sometimes their lives as well. The Lysenko affair has therefore become emblematic of science being fatally led astray by people invested in mistaken beliefs; it is retained as one of the darkest episodes in scientific history.
According to neoliberal thought, capitalists would never make such a blunder. If something doesn’t work, it is abandoned. No ideological commitment stands in the way of profit-and-loss calculations. Since there is no profit to be made by an investor for “ throwing good money after bad,” and since there is nothing to be gained by covering up past mistakes so that faulty research may be pursued (unless, of course, it’s tied to a lucrative government grant), capitalist doctrine says that private investors are more to be trusted than government bureaucrats, even if they are not in thrall to some rigid ideology.
Mazzacato shows in elegant detail that this just isn’t so. Never mind the building of Egyptian pyramids, the Roman aqueducts and the public funding of the journeys of Christopher Columbus, the entire history of modern capitalism is replete with examples of public funding as the foundation of private profit. When we think of successful mixed economies, Canada provides a case in point: from continental railways to hydro-electric energy and even the now much-debated nuclear industry, it was government investment that permitted private money to follow. Moreover, with respect to almost any example of a medical breakthrough, it was either done in a publically funded university or with a government research grant and sometimes both. Even in the twenty-first century and even in the United States, arguably the greatest celebrant of private enterprise on the planet, it is recognized that the majority of high-priority pharmaceuticals were developed not by drug companies, but by the federal National Institutes of Health.
Indeed, in the much hyped high-tech domain of electronic communications, Mazzacato reveals that the entrepreneurial spirit so crassly displayed by Steve Jobs and cunningly applied by Bill Gates is, in reality, very much a piggy-back initiative taking advantage of public funds and public risks. Only about one-quarter of computer-based innovation was accomplished with exclusively private investment. The rest was a matter of private profit-seekers building on a firm public-sector foundation. So, if anyone wishes to take credit for Silicon Valley, it should probably be the United States’ Department of Defense.
Innovation is built on basic research. Commercialization comes later when some aspect of fundamental inquiry is revealed as transferrable into a saleable commodity; absent the primary work, nothing can be manufactured and nothing can be sold. It is therefore distressing not only that private companies are cutting back on their own research and development, but also that they are influencing a decline in government research as well. We all know (or should know) that pharmaceutical companies spend much, much more on advertising than on improving medical treatments. We all know (or should know) that a great deal of money is invested in “lifestyle” drugs from Valium to Viagra than in medications related to core health problems. With cut-backs to academic foundational research, even if we accept for argument’s sake the primacy of the biomedical model in health care, it matters that we are reducing our capacity to generate new knowledge for the sake of a quick buck.
The point here is not that private corporations are necessarily parasitical or predatory. It is rather that private enterprise delights in taking the credit for innovation when it either builds upon or shares with the public sector the investment needed to thrive. The litany from business is nicely captured in perhaps the oldest continuous apologist for capitalism, The Economist magazine, which wrote (2012) that:
Governments have always been lousy at picking winners, and they are likely to become more so, as legions of entrepreneurs and tinkerers swap designs online, turn them into products at home and market them globally from a garage. As the revolution rages, governments should stick to the basics: better schools for a skilled workforce, clear rules and a level playing field for enterprises of all kinds. Leave the rest to the revolutionaries.
Mazzucato is not content to demystify the legend of Steve Jobs (nearly every Apple device derived ultimately from government and military projects, though Jobs and his crew can properly be credited with design and marketing initiatives). She presses on to show not just that government can and does regularly “pick winners” and that 98% of American projects funded by government (including the much maligned Solydra) have not gone bankrupt; in the private sector, however, 25% of start-up firms fail within a year and 50% are out of business by their fourth year (Statistic Brain, 2014). Odds of 98-to-2 certainly beat 50:50, though it could be argued, I suppose, that there are a lot of inexpert people with a widget and a delusion. Perhaps, the contest should be between governments and private sector start-ups which have already attracted enormous venture capital. Even here, however, in the tangled web of venture capitalism, it is hard to disentangle the data to see exactly which dollar came from where.
William H. Janeway comes at the issue from another direction. Whereas I am interested in the Canadian experience of public investment, Janeway’s principal area of concern is the United States of America. The difference between the two countries is partly a reflection of the fact that the Canadian political economy developed gradually from a managed mercantile to a more open free trade system, whereas the American Revolution was very much an anti-mercantile gesture which left the former colonies suspicious of state authority in general and especially when it threatened private property and commerce.
Canadian history is different. From the outset, under the charter awarded to the Hudson’s Bay Company in 1670 by King Charles II, a large part of the future Dominion of Canada was under British control and known as “Rupert’s Land.” It covered 1.5 million square miles wherein the Hudson’s Bay Company was not only the principal economic entity with monopoly trading rights, but was also the effective law-making and law-enforcement authority.
Canada was therefore not a just a “company town,” but pretty much a “company country”―as big a public-private partnership as had been before or since. Traditionally, Canadians who grew up in a mixed economy have tended to interpret public enterprise as a positive and even necessary contributor to the common weal. The neoliberal triumph that has resulted in the massive sell-off of public assets and radical cut-backs to crucial service providers notwithstanding, it is still possible to recognize the critical role that publically funded enterprise has played in Canadian nation building and there remain ample examples of successful government complements and supports to the private sector. The American experience has downplayed public investment (except, of course, in huge military expenditures) and generally speaks favourably of the private sector and venture capitalism as the engines of US economic success.
We have this vicious cycle where economic inequality gets translated into political inequality. It gets translated into rules of the game that lead to more economic inequality, and which allow that economic inequality to get translated into evermore political inequality. So, my view, you know, the only way we’re going to break into this viscous cycle is if people come to understand that there is an alternative system out here.
Joseph A. Stiglitz, Nobel Laureate in Economics, 2001
In Canada, for instance, railway transportation, electrification and communications have either been publically-owned or highly regulated at least prior to the 1980s, when successive Canadian governments divested themselves of ownership and regulatory control in many domains of enterprise. In the USA, it had long been the doctrine that the public sector and government in general were to be treated with suspicion. The foundations of the American republic were constructed to make government difficult―particularly as a result of its separation of powers into inherently adversarial executive, legislative and judicial institutions―and to inhibit restraints on capital and regulation of banking, commerce and privately owned instruments of production. So, when Janeway concentrates on booms in the nineteenth century rail transportation, the electrical utility boom of the 1920s and the high-tech bubble of late twentieth century, he is drawn inexorably to the role of the private sector in building the American nation.
Janeway himself is a prime example of a successful private entrepreneur. His own skill is demonstrated in his efforts to help turn a $6 million investment in the Internet company Covad into a $300 million project in under nine months and into $6 billion dollar enterprise within a year and a half (Doing Capitalism, pp. 191-192). It was all smoke, mirrors and the sweet scent of a tulip bulb, of course, for the company fell as quickly as it had soared. Still, despite or, perhaps because of, such casino-style dealings, even Janeway seems to appreciate the benefits of the public sector.
Doing Capitalism recognizes that government-sponsored research is the bedrock of economic and technological innovation. Currently, however, research and development are all but suspended. Ideologically induced worries about public debt make large-scale government investment in almost anything difficult, if not impossible, to make politically attractive. Moreover, while modest increases may be achieved, these will be restricted to the physical and biological sciences as social sciences are narrowed to reflect mainly economic and military interests and, we can be sure, the humanities will continue to be disdained. Meanwhile, private companies will continue to sit on unprecedented piles of cash and to resist investment in expansion, infrastructure or innovation.
There are exceptions, of course, Mazzacuto discusses the field of nanotechnology, which remains on the government’s “to do” list, while private investors watch carefully for opportunities to commercialize the consequences. And, of course, military spending on drone aircraft technology is already finding profitable applications in ventures from product delivery by mega-merchants such as Amazon.com to private surveillance devices that can be used to peek in the windows of neighbours or business competitors. A few examples of what’s for sale at the low-end of the inventory include the easily affordable Proto X Nano-sized Quadcopter at $40 (Robotshop, 2014), the immensely popular Parrot AR Drone 2.0 (2014) featuring a built in camera and wifi at $300 and the comparatively up-scale Skybotix CoaX Autonomous UAV Micro Helicopter (Complexmag, 2014) at $5,000 and … well, the sky’s the limit.
Exceptions, however, are just that: exceptions. What remains at issue is how to promote research investment in uncertain times. The fact is that most corporations are unlikely to risk their assets in a sluggish economy or, if they do, they will seek out opportunities for some immediate near-certain gain. They will certainly not do so in the public interest, for they have nothing to gain by being “job creators” unless there are immediate and substantial profits to be made. Instead, they are well advised to sit on their cash reserves and try to extort financial benefits from local, state/provincial/regional/national or multilateral governments. Despite sharp criticism from corporate-friendly governments and public officials, for instance, even a small economy such as Canada’s witnessed its major employers hoarding close to $600 billion in a deep recession with vast underemployment and unemployment. It is, therefore, a bit rich (so to speak) for multi-billion dollar enterprises to beg for public tax relief, government grants and “bail-outs” all the while condemning health care, education and social assistance to pensioners. It is also more than a bit poor for political parties to seek and very often to win the votes of ordinary citizens who mistake ideology for analysis, defer to authoritative narratives from business and government alike and chronically vote against their own self-interest―a habit said to be irrational and therefore inconsistent with the political theory of possessive individualism that is offered not merely as a preferred social strategy, but as a definition of human nature.
Complexma. (2014). Retrieved January 8, 2014 from http://www.complexmag.ca/tech/2013/03/10-cool-drones-you-can-buy-right-now/skybotix-coax-autonomous-uav-micro-helicopter
Isfeld, G. (2012, August 25) Canada’s corporate tightwads versus private spendthrifts. National Post. Retrieved September 17, 2013 from http://business.financialpost.com/2012/08/25/canadas-corporate-tightwads-vs-private-spendthrifts/
Parrot. (2014). Retrieved January 8, 2014 from http://money.msn.com/personal-finance/10-coolest-drones-you-can-buy
Pollowitz, G. (n.d.). Retrieved October 10, 2013 from http://www.nationalreview.com/the-feed/309431/president-obama-if-you-ve-got-business-you-didn-t-build-somebody-else-made-happen
Robotshop. (2014). Retrieved January 8, 2014 from http://www.robotshop.com/en/unmanned-aerial-vehicles-uav.html
Statistic Brain Research Institute. (2014, January 1). Startup business failure rate by industry. Retrieved January 6 from http://www.statisticbrain.com/startup-failure-by-industry/
Stein, B. (2006, November 26). In class warfare, guess which class is winning, New York Times. Retrieved from www.nyt.com/2006/11/26/business/yourmoney/26every.html?_r=0
White House. (2012). Retrieved September 17, 2013 from http://www.whitehouse.gov/the-press-office/2012/07/13/remarks-president-campaign-event-roanoke-virginia
Howard A. Doughty teaches Political Economy and Modern Political Thought at Seneca College in Toronto, Canada. He can be reached at firstname.lastname@example.org