Review of The Entrepreneurial State By Mariana Mazzucato, Anthem Press, London, 2013 By Hazel Henderson © 2013, for SeekingAlpha.com

The Entrepreneurial State by Mariana Mazzucato could help move the global policy debate beyond the binary options of “austerity” versus “stimulus.”  Both these macroeconomic policies have caused untold harm to millions and produced dangerous policy stalemates in the USA, Europe, Japan and other countries.  The experiments in Europe to impose austerity have not only caused unemployment, falling growth rates and quality of life but also rising extremism and political polarization.  Europeans have learned that debts can’t be paid by more borrowing.

The lessons of stimulus are equally dire.  Monetary expansion loses effectiveness with each new round of money-printing, whether as bond-buying by the European Central Bank or “quantitative easing”: QEs I, II, and III by the US Fed.  Pumping up stock markets in the textbook theory that this financial prosperity will trickle down to the real economies of “Main Street” becomes less and less effective.  Asset bubbles reappear, along with angry retirees and savers, rising inequality, extremist political parties and legislative deadlock.  Central bankers in emerging markets complain that all this monetary stimulus destabilizes their own currencies and economies.  Fiscal stimulus causes similar political responses with predictable conflicts about where funds will be directed, who will win and who will lose.  Popular tax cuts rarely target those whose need will spend them and often end up in more saving by rich recipients.  While spending on public services and infrastructure is a larger multiplier, it is too often spent on roads or bridges to nowhere.

The question arises: are either austerity or stimulus the only two options, as macroeconomic theories insist?  Increasingly, those “TINA” leaders who declare, “there is no alternative” are in disrepute. Even the grandees of the economics profession, including those of the George Soros-backed think tank INET, are now looking for alternatives, some even pronouncing macroeconomics as defunct.

Enter Mariana Mazzucato, a paradigm-buster, who cuts through this narrow debate within the conventional box of economics, forcing us to look at the bigger picture through wider lenses of science policy and the evolution of technologies in the real world.  As a former science-policy wonk at the US Office of Technology Assessment, the National Academy of Engineering, I deeply enjoyed Mazzucato’s slaying of so many defunct sacred cows of macroeconomics.  She begins by debunking the narrow public v. private sector framework and its most dysfunctional myths.  She challenges the myth that private business and entrepreneurs are smarter and more successful than governments in the key process of innovation.  She uncovers the embarrassing truth that economics has studied the innovation process and its drivers, since Robert Solow’s admission in 1957 that no theory has yet emerged to fully explain.  She recounts that engineering and technology often precede science and theory; the Wright brothers flew before aerodynamics and the steam engine was invented prior to knowledge of the laws of thermodynamics.  This slays many sacred cows of tax policy and that it and R&D funds and investments are drivers of innovation, which is a systemic product of many social, historical, geographical and cultural factors.

Then Mazzucato takes on the myth that venture capital (VC) is risk-taking, with massive evidence that actually governments in many countries are the primary risk-takers with VCs surfing the waves created by tax-payers.  She cites research showing that governments provide twice to eight times more venture funding than VCs.  Her chapter on Apple documents how Apple obtained early help with a $500,000 loan from the US government’s Small Business Investment Company (SBIC) and that every one of its 12 key technologies in its iphone were funded by government research grants including: the microprocessor and CPU, the DRAM, hard-drive storage (HDD); liquid crystal displays (LCDs), the li-pol and li-ion batteries, HTTP, HTML, GPS, click-wheel and multi-touch screens, as well as the internet itself.

Not to pick on Apple, Mazzucato shows that the Fourier Transform algorithm (FFT), the basis of Google’s success, was also funded by government research.  She adds research showing that the entire myth of Silicon Valley’s entrepreneurship and brilliance was based on military funding and Cold War R&D which continues to this day.  Special pleaders like the American Energy Innovation Council (AEIC) of which Bill Gates of MicroSoft is a member began calling in 2010 for tripling government funds for clean energy – about which Silicon Valley is demonstrably ignorant (p. 140).

All this upends the economics of stimulus versus austerity and its deeper basis on the myth that governments are bureaucratic and stupid at “picking winners” while the private sector is smart and creates the innovation engine that produces our jobs and economic growth.  Over 20 million jobs in the USA are created by governments at all levels (BLS.gov).  Starving government does not help economies recover as shown in Europe.  It may not “revive the animal spirits of private enterprise” or lead to the “magic of marketplace” recoveries.

We are led with mountains of careful research to the conclusion that all these economic bromides are nonsense and it is time to go beyond economics and look at the real processes of technological and social innovation through new spectacles and other scientific research.  All this is music to my ears and reflects my own research over the years since I wrote The Politics of the Solar Age (1981, 1988) looking at the evolution of human societies from the age of agriculture, the use of energy from wood and waterwheels to whale oil, fossil fuels to the next stage of innovation: the green economies of today’s emerging Solar Age.

Mazzucato also sees green technologies as the next great waves of human innovation, and she shows us that to fully exploit all these vast new opportunities, we must drop old economic categories and see the world anew.  Only this can end the current stalemates and gridlocks endlessly fighting over how to allocate resources to incumbent 20th century industries like fossil fuels and between competing legacy interests groups by trying more austerity or stimulus, deflating or inflating the decaying old pie!  The new goals for human development are to invest in the technologies of the future, not to bail out old industries and past mistakes.

Mazzucato’s chapters on China, Germany, Korea, Denmark show how they have used government risk-taking policies to invest in the rapid growth of their green sectors and companies providing insights into their paradigms beyond economics.  China’s leadership, for example, consists largely of engineers and scientists while the US is dominated by economists and lawyers.  Market fundamentalism seems only to lead to political gridlock, shutting down government services, mindless “sequestration” and loss of international prestige and competitiveness.  A clearer vision of our next human stage of development and policies articulating goals to achieve them is now vital – particularly in the USA.

Interestingly, Mazzucato’s own economics background leads to her own blind spots.  She uses quaint dogmas of “econospeak” such as parroting such mystifications cherished by her profession as “Knightian uncertainty” instead of clearer, plain English, i.e., immeasurable risk.  This kind of “economism” is to obfuscate the profession’s ignorance while backscratching colleagues, as in “Pigovian externalities” (rather than theories of Vilfredo Pigou about distribution and social costs) or the recent fad of criticizing efforts to increase energy efficiency by citing the 200-year old theory of coal use by Stanley Jevons as “Jevonian.” This elevates economists’ theories as if of comparable importance to Newton’s Laws of Motion!

All this attests to the bankruptcy of economics, its cognitive biases toward individualism, zero sum games and against collective win-win action – even on our small, polluted planet, as I described in Building a Win-Win World (1996, e-book 2008).  The Economist actually apologized for some of these biases in Herbert Spencer’s coining in its pages in 1864 the phrase “survival of the fittest,” as I noted in Ethical Markets: Growing the Green Economy (2006, p. 230).  This helped spawn the ugly philosophy of Social Darwinism – thus high jacking Charles Darwin’s actual thesis that the survival of the human species is more in our genius for bonding and cooperating than in competing (www.darwinproject.com).

Mazzucato has not yet found all her allies in brain science, endocrinology, anthropology, psychology, thermodynamics, biology, ecology and earth systems science, now laying out all the rich banquet of alternative policies and potentials that await us as we move further into the Solar Age we track in our Green Transitions Scoreboard®.  She will also find opportunities to present her book in new courses we are designing to retrain asset managers in how to move beyond their failed formulas: “efficient markets,” rational actors, modern portfolio theory (MPT), options pricing models, capital asset pricing (CAPM), Value-at-Risk (VAR).  We can now take in all the new scientific information available from NASA’s 12 geosynchronous satellites for better knowledge of our planet, deeper due diligence and more accurate metrics and risk-management, as I describe in my “Mapping the Global Transition to the Solar Age: From Economism to Earth Systems Science” (2013).  The Entrepreneurial State is a must for pension fund trustees, venture and private investors and all institutional asset managers.

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