Without state spending there’d be no Google or GlaxoSmithKline | Mariana Mazzucato

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Without state spending there’d be no Google or GlaxoSmithKline | Mariana Mazzucato

Where would Google be today without the state-funded investments in the internet, and without the US National Science Foundation (NSF) grant that funded the discovery of its own algorithm? Would the iPad be so successful without the state-funded innovations in communication technologies, GPS and touch-screen display? Where would GSK and Pfizer be without the $600bn the US National Institutes of Health has put into research that has led to 75% of the most innovative new drugs in the last decade?
The state’s role in each of these cases was not just about correcting “market failures”. What the state did was to take on the greatest risk, before the private sector dared to enter – acting as an “entrepreneurial” state. In biotech, venture capital entered 15 years after the state invested in the biotech knowledge base. In nanotech, scientists in the NSF coined the term before business understood its potential returns.

Even modern-day Keynesians have not recognised this enough. The state is not only important to kickstart the economy during recessions through fiscal stimulus, but also to lead the way during boom periods that coincide with the beginning of new technological and market opportunities. In such periods, the private sector waits for the state to first make the heavy and risky investments. Indeed, Keynes himself indirectly recognised this in a letter to Roosevelt in 1927 when he described business as “domesticated animals” that needed the state to become lions.

However, typically state investment rarely sees any return on this – certainly nothing close to what those who put money in later on in the process get.

To end this parasitic situation, it is important to think creatively how the returns from state investments can be retained to benefit the public that has funded them, and be reinvested in the next round to generate more. This could include “income contingent loans”, where state investments in particular companies and technologies reap a return if/when the companies make it big. Or also in the form of a public investment bank or fund, which retains equity in such investments. The Brazilian development bank (BNDES), which provides long-term “patient” finance to Brazilian industry – a key source of its success today – makes a 20% return on equity from its direct investments in high-growth sectors like biotech and renewables. A large percentage of this return is redistributed into the economy by the treasury. And one of the sources of Germany’s “competitive” position in Europe is due to its system of public investment banks that creates a virtuous circle of investment in the regions. Invest, reap a return, and reinvest.

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Donagh is the editor of Irish Left Review. Contact Donagh through email: dublinopinionAtgmail.com

One Response

  1. Anthony Binder

    April 25, 2012 2:05 pm

    Talking about Google algorithms, well, the Internet itself is a state funded invention, primarily developed at Berkeley University based entirely on state funding, and don´t forget that the World Wide Web and HTML is an invention developed also with state funding at CERN.

    Anthony Binder