Book Review: “Questioning the Entrepreneurial State”

by on April 26, 2022 · 0 comments

An important new book launched this week in Europe on issues related to innovation policy and industrial policy. “Questioning the Entrepreneurial State: Status-quo, Pitfalls, and the Need for Credible Innovation Policy” (Springer, 2022) brings together more than 30 scholars who contribute unique chapters to this impressive volume. It was edited by Karl Wennberg of the Stockholm School of Economics and Christian Sandström of the Jönköping (Sweden) International Business School.

As the title of this book suggests, the authors are generally pushing back against the thesis found in Mariana Mazzucato’s book The Entrepreneurial State (2011). That book, like many other books and essays written recently, lays out a romantic view of industrial policy that sees government as the prime mover of markets and innovation. Mazzucato calls for “a bolder vision for the State’s dynamic role in fostering economic growth” and innovation. She wants the state fully entrenched in technological investments and decision-making throughout the economy because she believes that is the best way to expand the innovative potential of a nation.

The essays in Questioning the Entrepreneurial State offer a different perspective, rooted in the realities on the ground in Europe today. Taken together, the chapters tell a fairly consistent story: Despite the existence of many different industrial policy schemes at the continental and country level, Europe isn’t in very good shape on the tech and innovation front. The heavy-handed policies and volumes of regulations imposed by the European Union and its member states have played a role in that outcome. But these governments have simultaneously been pushing to promote innovation using a variety of technocratic policy levers and industrial policy schemes. Despite all those well-intentioned efforts, the EU has struggled to keep up with the US and China in most important modern tech sectors.

As Wennberg and Sandström note in their introductory chapter:

Grand schemes toward noble outcomes have a disappointing track record in human political and economic history. Conventional wisdom regarding authorities’ inability to selectively pinpoint certain technologies, sectors, or firms as winners, and the fact that large support structures for specific technologies are bound to distort incentives and result in opportunism, seem to have been forgotten.

In summarizing the chapters, they conclude that, “while the idea of aiming high and leveraging large portions of society’s resources to address some fundamental human challenges may sound appealing to many, such ideas have limited scientific credibility.”

Why do governments frequently fail in attempts to be entrepreneurial? Johan P. Larsson gets at the heart of the matter in his chapter when noting how, “[t]he state entrepreneur is not subject to real risk, often faces no market, and cannot be properly evaluated. It pays no price for being wrong and it struggles in assigning responsibility.” Which leads to two questions that are rarely asked, he notes: “[F]irst, how do we ensure that the state pays a price for being wrong? And second, when is that price high enough for us to know it is time to cut our losses?”

The authors of another chapter (Murtinu, Foss & Klein) concur and note how, “even well-intentioned and strongly motivated public actors lack the ability to manage the process of innovation.” “As stewards of resources owned by the public,” they note, “government bureaucrats do not exercise the ultimate responsibility that comes with ownership.” In other words, the state faces problems of misaligned incentives.

Several authors in the book highlight the various public choice problems often associated with large-scale industrial policy initiatives, including rent-seeking and capture. Wennberg and Sandström note how this results in less disruption as established players don’t seek to challenge existing market or technological status quos but instead simply seek to benefit from it. “[S]upport structures, platforms for private-public cooperation, and large volumes of technology-specific money usually end up in the hands of established interest groups,” they note. “Hence, they are not very likely to question these policies but will rather go along with the ride.”

John-Erik Bergkvist and Jerker Moodysson devote an entire chapter to this problem and offer a grim assessment of how past industrial policy schemes have exacerbated it:

Assuming that policies and programs are shaped by the interest groups that are affected by the policies, we highlight the risk that policymaking may end up as support for established interest groups rather than supporting the emergence of those who could act as institutional entrepreneurs or disruptors. Policies and programs may thus be captivated by dominant actors in the established regime, who have superior financial and relational resources. The result would then be that innovation policies sustain the established socio-technical structures of industries rather than contributing to the emergence of new structures.”

Other organizations are incentivized to support the status quo when big money is on the line. One of the most interesting chapters in the book was co-authored by Wennberg and Sandström along with Elias Collin. They examine the conflicts of interest inherent in many evaluations of industrial policy programs by various third parties, including academics and consultants who receive generous state contracts:

the overwhelming majority of evaluations are positive or neutral and that very few evaluations are negative. While this is the case across all categories of evaluators, we note that consulting firms stand out as particularly inclined to provide positive evaluations. The absence of negative or critical reports can be related to the fact that most of the studies do not rely upon methods that make it possible to discuss effects. This discrepancy between so many positive evaluations on the one hand and comparatively weak evaluation methods on the other hand leads us to suspect that evaluators are not sufficiently independent. Consultants and scholars that are funded by a government agency in order to evaluate the agency’s policies and programs are put in a position where it is difficult to maintain objectivity.

This is one reason why industrial policy continues to have such currency in European policy discussions despite a long track record of failure, as documented throughout this new book. The biggest problem for Europe lies in its layers of regulatory bureaucracy and heavy-handed treatment of entrepreneurs.

Later in the book, Zoltan J. Acs offers a grim account of just how bad things have been for Europe on the digital technology front in recent decades, despite the many state-led efforts to promote the sector. “The European Union protected traditional industries and hoped that existing firms would introduce new technologies. This was a policy designed to fail,” Acs argues. “What has been the outcome of E.U. policy in limiting entrepreneurial activity over recent decades?” he asks. Acs concludes that:

It is immediately clear… that the United States and China dominate the platform landscape. Based on the market value of top companies, the United States alone represents 66% of the world’s platform economy with 41 of the top 100 companies. European platform-based companies play a marginal role, with only 3% of market value.

He says that the United Kingdom’s “Brexit” from the European Union was a logical move, “because E.U. regulations were holding back the U.K.’s strong DPE (digital platform economy).” “If the United Kingdom was to realize its economic potential, it had to extricate itself from the European Union,” Acs says, due to the “dysfunctional E.U. bureaucracy.” No amount of industrial policy support is going to allow European firms to overcome those burdens. In fact, many of Europe’s industrial policy programs create the very disincentives that retard innovation and discourage entrepreneurialism in key sectors.

Several of the authors in the collection stress how the better role for the state is usually to set the table for innovation and growth without trying to determine everything that is served on the plate. As Wennberg and Sandström summarize:

the best policies to promote innovation are those that promote productive economic activity more generally: property rights protection, open and contestable markets, a stable monetary system, and legal rules that favor competition and entrepreneurship. Policy should promote an institutional environment in which innovation and entrepreneurship can flourish without trying to anticipate the specific outcomes of those processes—an impossible task in the face of uncertainty, technological change, and a dynamic, knowledge-based economy.

That’s good advice, as is everything found throughout the book. I encourage all those interested in these issues to take a hard look at it because it is particularly relevant even here in the Unites States, as Congress is currently considering a massive new 3,000-page, $350 billion industrial policy bill that I’ve labelled “The Most Corporatist & Wasteful Industrial Policy Ever.” There doesn’t seem to be anything stopping the momentum of this effort with both liberals and conservatives lining up to pass out the pork. I wish I could put a copy of Questioning the Entrepreneurial State in all their hands and ask them to read every word of it before they gamble hundreds of billions on such foolish efforts.


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