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Mazzucato argues that everything that makes the iPhone "smart" and revolutionary – namely, the internet, GPS and touchscreen display – is all government-funded. Photo: Bloomberg

In her book, The Entrepreneurial State: debunking public vs. private sector myths (Anthem 2013), Mazzucato challenges the image of the lethargic, regulating state versus the dynamic business sector. She uses historical examples to show how public sector investments have sparked technological revolutions.

Shaping and creating markets

One example is the smartest, most revolutionary thing most people have in their pocket these days – the iPhone . Mazzucato argues that everything that makes the iPhone "smart" and revolutionary – namely, the internet, GPS and touchscreen display – is all government-funded. The internet and Siri were funded by DARPA, the US Department of Defence; GPS was funded by military's NAVSTAR program; while the touchscreen display was funded by two public grants from the CIA and NSF.

In fact, according to Mazzucato, military and defence fund research plays a role in a number of sectors, including the pharmaceutical industry. While each and every medicine can be divided up into the revolutionary or incremental, it transpires that 75% of new revolutionary medicines are funded by public sector labs.

According to Mazzucato, the state does so much more than just fix market failures; it shapes and creates markets. Not just funding the basic research which is a public good, but also the applied research; it could even be called a venture capitalist. This contradicts the traditional notion that the state is only important for the basics, but not the high risk, revolutionary, out-of-the box thinking.

Self-fulfilling prophecy

We all know that public-private partnerships are important, but by constantly depicting the state part as the necessary but sometimes slight boring Leviathan, we stunt the possibility to develop public-private partnerships in a dynamic way. The public part is often seen as de-risking, but in the above examples, they are doing much more than that; they actually take on the risk.

The biggest implication is beyond just innovation: if the state is more than just a market fixer, if it is the market shaper and takes on massive risk, what then is the reward? The problem is that economies think there is a reward back to the state and it is tax. Unfortunately this is not the case as many jobs go abroad with globalisation. In addition, the companies that receive massive benefits from the state tend pay very little tax back (e.g. Apple).

Mazzucatto argues that there should be a return-generating mechanism that is more direct than tax, such as equity. In countries that take a strategic approach, such as Finland, China and Brazil, the state retains equity in their investments. For example, Sitra, the public funding agency in Finland, funded Nokia, kept equity, made a lot of money, and in turn funded the next round of Nokias in Finland.

The next big thing

What can we learn about the IT revolution that can guide us in thinking about the next big thing, the green revolution? One of the most important lessons was the role of the public sector, not just in the long-term funding to companies, but also the innovative policies that allowed technologies to fully diffuse and get deployed. What then is the lesson for green? It might not just be enough to have carbon taxes, argues Mazzucato, it will also be important to have much more public involvement on both the demand and the supply side.

About Mariana Mazzucato

Mazzucato is Professor in the Economics of Innovation and Public Value and Director of the Institute for Innovation and Public Purpose at University College London (UCL). Her work is focused on the economics of innovation; finance and economic growth; and the role of the State in modern capitalism. She has advised policy makers around the world on how to achieve economic growth that is 'smart' and inclusive.

She will be speaking at the New Year's Conference in Copenhagen on 10 January 2018.

Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager's skill, the fund's risk profile and management fees. The return may become negative as a result of negative price developments.