The Entrepreneurial State: Debunking Public vs. Private Sector Myths

Mariana Mazzucato argues that the United States and other successful economies owe their innovation-led growth not to the private sector alone but to a proactive, risk-taking State that has funded and shaped the most transformative technologies of the modern era. Despite preaching small-government doctrine, the US has for decades directed large public investment programs in technology and innovation, from the Internet to biotechnology to shale gas. Countries seeking to emulate US success, Mazzucato contends, should do as the US actually did, not as it says it did.

Mazzucato frames her argument as a response to what political thinker Tony Judt called a "discursive battle": The way we talk about the State matters. Depicting it as inertial and bureaucratic while casting the private sector as dynamic and innovative becomes a self-fulfilling prophecy. This fabricated image has allowed certain actors, such as venture capitalists, to describe themselves as the true wealth creators and extract enormous value from the economy. Neoclassical economic theory holds that government should only correct market failures, such as monopolies or negative externalities, but Mazzucato argues the State has done far more, creating entirely new markets through mission-oriented investments.

The book opens by confronting the dominant post-crisis narrative that cutting back the State unleashes private sector innovation. Mazzucato notes the irony that the 2007 financial crisis, caused by excessive private debt, was reframed as a crisis of public debt, providing justification for austerity across Europe and the US. She distinguishes between symbiotic and parasitic innovation ecosystems: In a symbiotic system, public investment spurs private investment in risky areas like research and development (R&D); in a parasitic system, the private sector free-rides on State investments while channeling earnings into short-term strategies like share buybacks.

Two theoretical frameworks structure the early chapters. The "market failure" approach sees the State as correcting gaps where private firms underinvest, such as in basic research. The "systems of innovation" approach, developed by Richard Nelson and Sidney Winter in their 1982 work, focuses on how knowledge circulates through networks of firms, universities, and institutions. Mazzucato finds both incomplete because they cast the State as a facilitator rather than a lead actor. She introduces the concept of the "bumpy risk landscape," arguing that areas of high capital intensity and technological uncertainty are avoided by the private sector and have required public funding and vision, with venture capital typically arriving 15 to 20 years after the most important State investments.

Mazzucato debunks six myths about innovation. She shows that company-level evidence linking R&D spending to growth is inconsistent, that young high-growth firms rather than small firms as a category drive job creation, and that venture capital concentrates in low-complexity areas and prefers exits within three to five years. Government programs like the Small Business Innovation Research (SBIR) program provide two to eight times the early-stage funding of private venture capital. She also challenges myths about patents as indicators of innovation, about Europe's supposed commercialization gap, and about tax cuts as drivers of business investment.

The book's empirical core presents detailed case studies. In pharmaceuticals, 75 percent of the most radical new drugs, classified as new molecular entities (completely new drugs rather than variations of existing ones) with priority rating (a regulatory designation marking them as especially important), trace their research to publicly funded National Institutes of Health (NIH) laboratories, while private companies focus on minor variations and marketing. The NIH's total life sciences spending from 1938 to 2013 reached $884 billion in inflation-adjusted terms. In biotechnology, researchers concluded that the knowledge economy "did not spontaneously emerge from the bottom up, but was prompted by a top-down stealth industrial policy" (74), with venture capital entering only after the State had built the knowledge base over decades.

Four examples illustrate the US entrepreneurial State in action. The Defense Advanced Research Projects Agency (DARPA), created in 1958 after the Soviet launch of Sputnik, went beyond funding research to establish computer science departments, broker connections between researchers and entrepreneurs, and oversee the early Internet. The SBIR program, signed into law by President Ronald Reagan in 1982, provides more than $2 billion per year to high-tech start-ups. The 1983 Orphan Drug Act created a market for drugs treating rare diseases, enabling small biotech firms to become major players. The National Nanotechnology Initiative, launched in the late 1990s, spends approximately $1.8 billion annually across 13 government agencies on a technology the private sector had declined to lead.

Apple serves as the book's most extended case study. Mazzucato identifies 12 core technologies in Apple's products and traces each to government funding: The Internet originated in DARPA-funded research; GPS began as a 1970s military program; the iPhone's touchscreen grew from research at the publicly funded University of Delaware under National Science Foundation (NSF) and CIA grants; and SIRI, Apple's voice assistant, spun off from a DARPA artificial intelligence project. Apple received early-stage equity from the Small Business Investment Company program before its 1980 initial public offering, and its R&D spending as a percentage of sales ranks in the bottom three among its top 13 rivals because Apple excels at integrating publicly funded technologies rather than inventing them.

Two chapters examine the green industrial revolution. China's 12th five-year plan aimed to invest $1.5 trillion across green industries, while Germany enacted its Energiewende ("Energy Transition") plan in 2011. The US pursued a contradictory strategy, combining public R&D investment through the Department of Energy and ARPA-E (Advanced Research Projects Agency-Energy) with heavy reliance on impatient venture capital. Mazzucato details the Solyndra bankruptcy: A solar panel start-up that received $527 million in Department of Energy loan guarantees collapsed when silicon prices fell and Chinese competition intensified. She contrasts Solyndra with Tesla Motors, which received a $465 million loan and succeeded. Had the government held equity in Tesla, the returns would have more than covered Solyndra's losses, illustrating the need for the State to share in the upside of its investments.

The book traces wind and solar histories to reinforce the argument. Denmark succeeded where the US initially failed in wind turbine development by pursuing robust designs and allowing manufacturers like Vestas to scale production. The Department of Energy spent $1.2 billion on wind R&D, driving costs from 30 to 50 cents per kilowatt-hour in the 1970s to as little as three cents in the 2000s. In solar power, every leading company built on State-funded research. Mazzucato contrasts bankrupt Solyndra, which vanished entirely, with bankrupt Suntech in China, where the State preserved 20,000 jobs through nationalization.

Returning to Apple, Mazzucato examines the imbalance between public risk and private reward. Apple created a subsidiary in Reno, Nevada, where there is no corporate income tax, to channel earnings away from California, and uses subsidiaries in Ireland, Luxembourg, and the British Virgin Islands to shift profits internationally. The company's top nine executives received $440.8 million in 2011 compensation, equivalent to the earnings of approximately 17,600 of Apple's US retail employees. The broader innovation ecosystem, Mazzucato argues, has become parasitic: The State bears increasing R&D costs while private firms prioritize share buybacks over reinvestment.

Mazzucato proposes a new framework for aligning risks and rewards, developed with economist William Lazonick. The State should earn direct returns through several mechanisms: a "golden share" of intellectual property rights, with royalties paid into a national innovation fund; income-contingent loans requiring companies to repay once profits exceed a threshold; equity stakes in supported companies, as Finland's SITRA agency held in Nokia; and State development banks, such as Germany's KfW, which reported $3 billion in profits in 2012. She illustrates the current dysfunction through the pharmaceutical industry: Bristol-Myers Squibb sells the NIH-discovered cancer drug Taxol for $20,000 per year's dose, 20 times the manufacturing cost, while paying the NIH just 0.5 percent in royalties.

The book concludes that the entrepreneurial State is not always a reality but a possibility too often dismissed. Mazzucato calls for changing how we talk about the State, building public organizations capable of welcoming failure, and creating policy instruments that ensure growth is not only innovation-led but also inclusive and sustainable.