Entrepreneurship, Innovation, and the State

Simon Sarevski: Politicians constantly tell us how the rich are not paying their “fair share.” Barack Obama went a step further by telling us that “If you got a business, you didn’t build that.  Somebody else made that happen.” What is the fair share and why are we so infatuated with it?

Alberto Mingardi: This goes back to the Middle Ages and the quest for a “fair price”. But that is another fundamental mistake: we are constantly trying to “moralize” the economy. So it should “recognize” fair contributions in the past, it should reward people based on their desert, or perhaps help them based upon their needs. This is not what we should expect from the economy. The market is an a-cefalic, undirected process through which resources are allocated to give people what they want, in a certain moment in time. It should be judged by how it accomplishes this goal, not as a machine to give people what they are worth of.

That’s the logic of the classroom: you test students, those who studied most should be rewarded with a higher grade. But society is not a big classroom. We should entrust the economy to produce a “ranking of worthy individuals”, but more modestly to arrange scarce resources to satisfy as many people’s needs as possible.

Shareholder vs. stakeholder capitalism – why is the latter becoming popular nowadays? Wouldn’t it dampen the entrepreneurial spirit and progress in the process?

Stakeholder capitalism is popular for a number of reason. One is that it is nowadays fashionable not to say that you don’t like capitalism, but to propose “reforms” of it which will basically keep some form of private property but will do away with most of the freedom of contract. This is because it is difficult to argue, after 1989, that capitalism “failed” and socialism is about to triumph. Hence a change in rhetoric was due.

Another is that stakeholder capitalism brings with itself a diagnosis of the evils of capitalism which is very appealing to people. It basically portrays capitalism as a social context in which relationships are highly conflictual (workers vs. capitalists, multinational enterprises vs. states, et cetera) and suggests a way to ‘solve’ those conflicts and produce a more pacified economic system. So, in a way, it updates the ideal of social conflict for a society in which there are no longer visible signs of a ‘class war.’

But another reason is that capitalism’s historical triumph suggested to many that capitalist enterprises are very efficient, hence why not asking them to do more? Why keeping their scope of activity limited to the pursuit of profit? Should not they also be able to save the planet, clear the environment, et cetera? In this sense, stakeholder capitalism requires a leap of faith in business enterprises. But it also undermines them, because it forces us all to move from the clear cut metrics associated with the pursuit of profit, to different, quite unclear ones, that at least in the short term create room for more discretionary power on the part of CEOs and managers.

Mariana Mazzucato in her bestseller “The Value of Everything” claims that private sector “value creators” are not fully deserving of their gains. Therefore, we need to “ensure a capitalism that works for us all.” Why is this so and is this the whole truth? More so, even if true, how can we fix the system?

I sympathise with one of Mazzucato’s points: I do not think we should worship entrepreneurs or businessmen as heroes. Any product, any service, any invention comes after a history of products, services and inventions and it is somehow indebted with the past. Jeff Bezos cleverly says that without Rowland Hill inventing the postage stamp, he would have never developed Amazon – and he is right.

As it is certainly true that all businesses are in a sense more collective enterprises than typically acknowledged and many people contribute to their success. But (a) these many people are not necessarily “the government”; (b) as said before, economic decisions are not taken to pay a tribute to the past but trying to cope with the uncertainties of the future.

Things we seldom think that had any government merit (such as the internet, the GPS, or the touch screen, for example), we are being told we owe to the “entrepreneurial state.” What is problematic with such a claim?

In a sense, I think I’ve already answered. But even historically speaking statements such as Mazzucato’s are troublesome. Her key idea is that of directionality. She is not claiming (as it is certainly sensible) that some government spending resulted in technological advancements that also benefited consumers at large or the private sector. She is claiming that the state (that is, some bureaucrats who govern the great machinery) ‘invented’ market, that it foresaw the future hence the invention of the GPS for military purposes is actually ‘deserving the credit’ for Uber, a commercial application that uses the available technology to provide people with a certain service.

Again, airplanes are a product of the Great War, while duct tapes and radars of the Second World War. So, wouldn’t we, without the investment of the entrepreneurial state be left without certain technologies being invented, at least not as early as we did?

We don’t know. We can tell the history as we know it, and indeed war stimulated innovation: but also the opening of trade and a wider division of labour and scientific revolutions did. So, we are not bound to have a bigger army today, if we want an innovative society tomorrow. In a sense, we may say that Mazzucato does want to entrust innovation to governments not because they are always good at discriminating between different projects but simply because they have a bigger pocket, hence they won’t cut research programs that seem not to be fulfilling their promises. This amounts to say that if we had unlimited funds and we could finance all research ideas, then we’ll have a great harvest of innovation. This seems to assume that government spending has no opportunity cost: whatever you take out of people’s pocket, to be given to government bureaucrats, it will do good.

150 years ago Carl Menger, the father of the Austrian School of Economics, solved the paradox of value that tortured classical economists. So, why is Mazzucato challenging marginal utility?

Mazzucato seems to think that the discovery of marginal utility was not a genuine scientific discovery, but was part of an ideological plan to hijack societies by market-oriented economists. That’s a strange way of dealing with the notion of marginal utility, that was discovered by economists who were actually not, Carl Menger included, ‘free market fundamentalists.’

But that is also a telling intellectual error. Economics is forward looking, not governed by past accounting, though of course all manner of events in the past generate constraints relevant to any choice in the present. An economic decision itself, though, is a matter of expected marginal utility or marginal product and expected opportunity cost. In The Value of Everything Mazzucato recommends valuing all inputs and outputs by average rather than marginal product or marginal utility. She claims that “prices of innovative products do not reflect the collective contribution to the products concerned.” Of course they don’t, and should not: “the collective contribution” is the past, not the future. Entrepreneurs rightly think of how to price what they produce thinking of people’s preferences when the good or service they produce will land into the market. The economic problem is emphatically not given a “fair recognition” to whoever developed first a certain technique, for example. This is an appropriate logic for citations in a paper, not for products in a market.

Public choice, private choice, objective value and objective good… Is a technocratic entrepreneurial state guiding innovation and entrepreneurship the ideal, or at least the better of both worlds?

Once upon a time free market economists denounced ‘bourgeois socialism,’ meaning privileges of the sort you would see in a planned economy handed over to the benefit of a few, rich ‘crony capitalists.’ This may be ‘researchers’ socialism’ and I am not sure it is better.

The idea is not to amend whatever alleged evil of the market economy to help people who are ‘left behind,’ but to manage the economy top down.

With communism dying three decades ago, why didn’t central planning die along with it? One might argue, it has even grown into popularity in the past decades, both on the Left and the Right.

That’s a very important question. In part, I suppose the answer lies in political incentives: powerful people want to remain powerful, and to become more powerful. This narrative fits the needs. In part, however, the problem is of a different sort: the basic economic truth of coordination being achieved through the market regardless of people’s own intentions (“not from the benevolence of the butcher”) is something people do not understand. It is a profoundly counterintuitive truth. Human beings tend to have a simple idea of casual links, I press A and B happens. The market and complexity goes beyond our understanding.

If the government having a higher degree of control over the economy is not the answer, and yet the current system is imperfect, how do we fix it? More so, why haven’t we done so already?

We should not “fix” anything but stop thinking we can “fix” things. Let people free to search for their own ways, to develop their products, to supply their services. Will the outcome be perfect? Absolutely not. I don’t know if you have noticed, but as human beings we are quite imperfect ourselves. But the outcome is likely to be better if we rely on a decentralised decision making system, simply because we don’t know quite all that we believe we know, for making choices on behalf of the others.

Finally, although not directly related to the general topic of today’s conversation, I would like to end my interviews with this: How to find freedom in an unfree world?

I appreciate the reference to that book of Harry Browne but I’m not that much of a ‘positive’ thinker to answer that. I am also not that sure if people are really searching for ‘freedom’ in their own life. I think they want to be recognised, to find meaning. That’s a struggle which confronts any and each of us. I do not think there is any ‘one size fits all’ recipe.