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On the one hand, there is supporting evidence that financial innovation increases bank growth and supports financial deepening. For example, DeYounget al. (2007) find that Internet adoption improved U.S. community banks’ profitability – primarily through deposit-related charges. Several studies document that small business credit scoring increases the quantity of bank lending (Frame et al., 2001, 2004; Berger et al., 2005). Saretto and Tookes (2013) find that CDS trading increases bank credit supply, while Norden et al. (2014) show that banks that use credit derivatives as risk management tool pass these benefits on to their clients in form of lower interest spreads and cut lending less during the recent crisis. Using “counterfactual historic analysis”, Lerner and Tufano (2011) document the positive contribution to financial deepening and economic growth of financial innovations, such as venture capital and equity funds, mutual and exchange-traded funds, and securitization. 

Agricultural innovations are often promoted as a ‘package’ of technologies, which are released to farmers for adoption in order to improve the productivity of their farm enterprises. They are specifically designed to offer benefits to farmers through improvement of their soil fertility, conservation of soil nutrients, water and other natural resources, raising yields, improving pest management, decreases effects of climate change and aiding farm mechanisation.1 As noted by Asfaw et al. (2010), the development and dissemination of effective yield-increasing technologies are crucial to growth in agricultural productivity, especially in developing countries.

Adoption of agricultural innovations and technologies is essential in ensuring food security and poverty reduction, by potentially increasing the income of farming households as well as reducing the market price of staple foods (de Janvry and Sadoulet 2001). Since adoption of new agricultural technology is important to the realization of agriculture's full potential, study of the impact of adopting agricultural innovation and technology has remained central to both the academics and policymakers over the years.

Advocates of industrial and innovation policies thus most often given the government a major role in the promotion of innovations, sustainable development and the like. One such example is Mazzucato’s book The Entrepreneurial State (2015) which argues the state’s role in innovation has been greatly underestimated. Using examples primarily from the US to show different cases where the state rather than firms started the development of aviation, nuclear energy, computers, the internet, the biotechnology revolution, nanotechnology, and various environmental technologies, she then argues that the state should take the lead in developing strategies for key sectors and technologies. Scholars have pointed out a collection of problems with Mazzucato’s argument. First, Mazzucato’s view confuses invention with innovation as the iPhone and its social and economic value was an entrepreneurial discovery made in the marketplace, not in the laboratory. Second, her argument is at best anecdotal, but even the anecdotes contain several rather serious factual errors (Sandström 2015). Third, the book does not try to infer any causality and it avoids attempts at a cost-benefit assessment of public interventions while nevertheless making bold claims about the government’s positive net contribution (Potts et al. 2016).

It would be comforting to believe that it would work. And there are a few conspicuous and successful examples in history, such as the Manhattan Project’s quest to build the first atomic bomb, or Kennedy’s promise to put a man on the Moon before the end of the decade, which were kept. But as Harford (2011: 91) argues, “these examples are memorable in part because they are unusual”. Moreover, there are many examples of groundbreaking scientific discoveries and transformative innovations that have been based on work that funders have turned down and advised against, and several cases where these authorities also later have humbly conceded that “we are glad you didn’t follow our advice” (Harford 2011: 105–108).

Mazzucato (2011) deserves credit for reinvigorating the discussion of the role of the state in the innovation process. As she correctly points out, innovation is a complex and messy process, with many fits and starts along the way, and historically state agencies and state funding have played important roles in promoting technological progress. Moreover, some of the most successful recent commercial innovations, particularly in information technology, relied on discoveries and developments from state-funded projects.

However, we think this evidence does not suggest a stronger role for the state in promoting entrepreneurship and innovation, much less a fundamental rethinking of the cumbersome, bureaucratic, politicized governmental apparatus as a praiseworthy entrepreneurial state. States fund a lot of R&D projects and, inevitably, some will end up being commercially (and socially) beneficial. But this is simply the law of large numbers! The relevant question is whether heavy state involvement gives us better innovations than we otherwise would have had, and here both theory and evidence are less persuasive.

Mazzucato’s (2011) account of the “entrepreneurial state” starts from the well-known idea that private companies are often reluctant to invest in technologies with long-term, highly uncertain returns. State actors, free from the profitability requirements imposed by private capital markets, can pursue a variety of innovative projects unattractive to market participants. Sometimes, those investments can pay off, at which point private players enter the arena and manage the technology development process to commercialize the technological outcomes and monetize the investment. In other words, some commercially viable technologies typically emerge out of prior government investment in nascent projects that were not attractive to private investors.

It does not follow, however, that state investment in particular technologies generates net gains; for that, we would need a systematic analysis of the entire portfolio of state projects rather than sampling on the dependent variable. Nonetheless, examples popularized by Mazzucato such as the internet, GPS, and nanotechnology have been used to promote a more general, activist role for the state in innovation. Mazzucato (2011) calls for government, not decentralized market players such as startups and unicorns, large firms, or venture capital funds, to be the driving force in the development of innovations and technological progress. According to Mazzucato, only the state can play this role because it (properly) socializes the risk of long-term technological investment. The state can invest in whatever technologies it likes because it has access to the taxpayer’s bottomless purse. By contrast, private investors operating in competitive markets risk their own money and entrepreneurs are accountable to their financiers, who can withhold future support in the event of poor performance.

A literature review summarizing 77 different studies of government support schemes reveal scattered results and that many published studies suffer methodological problems, partly related to the prevalence firms that benefit from multiple supporting activities (Zúñiga-Vicente et al. 2014). Evaluating efforts where firms receive more than one type of support is methodologically complicated. When firms have received several support initiatives, it becomes difficult to distinguish which of the supports had a possible effect, if there are competing effects, or if effects arise cumulatively. One of the countries with the longest history of offering a range of policies in support of entrepreneurship is the United Kingdom. In a long-term study of various UK government initiatives to support new and small firms, Bennett (2008) surveyed more than 2000 firms in 1991, 1997, 2002, and 2004, finding that, overall, government intervention is difficult to make effective at reasonable cost–benefit ratios. Bennett finds little evidence of market failure for growing and more innovative firms, but rather than systemic market failures in the United Kingdom only seems to influence very early-stage start-ups. Over the study period, the UK government partly decentralized previously centralized programs, which had marginal benefits for the number and type of recipient firms on the one hand, but sharply increased public costs and the bureaucracy recipient firms had to negotiate on the other. Bennett’s survey also highlights the stark gender bias in a highly disproportionate number and sum of support provided to male-led firms, compared to the average level of male- and female-led small and new firms.

Policies enacted are also highly heterogenous. Some government support comes in the form of free or subsidized advisory services, rather than as financial support. A recent study by Widerstedt and Månsson (2015) examined the effect of business counseling support from a 2004–2007 Swedish grant program, aimed at firms in peripheral regions, in which 1244 firms that applied for and received advice were compared to more than 90,000 control group firms in a matched sample. The authors found that while value added and number of employees seemed to increase more rapidly for firms that received advice compared to the control group, this effect was mainly due to increased use of labor and capital rather than increased efficiency, and the differences disappeared when self-selection of firms seeking advice was controlled for.

I will end with one further prediction. While climate change is real and man-made, it will not cause catastrophe by 2060. The current rate of warming over the past three decades is about half what scientists predicted in 1990: 0.17ºC per decade compared with 0.30ºC. And, as predicted, the warming is happening more at night, in cold areas, and in winter than in the daytime, in warm areas, and in summer. The effect on the frequency and intensity of storms, droughts, floods, blizzards, and other weather events is still so small that it is hard to detect. These continue to happen, of course. There has probably been a slight decline in droughts, but a slight increase in heat waves. There is less snow cover in the northern hemisphere in spring, more in fall, and no change in winter. Glaciers are retreating, as they have been since the mid-1800s. Most important, deaths from weather events continue to fall steeply as more countries get access to the technology, infrastructure, and information needed to prevent large-scale loss of life in a hurricane, drought, or flood.

Moreover, if warming continues like this, by 2060 we will still not have reached the sort of temperatures that were standard in the early part of the current interglacial period, when the Arctic Ocean regularly lost all of its ice during the summer. So we are not heading into unprecedented territory. And I suspect that we will ultimately solve the problem by substituting nuclear fusion for fossil fuels long before its consequences turn catastrophic.

A first perverse effect is the “lack of stability” that results from the emphasis on continuous innovations. Although change may often be desirable, innovations may disrupt things that actually work well (academic respondent 1). The lack of stability can have negative consequences for people working in an organization in the form of stress but also for customers and external relations since they do not know what to expect from the organization. For China, it has been argued that policy innovation may create uncertainties and threaten social stability, economic growth, and ultimately the legitimacy of the state (Zang & Musheno, 2017). This lack of stability may not only be a problem for China but also for the Western governments.

A second perverse effect is that innovation may result in “illegal practices”: if there is no control the emphasis on innovation can result in(semi-)illegal actions (Fuglsang & Sundbo, 2016). Rules have been developed to regulate behavior and for this reason they may inhibit new approaches. A recent example from the Netherlands illustrates this risk. The tax department had opened up an innovation lab to experiment with the use of data science to improve its regulatory processes. The application of data science, however, resulted in a variety of privacy breaches which were only exposed at a later stage (Zembla, 2017).

This is just one small example of things going right in the environment. Let me give some bigger ones. Far from starving, the seven billion people who now inhabit the planet are far better fed than the four billion of 1980. Famine has pretty much gone extinct in recent decades. In the 1960s, about two million people died of famine; in the decade that just ended, tens of thousands died—and those were in countries run by callous tyrants. Paul Ehrlich, the ecologist and best-selling author who declared in 1968 that “[t]he battle to feed all of humanity is over” and forecast that “hundreds of millions of people will starve to death”—and was given a genius award for it—proved to be very badly wrong.

Remarkably, this feeding of seven billion people has happened without taking much new land under the plow and the cow. Instead, in many places farmland has reverted to wilderness. In 2009, Jesse Ausubel of Rockefeller University calculated that thanks to more farmers getting access to better fertilizers, pesticides, and biotechnology, the area of land needed to produce a given quantity of food—averaged for all crops—was 65 percent less than in 1961. As a result, an area the size of India will be freed up by mid-century. That is an enormous boost for wildlife. National parks and other protected areas have expanded steadily as well.

Progress that is both rapid enough to be noticed and stable enough to continue over many generations has been achieved only once in human history: right now. Around 1800, humanity made a stark turn from misery and stagnation to prosperity and progress. This is a truly unique moment in time, and yet one that most of us aren’t even aware of.

It’s not just GDP. Poverty and child mortality rates over the last two centuries have dropped while literacy and vaccination rates have climbed. Many more people live under democratic forms of government. The world today finds itself atop this upward march of progress, but we think we’re going the other way. When surveyed, only 6% of Americans think the world is getting better, while in Australia and France the figure stands at an even more ominous 3%.

“Technology critics have always been with us, and they have sometimes helped temper society’s occasional irrational exuberance about certain innovations,” I note in the opening of the first essay. The problem is that the “technology critics sometimes go much too far and overlook the importance of finding new and better ways of satisfying both basic and complex human needs and wants.” I continue on to highlight the growing “technopanic” rhetoric we sometimes hear today, including various claims that “it’s OK to be a Luddite” and push for a “degrowth movement” that would slow the wheels of progress. That would be a disaster for humanity because, as I note in concluding that first essay:

Through ongoing trial-and-error tool building, we discover new and better ways of satisfying human needs and wants to better our lives and the lives of those around us. Human flourishing is dependent upon our collective willingness to embrace and defend the creativity, risk-taking, and experimentation that produces the wisdom and growth that propel us forward. By contrast, today’s neo-Luddite tech critics suggest that we should just be content with the tools of the past and slow down the pace of technological innovation to supposedly save us from any number of dystopian futures they predict. If they succeed, it will leave us in a true dystopia that will foreclose the entrepreneurialism and innovation opportunities that are paramount to raising the standard of living for billions of people across the world.

This version of the unsustainability critique is challenged by some techno-optimists. For instance, Ramez Naam (2013) and Andrew McAfee (2019) (among many others, see Keary, 2016 for additional examples), have argued that technology is becoming less exploitative over time. Increased efficiencies in energy production and product manufacturing mean that fewer resources need to be used to produce the same output. McAfee refers to this as the ‘dematerialization’ phenomenon; it can also be called the ‘decoupling’ phenomenon (growth is being decoupled from exploitation). A simple illustration of this is the amount of aluminium used in food and drink cans. Quoting work by Vaclav Smil, McAfee (2019, 101) points out that the first aluminium drinks cans (produced in the 1950s) weighed 85 g. By the year 2011, they weighed 12.75 g. This massive reduction was made possible by computer-aided design processes that enabled thinner cans with the same structural integrity. This is an example of a trend that is repeated across industries. This trend gives us some reason for optimism when it comes to the role of technology in maintaining (and possibly increasing) the preponderance of the good over the bad.

But is this pessimism justified? Although futurists like Martin Ford and Silicon Valley’s techno-evangelists argue that today’s technology is significantly more disruptive and fundamentally different from everything that came before, we should be skeptical of worst-case scenarios. Predictions of social catastrophe have accompanied every period of rapid technological change and have invariably turned out to be wrong.

It is far from clear that AI, for example, will be more disruptive than the Industrial Revolution of the 19th century or the replacement of horses by cars and typewriters by computers. Nor is there any reason to accept the "Luddite fallacy" that presents technology as a threat to overall levels of employment. The Asian Development Bank reports that in Asia, AI is already creating more jobs than it destroys. Today, as in the past, techno-pessimists err in assuming that technology is the only thing that changes, while society remains static and helpless. In reality, our ability to adapt and take advantage of technological change has been as constant as technological change itself.

A starting point for missions is to emphasise the importance of cooperation, both between companies and between the public and private sectors. The state should actively point out “a direction that can foster and catalyze new collaborations across multiple sectors” (Mazzucato, 2021, p. 53).

Innovation is also in many respects the result of collective effort. This is easily recognised from an ecosystem perspective and the ‘collaborative innovation bloc’ (e.g. Elert & Henrekson, 2021), inspired by Schumpeter's view (1989, p. 261)4 that the entrepreneurial function is often performed by interaction and cooperation between many different actors.

Baumol (2002) argues that the market economy is in effect an innovation machine. By having no choice but to arms race each other, firms are forced to find new niches, improve existing products, and find new markets. That is, innovation becomes the primary weapon in each individual firm’s battle for survival. If the right knowledge is out there, and if the framework conditions are right, an entrepreneur will find it and turn it into something valuable. If that person is successful, more firms will follow suit and further refine the innovation, and of course introduce competing technologies.

A new wave of thinking about growth has come to incorporate entrepreneurship more explicitly. Acs et al. (2009) remark that part of “the endogenous” in endogenous growth theory is the creation of technological opportunities, driven by conscious investments in knowledge. In their model, entrepreneurs exploit knowledge that leaks out from incumbent firms and unto the rest of the economy. An entrepreneur is something like a dynamic conduit for finding, probing, and ultimately spreading knowledge. Acs et al. (2009) show that greater regulation, administrative burdens, and market intervention will reduce the knowledge available to us.

Once a decision has been taken to implement a particular mission, significant resources are made available to selected actors, in the form of preferential loans, R&D grants, various subsidies or protectionist measures. The availability of these resources influences the behaviour of actors. Many (large) companies may systematically take advantage of such government/policy allocations and become less cautious in their investment decisions– a scenario that can lead to increased moral hazard (moral hazard occurs when an actor has an incentive to increase its risk exposure because a large part of the cost of the risk is borne by someone else).

The actions of Fannie Mae and Freddie Mac during the US financial crisis are a clear example of the problem of moral hazard. While the institutions were guided by policy measures to increase lending to minority groups, they delivered profits to shareholders. They could meet these two objectives only by assuming ever greater risks, which eventually became so large that they threatened the stability of the entire financial system. With hindsight, it became clear that this was because too much of the risk was borne by taxpayers, which provided an incentive to guarantee loans to people who were not creditworthy.

That mission-oriented innovation policy must be evaluated is uncontroversial. Nelson (2011, p. 684) noted that “one cannot learn from experiments if one does not have ability to identify, control, and replicate effective practice.” At present, there does not appear to exist a solution to this problem.

One source of several problems with state entrepreneurship is that a state departs from issues that it thinks need solving, whereas entrepreneurs in the innovation machine generally depart from issues they think they can solve. The former issues are subject to substantially more uncertainty. Most entrepreneurs are ultimately forced to be realistic, at least in terms of large investments. When they have attempted to solve a problem for too long, they run out of investors. When they fail at solving actual problems, or when they succeed at solving immaterial problems, they are broken by markets.

This chapter has analyzed the innovation machines within our societies, making a case that the entrepreneur is, next to human capital, its most integral part. I have also argued that those market forces that spur and fetter entrepreneurs do not translate in any simple way to the realities of the state. A firm that is hijacked by a bad idea suffers financially. A state that is hijacked by a bad idea is unlikely to suffer by any parameters it cares about. It might even find parameters by which it appears successful and tout its success.

The most recent call for the state to be entrepreneurial involves so-called mission-oriented innovation policies: the mobilization of great resources across many sectors to solve a great problem or act on an opportunity. Missions suffer from three overarching weaknesses. First, we do not know how to pick them or operationalize them. Second, we do not know how to evaluate their successes and failures, and it is likely that we will never be able to do so in a satisfactory way, since the opportunity costs are incredibly complex. Third, it is difficult to make an actual flesh-and-blood person accountable, which greatly increases the risk that an unproductive, or even destructive, project is initiated, as well as supported past its due date.

There seems to be no limit to what policymakers and pundits expect that innovation can achieve. Above and beyond renewal and economic development on long term, innovation is today a “panacea” (Godin 2012: 37; Pfotenhauer and Jasanoff 2017: 784), generally viewed as an “institutional and individual road to salvation” (Brattström and Wennberg 2022), and the “ultimate solution to present welfare related problems in the West” (Gripenberg et al. 2012: 1). Innovation has therefore become “a policy obsession” (Pfotenhauer 2019: 191), and its alleged importance is treated as an axiom for policymaking (Sveiby et al. 2012b: 250). In many of the resulting policies and investments, innovation has ceased to be something real, that contributes to society and the economy by making substantial improvements to life in various respects, and has instead become the theme of a new “worldview or belief system” shared by policymakers, bureaucrats, communication officers, consultants, and even academics. The result is the spread of “innovationism”, an “invisible and naturalized” ideology, and an “accepted, self-evident, future-oriented-and collective-way of imagining a better future” (Valaskivì 2012: 150). Similarly, entrepreneurship has “become a mantra that has worked, paradoxically, by repetition”, with the same platitudes repeated by business gurus and “echoed by politicians seeking economic cures” (Jones and Spicer 2009: 2).

The result is, sadly, an abundance of misplaced initiatives and empty talk. For example, the European Union’s 2000 Lisbon strategy stated that the EU was to become “the most competitive and dynamic knowledge- based economy in the world” by 2010 (European Union 2000). Commentators have noted that the strategy was built on unrealistic promises and a deficient understanding of how regions and nations develop, and that its layout was aimed at meeting specific targets defined in a number of shallow indicators, rather than working purposefully to achieve real change and progress (Tausch 2010; James 2012). This notwithstanding, the EU has moved on from the Lisbon Strategy to even more ambitious programs, like Europe 2020, which appears as something of an invasive innovation policy framework program that takes over the agenda and subsumes other (important) policy areas like research policy, education policy, environmental policy, and industrial policy under its aims (Nauwelaers and Wintjes 2008: 286; Flanagan et al. 2011: 703; Lagendijk and Varró 2013: 115). National equivalents are just as grandiose, and just as superficial. In 2012, for example, the Swedish government launched its “innovation strategy” with the purpose to “contribute to a climate with the best possible conditions for innovation in Sweden with year 2020 in sight” (Swedish Government 2012). But although thousands of representatives from academia, industry, and government reportedly were invited to chip in, the strategy itself is “pretty thin and diluted” (Hall and Löfgren 2017: 311). Similar “innovation strategies”, containing mostly empty phrases with little or no connection to any real innovative capacity or effort, exist in many countries and on several levels of government (Pfotenhauer et al. 2019: 895; Pfotenhauer and Jasanoff 2017: 784). In order to back up these strategies with practical and concrete action, in most countries, specifically designated and considerably sizable innovation agencies have been set up with the mission of distributing public funding for innovation and keeping track of innovation policy and execution, which usually means producing reports, brochures and marketing slogans.