The State’s led the way on every meaningful innovation. Government innovation management makes it socially just. That solves: climate, inequality and disease.

The role of the state in the economy has always been contested. Neoclassical economic theory, which dominates most major economic departments of universities and thinking within national treasuries, holds that the primary goal for the state should be simply to correct market failures. These failures could be an externality that is not properly accounted for; a public good that is currently not being funded; or a monopoly exercising undue power or price gauging. The theory then holds that once the failure has been addressed, the state should step back in order to reap the rewards of now properly functioning market which should deliver growth together with increased jobs and tax revenues. Even within the narrow frame of the role that such economic thinking sets out, everyone benefits considerably from the investments made by the state. As Mariana Mazzucato has written, even free market fundamentalists: “gain directly through the roads you drive down, the rules and policing which ensure their safety, the BBC radio you listen to, schools and universities that train the doctors and pilots you depend on, parks, theatre, films and museums that nurture our national identity. You also gain, indirectly, through enormous public subsidies without which private schools, hospitals and utility providers would never be able to deliver affordably and still make a profit.”7 The idea that the state should just facilitate, administer and regulator the economy rather than engage in more direct directing and management started gaining wide acceptance in the 1970s. These ideas have received newfound popularity in the aftermath of the recent global financial crisis and used to target reductions in government spending and debt, often arguing that reducing government spending will not lead to stagnation and collapse but instead generate additional private investment. This kind of thinking led to policies like the one introduced by the Labour Party in 2002, which reduced the time that private equity funds must be invested to be eligible for tax reductions from ten years to two years.8 As Mazzucato argues, such policies ‘increase inequality, not investment, and by rewarding short-term investments at the expense of long-term ones, they hurt innovation.’9 Just as the state has led the development of infrastructure that makes our lives possible it will also need to take a lead in addressing some of the major challenges that we face as a society today, often ones that the market is either unable to address or in fact the primary driver of the problem, things such as climate change, youth unemployment, obesity, aging, and inequality. The development of the Covid-19 public health emergency has made these challenges more acute. Despite these enormous challenges, many governments are reluctant to explicitly target large-scale investment programmes to tackle them. Often, their actions are limited to creating tax incentives, enabling legislation or providing public money for R&D, usually implemented in such a way that the state gets nothing direct in return. However, as our analysis of ONS data reveals in the following section, these limited actions operate at considerable scale, with tax incentives and public R&D spending totalling £14.4bn in the UK in 2017-18. The same is true in the US, where even though publicly funded R&D has been happening quietly, it has nevertheless delivered significant results as evidenced by the development of key components of the iPhone, outlined in Box 1

Box 1 – The public money behind the iPhone

One of the icons of the modern world is the smartphone and within that category the iPhone still rules the roost since it was first launched in 2007. For many it seems like the culmination of private sector genius, embodied by the likes of Apple’s CEO Steve Jobs and Chief Design Officer Jony Ive, and they, as well as many others, certainly played a very significant part in the success of the product. However, as Mariana Mazzucato revealed in her book The Entrepreneurial State, in fact, the US government directly funded and developed many of the key technologies that make up the iPhone. The diagram below, taken from the same book, shows some of these technologies alongside the US public sector bodies that developed them. This analysis highlights the fact that most useful innovations are not the product of a single genius or even a single company but instead are derived from a multiplicity of sources, with the public sector playing an important but under-appreciated role in the process

The moral of this story is not that the government could have developed the iPhone or that the team at Apple were not exceptionally gifted in making transformational products. The key takeaway from this example is that the state made a huge investment in multiple diverse technologies, from the microprocessor to the internet to GPS. Moving forward, however, there remains a need for the state to reorient its investment toward tackling today’s social challenges. To fail to recognise this in the narrative of innovation hampers the ability of the state to replicate this vital innovation in the future. Also, much of this innovation would never have been funded by the private sector, because the investments were too large, the risk too high, and the pay-off (at the time the investments were being made) seemed implausible.

These issues beg key aspects of innovation that need to be managed to ensure an evolving and successful economy. First, there is the question of scale. An economy needs to conduct R&D and invest in innovation in order to ensure that new businesses, jobs, products and services are created. Second is the question of direction, and whether the R&D is pursuing the right questions to meet the challenges that we face today and will face in the future. The state is an important actor addressing both questions. The argument that the state should be written (back) into the story of how innovation is driving the modern economy ‘in letters ten foot high’ is agreed by all but the most libertarian commentators, even by those who question whether this conclusion merits any significant policy change.10 The primary contention of this paper is that not only should the story of innovation be amended to include the active role of the state but, given its major role in directly and indirectly funding R&D, that we should also rethink the way in which the state shares in the upside of its risky investments as well as shouldering the costs. When the private sector invests in R&D, it does so with the explicit goal of creating new products and services, often in the process creating IP to protect and monetise them. Under the current system, all public sector investment that does the same thing (that is, create new products and services) is subsequently free to be enclosed by the individuals and companies that are funded, using public money, to do the research. This is the case even when the public R&D spending has proved transformative, creating entirely new markets and sectors, including the Internet, nanotechnology, biotechnology, and clean energy.