Prefer empirical evidence to their highly dubious economic theory crafting

The other side of that ideological coin is the belief that only business creates value. Here, risk-taking entrepreneurs, driven by the motive of profit, deserve a special place in society because only they, in the end, generate the tax revenues on which government depends, push innovation forward and create jobs. But the truth is not that simple. How private firms create value has been analysed extensively in the field of microeconomics, and its equivalent in business literature. There is no question that businesses create value and need to make profits, and should be free to do so. The issue is understanding how this occurs. Economics talks about the ‘production function’. It explains how value is created within the firm (the microeconomic theory of value) by combining capital (tangible, such as machinery, and intangible, such as knowledge) with labour and technology.2 In business studies, value is understood as being created inside the company by bringing together managerial expertise, strategic thinking and a dynamic (changing with circumstances) division of labour between workers.3

All this ignores the massive role of government in creating value, and taking risk in the process. In The Entrepreneurial State I argued that Silicon Valley itself is an outcome of such high-risk investments by the state, willing to take risks in the early stages of development of high-risk technologies which the private sector usually shies away from.4 This is the case with the investments that led to the internet, where a critical role was played by DARPA, the Defence Advanced Research Projects Agency inside the US Department of Defense – and also by CERN in Europe with its invention of the World Wide Web. Indeed, not only the internet but nearly every other technology that makes our smart products smart was funded by public actors, such as GPS (funded by the US Navy), Siri (also funded by DARPA) and touch-screen display (funded initially by the CIA). It is also true of the high-risk, early-stage investments made in the pharmaceutical industry by public actors like the National Institutes of Health (NIH) – without which most blockbuster drugs would not have been developed. And the renewable energy industry has been greatly aided by investments made by public banks like the European Investment Bank or the KfW in Germany, with private finance often too risk-averse and focused on short-term returns.5 On the demand side, it required organizations such as the Small Business Innovation Research Programme (SBIR), housed in the US Department of Commerce, to create markets for small and medium-sized enterprises (SMEs) by designing procurement policy so it is focused on helping SMEs provide goods and services via department budgets (about 3 per cent of the budget).

Globally, the actions of public agencies across the entire innovation chain have also been crucial, allowing innovation powerhouses to emerge: in Taiwan, the role of the Industrial Technology Research Institute; in Israel, that of the Office of the Chief Scientist; in Japan, the Ministry of International Trade and Industry; and in Singapore, the Agency for Science, Technology and Research.6 The Republic of Korea has been especially successful in developing electronics. It first made its entrance into the semiconductor industry in the 1970s, when it attracted US companies looking for cheap assembling facilities, and spent the following decade implementing widespread industrial policy measures that included supporting business groups capable of mass production and exporting consumer electronics. This led to the launch of the first commercial dynamic RAM product in 1984.7

In all of these cases, without ambitious public investment the private sector would have proved unwilling to invest in areas where the required funding was large, long-term and highly uncertain. Only after the risk had been absorbed by the public sector did private businesses take advantage of the new opportunities created by the innovation. Thus, the empirical evidence paints a very different picture from the theory based on highly dubious assumptions.