Choosing the direction of innovation is the problem – by definition it crowds out alternative directions, and the state lacks knowledge to choose the optimal direction

The entrepreneurial state narrative represents a combination of top-down and bottom-up approaches. The call is for states to create markets, radically change the direction of research and development, and then let bottom-up forces work their magic. The example par excellence is the internet, for which radical public sector (defense) research seeded a development that was combined with exponentially increasing entrepreneurial effort to commercialize the new technology and extend it to more areas.

A mission needs to be backed by considerable central power from the very top. The leaders of a large mission will need to subsidize, regulate, and continuously find new top-down paths if the old ones are not working. Each path chosen will eliminate alternative paths, including those that would have followed on those alternative paths, and so on. One reason why economists and proponents of theories of market failure tend to support R&D subsidies is that such a policy works from the bottom up: It does not (at least not necessarily) tell firms what to do or how to do it. When the state is the entrepreneur, grassroot entrepreneurs are not as free to work, and ultimately to spread knowledge, because they are no longer as free to decide the direction of their efforts.

It follows that a main problem with top-down policies is that this category of activity crowds out bottom-up solutions. Crowding out can happen either through higher taxes, more regulations, or direct competition. It can also happen since top-down policies by construction alter the profitability of firms in different sectors, as well as of firms that employ unequally preferred means toward similar ends. Even if you are the most innovative manufacturer of a product, you will face problems if the state chooses to back a competing technology. Even if you develop the best technology to produce renewable energy, the state may already have supported a competing technology and pushed it across the Valley of Death, to the point at which it is just too cheap relative to your own.

What then seems to be the key characteristic of the entrepreneurial state narrative, other than sheer ambition, is that it moves more responsibilities over to the state in terms of picking the direction of innovative activity. What is not currently discussed very much is exactly what to do if a mission, say, to reduce greenhouse gas emissions by some number, appears unfulfilled. Exactly which tools should the state have at its disposal to make a mission work, particularly if it appears to be failing? Should state bureaucrats be able to close firms that use carbon-emitting technologies? Should we be able to invade countries that counteract our missions? These are extreme cases in point, indeed, but not really knowing when to stop is an inherent problem with top-down policy. So are slippery regulation slopes; to make past efforts work, we need just one more tariff, one more regulation, or one last big-push subsidy. These questions raise a related problem: We seem to have absolutely no tools for evaluating these kinds of policy bundles, and in particular their effects on crowding out alternative technologies.