Government planning is subject to interest group capture and reduces overall innovation – the most productive entrepreneurs won’t even apply for government grants

The knowledge problem is but one exponent of what could very well be called “government failure” to counterbalance the hypothesis of “market failure”. Politics is, in and of itself, a struggle between different special interests. These special interests will take every opportunity to benefit from policies that they can have influence over (Niskanen 1975). On a general level, any policy measure will therefore run the risk of being captured by special interests, which means that rather than aiming for utility maximization on overall societal level, it will aim for utility maximization on individual or group level.

Purposive social action always has unintended consequences, changing the behavior of those it is aimed at (Merton 1936) and incentivizing beneficiaries of rewards or subsidies to adapt to terms and conditions rather than aspiring to quality or competitiveness in a broader or general sense (e.g. Muller 2018: 19–20). Direct and indirect subsidies handed out by public sector organizations tend to lead both public and private actors and entities in innovation systems to reorganize their efforts so as to maximize their eligibility for funding, and realign their activities to fit specific aims and purposes. Studies have shown that government subsidies tend to go to those who are good at applying for them, or lobbying for them, rather than those who need them (Karlson et al. 2021: 85). Programs are, allegedly, routinely “hijacked” by special interests so that resources are diverted away from intended goals and to “boosting cronies of the nation’s rulers or legislators” (Lerner 2009: 11). Other studies have demonstrated that entrepreneurs who are productive enough on their own are not only in no need for these types of grants, but indeed abstain from applying at all, and instead use their effort on increasing their productivity (Gustafsson et al. 2020). This seems to imply an inverse correlation between productivity and effort put into acquiring grants.