Innovation State

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Dan Rodrik:

"Financial markets in the advanced economies provide risk capital through different sets of arrangements – venture funds, public trading of shares, private equity, etc. But there is no reason why the state should not be playing this role on an even larger scale, enabling not only greater amounts of technological innovation but also channeling the benefits directly to society at large.

As Mariana Mazzucato has pointed out, the state already plays a significant role in funding new technologies. The Internet and many of the key technologies used in the iPhone have been spillovers of government subsidized R&D programs and US Department of Defense projects. But typically the government acquires no stake in the commercialization of such successful technologies, leaving the profits entirely to private investors.

Imagine that a government established a number of professionally managed public venture funds, which would take equity stakes in a large cross-section of new technologies, raising the necessary funds by issuing bonds in financial markets. These funds would operate on market principles and have to provide periodic accounting to political authorities (especially when their overall rate of return falls below a specified threshold), but would be otherwise autonomous.

Designing the right institutions for public venture capital can be difficult. But central banks offer a model of how such funds might operate independently of day-to-day political pressure. Society, through its agent – the government – would then end up as co-owner of the new generation of technologies and machines.

The public venture funds’ share of profits from the commercialization of new technologies would be returned to ordinary citizens in the form of a “social innovation” dividend – an income stream that would supplement workers’ earnings from the labor market. It would also allow working hours to be reduced – finally approaching Marx’s dream of a society in which technological progress enables individuals to “hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner.”

The welfare state was the innovation that democratized – and thereby stabilized – capitalism in the twentieth century. The twenty-first century requires an analogous shift to the “innovation state.” The welfare state’s Achilles’ heel was that it required a high level of taxation without stimulating a compensating investment in innovative capacity. An innovation state, established along the lines sketched above, would reconcile equity with the incentives that such investment requires." (