The state, not the private sector, invented the modern economy

I read an article in The Economist a while ago that insisted the state should constrain itself to providing basic services and otherwise stay out of the economy. That is, of course, a common belief on the right. The Economist, however, ought to know better.

Let us assume that governments had stayed out of the economy after, say, the Second World War. We would be living in a very different world. We wouldn't, for example, have the Internet. Or the World Wide Web. And those iPhones so many people depend upon, we wouldn't have those either.

The reason we wouldn't have these things is because they are products largely developed by state agencies. The Internet resulted from research directed by the U.S. government agency DARPA (Defense Advanced Research Projects Agency). The World Wide Web was invented by British computer scientist Tim Berners-Lee when he worked at CERN, the particle physics laboratory near Geneva, Switzerland, best known for its Large Hadron Collider. CERN is funded by its 23 member states.

The Apple iPhone is often considered the poster product of the Information Age, created by one of the age's heroes, Steve Jobs. Jobs packaged the product beautifully but almost everything in the package was developed by government agencies either directly or through state funding. This includes the Internet, of course, as well as GPS, touch screen and SIRI.

And governments fundamental contributions go well beyond electronics. Research by the American taxpayer-funded National Institutes of Health originates most promising new drugs. The oil industry owes it recent explosion of reserves and profits from fracking to major investments by the U.S. Department of Energy and the U.S. Department of Mines in the technologies that unleashed it. Governments are also heavily funding innovation in green energy, actually creating markets for electric cars and solar panels with tax credits and rebates. Even space travel, envisioned and massively funded by governments, is now being exploited by private interests. Governments also heavily subsidize the demand side. For example, by building roads and backing mortgages, they have enabled the suburban lifestyle.

All this is spelled out in great detail in a book by Mariana Mazzucato entitled The Entrepreneurial State. This is one of those books, like Richard Dawkins' The Selfish Gene or Carl Safina's Beyond Words, that offers profound revelations about how the world works.

Mazzucato lays out a pattern for the development of breakthrough technologies. The state, not the private sector, envisions the technology. The state, not the private sector, then puts up the massive funding necessary to make the technology viable. And then the private sector enters the picture and commercializes it. And they do a wonderful job, but the institution that made it all possible, the government, is generally omitted from the credits.

I hate to recommend books to people (everybody's tastes differ), particularly books on economics, but some are irresistible, and this is one of them. So, if you're looking for a good read ...