Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

Value extraction in the innovation economy occurs in various ways. First, in the way that the financial sector – in particular venture capital and the stock market – has interacted with the process of technology creation. Second, in the way that the system of intellectual property rights (IPR) has evolved: a system that now allows not just the products of research but also the tools for research to be patented and their use ring-fenced, thereby creating what the economist William J. Baumol termed ‘unproductive entrepreneurship’. Third, in the way that prices of innovative products do not reflect the collective contribution to the products concerned, in fields as diverse as health, energy or broadband. And fourth, through the network dynamics characteristic of modern technologies, where first-mover advantages in a network allow large economies to reap monopolistic advantages through economies of scale and the fact that customers using the network get locked in (finding it too cumbersome or disadvantageous to switch service). The chapter will argue that the most modern form of rent-seeking in the twenty-first-century knowledge economy is through the way in which risks in the innovation economy are socialized, while the rewards are privatized.

WHERE DOES INNOVATION COME FROM?

Before looking at these four areas of value extraction, I want to consider three key characteristics of innovation processes. Innovation rarely occurs in isolation. Rather it is by nature deeply cumulative: innovation today is often the result of pre-existing investment. Innovation is, moreover, collective, with long lead-times: what might appear as a radical discovery today is actually the fruit of decades of hard work by different researchers. It is also profoundly uncertain, in that most attempts at innovation fail and many results are unexpected. (Viagra, for instance, was initially developed for heart problems.)

(i) Cumulative Innovation

If there is one thing that economists agree on (and there are not many), it is that technological and organizational changes are the principal source of long-term economic growth and wealth creation. Investments in science, technology, skills and new organizational forms of production (such as Adam Smith’s emphasis on the division of labour) drive productivity and long-term increases in GDP. Building on the work of Marx, who highlighted the role of technological change in capitalism, Joseph Schumpeter (1883–1950) is probably the economist who has most emphasized the importance of innovation in capitalism. He coined the term ‘creative destruction’ to describe the way that product innovations (new products replacing old) and process innovations (new ways to organize production and distribution of goods and services) caused a dynamic process of renewal but also a process of destruction, with old ways falling aside and in the process causing many companies to go bankrupt. Schumpeter was particularly fascinated by ‘waves’ of innovations, which he believed occurred every thirty or so years. While Marx’s interest in technological change led him to look at the crises that capitalism would experience due to the effect of innovation on capital’s ability to create surplus value (or, to put it another way, if machines replace labour, how will the exploitation of labour – the source of profits – occur?), later economists focused mainly on the positive side of innovation that Schumpeter had underscored: its role in increasing the productive capacity of national economies.

In 1987 Robert Solow, a professor at the Massachusetts Institute of Technology, won the Nobel Prize in Economics for showing that improvements in the use of technology explained over 80 per cent of economic growth. Following many before him who were readers of Schumpeter, Solow argued that economic theory had to better understand how to describe technological change. 2Practising what they preached, they explored what forces drive technological change. But where does innovation come from? Is it lone entrepreneurs working in their garages, genius scientists having a eureka moment in the laboratory, heroic small businesses and venture capitalists struggling against the commercial odds? No, they concluded that inventions are overwhelmingly the fruits of long-term investments that build on each other over years.

To take one obvious example: innovation in personal computers, which replaced clunky mainframes, came after decades of innovation in semiconductors, in memory capacity and in the box itself (reducing the size of mainframes to much smaller units). Individual companies such as IBM were key to the introduction of personal computers in the late 1970s and 1980s. But there would have been little innovation without the contribution to that lengthy process of other actors, such as the US government’s investment in semiconductor research and its procurement power in the 1950s and 1960s. Or, later, the investments made by the US government in the Internet, or that made by companies like Xerox Parc – itself a beneficiary of large amounts of public co-funding – in the development of the graphical user interface, which Steve Jobs later made use of in Apple’s first Macintosh, Lisa.

(ii) Uncertain Innovation

Innovation is uncertain, in the sense that most attempts to innovate fail. It also can take a very long time: decades can pass from the conception of an idea to its realization and commercialization. The types, sources and magnitude of risks vary across technologies, sectors and innovations. Technological risks, for instance, can increase with the complexity of the target (e.g. going to the moon, solving climate change) or the paucity of knowledge within the organizations involved. 3The longer the time required to devise certain solutions, the greater the chance of a competitor reaching the market first, establishing what are known as first-mover advantages. Additional risks that militate against recouping the initial investment or the viability of the business include spillover effects (an event brought on by an apparently unrelated event elsewhere); the lack of demand for goods even if they make it to the market; investors’ exposure to labour or tax problems; and changing economic conditions. These are all reasons why an appetite for risk – in both the public and private sectors involved in innovation – is essential.

Yet contrary to the prevailing image of fearless, risk-taking entrepreneurs, business often does not want to take on such risk. This is especially the case in areas where a lot of capital is needed and the technological and market risks are high – pharmaceuticals, for instance, and the very early stages of sectors, from the Internet to biotech and nanotech. At this point the public sector can, and does, step in where private finance fears to tread, to provide vital long-term finance.

(iii) Collective Innovation

Understanding both the role of the public sector in providing strategic finance, and the contribution of employees inside companies, means understanding that innovation is collective: the interactions between different people in different roles and sectors (private, public, third sectors) are a critical part of the process. Those who might otherwise be seen as lone entrepreneurs in fact benefit from such collectivity; moreover, they stand on the shoulders of both previous entrepreneurs and taxpayers who, as we will see, often contribute to the underlying infrastructure and technologies on which innovation builds.

Such processes are evident in the technologies underpinning some of today’s most ubiquitous products: the iPhone, for instance, depends on publicly funded smartphone technology, while both the Internet and SIRI were funded by the Defense Advanced Research Projects Agency (DARPA) in the US Department of Defense; GPS by the US Navy; and touchscreen display by the CIA. In the pharmaceutical sector, research has shown that two-thirds of the most innovative drugs (new molecular entities with priority rating) trace their research back to funding by the US National Institutes of Health. Meanwhile, some of the greatest advances in energy – from nuclear to solar to fracking – have been funded by the US Department of Energy, including recent battery storage innovations by ARPA-E, DARPA’s sister organization. Both Bill Gates, CEO of Microsoft, 4and Eric Schmidt, Executive Chairman of Alphabet (the parent company of Google), 5have recently written about the immense benefits their companies gained from public investments: as well as the Internet and the html code behind the worldwide web written in CERN, a public lab in Europe, Google’s very algorithm was funded by a National Science Foundation grant.