The Entrepreneurial State

Today George Osborne announced that further cuts of £25bn will be made to the Welfare bill after the next election. Paul Johnstone of the Institute of Fiscal Studies pointed out that this would mean taking money from the poor, the sick and disabled and those with children, essentially the most vulnerable in our society. Robert Chote of the Office of Budget Responsibility didn't disagree. Over the next 4 years, we in Lewisham will have to implement around £85m worth of cuts, along with other Labour authorities across the country. Strangely, councils run by Coalition parties in more affluent areas have been protected from such severe budget reductions. Their residents clearly won't be required to endure quite the same levels of austerity as ours. Large cuts to Welfare spending coupled with disproportionately larger cuts to Local Government in the more deprived areas of the country gives a lie to the assertion that 'we are all in this together'. Just like some passengers on the Titanic were in first class, enjoying a luxurious trip and able to get to the lifeboats a lot faster than their fellow travellers in third class when disaster struck.

The Chancellor's remarks today should come as no surprise. He is merely restating what was implied in December's Autumn Statement. Osborne has set out the Government's course so that by 2018-19, according to the OBR, its "consumption of goods and services - a rough proxy for day-to-day spending on public services and administration - will shrink to its smallest share of national income at least since 1948, when comparable National Accounts data are first available". This was the time when the post-war Labour Government was setting up the Welfare state. The Act that set up the the NHS, the crowning glory of Labour's achievement, didn't take effect until 5 July 1948. So, in short, the Coalition want to reduce government back to the size it was before the Welfare state was set up.

This motivation to reduce the size of the Government surely comes from an ideological view that the state is a burden on the economy sucking up resources that could be more efficiently used in the private sector. That this position is still so widely held over 6 years after a financial crisis created in the private sector and from the effects of which we are still reeling is disappointing.

The argument that the State has a positive role in the economy is not one that you hear articulated in bold terms very often. You might hear the case being put for the need for state intervention to correct market failure and deal with 'externalities'. If markets don't capture the full costs of pollution to society, then Governments should act. If the private benefit (profit) is too low to get a bridge built but is outweighed by the social benefit, then the Government should intervene. This sounds very technocratic and therefore not too radical and leftwing. However, the argument for more regulation to correct the excesses of free markets makes many advocates of an active role for the state feel a bit uneasy. It's one thing to call for more social justice, but this can lead on to demands for more 'fairness' which can seem naïve and immature, opening one up to charges of being a rampant 'redistributionist' 

So it has been a great encouragement to me to finally get down to reading Marina Mazzucato's book The Entrepreneurial State over Christmas. Mazzucato argues that we need to see the state not as a necessary evil but as an engine of dynamism and entrepreneurship in the economy. If we do, then we no longer need to believe that the state 'crowds out' more productive investment in the private sector because we can see that the state can not only invest where it is too risky for the private sector, but it can invest to develop projects that deliver a much bigger return than those promoted by the private sector. I think that this idea is far more difficult to brush aside than it would have been 10 years ago, bearing in mind that we now realise that much of the R&D that was going on in the banking sector before the Great Recession was used to develop products that turned out to be 'financial weapons of mass destruction', to quote Warren Buffett. To support her argument Mazzacuto shows that, 'there is not a single key technology behind the iPhone that has not been State-funded.' These include the Internet, GPS, touch-screen display and the new voice-activated personal assistant (SIRI). The algorithm that led to Google's success was funded by a US public sector grant and the 'molecular antibodies, which provided the foundation for biotechnology before venture capital moved into the sector, were discovered in public...labs in the UK.'

Perhaps we need to be more confident in putting the case for a major role for the State to play in generating growth and creating wealth, by building an economy founded on research, invention, innovation and technological advance.