Book Summary: “The Myth of the Entrepreneurial State”
The Myth of the Entrepreneurial State: Deirdre Nansen McCloskey and Alberto Mingardi
This book is a reaction to Mazzucato’s “Entrepreneurial State,” so it reads a bit like you’re overhearing someone behind you in the coffee shop tell a colorful breakup story, but despite the drama and emotion, the facts, like some of those stories I’ve overheard, are very interesting, compelling, and relevant to the world.
I’m not an economist, I’m a theologian-philosopher so I come about this conversation from an untraditional angle, but I come to it in a search to end the suffering that comes from material poverty. I want to see human flourishing and am on a quest for truth to see that happen through my impact on the world.
I see government price fixing on water causing massive water shortages because they’ve kept the price so low that there is no incentive to produce or deliver water. The more water delivered, the higher the losses to state, parastatal, and private actors. In the name of protecting people, the private sector is shackled from innovating to provide greater and greater levels of service, technologies, and models that would cause breakout innovations to serve increasingly “bottom” but abundant markets.
Here are my bullet points and my underlines from her work, I hope you can put the pieces together to see the story, or gain interest to purchase the book and dive into this conversation yourself. Saddle up!
The big fight here seems to be over the principle cause of The Great Enrichment, the period from 1800 to present in which incomes across the world went up by a FACTOR of 10, 30, to 100 depending on how you account for goods and services.
Deirdre says “People, regular people..began to perceive themselves in a new and dignified light and crucially, came to feel their artisanal and commercial undertakings to be more appreciated socially. They were permitted to “have a go.” As the British say, and proceeded to innovate at a massive scale.”
A constant theme is that academics don’t realize that while they look from the present backward, searching for causation, markets look from the present to the future, adapting rapidly to survive and thrive, like bacteria in a pétri dish. You can’t reverse engineer that type of life, yet economists and lawyers seem convinced that the world works because that’s the way their report writing works.
“…economist should not act as though they were advising a perfectly ethical and competent and non-tyrannical philosopher king, considering, as he put it, that in a democracy “the main task of the government is to win and hold a parliamentary majority for the executive’s own interests.”
What I gathered is Deirdre defends against the argument made on the premise that those who have wealth have gotten it because of the state and therefore the state has the right to take that wealth and redistribute it for equity. This is based on Obama’s “road” statement to Google. As if infrastructure enables innovation instead of innovation driving the taxes paid that enable infrastructure which enable more taxes to support Government. She argues wealth is created by providing for the needs of the masses in the terms of the masses and the Government should protect an environment that enables the cycles of innovation and loss to happen, shielded only from monopolies (for which both the government and businesses pose a threat).
What Mazzucato promotes, according to the authors, is statism, which assumes that governments should be the moral authority that ensures the right things get done and everyone gets treated fairly. Getting the right things done, of course, requires innovation, which Mazzucato allegedly claims is also the role of the government to dictate. The problem is in who takes the credit for societal and market advancements.. Deirdre would argue it's the billions in the marketplace making small adjustments and micro innovations, taking on personal risk that ensures solutions optimize and better services are provided for the world. If entrepreneurs don’t provide value, consumers don’t purchase, and another entrepreneur fills the gap and adds the value people wanted. Mazzucato is said to argue to the counter—people don’t know what they want/need and the Government is best positioned to regulate the resources and direct energy towards long term outcomes.
She makes clear points that in trying to prevent corruption in the private sector we just enable and create new forms of corruption within the public sector:
“If consumers, for whatever reason, prefer Jay’s store to Joanna’s office, then Joanna should either improve her office or leave the trade. That’s democratic. But under statism Joanna has a third option, persuading the state to blockade competing entry, which is to her advantage, or to regulate her competition, also to her advantage. Joanna, an ophthalmologist, can use the third way, after carefully aimed bribes to the State’s politicians and officials, to block Jack the lens-grinder and spectacle fitter. By the force of the new law, Joanna the doctor of ophthalmologist can put Jack the optometrist out of business, or make him neatly subordinate to her, but arranging against Jack through politics a legal monopoly of medical prescription, in the name of “safety.” An ophthalmologist can recruit state coercion to prevent a mere optometrist from offering 5.0 magnifying eyeglasses without a prescription. In fact, in American states she does.”
“The Statists do not appear fully to appreciate in particular the astounding scale of little, bottom-up innovations. They tend to think of innovation as big, dramatic items such as the Manhattan Project, and to overlook the myriad of small improvements, and often enough pretty big ones, coming to the market daily. They do not realize that almost every object why buy, for example, is designed by someone under the guidance of profit.”
“Innovation is a bottom-up evolution deriving from knowledge dispersed among millions of people…it is not the technology but the social environment around it that determines whether it will be accepted. It is why casting around for a magic wand to create innovation, the state can crush it. And when it succeeds, which it seldom does, it crowds out the private sector, which is to say the mass of scientists and tinkerers and common people venturing under liberalism.”
One quip I caught was the notion that when private investment fails, it is corrected by failure. When public investment fails, it is corrected by coerced taxation and subsidization to the friends of that government (lobbyist, bribes, post-office-promises, etc.)
The way she describes markets makes me see that biologically: as teeming, evolving, non-linear, catalytic growth like a forest floor rather than an equation that can be predicted and coerced by some large organizing power. Reading I thought, “you can’t breed Pandas in captivity, you can’t breed innovation in universities…”
“How much imperfection there is in markets and how much imperfection in the proposed statist alternative…”
“Business executives do sometimes conceal deadly pollution from public scrutiny. Senators do sometimes use inside knowledge to profit from the COvid-19 stock market crash.”
“Political decision making is less directly aimed at human welfare than is market decision-making. You won’t believe such a claim if you believe that markets are merely sites for seizing profit from the citizenry, like a mafia extorting or a government taxing, and if you do not see that a market profit comes only when other humans find themselves better off when they purchase the product.”
“Conversation and persuasion is more democratic and sometimes faster. If it becomes known that a certain restraint poisons its customers, it promptly loses paying customers and closes down, because of persuasive publicity on TV and in the newspapers, long before the police and regulators show up (with, in most cases, their hands out for a bribe). It is why free press is so important to the function of innovism…”
“The state is of course the monopolies of monopolies. Harmful bigness in the private economy does not survive without the protection of the state. If you are going to coerce someone to buy your product, the demand for which is, unhappily, falling (such as the USPS, Europe-grown food and fiber), you would do well to get the State behind you. They will carry on for twenty years of falling demand without disturbance.”
“…the State is not akin to a private company. It is from a very different kinship system, that of coercion rather than persuasion. It does not start a software company in a garage like Bill Gates. It does not go out of business if its investors quit or its customers do not turn up at the shop. The State’s shops in Cuba are mostly empty of products, but they remain open. The State can always tax, or inflate, or nudge, or in prison, so that the whole of the population, like it or not, is investors and its customers…”
“…the actual virtue of Steve Jobs extracting public good from “stay hungry, stay foolish” was that his hungry foolishness was quickly tested by customers. His ideas were quickly rejected when they proved foolish and did not persuade customers to offer more than the cost in alternative uses of the inputs elsewhere in the economy (his NeXt computer) and were quickly accepted when in the same terms they proved wise (his iPhone.)”
“…the crucial disability of the State is precisely the “scale and the tools not available to businesses (i.e. taxation and regulation)—which is to say massive, politically guided coercion without a test (actual or imagined) of profit paid by consumers.”
“The invisible hand” (Adam Smith reference to capitalism), “which works quickly, should be replaced by a visible fist of the state, which keeps on pounding. We don’t think so”
“Foreign aid, run by the entrepreneurial governments that Mazzucato admires, has enriched elites and financed impoverishing projects, such as an artificial lake in Ghana now fished by slave children and producing water borne disease.”
Deirdre adds context to Milton Friedman’s often quoted statement on maximizing shareholder value as the core aim of companies: “make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”
“The leftish premise seems to be that businesspeople can’t possibly have a professional ethic. Unlike we secular priests, they think, businesspeople are always corrupted by Mammon.”
“The connection between paying and receiving in ordinary markets is of course tight, whereas the connection between outcomes and the voting or other political expressions of desire is notoriously loose.”
“Profit, which determines shareholder value, summarizes at the margin, for the making of a decision today about what to do tomorrow, what the millions of customers, suppliers, workers are willing to offer and accept, taking responsibility for their actions rather than shouting at public meetings to persuade politicians to coerce other people. In the various markets in which people participate they put their money where their mouth is.”
“We note that the independence of the individual in a liberal economy lets people exchange as they wish with free will—and it results in the great and good interdependence of modern life.”
“The blessed Adam Smith reminded us that even the beggar, who has chosen to depend on the “charity of the well dispose people” then “with the money which one man gives him he purchases good” from another man or woman presumably. “The greater part of hic occasional wants are supplied in the same manner as those of other people, by treaty, by barter, and by purchase” — I.E. even the beggar gets charity from profits and uses that charity to purchase things in a way that profit them and those they purchase from
“Nonetheless the buyer receives the correct signal from its price, learning the cost to other people that is to be compared with the gain to the very buyer. Benefit minus cost is gain to the person and to society. To use business jargon, “value creating.” The economist’s word is simply profit.”
I found it so remarkable that she points out that Governments demand data from the private sector but when asked whether government failure is likely to be greater or lesser than market failures it seeks to correct, governments do not nor cannot provide any serious argument for their positive assertion. They assume authoritative knowledge on markets from the market itself.
“The alternative to dignified pricing, we say again, is undignified coercion.”
“We are saying that the market gives the dignity of self-governance within the laws of physics and the customs of community…The market, though, gives a voice automatically with no other poll or policy required. Each consumer or employee has a voice, loud or soft, through exit.”
“Private reward, factually speaking…has proven to be a pretty good indicator of social reward. Not perfect, but pretty good. The factual question is whether on this or that occasion the social reward so greatly diverges from the private reward that the State should intervene.”
“The statist faith is like thinking that your laptop in 2021 was envisioned in 1981 by IBM technicians making the first desktop computer. It infers direction and rationality, and therefore the efficacy of central planning ex ante, from a complex evolutionary result, ex post. It is similar to the inference to a Maker from the complexity of the eye. But in fact the products and processes evolve in the economic world in the way the eye evolved, by back and forth between producers and consumers, as between biological variation and its environment. Bottom-up, as we keep saying.”
“It is a profoundly erroneous truism that we should cultivate the habit of thinking of what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them. You can drive your car without knowing how it works. George Will draws the moral : “So in a sense, ignorance really is bliss because so many other people, who are also ignorant of almost everything, are knowledgeable about something, and we can make use of their knowledge.” Or the society can if it leaves them alone to offer it to the market.”
“Fantasies of the Entrepreneurial state to the contrary, enrichment of the poor was produced by human action in aid of innovation”
Lionel Trilling warned in 1948 “we must be aware of the dangers that lie in our most generous wishes,” because “when once we have made our fellowmen the objects of our enlightened interest we go on to make them the objects of our pity, then of our wisdom, ultimately of our coercion.”
“One of the biggest problems with such a distinction (essential/non-essential) is that it postulates a fixed-hierarchy of needs and preferences, once for all. If such a hierarchy is accepted, the economy is merely and engineering problem: a bevolant engineer-in-chief can order factors of production so that people never stop getting all the “essential”things they need, the green raincoats of Soviet planning.” — This hit me thinking of governments fixing water costs and water amounts per day. The fixed costs disincentivize production and create shortages while the fixed amounts stagnate innovation and improvement of life. By defining what access should and shouldn’t be from the outside, Governments and Aid agencies are retarding development, not aiding it.
“Profits signal the preferences of ordinary people massing about in markets, proving that a certain move, a certain technique, a certain innovation has been wisely put forward.”
While a bit “ranting,” I found the axioms and metaphors shared extremely helpful in adding color to the philosophical concerns I have from a Statist approach in Africa. Deirdre’s writing correlates from my recent read, “Africa Unchained '' by Ghanaian Economist George Ayittey, who bemoans the effects of statism in Africa’s development for all the same reasons.
For a non-Economist, I’m thoroughly enjoying the thought work and fuel to my curiosity, poured on from bold authors and thinkers like Deirdre McCloskey and Alberto Mingardi.