Government should not pick winners and losers. Public sector bureaucracy strangles entrepreneurship and innovation. Government can establish broad policy framework, but then should get out of the way.
Sounds very familiar, right? I've never been much of a fan of these truisms, so often cited and accepted as gospel by businesspeople and politicians across the opinion spectrum, not just libertarians and those on the right. And rarely have I heard this conventional wisdom debunked as eloquently and passionately as by economist and professor Mariana Mazzucato, a keynote speaker at the fifth annual ARPA-E Energy Innovation Summit outside Washington, D.C. late last month.
Mazzucato, a professor of economics and science and technology policy at the University of Sussex in the U.K., published a book last year called The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Far from being an obstacle to innovation, government, Mazzucato argues, has been and continues to be a critical source of it throughout technology-based industries. Somehow, she says, we need to get past the pervasive political and cultural stereotypes that exalt the tinkerer-geniuses in Silicon Valley garages (or the Googleplex) while denigrating public-sector workers as clock-watching, paper-pushing dullards.
There is always an element of truth to stereotypes, otherwise they wouldn't be stereotypes. But reality is always much more complicated and diverse. There are plenty of people running startup companies, for example, who are too non-imaginative and risk-averse. But the far more common misconception comes in downplaying or ignoring the myriad public-sector activities, and the people who create and implement them, that seed and drive technology and business innovation.
In one of many telling PowerPoint slides, entitled "What makes the iPhone so smart?" Mazzucato listed the U.S. government agencies whose initial R&D work laid the groundwork for the blockbuster Apple product's impressive features. Siri had her roots in voice-recognition technology development at DARPA. GPS and mapping? The Department of Defense and the U.S. Navy. Lithium-ion batteries? The Department of Energy. Liquid-crystal display? The National Institutes of Health, the National Science Foundation, and DoD. "The problem," says Mazzucato, "is that many people don't know this."
Granted, there's no better forum for a speaker touting the role of government than the annual ARPA-E event, which showcases the latest energy technology innovations from all of the nation's DOE research labs, plus dozens of companies and universities that have received ARPA-E research grants. (The dominant sector this year, by the way, was grid improvements and energy storage, both portable and stationary). But Mazzucato is spreading her message far and wide, with The Entrepreneurial State earning praise from the likes of the Financial Times, The Economist, and Forbes. Last year, The New Republic called her one of "the three most important thinkers about innovation you need to know."
As the clean-tech industry well knows, federal energy R&D entities like ARPA-E are constantly battling for every budget dollar. Of course it's not just about throwing money around, but by any objective measure -- and I use the word objective very deliberately -- ARPA-E's loan guarantee program has been quite successful, with a loan payback rate of 97 percent, according to the U.S. House Committee on Oversight and Reform. And globally, since 2008, financial support of clean tech from mostly government-funded development banks has outpaced venture capital and private equity by a wide margin -- one need only look at the billions in funding in the world's largest clean-tech market, China.
The key, of course, is public-private partnerships -- and it has been that way throughout history. In our 2012 book Clean Tech Nation, Clean Edge managing director Ron Pernick and I outlined this in a section called "We've Done this Before: Lessons from U.S. History." The Transcontinental Railroad, the World War II manufacturing overhaul, the development of the Internet under DARPA, and the Apollo space program all involved the government working closely with the private sector. Did this mean picking winners and losers? Damn right it did. "Governments have been picking winners and losers for as long as there have been governments," says Marc Boom, federal legislative advocate for clean-tech and sustainable business advocacy group Environmental Entrepreneurs (E2).
Mazzucato says we need to encourage more innovative and entrepreneurial thinkers to work in government. In clean tech right now, a key aspect of that is innovation in finance. In the solar power industry, for example, financial innovations such as solar leasing and power purchase agreements have been arguably more responsible for the current solar PV deployment boom, both in the U.S. and overseas, than any technological breakthrough. Much of today's finance innovation in clean tech is taking place at the state and city level, with green banks (which use public funding to leverage private capital) launched recently in places like New York State, Connecticut, and Chicago.
Daniel Esty, one of the key architects of Connecticut's green bank and a great example of a government innovator, was at the ARPA-E conference moderating a panel on microgrids. The Connecticut green bank, formally known as the Clean Energy Finance and Investment Authority, helped fund some of the nine pilot microgrids across the state, with 15 more in the pipeline. The first, on the campus of Wesleyan University in Middletown, launched earlier this month. Esty recently left his job as the state's first commissioner of energy and environmental protection to return to teaching at Yale, handing the reins to his chief of staff Robert Klee. Green banks, Esty says, can step in and fund clean-tech projects where private capital has failed to because "the perceived risk may be bigger than the actual risk."
At Clean Edge, we have always said that clean tech -- and indeed, any technology-based industry -- rests on the three pillars of technology, policy, and capital. The common perception may be that government's role is mainly in policy, but in reality the public sector is a critical player in technology and capital. In our culture that prizes and celebrates innovation, we need to not only recognize that it occurs in government; we need to encourage and expand it as well.