Invention vs. Innovation

One often hears about the creative power of the State, an entity whose main attributes seems to be confiscation and blowing things up. This is a discussion by Worstal on the subject:

Ms Mazzucato is the economist who insists that government is responsible for innovation in this world of ours, the same Government that took four months to notice a typo on her visa application, she argues, is the one which made the iPhone possible.

She’s written an entire book on the subject of the entrepreneurial state and is setting up an institute to propagate the idea.

The problem with her assertion is that she, and her acolytes, have forgotten the basic economics of invention and innovation. Something which we really should remember given that William Baumol, the man who explained it all to us, died recently.

The essential point is that we must distinguish between invention, the creation of new things, and innovation, the combining of extant things to enable new things to be done. Baumol was insistent that the state was equally good, or equally bad, if you prefer, at that invention part in comparison with the market unadorned. But the market performed heroically in comparison with the state with regard to innovation.

The word entrepreneur is not meant to mean someone who invents new stuff, it’s meant to mean someone who organises stuff in a new manner. An entrepreneur collates capital, labour, technology, in order either to sate some human need, or to do so in a different manner. The state, as Baumol insists, is bad at being the entrepreneur.

Mazzucato’s basic observation is that the varied underlying technologies which go into an iPhone were all backed by government money. The touch screen for example. It was, in a small way, state funded in America.

GPS for example, was designed to let soldiers know where they were and where the enemy was assumed to be. We can call that invention. But no government ever thought to put that same technology into a smartphone so that we could be sent an ad by the doughnut shop we just walked past. That’s innovation, a new use for an extant piece of technology.

As for our government, we wanted to have a slice of the equity in what was being developed with tax money – the touch screen technology. The American version of the same sort of thing was also developed with tax money through Darpa, the defence research agency. But the one thing that Darpa never does do is take equity stakes in technologies it funds. That’s why any old entrepreneur can pick up a Darpa funded technology, play with it, and see if it can be combined in some useful manner into something people want.

Inventions are public goods, gaining access to public goods is one of the reasons we have government – because ownership of such isn’t really possible. Which is why, if the state does produce them it should give them away. We’ve paid our taxes, we’ve got our public goods, what’s the problem here?

And no, the state did not invent the iPhone. That’s innovation, the one thing government is provably, ridiculously, bad at.