253Directionality in Innovation Policy and the Ongoing Failure of Green. . .

In recent years, we have witnessed the emergence of an alternative, much more interventionist approach to accomplishing economic growth and sustainability. Derived from theories on both market failure and system failure, literature on innovation systems and technological systems has argued that collective action problems may inhibit technology development (Jacobsson & Bergek, 2004). Uncertainties are initially high, huge investments are required, free rider problems may exist, and benefits may be distant. At the same time, investments in new knowledge may benefit the economy in the long term due to positive externalities.

Based on these theoretical arguments, scholars such as Mariana Mazzucato have advocated that the state take on a more active role in advancing societal goals such as sustainability (Mazzucato, 2015; Mazzucato et al., 2020). The term directionality is increasingly used among scholars in order to emphasize the role of innovation policies in directing society toward addressing grand challenges (Schot & Steinmueller, 2018). This new idea is at times referred to as innovation policy 3.0 and stands in contrast to previous innovation policy because it is explicitly concerned with making use of science, technology development, and entrepreneurship in order to address large societal challenges (Grillitsch et al., 2019). These recommendations stand in contrast to the perspectives brought forward, for example, by Josh Lerner’s Boulevard of Broken Dreams (2009). In his book, Lerner describes how innovation and entrepreneurship policies have been largely unsuccessful across both developed and developing countries. Generally, calls for increased directionality are made without considerations of the limitations of policy or policymaking (Mazzucato, 2015, 2018). Evidence of policy failure is scarcely reviewed, yet there are, by now, many studies pointing out the limited effects of more interventionist policy approaches and support structures aiming to raise innovation (Bennett, 2008; Ejermo, 2018; Karlson et al., 2021). Lerner (2009, p. 5) summarized extant evidence on government interventions for innovation: “for each effective government intervention, there have been dozens, even hundreds, of failures, where substantial public expenditures bore no fruit.” Economic theory can explain the evidence described by Lerner and other researchers. First, theories on market failure regarding innovation and technology development were derived in the 1960s and 1970s (Arrow, 1962). Empirically, it is very difficult to quantify and locate a market failure, which means that attempts to correct a market failure face the risk of being miscalculated in terms of size and scope. Second, it is difficult for the state or any other single actor to know beforehand what technology is more likely to prevail. Selection of technologies happens through trial and error over time, and capitalist competition can in that sense be regarded as a discovery procedure (Hayek, 1945). If the state decides which technology should be chosen, it is very likely that such a decision will in hindsight be regarded as incorrect. Third, the presence of interventionist policies such as targeted support structures and large amounts of public money devoted to certain technologies easily distort incentives in the marketplace and result in opportunistic adaptation by firms such as subsidy entrepreneurship (Gustafsson et al., 2020) or corruption. These three mechanisms shed light on the risks of active interventionist policies and help to explain some contemporary cases of failed industrial policies, like solar photovoltaics in C. Sandström and C. Alm

254Spain (Del Río & Mir-Artigues, 2012) and targeted innovation support schemes (Daunfeldt et al., 2016). In the coming section, we provide further empirical evidence on how these factors have applied to two contemporary cases of industrial policies in Sweden: biogas and ethanol from cellulose.

3

Two Historical Cases of Policy Failure: Biogas

and Ethanol

We here describe and discuss how efforts related to technological development and sustainability have failed. We first look at biogas in Sweden and next turn to ethanol.

3.1

Investments in Biogas

Throughout Sweden, there are many cases of large-scale attempts and failures to develop and manufacture biogas—i.e., gas and energy from waste—over the past two decades. In 1998, a national public investigation into the technology and economics of biogas had identified a collection of limitations related to biogas, including limited economies of scale because new sites need to be built locally. The transport of manure requires an expensive infrastructure of pipes. The idea is to make use of biogas as fuel, so these public companies are really competing with gasoline and diesel, fuels that are presently very competitive and subject to considerable price variations. Attempts to introduce and sell biogas are therefore a form of speculation over an increase in oil prices over time.

In the Västerås case in the city of Västerås, 100 kilometers west of Stockholm, a couple of municipalities joined forces in the late 1990s and formed a public company