8577 K. Wennberg, C. Sandström (eds.), Questioning the Entrepreneurial State, International Studies in Entrepreneurship 53, https://doi.org/10.1007/978-3-030-94273-1_5 J. P. Larsson

78first question. What is an entrepreneur and why do we need to understand that function to assess innovation policy? Entrepreneurs who assume risk by putting their money and reputation on the line provide us with new and better things, but they also play a different role. They constitute the glue in any well-performing system of innovation by probing the commercial viability of knowledge, broadly defined as know-how to fulfill desired ends. By prowling for commercially useful knowledge, they also spread it (Acs et al., 2009) and advertise its use across occupations, industries, and other settings. But the complexity, decentralized nature, and sheer range of all potential sources of knowledge and opportunities imply that economists have generally considered it impossible for the entrepreneurial function to be performed centrally, as argued by Hayek (1945). The above statements represent known facts of the market economy and are hardly controversial. To anyone in the business of trying to improve a system of innovation, encouraging productive entrepreneurship should then seem like low-hanging fruit. We also know a substantial amount about how to promote productive entrepreneurship, at least in the sense that businesses respond to incentives. For instance, Baumol and Strom (2012) discuss how we can learn from historical institutional arrangements to prune our present institutions to make entrepreneurship more socially productive. Elert et al. (2019) convincingly argue that regulations of capital and labor markets, the taxation system, property rights, and entry and exit barriers all represent areas that are both important for productive entrepreneurship and actionable for makers of policy. In the Knowledge Spillover Theory of Entrepreneurship, Acs et al. (2009) similarly argue that regulations, administrative burdens, and market intervention create friction as knowledge diffuses in the economy. By focusing on supporting the production of knowledge, proper infrastructure in the broad sense, and maintaining and sometimes carefully shaping institutions, politicians can fuel and lubricate what Baumol (2002) dubbed the innovation machine. Broadly speaking, this is what successful societies have done in the past (see e.g., Landes et al., 2010).

But when governments set out to improve our present innovation systems, they decreasingly do what we know how to do and what we have successfully done in the past. Today, they direct their efforts and our resources toward what we do not know how to do, in attempts to solve what politicians and civil servants consider the big issues of our time. This is all in response to challenges identified by the state and formulated as missions. The call is for the state to be outright entrepreneurial in the generation and application of knowledge to different ends, in steering the direction of private sector innovation, and in mobilizing the entire breadth of the state apparatus to do so. That is, a first difference to note between entrepreneurship and state entrepreneurship is that they depart from opposite ends of the scale in terms of how they identify an opportunity (or threat). While entrepreneurs work at the intersection of available capabilities and opportunities, the state can afford to ignore either, or both. At the heart of this matter lies the current push for the state to go beyond market failures. More specifically, some academics and many policymakers now call “for Innovation Without Entrepreneurship: The Pipe Dream of Mission-Oriented. . .

79public policy to actively create and shape markets, not only to fix them” (Mazzucato & Penna, 2015, p. 4). These calls are generally accompanied by anecdotes of how this practice has presumably worked in the past, rather than by clear guidance for how it can work in the future, or how missions can be evaluated. Hekkert et al. (2020, p. 77) note that while “‘missions’ is the new buzzword in policy departments, both analysts and policy makers are struggling in their attempts to design and implement [mission-oriented innovation policy].”

The call, I argue, is for the state to work on issues better described as subject to genuine market failure: specific problems or opportunities of great public interest, but with an often unclear end goal to be arrived at by often unknown means. The notion that these issues are not characterized by market failure is only true by an overly strict definition of that term. Because why are they of great public interest? Because they are subject to large positive or negative externalities, or other market failures, making it unattractive for the market to engage. Bringing about a sector or market that is not there because of market failure is fixing it. Before we had a national defense, creating it may not have seemed like fixing a market, but it was ultimately about coordinating buyers and sellers of a service who could not come together because of its public good like properties, i.e., market failure. The perceived dichotomy between the new and the old is splitting hairs, and the raison d’être for mission-oriented innovation policy is still market failure in this broader sense.

The call for state entrepreneurship is for the state to be not just entrepreneurial, but rather something like the entrepreneur: what Schumpeter (1961) identified as the force that moves the economy toward new equilibria. The difference is that the forces bringing those equilibria about are determined from the top down rather than from the bottom up. The result is a situation in which state entrepreneurship crowds out market-driven entrepreneurship. Indeed, a central tenet of mission-oriented policy is tilting the playing field away from unwanted solutions (Mazzucato, 2016). This process then obviously involves picking winners—an activity for which many of us are not convinced of the state’s expertise.

Researchers who push this narrative do argue that the state must be brave in these endeavors and indeed willing to fail. The problem is that the risk component inherent in the definition of entrepreneurship (Shane & Venkataraman, 2000) is lacking in state entrepreneurship. It is simply difficult to draw the line for what constitutes failure. Failure takes place in two main ways: we can succeed at doing the wrong thing, or we can fail at doing the right thing. The market is a mechanism that distinguishes failure from success in brutal fashion, regardless of the source of the failure. Whether entrepreneurs are unsuccessful at valued ends or successful at unvalued ends does not matter. Whether an entrepreneur produces bad ice cream and falls to competition from other ice cream firms or produces the best typewriters in the world and falls to competitive pressures from the computer industry matters little for the result. The government would need two mechanisms: one for each source of error. When the state fails at the right thing, the main risk is crowding out, in the ordinary sense: firms and technologies that would have better solved the problem are outcompeted. But the biggest long-term threat is that the state succeeds at doing the wrong thing and locks us into a suboptimal equilibrium by tilting the playing field: It crowds out alternative solutions and means altogether. No known J. P. Larsson

80method of evaluation could deal with these problems, because the biggest risk is wrapped in a counterfactual. The two overarching questions are first, how do we ensure that the state pays a price for being wrong? And second, when is that price high enough for us to know it is time to cut our losses? The fact that the state can produce policy failure by being wrong about means or ends severely complicates this question. In addition, even when and if the state’s venture appears highly successful, we simply do not know the