80counterfactuals. How large is the graveyard of ideas that were never put into practice because the state tilted the playing ﬁeld the other way? The answer is not merely unknown but unknowable. It is, in Bastiat’s (1850) words, not seen.

Many speciﬁc problems—often the most obvious ones—that involve genuine market failure are also global, and it is far from obvious that individual governments should be involved in trying to solve them. For most states trying to be entrepreneurial, there exists a small economy paradox: when the identiﬁed issues are signiﬁcant and evident enough, the small state lacks critical mass. But in the opposite situation, with problems of sufﬁciently narrow scope, the state itself almost always lacks the expertise both in identifying and solving the problems. When it demonstrably possesses that expertise, it is likely to meet little opposition. The entrepreneurial state narrative has grown out of a big state context, mostly with examples from the United States, where the state has access to resources and know-how that other states simply do not possess. The idea that nation-states a tiny fraction of the size of the United States could in any way be employed in solving similar problems is like asking your local pizzeria to produce a gourmet dinner for 500 guests. It is possible that smaller states have enough research or business excellence to solve some component of a larger problem, but then they are probably better off employing those smart specialization strategies that already exist and that we know much more about (see e.g., the overview in McCann & Ortega-Argilés, 2015). That is, proponents of entrepreneurial states and their missions regularly ignore several facets of the market economy but also of political reality.

The chapter is outlined as follows. Section two selectively reviews growth theory to put our innovation efforts in a larger perspective. It also moves on to draw some conclusions for state policy based on theoretical developments in economics. Section three takes a more detailed look at the market failure vs. market creation justiﬁcation for state entrepreneurship. Section four asks to what extent anecdotes from large countries can be extrapolated to smaller ones and ponders the possibility of international cooperation. Section ﬁve concludes.

2 Innovation and Entrepreneurship:

A Knowledge-Based View

The canonical growth models, i.e., the exogenous growth framework (Solow, 1956) and its endogenous counterpart (Lucas, 1988; Romer, 1986), have guided our thinking around economic growth in academia and policy circles alike. These Innovation Without Entrepreneurship: The Pipe Dream of Mission-Oriented. . .

81models clearly contain something deeply important about economic growth and prosperity. By learning how to do things more efﬁciently, and by coming up with new things to do, we can have products and services of higher quantity and quality, at a cheaper price than before, and entirely new products and services. In short, growth models tell us that we need to innovate to grow.

The point of departure for endogenous growth models was that growth built on increasing, not decreasing, returns to ideas. The more we learned, the more we managed to combine old and new ideas in a cumulative growth process. In turn, these models have often been criticized for not explicitly associating knowledgecreation or growth with a mechanism, and sometimes for ignoring the role of innovation. Rosenberg (1982, p. 4) and Baumol (2002, p. 9) both refer back to an old English saying and comment that thinking of technical progress without innovation “is to play Hamlet without the prince.” Rosenberg also pointed out that researchers generally, and Schumpeter in particular, had been more interested in the way innovations reshaped society, rather than in the actual sources of innovation. These are certainly objections that a serious treatment of systems of innovation will have to take seriously. Policy to enhance growth through innovation can come in two broad categories. First, it can accumulate and help the spread of knowledge, i.e., it can support our brains and give us infrastructure to spread what we know and verify that our knowhow is indeed commercially viable. This ﬁrst category contains a crucial, and up until a couple of decades ago understudied, component: entrepreneurship. Baumol (2002, p. 10) pointed out that even though medieval China and ancient Rome did produce a solid number of inventions, a “systematic innovation mechanism” was lacking. We may loosely refer to approaches aimed at these functions as bottom-up policy because their main objective is to exploit, nourish, and support the grassroots in the quest for eventual gains at a more global level.

Second, and clearly, the state can also identify what speciﬁc knowledge we need, bring about innovations itself, or bring about growth through state-owned businesses and other bodies. This second category of solutions has always been appealing to politicians and representatives of the state more widely, which is no wonder. This category represents solutions in which the state is brave, heroic in effort, and indeed entrepreneurial. We may, equally loosely, call this top-down policy.

Many top-down policies misunderstand a crucial aspect of knowledge: it is not a public good, but in fact mostly a club good. Rather than non-rival and non-excludable it is non-rival and partially excludable, and it is particularly excludable in the early stages of development. Entrepreneurs do not merely spread knowledge; they take club goods and push them closer to being public goods through the innovation process. When Henry Ford searched for proﬁt by massproducing cars, he also demonstrated his knowledge to a much wider audience. Without engaging the best entrepreneurs, any innovation policy will be inefﬁcient. That is to say: any efﬁcient top-down approach must be linked to bottom-up forces and ﬁnd ways of prioritizing some bottom-up actors over others.

Baumol (2002) argues that the market economy is in effect an innovation machine. By having no choice but to arms race each other, ﬁrms are forced to ﬁnd J. P. Larsson

82new niches, improve existing products, and ﬁnd new markets. That is, innovation becomes the primary weapon in each individual ﬁrm’s battle for survival. If the right knowledge is out there, and if the framework conditions are right, an entrepreneur will ﬁnd it and turn it into something valuable. If that person is successful, more ﬁrms will follow suit and further reﬁne the innovation, and of course introduce competing technologies. A new wave of thinking about growth has come to incorporate entrepreneurship more explicitly. Acs et al. (2009) remark that part of “the endogenous” in endogenous growth theory is the creation of technological opportunities, driven by conscious investments in knowledge. In their model, entrepreneurs exploit knowledge that leaks out from incumbent ﬁrms and unto the rest of the economy. An entrepreneur is something like a dynamic conduit for ﬁnding, probing, and ultimately spreading knowledge. Acs et al. (2009) show that greater regulation, administrative burdens, and market intervention will reduce the knowledge available to us.

To be sure, this role of private enterprise does not preclude a substantial role for the state; it is not a point of ideology. But the knowledge-carrying function of entrepreneurship implies that intervening with the process comes at a risk. It is certainly possible that by steering ﬁrms into more productive, or more socially desirable activities, the state may improve upon things. This much seems to have been known by almost every ruler since the invention of enterprise (see for instance, the exposé in Landes et al., 2010). But this almost self-evidently correct claim—the could—does not in and of itself lead to the conclusion that the state should be actively involved in these things, because we are not living in a ﬁrst-best world. This would require the state to have some method for picking the right paths among many possible ones. A key thing to understand is that private sector entrepreneurship has not been invented; it has evolved (Winter & Nelson, 1982). In a cocktail of local and regional institutions, available human capital, and input from markets, small and large ﬁrms have butted heads. What remains is, with simpliﬁcation, either deeply battle-tested, currently challenging the status quo, or funded by investors who are too patient. Actors in social systems can indeed copy behaviors of others and entrepreneurship is no exception (Andersson & Larsson, 2016), so it is by no means impossible for top-down entrepreneurs to do well by learning from the past and the present in similar ways. In fact, the best-case scenario—when one entrepreneurial state ﬁgures something out that really works, other states copy it—can work under the right circumstances. But key for the state is to know two things: ﬁrst, it must challenge the status quo in the right way. Even when the state appears to have been highly successful, it is possible that the results are disastrous if it has crowded out better solutions to the problem at hand. Second, it needs to be able to tell when it has turned into an overly patient investor that should cut its losses.

There is a key difference between the state as innovator and the free-market system the way Baumol describes it: it is not clear how the state can bear any costs of being wrong (in part because it is unlikely to know when it is wrong, as noted above). The arms race that drove ﬁrms to innovate to stay ahead of the competition is not there for the state, except for in a few exceptional cases, such as literal arms Innovation Without Entrepreneurship: The Pipe Dream of Mission-Oriented. . .

83races. The one real cost that the state does bear for being wrong is possible embarrassment a long time into the future, if at that point it is obvious that it backed the wrong horse. That is, the state does not carry much risk, mostly none at all, and as such it cannot act entrepreneurially the way we normally deﬁne the term (see e.g. Shane & Venkataraman, 2000, p. 222). It simply is not its area of expertise, just as running the police force is no area for private businesses. That the incentives are skewed the wrong way is not evidence that the state cannot mimic entrepreneurial behavior, or for that matter, that competing private enterprises could not run a working police force. But these are extraordinary claims, and we should require extraordinarily good arguments from those who want to go down those paths.

3 Market Failure and the Entrepreneurial State

A central claim in motivating the wider role for the state is that it must do much more than ﬁxing broken markets. The state should create markets. Mazzucato (2016) juxtaposes this view against what she calls “market failure theory.” Mazzucato (2016, p. 143) claims that “[market failure theory] justiﬁes public intervention in the economy only if it is geared toward ﬁxing situations in which markets fail to efﬁciently allocate resources (Arrow, 1951)” (reference in original). It remains unclear who the proponents of this theory really are and what their inﬂuence is. Mazzucato’s reference is to Kenneth Arrow’s famous extension of the welfare theorems of economics. It is doubtless true that it can be inferred from the referenced article that the presence of market failures can motivate government involvement. Arrow (1962) made this point eloquently, where he showed how invention suffered from all classical sources of market failure and note that invention in Arrow’s vocabulary referred to the production of knowledge in a broad sense. Does this in any way show that the only reason for governments to intervene is market failure? No, it does not; it simply means that investment in knowledge suffers from a particularly difﬁcult form of uncertainty. Arrow himself most certainly did not think that any such ideological view followed upon his theory. He was clear on