853.1

Bottom-Up, Top-Down, and the Role

of the (Entrepreneurial) State

For the purposes of our discussion here, by bottom-up approach, I will refer to processes in which the key decisions are taken by those with knowledge of time and place in Hayek’s (1945) analysis. By top down, I will mean that decisions are taken further up in a hierarchy, by someone who by construction is unable to overview all significant consequences of the actions taken. Bottom up is not always better and the context dictates what works, how, and when. Sowell (1980) argued that in the Soviet Union, top-down production plans worked relatively better in heavy manufacturing, whereas they almost always failed miserably in agriculture, where knowledge of time and place were keys to producing output.

The entrepreneurial state narrative represents a combination of top-down and bottom-up approaches. The call is for states to create markets, radically change the direction of research and development, and then let bottom-up forces work their magic. The example par excellence is the internet, for which radical public sector (defense) research seeded a development that was combined with exponentially increasing entrepreneurial effort to commercialize the new technology and extend it to more areas.

86J. P. Larsson

A mission needs to be backed by considerable central power from the very top. The leaders of a large mission will need to subsidize, regulate, and continuously find new top-down paths if the old ones are not working. Each path chosen will eliminate alternative paths, including those that would have followed on those alternative paths, and so on. One reason why economists and proponents of theories of market failure tend to support R&D subsidies is that such a policy works from the bottom up: It does not (at least not necessarily) tell firms what to do or how to do it. When the state is the entrepreneur, grassroot entrepreneurs are not as free to work,