August 05, 2013

State and private entrepreneurs are neither alike nor equal

Sir, I refer to Martin Wolf’s comments on Mariana Mazzucato’s “Debunking Public vs Private Sector Myths”, “The State is the real engine of innovation”, August 5.

In these Wolf writes “the state is also an active entrepreneur taking risks and of course accepting the inevitable failures”. This entirely fails to recognize that state and private entrepreneurs are neither alike nor equal.

Currently, under Basel II bank regulations, if a bank lends to a private entrepreneur, it needs to hold 8 percent in capital/equity, but, if it lends to the state entrepreneur, then it does not have to hold any capital/equity... zero!

Also if the private entrepreneur is unsuccessful in his undertaking he will suffer the consequences, while if the state-bureaucrat-entrepreneur wastes away taxes, he will most likely not suffer at all.

I do not understand how one can ignore those differences, and conclude that “the entity that takes the boldest risks and achieves the biggest breakthroughs is not the private sector; it is the much-maligned state”, and especially so when extremely little of public spending really goes to take bold risk to achieve breakthroughs.

To describe the financing of innovation as “a parasitic [system] in which the most loss-making elements are socialized, while the profitmaking ones are largely privatized”, is to completely confuse the losses incurred when lending to safe-non-entrepreneurial activities, such as financing real estate and sovereigns, with losses derived from investments in innovation. In fact, the socialized losses in innovation financing that most comes to mind, are those which originate in loans given to entrepreneurs by the state, like that to Solyndra.

We do of course not object to the state lending a much needed helping hand in basic research but, if it goes overboard doing so, that will only guarantee this will be abused by those entrepreneurs who specialize in the extraction of rents from the state.

Wolf concludes “The failure to recognize the role of the government in driving innovation may well be the greatest threat to rising prosperity”. Wrong! The greatest current threat is the silly risk-aversion imposed on banks by regulators who fail to understand what brought our economies to where they are.