Mazzucato versus Worstall and Westlake

Marianna Mazzucato’s 2013 The Entrepreneurial State is the most influential book on innovation. Although Mazzucato’s arguments in the book and beyond are many and varied – for example, I’m particularly sympathetic to her scepticism of the uncritical financial support for small businesses – the arguments gaining the most traction are the least convincing and potentially most damaging.

In short, Mazzucato’s thesis is that the state has been the key driver of “innovation” and should therefore take a more active role than they currently do. Central to this, is the policy suggestion that government agencies that fund this innovation should take a cut of the profits from the inventions. Two writers have convincingly unpicked this – the Adam Smith Institute’s Tim Worstall and Nesta’s Stian Westlake.

First, on the point about states driving innovation, Worstall cites William Baumol, who makes the crucial distinction between innovation and inventions. In reference to Mazzucato’s observation that the key technologies that went into making the iPhone were state funded Worstall explains: “Baumol’s point is that the private sector could have come up with these technologies, even though it was the state that did. But only the private, or market, sector could have come up with the iPhone.”

To put it another way, the iPhone is more than the sum of its parts. In an excellent article (worth reading in full), Westlake cites the work of Jonathan Haskel, which “suggests that for every £1 that British businesses spend on R&D, they spend £8 on other intangible investments of the sort that Apple used to make the iPod a success: design, new business models, marketing and software development.”

But perhaps Mazzucato’s biggest mistake is one of policy. As Westlake explains elsewhere, in The Entrepreneurial State Mazzucato suggests that “the state should find ways to share directly in the profits of companies that benefit from government innovation spending. A repayment system needs to ‘reward [the government for] the wins when they happen so that the returns can cover the losses from the inevitable failures.’”

Westlake outline three convincing reasons why this wouldn’t work: “it would be nightmarish to administer; it imposes costs on exactly the wrong businesses, creating both a presentational and a practical problem; and it’s worse than an already existing option – funding innovation from general taxation.” Westlake’s last point cuts to heart of the problem. As Worstall has pointed out in a response to Mazzucato’s response to his criticism of her work:

That governments sometimes produce public goods should not be a surprise. That’s what governments are for in fact. To provide collectively those things that cannot be provided through voluntary cooperation. To then complain that government doesn’t get extra rewards for doing the very thing we institute it for seems most odd. That’s why we pay our taxes in the first place: in order to get those public goods. Why should there then be some extra appropriation when all government is doing is what we asked it to and paid for it to do in the first place?

We shouldn’t underestimate the economic value of high-growth small firms

A new report from Octopus Investments and the Centre for Economics and Business Research uncovers the economic value of the UK’s fastest growing small companies. The report can be found here, and our director Philip Salter’s analysis of its findings – and its policy recommendations – can be found in his Forbes column here.

 

Are bad jobs at bad wages are better than no jobs at all?

In the wake of the “This is what a feminist looks like” 62p-an-hour t-shirts scandal, our director, Philip Salter, considers the words of noted economist Paul Krugman in his 1997 essay, “In Praise of Cheap Labor”.

The revelation that the t-shirts created by The Fawcett Society as part of a campaign for women’s equality were in fact manufactured in a Mauritian sweatshop has been described as a monumental own goal.

As Salter points out in his Forbes column, the t-shirts on sale are expected to be recalled and production moved to Britain. But what about the sweatshop workers, he asks? Was Krugman right to make the case, back in 1997, that bad jobs at bad wages are better than no jobs at all? Read more here.

Is Victoria Beckham really UK entrepreneur of the year?

Victoria Beckham has topped a list of Britain’s top entrepreneurs by Management Today magazine.

The former Spice Girl certainly deserves praise for expanding her fashion empire into a business with a £30m turnover and a staff of 100. But, asks The Entrepreneurs Network’s director Philip Salter in a Forbes column, does this make her the country’s top entrepreneur?

In his column, Salter rightly raises an eyebrow at one criterion in the ranking: the entrepreneurs’ wealth. “They are ranked by their own or their immediate family asset wealth, which we identify from their holdings in private or public companies, share sales, dividends, salaries, plus any other assets that they have revealed to us,” the report says.

It means that the designer’s entrepreneurial success owes much to her husband David’s right foot and chiselled abs. But, Salter says, we should not deny Victoria Beckham’s status as a top entrepreneur. It’s just a shame the list wasn’t compiled with a little more care.

Why the startup mentality may not be bound by age

History suggests that it’s never too late to innovate, a forthcoming thesis will say.

According to Anton Howes (pictured), who is undertaking a PhD in Political Economy at King’s College London, many of the world’s great innovations have come from the mature mind.

For his Forbes column, The Entrepreneurs Network director Philip Salter has been given a sneak preview of the research, and has spoken to Howes about the findings of his thesis. Read more about age and innovation here.

 

Singapore comes top on ease of doing business

When it comes to evaluating the results of this year’s World Bank Doing Business report, the devil is in the detail – says The Entrepreneurs Network director Philip Salter.

As the World Bank’s Kaushik Basu notes in his foreword:

The laws that determine how easily a business can be started and closed, the efficiency with which contracts are enforced, the rules of administration pertaining to a variety of activities—such as getting permits for electricity and doing the paperwork for exports and imports—are all examples of the nuts and bolts that are rarely visible and in the limelight but play a critical role.

Find out more about which countries have shot up the rankings, and why, in Philip’s most recent Forbes column.

Size might not matter but age definitely does

It’s ironic that politicians are so obsessed with creating jobs, given that many interventions – such as employers’ national insurance contributions and a politically determined minimum wage – achieve the diametric opposite. Yet it remains a key metric for determining political success and failure, and it drives much that passes for entrepreneurship and enterprise policy.

When it comes to job creation there is a debate about whether small or large businesses contribute more. Those representing small businesses can claim that micro businesses account for around 95% of all private sector companies, while those representing large businesses can counter that despite making up less than 0.1 per cent of the total private sector stock, large businesses account for more than half of all turnover and more than 40% of UK private sector employment.

It’s a complicated debate. Nesta research suggests a small proportion of businesses are responsible for the majority of job growth, with the data showing that “just 7% of businesses are responsible for half of the jobs created between 2007 and 2010.”

Elsewhere, Nesta suggests focussing government resources on supporting what was then “the vital 6%” . But it isn’t obvious that this is the right conclusion from the data. It’s entirely possible that current polices are limiting the size of this so-called vital 6% job-creating companies. If this were the case, instead of focussing on those businesses and sectors already succeeding, the right policy would be the exact opposite: focusing on increasing that 6% figure by targeting companies not in the 6%.

Although the ideal ratio of small to large businesses might be indeterminable, we do know one thing. Size might not matter but age definitely does: we want new businesses. As the Kaufman Foundation explains: “Policymakers often think of small business as the employment engine of the economy. But when it comes to job-creating power, it is not the size of the business that matters as much as it is the age.”

Therefore, politicians and policymakers should want the entrepreneurial process to happen quickly; they should want to make sure regulations don’t inhibit the process of business creation and destruction; they should, to paraphrase the lean startup, want entrepreneurs to start fast, grow fast and fail fast.

Should we worry about the surge in UK micro-businesses?

A new report from Royal Sun Alliance has concluded that the UK is now a “nation of micro-businesses”.

Many of these companies, the study says, are “zero-employee firms” with lower potential than “traditional” startups to expand and take on staff. However, as The Entrepreneurs Network director Philip Salter explains in his most recent Forbes column, there is more to this issue than the raw data. Many of these companies, for example, are hiring on a freelance basis.

But the question for policymakers, he says, should be: How can we get micro-businesses to hire more “formal employees”? And what other barriers to growth – such as business rates or red tape – should the government be addressing?

The tax system is the biggest barrier to growth

Outside of academic papers that too rarely see the light of day, most “research” is unremarkable in its optimism about the state of entrepreneurship in the UK. That’s why the RSA’s Growing Pains: How the UK became a nation of “micropreneurs” caught my eye. It paints a stark picture.

The UK, according to the report, has become a nation of micro businesses, while the proportion of high-growth businesses has plummeted: “UK businesses are becoming increasingly micro in size – reducing the overall potential for economic output and future growth, and increasing the economy’s reliance on a relatively small number of larger businesses.”

Since 2000, the proportion of businesses classified as micro (0-9 employees), as a share of all UK businesses has grown from 94.3 per cent of all private sector companies to 95.4%. This represents an additional 1.4 million micro firms and an increase over the same period of 43%.

“At the same time, the proportion of high-growth enterprises has declined sharply, falling by more than a fifth in the majority of regions since 2005.”

Although the number of high-growth firms is expected to rise over the coming years, the report cautions optimism: “performance is expected to remain below 2005 levels in all regions except London”.

So how can we solve the problem? According the entrepreneurs, the tax system (44%) is the biggest barrier to growth – ahead of a lack of bank lending (38%) and the cost of running a business (36%).

Another problem highlighted by the report is that entrepreneurs don’t know what the government is up to:

“Around three-quarters (73%) of small business leaders also say the Government must make it easier for SMEs to access the right information and support for growth. While several of the Government’s recent incentives to support SMEs are designed to address the top-cited barriers, perhaps this information is not reaching the people who need it the most.”

Two polices are put forward in the conclusion to help entrepreneurs. First, “continued reform of the apprenticeship scheme could help micro firms to grow out of this business size category”. Second, “more tax relief like the National Insurance holiday could also pay real dividends.” It would be worth exploring the former in detail (something I plan to work on), but I don’t think another NI holiday goes nearly far enough: Employers’ National Insurance should be scrapped entirely. And no just for small businesses.

Being an entrepreneur is tough. As the report points out, “the majority (55%) of new businesses don’t survive beyond five years.” Scrapping Employers’ NI is the logical place to start.

UK Entrepreneurs Divided Over Brexit

With our membership of the European Union now a key battleground ahead of next year’s General Election, The Entrepreneurs Network director Philip Salter has weighed up the impact of a Brexit on UK entrepreneurs in his most recent Forbes column.

Despite the extraordinary rise of Ukip and a growing resentment towards the EU’s democratic deficit, Euroscepticism is not as rife in Britain as one might expect. A recent British Chambers of Commerce survey found that most businesses would like to remain in the EU, but with specific powers transferred back from Brussels. Celebrity entrepreneurs have already locked horns on the issue: Sir Richard Branson wants to remain in, Sir Alan Sugar out, and Dragons’ Den star Theo Paphitis supports renegotiation.

Yet two things stand between the UK and a Brexit. First, in the event of a Tory victory, our relationship with Europe will depend on David Cameron’s success in his promised renegotiations. Secondly, Labour leader Ed Miliband has ruled a Brexit unless further powers are handed over to Brussels.

And many entrepreneurs fear losing access to the Single Market, which pro-Europeans argue would significantly weaken Britain’s economy. The EU remains the UK’s biggest trading partner, accounting for more than £400bn a year. But if a Brexit is on the cards, our political leaders should follow in the footsteps of Ireland, Norway and Switzerland, by remaining within the European Free Trade Association, Salter says. The only question is: Would Europe let Britain have the benefits of free trade without the political union?