International Studies in Entrepreneurship

Magnus Henrekson
Christian Sandström
Mikael Stenkula Editors

Moonshots
and the New
Industrial
Policy
Questioning the Mission Economy
International Studies in Entrepreneurship

Volume 56

Series Editors
Zoltan J. Acs, George Mason University, Fairfax, VA, USA
David B. Audretsch, Indiana University, Bloomington, IN, USA
This series highlights cutting-edge research in entrepreneurship, small business/
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Magnus Henrekson • Christian Sandström •
Mikael Stenkula
Editors

Moonshots and the New

Industrial Policy
Questioning the Mission Economy
Editors
Magnus Henrekson Christian Sandström
Research Institute of Industrial Economics Jönköping University
(IFN) Jönköping, Sweden
Stockholm, Sweden

Mikael Stenkula
Research Institute of Industrial Economics
(IFN)
Stockholm, Sweden

ISSN 1572-1922 ISSN 2197-5884 (electronic)

International Studies in Entrepreneurship
ISBN 978-3-031-49195-5 ISBN 978-3-031-49196-2 (eBook)
https://doi.org/10.1007/978-3-031-49196-2

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“Proponents of the ‘mission economy’ offer sparse empirical evidence for their
ideological agenda. Any evidence offered is either based on extreme outlier
success cases, or worse, a misrepresentation or oversimplification of government
initiatives in achieving entrepreneurial and innovative solutions. This book adds to
the growing body of scientific evidence that critically examines missions and
government industrial policy. The compelling evidence of failures in mission
definition, coordination, and economic or social outcomes provides a cautionary
reminder that government policies are likely to be distorted by political agendas,
rent-seeking, lack of relevant information or capabilities, and bureaucratic red tape.
Taken together, the theoretical and empirical chapters of ‘government failures’
provide a powerful and rigorous challenge to ideologies that posit ‘market
failures’ must and should be solved through government intervention.”
—Rajshree Agarwal, Rudolph Lamone Chair of Strategy and
Entrepreneurship and Director of the Ed Snider Center for
Enterprise and Markets, University of Maryland

“In this important and thoughtful new book, Magnus Henrekson, Christian
Sandström, and Mikael Stenkula challenge the conventional wisdom prioritizing
government directed innovation and entrepreneurship. The well-researched and
insightful collection of analyses by a team of leading scholars spanning a broad
spectrum of fields and countries across the globe provides compelling evidence that
societal faith in government-led innovation and entrepreneurship is no more than a
pie in the sky. Thought leaders in business, policy and academia need to carefully
and fundamentally rethink their public policy stance towards the role of government
in the economy on the basis of this inspiring book.”
—David B. Audretsch, Distinguished Professor, Ameritech
Chair of Economic Development and Director, Institute for
Development Strategies, Indiana University
“Since the Global Financial Crisis, enthusiasm about industrial policies has soared
among policymakers and academics alike. But despite the optimism of the
advocates, the track record of these efforts—particularly when it comes to their
frequent goals of promoting innovation and entrepreneurship—has been very mixed.
This volume focuses on carefully understanding the barriers to the effective
implementation of industrial policies and serves as a healthy corrective to much of
the recent literature.”
—Josh Lerner, Jacob H. Schiff Professor of Investment Banking,
Harvard Business School

“This take-down of ‘mission-oriented innovation policy’ is a must read. It shows us

what happens when the fine folks who brought you the War on Drugs turn to other
‘wars’ and grand ‘missions.’ The distinguished contributors to the volume dive deep
into theory and history to show how the push for mission-oriented policy inevitably
becomes a march of folly. Together, the chapters in the volume provide a thoughtful
and much needed analysis of what happens when top-down best practices prevent
the emergence of bottom-up entrepreneurial solutions to grand challenges. Readers
of all persuasions will find the volume informative and enlightening.”
—Maria Minniti, Louis A. Bantle Chair in Entrepreneurship and
Public Policy, Director of the Institute for an Entrepreneurial
Society, Whitman School of Management, Syracuse University

“Behaviorally speaking, even the most open advocates of market approaches tend to
quickly embrace command economies when big crises hit. Managers of large
corporations, for example, tend to hunker down into more predictive approaches
to innovation, the more uncertainties and fast-paced changes they get confronted
with. The current rise in government-led and mission-oriented innovation is
symptomatic of such a paradoxical behavioral response to the global financial
crisis and other challenges facing Europe and the world. I endorse the pluralistic
approach to innovation incorporated into the various essays in the collection by
Henrekson et al. While we need to protect and enhance historically hard-fought
institutions, we also need to guard against turning to governments as pioneers of
entrepreneurial innovation. Especially in face of big challenges under multiple
uncertainties, we simply cannot “leave it” to governments, not even the most
benign and well-intentioned ones. The variety, independence and diversity of
entrepreneurial actions at individual, small group and community levels are vital
to the tasks at hand. This book emphasizes those and points to productive ways
forward.”
—Saras Sarasvathy, Paul M. Hammaker Professor of Business
Administration, Darden School of Business, University of Virginia
Preface

Until recently, there was a broad consensus that free trade, domestic deregulation,
and the removal of entry barriers and other policies that curtail competition were the
keys to stimulating economic growth and societal welfare. In the business realm, the
prevailing sentiment was that policy’s primary objective was to create a level playing
field for companies—regardless of their age, industry, size, or the personal charac-
teristics and nationality of their owners. This perspective significantly influenced the
establishment of an internal market within the European Union.
However, this consensus has shifted in recent years. Western governments are now
launching expansive programs to not only rejuvenate their economies post-pandemic
but also achieve ambitious goals such as sharply reducing and eventually eliminating
CO2 emissions. British-Italian economist Mariana Mazzucato was at the forefront of
advocating this renewed policy direction, gaining widespread attention with her 2013
book, The Entrepreneurial State. In the United States, eminent scholars, including
Harvard professor Dani Rodrik, have championed the resurgence of vertical industrial
policies that address specific challenges and cater to select sectors.
Highlighting the purported immediacy of the problems they aim to address, these
increasingly interventionist and specialized industrial policies are frequently termed
“Missions” or “Moonshots.”
The reemergence of state-driven strategies stems from several powerful dynam-
ics: China’s deployment of industrial policy fueling its remarkable growth, the
West’s perceived stagnation juxtaposed with China’s swift technological advance-
ments, the unforeseen disruption of the COVID-19 pandemic, climate change
concerns, and growing geopolitical tensions. The ripple effect of imitation is evident:
the European Union, observing the recent surge in subsidies and interventions in the
United States, has reciprocated with measures of its own. Intriguingly, this trend
intensifies even as the inherent limitations of vertical industrial policy seemingly
hinder China’s economy.
Horizontal policies are universal, applying to companies regardless of their
operations, geographic locations, or employed technologies. Such policies encom-
pass measures such as R&D tax credits and accelerated depreciation allowances,

vii
viii Preface

which mitigate capital investment costs. In contrast, vertical policies are tailored to
benefit particular sectors or even specific companies. A notable recent instance is the
renewable energy tax credits included in the US Inflation Reduction Act.
Mission-driven innovation policies are politically enticing, casting policymakers
in the light of visionaries who bravely tackle contemporary grand challenges.
Concurrently, major corporations reap the rewards of expansive support schemes
and stimulus packages unfolding across Europe and the United States.
These vast interventions carry substantial costs and often introduce distortions,
predominantly favoring influential and firmly established interest groups in society.
Consequently, there is a pressing need for a rigorous scrutiny of these measures.
Questioning the Entrepreneurial State (QES) aptly addressed this gap, evident from
its impressive download count exceeding 200,000 in just 1.5 years. Nonetheless,
with the publication of QES, the endorsement for large-scale missions has only
broadened. This realization catalyzed our drive to produce a subsequent volume to
QES, incorporating a more diverse authorship, offering deeper case-study insights,
providing enriched theoretical viewpoints on the subject, and suggesting feasible
alternative paths.
We wish to express profound gratitude to the chapter authors of this book. Their
expertise has been invaluable, with each scholar not only contributing their own
narratives but also offering feedback on drafts penned by their peers.
Magnus Henrekson gratefully acknowledges financial support from both the Jan
Wallander and Tom Hedelius Foundation and the Kamprad Family Foundation for
Entrepreneurship, Research & Charity. Christian Sandström is indebted to the
Hamrin Foundation, the Knowledge Foundation, and the Ratio Institute, while
Mikael Stenkula extends his gratitude to the Jan Wallander and Tom Hedelius
Foundation. The Open Access fee has been generously co-funded by the Marianne
and Marcus Wallenberg Foundation and the Knowledge Foundation. Special thanks
are also due to Niklas Elert, Kathy Saranpa, Gustav Häggbom, and Mikael
Arvidsson Martins for their insightful comments and suggestions on preliminary
drafts of the chapters.

Stockholm, Sweden Magnus Henrekson

Jönköping, Sweden Christian Sandström
Stockholm, Sweden Mikael Stenkula
October 2023
Contents

Part I Introductory Chapter

Moonshots and the New Industrial Policy: Questioning
the Mission Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Magnus Henrekson, Christian Sandström, and Mikael Stenkula

Part II Theoretical Perspectives

State and Markets: Not Whether But How . . . . . . . . . . . . . . . . . . . . . . . 31
Diane Coyle
Engineering Is Not Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Randall G. Holcombe
A Behavioral Economics Perspective on the Entrepreneurial
State and Mission-Oriented Innovation Policy . . . . . . . . . . . . . . . . . . . . 61
Jan Schnellenbach
Innovationism and the New Public Intellectuals . . . . . . . . . . . . . . . . . . . 77
Olof Hallonsten

Part III Empirical Evidence

Analyzing the Effectiveness of State-Guided Innovation . . . . . . . . . . . . . 95
Rodney H. Yerger Jr
A Case Study on DARPA: An Exemplar for Government Strategic
Structuring to Foster Innovation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Rodney H. Yerger Jr
The State of the Entrepreneurial State: Empirical Evidence
of Mission-Led Innovation Projects around the Globe . . . . . . . . . . . . . . 125
Maral Batbaatar, Johan P. Larsson, Christian Sandström,
and Karl Wennberg

ix
x Contents

When “What Works” Does Not Work: The United States’

Mission to End Homelessness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
David S. Lucas and Christopher J. Boudreaux
The Cost of Missions: Lessons from Brazilian Shipbuilding . . . . . . . . . . 169
André Cherubini Alves
You Can’t Develop What You Don’t Know: The Realities
and Limitations of Foreign Aid Missions . . . . . . . . . . . . . . . . . . . . . . . . 191
Kathryn Waldron and Christopher J. Coyne
A Public Choice Perspective on Mission-Oriented Innovation
Policies and the Behavior of Government Agencies . . . . . . . . . . . . . . . . . 213
Rickard Björnemalm, Christian Sandström, and Nelly Åkesson
Learning from Overrated Mission-Oriented Innovation Policies:
Seven Takeaways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
Magnus Henrekson, Christian Sandström, and Mikael Stenkula

Part IV Alternative Paths

The Entrepreneurial State Cannot Deliver Without
an Entrepreneurial Society . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Mark Sanders, Erik Stam, and Roy Thurik
Overcoming the Siren Song of Central Planning . . . . . . . . . . . . . . . . . . . 271
David C. Rose
R&D Tax Incentives as an Alternative to Targeted R&D Subsidies . . . . 289
Roger Svensson
Bottom-Up Policies Trump Top-Down Missions . . . . . . . . . . . . . . . . . . . 309
Magnus Henrekson and Mikael Stenkula
About the Editors

Magnus Henrekson is Professor of Economics and Senior Research Fellow at the

Research Institute of Industrial Economics (IFN) in Stockholm, Sweden. He
resigned as CEO of IFN in 2020 after 15 years of service. Until 2009, he held the
Jacob Wallenberg Research Chair in the Department of Economics at the Stockholm
School of Economics.
He received his PhD in 1990 from Gothenburg University with his dissertation An
Economic Analysis of Swedish Government Expenditure. Throughout the 1990s, he
conducted several projects that aimed to explain cross-country growth differences.
Since the turn of the new millennium, his primary research focus has been entrepre-
neurship economics and the institutional determinants of the business climate. In this
area, he has published extensively in scientific journals and contributed several
research surveys to Handbooks in the field of entrepreneurship.
In addition to his academic qualifications, Henrekson has extensive experience as
an advisor, board member, and lecturer in many different contexts, in both the
business and public sectors.

Christian Sandström is Senior Associate Professor at Jönköping International

Business School and the Ratio Institute in Sweden. His research concerns innovation
policy and the interplay between technological and institutional change. Sandström
is one of the editors behind Questioning the Entrepreneurial State (Springer). He has
published more than 30 papers in peer-reviewed academic journals such as Techno-
logical Forecasting and Social Change, the Journal of Technology Transfer, and
Industry and Innovation.
Sandström wrote his PhD thesis on the topic of disruptive innovation at Chalmers
University of Technology (2010). He has been a visiting scholar at the University of
Cambridge and ETH Zürich in Switzerland. Sandström has received several awards
for his pedagogical skills and is a frequently hired public speaker on the topic of
technological change and industrial transformation.

xi
xii About the Editors

Mikael Stenkula is Associate Professor of Economics and holds a PhD from the
School of Economics and Management at Lund University. He received this degree
in 2004 with his dissertation Essays on Network Effects and Money. After having
worked for a year as a lecturer at Lund University, where he taught microeconomics,
he joined the Research Institute of Industrial Economics (IFN) in the fall of 2005.
His main area of research is entrepreneurship economics.
Stenkula is part of IFN’s taxation history project, which has systematically and
comprehensively described and analyzed the Swedish tax system from 1862 to the
present day. This study is unique in scope—no equally comprehensive investigation
of a national tax system has been conducted for any other country. In addition to the
meticulous year-to-year documentation of all relevant details of the tax code, the
project aims to examine how changes in the tax system affect the economy by
guiding people’s choices, particularly how the tax system affects entrepreneurial
activity and firm behavior.
Stenkula also teaches at the Stockholm School of Economics and serves as the
executive secretary of the award committee for the Global Award for Entrepreneur-
ship Research, the foremost global award for research on entrepreneurship.
 Part I
Introductory Chapter
Moonshots and the New Industrial Policy:
Questioning the Mission Economy

Magnus Henrekson, Christian Sandström, and Mikael Stenkula

Abstract The notion that society should be organized around large so-called mis-
sions has gained momentum in public debate, and the reemergence of active
industrial policy across the world has been inspired by academic scholars promoting
the idea of mission-oriented innovation policies (MOIPs). Besides this introductory
chapter, this collective volume consists of 16 chapters distributed across 3 overarch-
ing themes: theoretical perspectives, empirical evidence, and alternative paths. The
volume provides a comprehensive assessment and normative critique of the efficacy
of such policies. In addition to summing up the main findings in the 16 chapters, this
introduction provides some additional analysis, pins down the most important
general conclusions, and suggests future research questions. Today’s economies
are highly dependent on a well-functioning process of decentralized experimenta-
tion, selection, and screening. Instead of large-scale MOIPs, governments should
strive to create an institutional framework that levels the playing field for potential
entrepreneurs while encouraging productive entrepreneurship.

Keywords Entrepreneurship policy · Innovation policy · Institutions · Public choice

JEL Codes H50 · L26 · L52 · O31 · O38 · P16

We are grateful for useful comments and suggestions from David Lucas and Kathy Saranpa.
Financial support from the Jan Wallander and Tom Hedelius Foundation (P2018-0162 and
P2023-0186), the Kamprad Family Foundation for Entrepreneurship, Research & Charity
(P20220048), the Marianne and Marcus Wallenberg Foundation (2020.0049), and the
Knowledge Foundation is gratefully acknowledged.

M. Henrekson · M. Stenkula (✉)

Research Institute of Industrial Economics (IFN), Stockholm, Sweden
e-mail: [email protected]; [email protected]
C. Sandström
Jönköping International Business School, Jönköping, Sweden
The Ratio Institute, Stockholm, Sweden
e-mail: [email protected]

© The Author(s) 2024 3

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_1
4 M. Henrekson et al.

Introduction

We observe how governments in the West are introducing large-scale government

programs in their efforts to both reboot their post-pandemic economies and to attain
bold targets such as sharply reducing and eventually eliminating CO2 emissions.
This broad trend toward increasingly interventionist industrial policies is often
named missions, moonshots, or mission-oriented innovation policies (MOIPs). An
archetypical example is the Cancer Moonshot, a large, government-directed effort to
eliminate cancer, initiated by Barack Obama in 2016.1 President Biden decided to
reignite this MOIP in 2022. At the 60th anniversary of President John F. Kennedy’s
historical speech in which Kennedy had announced the idea of putting a man on the
moon “before this decade is out,” Biden announced:
I give you my word as a Biden: This Cancer Moonshot is one of the reasons why I ran for
President. It’s part of my Unity Agenda that I laid out in my State of the Union Address to
rally the American people to work together. Because we know this: Cancer does not
discriminate red and blue; it doesn’t care if you’re a Republican or a Democrat.2

The renaissance of moonshot policies is interesting, especially bearing in mind that

the first Cancer Moonshot was put in place over 50 years prior. In his 1971 State of
the Union speech, President Richard Nixon declared:
The time has come in America when the same kind of concentrated effort that split the atom
and took man to the moon should be turned toward conquering this dread disease. Let us
make a total national commitment to achieve this goal.

Unfortunately, as is widely recognized, this first Cancer Moonshot, known as the

War on Cancer, fell far short of its aspirations (e.g., Faguet 2005). Rostand (1990)
summarizes the War on Cancer in the following way:
What is surprising, in this affair, is the numbers and qualifications of those gone astray. They
were not half-wits, fools, or friends of the wondrous; No, they were true men of science,
unbiased and honest men familiar with the scientific method: Men with cool and solid heads
who, before and after their escapade, proved themselves worthy researchers.

The EU Green Deal is an example of a new MOIP, amounting to EUR 1000 billion
over a 10-year period. Several of the main reports that lay the foundations for the EU
Green Deal were written by a comparatively small group of scholars who have
popularized the idea of MOIPs. In the United States, the Biden presidency has put in
place the Inflation Reduction Act (IRA), which is a combination of debt repayment
(USD 306 billion) and funds specifically targeting cleantech. The design and
implementation of these policies is influenced by the advice of scholars such as
Mariana Mazzucato and colleagues. Economists such as Dani Rodrik at Harvard

1
White House (2022a).
2
White House (2022b).
Moonshots and the New Industrial Policy: Questioning the Mission Economy 5

University have also been instrumental in advocating the renaissance of industrial

policies (Juhasz et al. 2023; Tagliapietra and Veugelers 2023; Rodrik 2022).3
Despite many historical examples of failed moonshot policies, policymakers and
scholars who engage in these large-scale programs which aim to accomplish indus-
trial and environmental renewal are rarely questioned. Often, it appears that these
policies are put in place with little scrutiny and prior analysis. This trend is in many
ways a manifestation of renewed belief in the efficacy of government interventions,
formulated by Mazzucato (2022, p. 93) as follows:
Governments are the only actors capable of underwriting the scale of investments required;
of coordinating multiple actors around the common goal of decarbonization; and of ensuring
the costs and benefits of a green transition are distributed equitably across society so that
social injustices are tackled alongside environmental crises.

We have witnessed a growing number of scholars questioning the entrepreneurial

state and the idea of a mission economy (Wennberg and Sandström 2022; Muldoon
and Yonai 2023; Kantor and Whalley 2023; Kirchherr et al. 2023), but this trend
toward critical examination of such policies is still in its infancy. In the collective
volume Questioning the Entrepreneurial State (Wennberg and Sandström 2022),
32 scholars offered a combination of theoretical and empirical contributions on the
topic of industrial policy. Critical praise of the volume has emphasized the impor-
tance of both more grounded theoretical perspectives and further empirical studies of
MOIPs (Muldoon and Yonai 2023). Moreover, the accelerating trend toward more
proactive industrial policies, under labels such as Inflation Reduction or Green
Deals, has spawned a need for continued inquiry into the workings of industrial
policy in general and MOIPs in particular.
We begin this introductory chapter with an overview of the ongoing debate
concerning the role of the entrepreneurial state and industrial policy. Then, we
review and summarize the different contributions to this volume. It consists of
three parts: (i) theoretical perspectives on MOIPs; (ii) empirical examinations of
MOIPs, including in-depth case studies and reviews of previous studies; and (iii)
contributions pointing to alternative ways to accomplish economic and social
development.
Throughout this volume, we rely on the OECD’s (2021, p. 15) definition of a
MOIP as
a co-ordinated package of policy and regulatory measures tailored specifically to mobilise
science, technology and innovation in order to address well-defined objectives related to a
societal challenge, in a defined timeframe.

3
Tagliapietra and Veugelers (2023) is an ambitious volume published by Bruegel. It consists of
12 chapters by a total of 18 authors including world-leading scholars Philippe Aghion, Dani Rodrik,
and Laura Tyson. The volume asks whether industrial policies can be designed “that strengthen
green growth and economic security without hurting competition, economic openness and cohesion
in the EU” and whether it is “possible to do so without stronger EU-level governance, backed by
financial resources” (p. 12). In his Foreword, Bruegel Director Jeromin Zettelmeyer asserts that the
answer to the first question is Yes and that this cannot be achieved unless the EU assumes a stronger
governance and financing role.
6 M. Henrekson et al.

Relatedly, the OECD specifies a set of criteria for a MOIP, adding that these policies
ideally also (i) involve different actors from different fields and sectors; (ii) address a
grand challenge or wicked problem; (iii) have a defined deadline that is medium- or
long-term with (iv) clear, measurable milestones along the way; and (v) involves an
element of risk.

Questioning the Entrepreneurial State

In some respects, this volume is a sequel to Questioning the Entrepreneurial State:

Status-quo, Pitfalls, and the Need for Credible Innovation Policy (Wennberg and
Sandström 2022), which was published in 2022 as an open access book available for
free download. In its first year, the book was downloaded more than 180,000 times,
and in September 2023, the number of downloads surpassed 200,000. The book has
been presented at numerous academic seminars and conferences as well as to
policymakers across the globe.
The volume received positive reviews in, e.g., the Journal of Evolutionary
Economics (Boudreaux 2022), the Journal of Economic Literature (2022),4 Inter-
national Small Business Journal (Stam and Vogelaar 2023), and the Review of
Austrian Economics (Holcombe 2022), and was endorsed by scholars and
policymakers. Josh Lerner of Harvard Business School, David Audretsch of
Indiana University (the most cited scholar in entrepreneurship economics), and
former Swedish Minister of Finance, Anders Borg, have all endorsed the book
(see endorsements in Wennberg and Sandström 2022).
Despite having engaged so many well-reputed authors and receiving widespread
attention and praise from both scholars and policymakers, the response from
Mariana Mazzucato and her colleagues was meager. On April 27, 2022, Mazzucato
posted this response on X (then Twitter):
Critical thinking on innovation policy is key but using a book to attack a strawman of an idea
is just another distortion. Response to be followed by longer article.

When asked 4 months later about this longer response, no answer came from
Mazzucato. However, the following comment was made on the third of September
2022 on X (then Twitter) by Rainer Kattel, professor and deputy director of the
Institute for Innovation and Public Purpose at University College London (UCL):5
The collection is intellectually embarrassing, arguments in most articles have no legs to
stand on. And I am not sure most authors even realize they are serving the agenda of Cato-
wannabes.

4
Unsigned review in Vol. 60, No. 4, p. 1545.
5
On the initiative of Mariana Mazzucato, the Institute for Innovation and Public Purpose was
founded in 2017 with herself as its director. It is fair to say that the institute was founded with the
express purpose of providing a platform for Mazzucato and her ideas.
Moonshots and the New Industrial Policy: Questioning the Mission Economy 7

When professors with elevated positions at prestigious universities such as UCL

respond in this way to fellow scholars seeking to engage in a discussion, it is a signal
that the topic warrants further examination.
There are several other examples of policymakers and scholars who have tried to
initiate an open discussion about MOIPs and the renaissance of industrial policy. For
more information, see Olof Hallonsten’s chapter in this volume about innovationism
and the new public intellectuals. Such attempts have usually received little attention
and been ignored by proponents of MOIPs (Hallonsten 2024).

The Critique

Questioning the Entrepreneurial State gathered a group of scholars who brought

forward different theoretical angles to the limitations and challenges related to
MOIPs and the notion of an entrepreneurial state. Several insights emerged from
this combined effort. Governments cannot act as entrepreneurs because they face no
real market or risk and can therefore not be evaluated (Larsson 2022). For similar
reasons, they are less able to act entrepreneurially (Sarasvathy 2022). Relatedly, they
are likely to lack ownership competence (Murtinu et al. 2022). Other critical work
has been of a more empirical nature, pointing to the lack of information and
knowledge among policymakers who are in the position of enacting these initiatives
(e.g., Sandström and Alm 2022) and that missions tend to favor vested interests
rather than new entrants or institutional entrepreneurs (Bergkvist et al. 2022).
Beyond Wennberg and Sandström (2022), we see increasing scholarly interest in
the actual workings of MOIPs. Some of this critique has been of a more theoretical
nature such as Lucas et al. (2018). Richard Nelson and co-authors argued that
MOIPs “are not the right models for new programs aimed at the challenges we
now face” (Foray et al. 2012, p. 1697). Grand societal challenges cannot be solved
using a mission-oriented approach because such challenges
are all very different than the challenges faced and met by Manhattan and Apollo. These
programs were aimed to develop a particular technological capability, and the achievement
of their technological objective signaled the end of the program. (p. 1698)

Other scholars have applied public choice perspectives on policymaking, suggesting

that incentives may diverge among policymakers, government officials, and interest
groups in society. This renders the possibility of a societally beneficial outcome less
likely (Muldoon and Yonai 2023).

The Rationale Behind This Volume

The rationale behind this volume is threefold. First and arguably most important,
larger and more ambitious government programs continue to be initiated across the
8 M. Henrekson et al.

European Union and in the United States. For example, the EU program Horizon
Europe is structured to address five mission areas regarded as “grand social chal-
lenges.”6 Running from 2021 to 2027, the program has a total budget of EUR 95.5
billion. The EU’s Green Deal is committed to spending EUR 1000 billion over
10 years in order to attain climate neutrality by 2050.7 More than 40 percent of these
resources (EUR 430 billion) are earmarked for hydrogen-based technologies.8 The
US equivalent is the Inflation Reduction Act of 2022, which will “provide more than
USD 369 billion for climate solutions and environmental justice and put the United
States on a path to cut carbon emission by an estimated 40% by 2030.”9 These new
programs—initiated on both sides of the Atlantic Ocean—are inspired by
Mazzucato’s books and by the broader literature on innovation systems. Mazzucato
(2021) describes how congresswoman Alexandria Ocasio-Cortez and senator Ed
Markey in the United States as well as the president of the European Commission,
Ursula von der Leyen, were inspired by her work. Mazzucato recalls in her book that
she advised the European Commission regarding the design and implementation of
the Green Deal, which covers various subsidies and guaranteed loans related to a
range of missions including the reduction of CO2 emissions.
Second, many programs are put in place without significant prior analysis of the
risks and problems related to large-scale government missions. Past examples of
underperformance or outright failure are often disregarded. Research on innovation
policy more generally pays little attention to failure, and there are few studies aiming
to explain how and why innovation policies fail (Kärnä et al. 2022). As noted by
Josh Lerner in Boulevard of Broken Dreams (2009, p. 5), “for each effective
government intervention, there have been dozens, even hundreds, of failures,
where substantial public expenditures bore no fruit.” Kärnä et al. (2022) document
that these dozens, or hundreds, of failures are largely absent in the literature on
innovation policy. In order to develop sound policies, it is important to look at both
successes and failures; we therefore see a need for more explicit attention focused on
how and why MOIPs may fail. Relatedly, we see a need for additional theories that

6
https://research-and-innovation.ec.europa.eu/system/files/2022-06/ec_rtd_he-investing-to-shape-
our-future_0.pdf.
7
The proposed financing of the EU Green Deal is set out in the EU Green Deal Investment Plan
(European Commission 2020). It comprises two principal financing streams totaling EUR 1 trillion.
Over half of the budget, EUR 528 billion, will come directly from the EU budget and the EU
Emissions Trading System. The remainder will be sourced through the InvestEU program, which
combines EUR 279 billion from the public and private sectors to 2030 and EUR 114 billion from
national co-financing. It will provide an EU budget guarantee to allow the EIB Group and others to
invest in higher-risk projects, enabling private investment. The European Innovation Council has
also set aside a EUR 300 million budget to invest in market-creating innovations that contribute to
the goals of the EU Green Deal.
8
The president of the European Commission, Ursula von der Leyen, stated that the European Green
Deal would be Europe’s “man on the moon moment” (https://www.euractiv.com/section/energy-
environment/news/eu-commission-unveils-european-green-deal-the-key-points/).
9
https://www.c40knowledgehub.org/s/article/Climate-action-and-the-Inflation-Reduction-Act-A-
guide-for-local-government-leaders?language=en_US.
Moonshots and the New Industrial Policy: Questioning the Mission Economy 9

highlight both the costs and the benefits of various innovation policies. We note that
several scholars have emphasized the importance of articulating political economy
perspectives on MOIPs more clearly and challenge these ideas on both theoretical
and empirical grounds (Muldoon and Yonai 2023; Holcombe 2022). Several con-
tributions in this volume try to do so explicitly (e.g., Holcombe 2024; Waldron and
Coyne 2024; Henrekson and Stenkula 2024; Schnellenbach 2024).
Third, the lack of substantive reactions so far from Mazzucato and colleagues—
paired with the fact that other scholars and policymakers have experienced a
reluctance to engage in critical debate—indicates that this subject is in great need
of further inquiry. If new policies and government programs are established based on
information provided by scholars soliciting policymakers to promote their own
agendas, it is essential for economic and social progress that such academics engage
with and respond to the work of their critics. We continue this introduction with a
brief historical and conceptual background to MOIPs.

Historical and Conceptual Background to Mission-Oriented

Innovation Policy

The idea of mission-oriented innovation has its roots in the literature on evolutionary
economics (Nelson and Winter 1982; Freeman 1987) and innovation systems
(Lundvall 1992; Geels 2004; Borrás and Edler 2014; Schot and Steinmueller
2016). It is clearly steeped in the tradition of what could be called third-generation
innovation policy, which posits that governments should not only provide basic
research and contribute to the commercialization of it but also to guide innovation
efforts in specific directions. According to this approach, it is no longer enough for
the government to increase positive knowledge externalities by supporting R&D
activities, nor is it enough to provide targeted support or platforms strengthening the
links between diverse actors such as universities, start-ups, and incumbent firms. The
purposeful direction of these activities and proactive intervention in the marketplace
is deemed necessary. A critical element distinguishing the mission-oriented
approach is therefore directionality. This concept is used to underscore the impor-
tance of establishing a specific direction for innovation policies:
The key insight of this report is that missions are both a means of setting economic growth in
the direction of where we want to be as a society and a vehicle we can use to get there.
(Mazzucato 2018, p. 28)
Missions are a way to implement directionality inside an economy. (Mazzucato 2021,
p. 124)

While several scholars have proposed more directed innovation policies, no one
has been more successful in diffusing such ideas and popularizing them to
policymakers than Mariana Mazzucato. Using the Apollo and Manhattan Projects
as illustrative examples, she argues that the state should initiate bold efforts into
novel, unchartered territory, thereby guiding and driving change to achieve social
10 M. Henrekson et al.

and economic progress. The fact that Mazzucato (2018), the study from which the
above quote comes, is an official document of the European Commission highlights
how popular mission-oriented policies have become among policymakers.
From this perspective, policymakers are given a pronounced role as the primary
agents behind desirable changes:
Moving to a greener low carbon economy means redirecting all sectors and all actors –
public, private and civil society – towards economic growth in a sustainable and inclusive
direction. (Kattel et al. 2021, p. 18)

MOIPs are initiated in order to apply a “moonshot” logic to grand societal chal-
lenges. In this sense, MOIPs can be regarded as an attempt to extend Richard
Nelson’s work in the 1977 book The Moon and the Ghetto, where he discussed
why humanity could put a man on the moon but failed to eradicate poverty. The
purpose of MOIPs is to mobilize actors from various parts of society to address
important challenges. Its proponents claim that missions can be launched in order to
transition to green energy, address homelessness, clean up oceans, or increase
equality, to name a few examples. Ideally, these missions provide an overarching
umbrella where actors can be mobilized and collaborate.

How to Read this Volume

This collective volume contains three distinct parts in addition to the introduction.
Part II presents a collection of theoretical perspectives on MOIPs (Coyle 2024;
Holcombe 2024; Schnellenbach 2024; Hallonsten 2024). Part III examines the
empirical evidence related to MOIPs. It consists of explorations of the empirical
evidence used to justify missions (Yerger 2024a, 2024b), three case studies of failed
MOIPs (Lucas and Boudreaux 2024; Alves 2024; Waldron and Coyne 2024), an
assessment of previously published analyses of MOIPs (Batbaatar et al. 2024), an
exploration of government agencies implementing MOIPs (Björnemalm et al. 2024),
and a chapter in which the main takeaways from the previous chapters are identified
(Henrekson et al. 2024). Part IV presents alternative strategies for policymakers to
accomplish innovation and renewal (Sanders et al. 2024; Rose 2024; Svensson 2024;
Henrekson and Stenkula 2024). Here we summarize each chapter and seek to
integrate them into a more holistic discussion.

Part II: Theoretical Perspectives

In the chapter “State and markets: Not whether but how,” Diane Coyle (2024)
situates several of the contributions of this volume. Coyle asserts that MOIPs may
help private and public sector actors to coordinate their efforts toward a common
objective but underscores that this interaction is much more nuanced than current
Moonshots and the New Industrial Policy: Questioning the Mission Economy 11

accounts of the Apollo or the Manhattan projects, for example. There is a need
among policymakers to offer simple solutions and hence to find ways to gain short-
term popularity—a need that certain scholars have met by offering oversimplified
narratives.
Coyle describes Mazzucato’s overarching argument, summarizing it as “the
attribution of intentionality, and the conclusion that if it worked for inventing the
Internet, it can work for other societal aims.” She further notes that it is widely
acknowledged among economists that governments have a critical role in funding
basic research and technology development and that there is by now a large and
growing body of literature discussing various forms of public-private interactions
and the optimal role of a government in innovation (e.g., Rothwell and Zegveld
1984; Aghion and Tirole 1994; Acemoglu 2002). Covering some of this literature,
Coyle suggests that coordination problems between different actors seem to provide
the strongest rationale for MOIPs but emphasizes that each mission needs to be
specific concerning the problem to be addressed and that not every policy should be
“shoehorned into a mission.”
In the next chapter, “Engineering is not entrepreneurship,” Randall G. Holcombe
(2024) discusses key differences between engineering and entrepreneurship. He
notes that governments may be capable of addressing engineering challenges,
which he defines as solving problems, whereas entrepreneurship involves develop-
ing solutions that create more value than the cost incurred. From this perspective,
Project Apollo was an engineering success, but it is impossible to ascertain whether
it was a commercial success. Holcombe argues that in this sense, the Manhattan and
Apollo projects cannot be invoked as examples of involvement by entrepreneurial
governments. Based on this distinction between engineering and entrepreneurship,
Holcombe emphasizes that firms engage in both technological and commercial
exploration of new ideas, whereas governments can only develop technology. This
argument has been expanded upon by other scholars (e.g., Larsson 2022; Potts
2015).
Next, Holcombe discusses outcomes of entrepreneurial efforts by a government
by applying his work to political capitalism (Holcombe 2018), an economic system
where profit-maximizing firms extract profits from government connections rather
than by producing value for consumers. The decision to pursue one mission over
another is inherently a political one, meaning that political popularity will determine
what missions to pursue. Once a mission is established, societal resource allocation
becomes increasingly political, which means that vested interest groups will
entrench their connections and abilities to influence government. Holcombe argues
that countries are more likely to end up in a tragedy of the commons where welfare-
reducing activities are more incentivized as a result.
To illustrate the underlying mechanisms of MOIPs, Holcombe points to several
historical examples of how politicians have formulated grand schemes and gained in
popularity by doing so, including Lyndon B. Johnson’s War on Poverty and Franklin
D. Roosevelt’s New Deal. He also describes briefly how the corn lobby managed to
influence legislation to increase the amount of ethanol in gasoline. Holcombe’s
12 M. Henrekson et al.

chapter thus provides a public choice lens for analyzing MOIPs, providing a useful
structure to explain and understand why several historical missions have failed.
In the chapter entitled “A behavioral economics perspective on the entrepreneur-
ial state and mission-oriented innovation policy,” Jan Schnellenbach (2024)
develops Holcombe’s political economy analysis further by expanding upon the
behavioral aspects of MOIPs. Schnellenbach argues that MOIPs and the idea of an
entrepreneurial state are vulnerable to several behavioral biases. These include
“rational irrationality” whereby policymakers hold on to objectively untrue beliefs
because they may benefit socially and politically from doing so. Policymakers are
also susceptible to overconfidence, which (in combination with sunk cost fallacies)
implies that more resources are allocated to initiatives with limited potential. More-
over, Schnellenbach shows how Mazzucato herself exploits behavioral biases to
prop up her arguments in favor of MOIPs. Among them, a normativity bias where
policy measures are justified by virtue of the goals they are supposed to implement
rather than good institutions, and a frequent appeal to loss aversion, by depicting
catastrophic scenarios, for which mission orientation is advertised as the universal
solution.
In contrast to government policies where direct support is allocated through
formal application processes, broad generic reforms such as tax deductions for
R&D or lower corporate taxation would not be subject to such behavioral biases.
Schnellenbach presents several illustrative examples such as the Concorde super-
sonic airliner project, where “it was clear from relatively early on that. . .the project
was most likely to be economically unsuccessful.”
In the chapter, “Innovationism and the new public intellectuals,” Olof Hallonsten
(2024) expands on the analysis in his book Empty Innovation (Hallonsten 2023) by
discussing the role of public intellectuals. Drawing on Valaskivi’s (2012) concept
innovationism, which affirms that innovation has been elevated to the status of a
cure-all in Western societies, Hallonsten applies a sociological perspective when
exploring the roots of innovationism and the role played by public intellectuals.
He compares three different public intellectuals who have had significant influ-
ence on policymakers over the past decades: Michael Porter and his work on the
competitive advantage of nations, Richard Florida and his concept of the “creative
class,” and Mariana Mazzucato and her work on the entrepreneurial state and the
mission economy.
Hallonsten describes how public intellectuals throughout the nineteenth and
twentieth centuries were often contrarian as they leveraged their status and elevated
positions in academia to criticize established consensus in different areas. According
to Hallonsten, the new public intellectuals rather resemble high priests who (p. 82)
command the efficacious but essentially empty ‘innovation-speak’ that simultaneously pro-
claims the crucial importance of innovation for everything and everyone and dilutes the term
beyond any operational significance.

As these public intellectuals are put on pedestals, they are able to monetize their role
as professors by selling “airport literature,” giving speeches and offering various
consultancy services dressed up as research. Hallonsten provides illustrative data
Moonshots and the New Industrial Policy: Questioning the Mission Economy 13

concerning Porter, Florida, and Mazzucato. For example, more than 245,000 people
follow Mazzucato on X/Twitter, and her speaking fee is in the range of USD
50,000–100,000.10 According to Hallonsten, such business opportunities for pro-
fessors constitute a “vanity trap” (Mulgan 2016) by offering an opportunity to set
aside the tedious toil of academic research to become celebrities while still enjoying
the status of their academic titles and affiliations. Interestingly, Hallonsten concludes
that the transition away from academic norms and into the institutional logic of
media and politics seems to be associated with little academic cost. Scholars such as
Porter, Florida, and Mazzucato receive many citations despite their primary focus on
nonacademic audiences. At times, the research community seems to cite and take
these scholars even more seriously when they become public intellectuals.
Hallonsten decries this trend toward fame begetting academic influence. This is at
odds with how best practices are traditionally arrived at in academia: the vetting of
information through scholarly discourse.

Part III: Empirical Evidence

Exaggerated Claims Regarding the Role of the State

In the first chapter in Part III, “Analyzing the effectiveness of state-guided innova-
tion,” Rodney H. Yerger Jr (2024a) takes a closer look at some of the key technol-
ogies behind smartphones and Mazzucato’s (2021, p. 29) assertion that these were
related to visionary investments by state officials rather than the product of devel-
opment taking place in the market. Reviewing the history of both GPS and
touchscreen technology, Yerger argues that labelling these two innovations as
products of state efforts is an oversimplification and potentially a misrepresentation
of history. While early explorations of touchscreen technology were made at Bell
Labs, the greatest leaps of development were taken by Wayne Westerman in his
doctoral dissertation at the University of Delaware (Westerman 1999). Westerman
co-founded the company FingerWorks to commercialize his invention. The firm was
acquired by Apple in 2005. Here, Yerger suggests that Mazzucato’s argument
becomes a supply chain fallacy as she effectively labels everything that has ever
been involved with any government initiative a product of government efforts.
Many of the research efforts that preceded the breakthrough of touchscreen
technology can therefore be regarded as basic research in its more conventional
sense. To express this differently, research that was partly public and partly private
was conducted and resulted in positive spillovers that were subsequently commer-
cialized through private entrepreneurship and the strategic acquisition of this firm by
a leading actor such as Apple—a company that also spent substantial resources to

10
https://www.aaespeakers.com/keynote-speakers/mariana-mazzucato.
14 M. Henrekson et al.

further develop the technology. There was no visible hand of government guiding
these efforts through visionary, overarching goals.
Yerger’s chapter is an important contribution as it questions the evidence origi-
nally brought forward both in The Entrepreneurial State and Mission Economy. It is
somewhat surprising that anecdotes invoked to justify MOIPs have been so widely
accepted despite the lack of proper scrutiny. A quick glance at the technological
advances in computing is enough to realize that Mazzucato’s statements about the
state’s role is exaggerated. Entrepreneurial ventures played key roles in the devel-
opment of the integrated circuit, for example, which was co-invented by Jack Kilby
at Texas Instruments (Kilby 2001) and Robert Noyce at Fairchild in 1959–1960
(Lojek 2007). The microprocessor was developed by Intel in collaboration with
Japanese firms (Noyce and Hoff 1981), and mobile telephony was invented by
Martin Cooper and his team of engineers at Motorola in 1973 (Cooper 2001).
Moreover, Hiltzik (1999) documents how a decade of research at Xerox Palo Alto
Research Center (PARC) resulted in many of the breakthrough technologies that
were pivotal to the advances of the information age: personal computers, emails,
ATMs, the first version of the Internet, user-friendly word-processing programs,
graphical user interfaces, and object-oriented programming.
To be sure, the state has played an important role—not only as a funder of
research but also as a demanding customer for R&D. It would be strange if that
were not the case; the state is involved in nearly all activities in the economy, either
as a customer, sponsor, or regulator. However, given the numerous accomplishments
by both large companies and entrepreneurial ventures, Mazzucato’s claims regarding
the state’s pivotal role in developing digital technology seem overly simplistic.
In the next chapter, “A case study on DARPA: An exemplar for government
strategic structuring to foster innovation?”, Yerger (2024b) investigates DARPA,
another empirical example of crucial importance for the MOIP case. While Yerger’s
examination of DARPA underscores that this agency has at times been very inno-
vative and is in several ways an exemplar of how R&D can be organized to make
considerable advances, he also shows that many of these traits are difficult to transfer
to other settings. Applying economic theory related to political transaction costs,
Yerger identifies a set of DARPA’s key success factors including autonomy, small
size, and limited tenure of its program managers. While DARPA certainly has made
important contributions to technological development and national defense, Yerger
argues that it cannot be regarded as a sustainable and scalable way to organize
government efforts in a consistent manner over time. Gradually, DARPA has
become more bureaucratic and more controlled by policymakers, which indicates
that this model is difficult to sustain over time due to political pressure.
In the chapter entitled, “The state of the entrepreneurial state: Empirical evidence
of mission-led innovation projects around the globe,” Maral Batbaatar et al. (2024)
delve deeper into the literature discussing MOIPs. They identify 28 academic papers
and reports that describe one or more missions, yielding a dataset of 49 MOIPs.
Fifty-nine percent of the cases were still ongoing, 33 percent were described as
“successful” by the originators, and 8 percent were described as failures. Not a single
Moonshots and the New Industrial Policy: Questioning the Mission Economy 15

one of the 49 cases was evaluated by means of a cost-benefit approach or estimated/

discussed opportunity costs.
Moreover, Batbaatar et al. find that most missions do not satisfy the OECD’s
(2021) defining criteria for a mission such as an integrated and coherent vision; clear,
measurable goals; and milestones that make it possible to evaluate them. For
instance, a mere 51 percent of the missions had set deadlines for completion, and
many goals were so vague that it was impossible to assess whether they had been
achieved. Examples include “Establish a vital and innovative biotechnology land-
scape” (Prochaska and Schiller 2021), “Develop new forms of flexible automation in
the footwear industry for the region to be a leading producer in the world” (Foray
2018), “Bring transformative effects from science and research in Finland,” and
missions aimed to “Support Finland’s growth and expertise in the transport and
mobility sector and get international attention” (Kivimaa and Rogge 2020).

Three Case Studies of Failed MOIPs

In the chapter “When ‘what works’ does not work: The United States’ mission to end
homelessness,” David S. Lucas and Christopher J. Boudreaux (2024) analyze a
recent and still ongoing mission that has failed to achieve its intended goals. Lucas
and Boudreaux document the United States’ efforts to combat homelessness during
the years 2010–2022 and show that despite a doubling of the federal budget, the
number of homeless people remained largely unchanged. The case of homelessness
is referred to by Mazzucato (2021, p. 92) as an example of an area where it would be
desirable to implement a MOIP. Other scholars have referred to homelessness as a
“wicked problem” (Brown et al. 2013) and as a “grand challenge” (Henwood et al.
2015), also making the case suitable for study.
The US program to reduce homelessness seems to fit the definition of a MOIP.
The government took an active role, involving the private sector and a wide range of
nonprofit organizations to lead the sector toward four tangible goals. The govern-
ment agency USICH (United States Interagency Council on Homelessness) was put
in charge of the mission to eradicate homelessness. As stipulated in the literature on
MOIPs, USICH sought to involve many actors, seeking broad collaboration across
sectors and applying an evidence-based approach. Its goals were clearly defined: end
chronic homelessness in 5 years; prevent and end homelessness among veterans in
5 years; prevent and end homelessness for families, youth, and children in 10 years;
and set a path to ending all types of homelessness.
Although funding was doubled, the progress was minor. The annual budget
reached USD 7.9 billion in 2022, which amounted to USD 13,500 per homeless
person. If each homeless person had received this amount of money instead, it would
have been more than enough to secure accommodation and thereby end homeless-
ness. The mission design was justified by invariably referring to it as “evidence
based.” Such persistent use of a term that signaled objectivity and reliability made it
possible for stakeholders and policymakers to ignore the lack of progress. The
16 M. Henrekson et al.

chapter provides a contemporary example of a mission where all criteria for a MOIP
are fulfilled and federal expenditures were greatly expanded, but the outcome still
fell short.
In the next chapter, “The cost of missions: Lessons from Brazilian shipbuilding,”
André Cherubini Alves (2024) presents an in-depth case study of the Brazilian
shipbuilding industry and the government’s attempt to revive it in the 2000s. The
chapter covers various aspects of the political and economic forces that lead up to
one of the largest scandals in Brazil’s modern history. Alves notes that industrial
policy and innovation policy have often played a more interventionist role in
developing countries as attempts have been made to leapfrog economies to a higher
level of prosperity. He makes a distinction between old and new MOIPs, stating that
the former is more of a technology-driven top-down approach pursued by experts.
Here, control is centralized, and participation is more narrowly defined. In contrast,
new MOIPs are defined more in terms of grand challenges, and there is more room
for various stakeholders to take part in the mission.
Attempts at reviving the country’s shipbuilding sector were triggered by the
discovery of vast oil reserves in the deep waters off the Brazilian coast. The
government sought to mobilize actors and resources from the entire economy into
efforts to reach a globally competitive position in this industry, but the high
expectations were not reached in the end. While Brazil already had an established
shipbuilding industry in the 1950s, it had declined in the 1970s and 1980s due to
mounting competitive pressure. The discovery of deep-sea oil reserves triggered a
demand for advanced oil rigs. As Petrobras intended to buy these from foreign firms,
labor unions put pressure on President Lula da Silva—eventually resulting in
acquisition from domestic sources instead. In the following years, the government
put in place a wide range of support policies largely targeting domestic suppliers.
As investments and enthusiasm grew across the Brazilian economy, these efforts
were increasingly referred to as the “space race” for Brazil. Large government-led
programs were put in place, including the National Program for Mobilizing the Oil &
Gas Industry (PROMINP), which sought to maximize the participation of domestic
firms. More regulations and programs were implemented to accelerate the process.
In 2007, a Program for Growth Acceleration was initiated, giving special priority to
the shipbuilding industry. At the same time, the National Oil Regulatory Agency
imposed laws requiring certain minimum levels of local content in the goods and
services developed. In short, the MOIP drifted into a political and economic context
where interest groups demanded protectionist measures that prioritized Brazilian
firms and employees, thus barring procurement from the world’s best suppliers.
Brazilian firms received support, obtained cheap loans, and were encouraged to
participate in the supply chain.
The industry grew rapidly: Employment in shipbuilding increased from 1900 in
2000 to 46,500 in 2009 and peaked at 82,500 in 2014. Following several corruption
scandals, the number of employees in the industry fell rapidly to 46,000 by 2016.
Alves argues that it takes time and effort to build capabilities in a certain sector and
as the country’s shipbuilding industry had deteriorated, the capabilities could not
match the massive support the industry received from policymakers.
Moonshots and the New Industrial Policy: Questioning the Mission Economy 17

The fact that the government’s mission to revitalize shipbuilding resulted in major
corruption scandals related to various contracts and suppliers also highlights the
question of how MOIPs affect the initiating country’s institutional quality. Large-
scale missions, implemented under political and economic pressure to expand and
grow rapidly, may create fertile soil for corruption.
In the chapter entitled “You can’t develop what you don’t know: The realities and
limitations of foreign aid missions,” Kathryn Waldron and Christopher J. Coyne
(2024) apply Mazzucato’s seven principles for mission design to foreign aid.
Reviewing extant research on this subject, they identify two primary categories of
challenges: knowledge problems and political economy problems, i.e., incentive
distortions in the economy. The authors illuminate how foreign aid gives rise to
several destructive incentives and related behaviors where (p. 200) “individuals and
firms choose to compete for political favors, diverting resources better used else-
where and rewarding corruption for those in positions of power over how foreign
assistance is spent.”
As MOIPs often contain various elements of soft loans, targeted subsidies, or
grants earmarked for specific causes, it is important to discuss in what ways such
funds affect incentives and behavior. Previous research has shown how innovation
grants trigger the emergence of subsidy entrepreneurs, i.e., companies that system-
atically exploit such grants. Such firms have been found to have lower productivity
and not be more innovative than other businesses (Gustafsson et al. 2020).
Foreign aid results in several other forms of destructive opportunism, and
Waldron and Coyne describe how foreign aid funds and disasters result in an
“NGO scramble” (Cooley and Ron 2002, p. 26), meaning that NGOs focus on
those disasters that receive extensive media coverage and that they exaggerate and
act opportunistically to obtain more funds, at times creating “disaster hype.” The
authors also point out that organizations in charge of implementing foreign aid
programs may grow and suffer from poor governance; they quote the former
World Bank managing director Jessica Einhorn (2001, p. 22) that the World
Bank’s “mission has become so complex that it strains credulity to portray the
bank as a manageable organization.”
Related to these observations, Waldron and Coyne point out that, under these
circumstances, outcome-based budgeting faces an inherent risk to (p. 203)
simply grow relatively unchecked regardless of whether the benefit is greater than the cost.
Exacerbating the issue is the fact that government bureaus must spend down their yearly
budgets in order to justify receiving additional funding in the next year.

Consequently, decision-makers face few incentives to reduce or remove funding

from any projects, even in those cases where costs outweigh benefits by a substantial
margin. Policy recommendations from Mazzucato and other scholars to pay little
attention to costs may therefore end up legitimizing budget overruns, deficits, and
sunk cost fallacies.
18 M. Henrekson et al.

Laudatory Self-Evaluations by Government Agencies

In the chapter “A public choice perspective on mission-oriented innovation policies

and the behavior of government agencies,” Rickard Björnemalm et al. (2024) open
up the black box of government agencies in charge of allocating funds to MOIPs.
The authors draw on Muldoon and Yonai’s (2023) work to apply public choice
theory to the analysis of industrial policies. According to Muldoon and Yonai (2023,
p. 3), Mazzucato’s work on the entrepreneurial state depicts the government as “a
dynamic, thoughtful body that makes decisions based on relevant information.”
Björnemalm et al. (2024) set out to explore the behavior of these government
agencies that are assumed to be both competent and altruist. This is done by taking a
closer look at three government agencies concerned with innovation and renewal in
Sweden: Sweden’s Innovation Agency (Vinnova), the Swedish Energy Agency
(Energimyndigheten), and the Swedish Agency for Economic and Regional Growth
(Tillväxtverket). Tracking all instances when these three government agencies refer
to evaluations of their activities in their annual reports over 10 years, the authors
identify 654 occasions where an evaluation is mentioned. Among these references to
evaluations, 84 percent were positive, 12 percent were neutral, and 4 percent
expressed negative or critical views stemming from the evaluations of these agen-
cies’ programs and activities. The Innovation Agency had the highest share of
positive statements (92 percent).
At the same time, these agencies ignored and scarcely mentioned evaluations or
studies that were critical of their activities. The authors also identified instances
where the studied government agencies were making positive statements about
projects and programs which had subsequently resulted in failure and scandal. The
Sekab case was evaluated by Sandström and Alm (2022); it was financed by the
Energy Agency and resulted in controversy surrounding illegal activities and cor-
ruption in Africa. Nevertheless, it was referred to in the following way by the Energy
Agency (2012, p. 42): “It was an excellent program and a continuation at least on the
same level as during the past years is strongly recommended.”
Björnemalm et al. also identify several instances where government agencies
refer to evaluations which are so positive that they seem difficult to believe. For
instance, the Innovation Agency writes in its annual report for 2013 (Innovation
Agency 2014) that recipients of their innovation support “increased their turnover
and employment more than twice as much as companies in a control group” (p. 40),
that certain “companies granted funds attract more capital (14–15 times), increase
their turnover (3 times), and the number of employees (2.5 times) more than a
control group” (p. 40). Furthermore, the Agency asserts that its innovation support
had “increased their turnover 19 times on average between the year of financing and
the measurement point in 2012” (p. 11). The findings are in line with public choice
theory, as it shows how government agencies act in their own interest. The three
studied agencies use positive evaluations to portray their activities in a good light
and, at times, to defend themselves against critique while ignoring critical evalua-
tions. Thus, government entities in charge of implementing MOIPs are not
Moonshots and the New Industrial Policy: Questioning the Mission Economy 19

necessarily altruistic and competent. As MOIPs elevate them to the forefront of the
economy, policymakers are likely to favor such initiatives and portray them in a
favorable fashion regardless of the true results.

Main Takeaways from Parts II and III

The contributions reviewed above shed new light on the risks associated with
implementing mission-oriented innovation policies. In the final chapter of Part III,
“Learning from overrated mission-oriented innovation policies: Seven takeaways,”
Magnus Henrekson et al. (2024) synthesize the theoretical arguments and empirical
observations in the form of seven takeaways that together call into question the
usefulness of MOIPs. These seven takeaways are as follows:
1. Wicked problems cannot be solved through missions.
2. Politicians and government agencies are not exempt from self-interest.
3. MOIPs are subject to rent seeking and mission capture.
4. MOIPs distort competition.
5. Policymakers lack information to design MOIPs efficiently.
6. Government support distorts incentives and creates moral hazard.
7. MOIPs ignore opportunity costs.
These takeaways provide a cogent summary of the findings in Parts II and III, and
elsewhere in the literature on missions, innovation policy and political economy
concerning the likelihood that MOIPs will not live up to expectations.
The results presented so far in this volume therefore support the conclusions by
Foray et al. (2012, p. 1697) who, in a special issue on the topic, wrote that mission-
oriented innovation policies “are not the right models for new programs aimed at the
challenges we now face.” Given the evidence reviewed, and the fact that an
increasing number of scholars are becoming critical of MOIPs, it is a cause for
concern to watch how MOIPs are being implemented across the world in order to
address environmental challenges and health issues such as cancer—particularly
given that many of these areas have already been subject to failed missions in
the past.

Part IV: Alternative Paths

While Parts II and III of this volume focus on theoretical difficulties and empirical
analyses of MOIPs, Part IV is devoted to discussing alternative approaches to
innovation and development, showcasing credible alternatives to MOIPS.
Part IV begins with a chapter entitled “The entrepreneurial state cannot deliver
without an entrepreneurial society” by Mark Sanders et al. (2024), where they
elaborate on Mazzucato’s notion of an entrepreneurial state. The authors do not
20 M. Henrekson et al.

dispute the importance of the government sector in mobilizing resources in the

economy. Certainly, government interventions may result in a short-term boost to
innovation and economic growth. But the full economic potential will only be reaped
if the institutional framework in society fosters and rewards experimentation and
scaling. A dominant entrepreneurial state may block outside challengers and the
experimentation necessary for the economy to prosper. Long-term development
requires an entrepreneurial ecosystem that facilitates bottom-up entrepreneurship
in the private sector. The primary role of the government in this scenario is to
provide and continually update the institutional setup to provide the right incentives
for all relevant agents, to produce crucial collective goods such as infrastructure, and
to subsidize services with large positive external effects such as education and basic
research. This prepares the stage for the emergence of an entrepreneurial society.
As valuable and successful innovations and spin-offs often include a significant
element of serendipity and many of the benefits that resulted from historical missions
were unintended and provoked by challengers from outside, the conditions for acting
on opportunities must be favorable and allow for experimentation and failures. The
fallacy of hindsight often misleads policymakers to overlook this point, thus
overestimating the potential for successfully designing interventions on the drawing
board. Sanders et al. conclude that a well-balanced entrepreneurial ecosystem is
needed, one that strikes a balance between the private sector’s desire for unbridled
autonomy and the public sector’s instinct to use its powers to steer and control.
In the next chapter, “Overcoming the siren song of central planning,” David
C. Rose (2024) discusses the human tendency to believe in authoritarian control and
central planning. According to Rose, human evolution has made us inclined to
believe in authoritarian ruling in small groups. This belief in central planning is
naturally transferred to a belief in similar governance structures for larger groups
such as entire cities or countries. Rose further notes that humans have a tendency for
control bias, i.e., an inclination to call for planning and control as the opposite would
appear irresponsible. Rose concludes that (p. 283)
our genes lead us to think that someone or something needs to be in control of society, not
just in terms of day-to-day operation, but also in terms of how it evolves. Our genes are right
about this for societies that are not much larger than the groups within which they evolved.
But now that we live in very large societies, using central planning to efficiently control
society is a pipe dream.

Rose develops an alternative to missions and utopian ways of thinking that is

ultimately built around morality, primarily moral beliefs that instill duty-based moral
restraints. If all individuals in a society are governed by duty-based morals focused
on not doing harm to others, we cannot know the outcome of the combined efforts of
all individuals, but we can know that it will not be negative. In this sense, morality
can help societies overcome genetic biases toward control and central planning.
In the chapter “R&D tax incentives as an alternative to targeted R&D subsidies,”
Roger Svensson (2024) discusses the advantages of various policy instruments
aimed at increasing the rate of innovation. Svensson notes that R&D subsidies are
suitable when policymakers want to support a specific industry and when there is a
Moonshots and the New Industrial Policy: Questioning the Mission Economy 21

longer time horizon. However, such support also has downsides: It has administra-
tive costs, distorts competition, and nurtures a culture in which companies expect
subsidies. Moreover, the greater share of such subsidies is likely to end up in the
hands of large incumbent firms, possibly reinforcing rather than challenging the
status quo (Bergkvist et al. 2022). Tax incentives, on the other hand, are neutral
regarding both effects on competition and technology. Svensson concludes that
MOIPs may distort the competitive process, and because direct subsidies are allo-
cated through an administrative and politicized process, regulatory capture is likely
to take place where vested interests end up entrenching their positions and
technologies.
In the final chapter, “Bottom-up policies trump top-down missions,” Magnus
Henrekson and Mikael Stenkula (2024) discuss what they deem to be a more viable
alternative to innovation and progress without relying on an interventionist
top-down approach. They maintain that MOIPs are based on an overly mechanistic
view of innovation and economic growth, downplaying the problems caused by the
lack of an altruistic and omniscient political sector.
Echoing what Sanders et al. show in their chapter, Henrekson and Stenkula
conclude that a flourishing economy requires a well-balanced entrepreneurial eco-
system and an institutional framework that levels the playing field for potential
entrepreneurs while encouraging productive entrepreneurship. Innovative entrepre-
neurship also requires many other actors—besides the entrepreneur—who are
greatly influenced by the reward structure they encounter. To promote an entrepre-
neurial ecosystem, Henrekson and Stenkula discuss in more detail eight key areas,
including taxation and labor market regulations, where appropriate horizontal or
bottom-up policy measures can foster innovation. They end the chapter by pointing
out that today’s economies are highly dependent on a well-functioning process of
decentralized experimentation, selection, and screening.
Rather than appealing to policymakers to become bold, visionary, inspirational
political entrepreneurs, the contributions in Part IV advocate institutions that direct
self-interested individuals to make decisions that increase general social welfare.
However, since the emotional appeal of top-down missions as solutions to our most
urgent problems is likely to persist, we must continue to inform policymakers and
the general public about its risks and our collective tendency to be misled by various
biases, including a genetic predisposition to call for planning and control as the
opposite would appear irresponsible.

Conclusions and Future Research

Large-scale government programs and interventionist industrial policies are

implemented in many Western countries without much critical inquiry. We have
also witnessed an unwillingness by leading scholars promoting this strategy to
debate the pros and cons of mission-oriented policies (MOIPs) (Hallonsten 2024).
Moreover, a shortage of academic studies devoted to how and why innovation
22 M. Henrekson et al.

policies, and especially MOIPs, may fail points to a need for a volume that takes a
critical look at these projects.
The contributions in this volume explore both ongoing MOIPs and historical
examples of large government-led efforts to mobilize society toward achieving
certain goals. It also seeks to explain under what circumstances MOIPs may fail,
which helps us identify a set of factors that, in combination, point to the risks
associated with MOIPs. In light of those experiences, the last four contributions
present alternative approaches to accomplishing economic and social development.
Government-led, large-scale attempts to achieve industrial renewal or fulfil
various desirable goals have often failed. This volume features several case studies
of such failed endeavors, including foreign aid, the Brazilian shipbuilding industry
and deep-sea drilling for oil, and the large-scale US government effort to eradicate
homelessness. Other examples covered in Henrekson et al. (2024) dealing with the
most important takeaways from the theoretical and empirical contributions concern
the role of Fannie Mae and Freddie Mac in the global financial crisis, the US War on
Cancer in the 1970s, and the Swedish Million Program for housing.
While many of these programs and initiatives were put in place prior to the
widespread diffusion of ideas around a mission economy, it is still clear that they
were inspired by a mission-oriented logic, often with explicit reference to the
moonshot. The Brazilian shipbuilding industry MOIP, which led to the most exten-
sive series of arrests of government officials in the country’s history and the
imprisonment of President Lula in 2018, was at its inception in 2005 compared to
the 1960s US-Soviet “space race” (Alves 2024). Likewise, Mazzucato and col-
leagues (Hill 2022) describe the Swedish Million Program in hindsight as a success
story.
Our findings point to the risks of missions being captured by vested interests. We
also observe that such large-scale government initiatives distort incentives and give
rise to unproductive entrepreneurship. Subsidies, soft loans, and various targeted
support programs aimed at objectives such as homeownership, building inexpensive
housing, reducing homelessness, or nation-building provide an opportunity for
companies and policymakers to engage in opportunistic behavior as someone else
is footing the bill. Several chapters also emphasize that governments cannot set goals
and design a credible plan for their accomplishment, as they have neither the ability
to aggregate and process the required information nor the know-how to accomplish
these goals. The success bias in the broader literature on innovation policy (Kärnä
et al. 2022) also seems to characterize the literature on MOIPs (Batbaatar et al.
2024). This volume provides a corrective by taking a closer look at failures and the
mechanisms that lead to failure, but it also outlines alternative approaches to
accomplishing growth and renewal.
Proponents of MOIPs may criticize our suggested alternative approaches on the
grounds that they deny the existence of grand challenges, such as climate change and
global health inequality, that can only be solved through MOIPs. We do not deny
that those challenges are formidable, but the evidence and theoretical arguments
provided in this collective volume suggest that MOIPs are plagued by so many
Moonshots and the New Industrial Policy: Questioning the Mission Economy 23

problems that they even may prove to be counterproductive. Instead, the solutions
provided in this volume consist of stepwise, bottom-up improvements and innova-
tions guided by an institutional setup providing “rules of the game” that incentivize
the relevant agents to work toward solving the most pressing issues. In effect, the
“bottom-up” premise is really the foundational alternative to the “top-down”
mission.
We welcome future work that takes a rigorous look at MOIPs in both theory and
practice. In addition to the areas for future research highlighted in each chapter, we
conclude this introductory chapter by pointing to two broad directions for further
work that we deem particularly valuable.
First, several chapters in this collective volume have, to varying degrees, applied
a public choice perspective to the study of MOIPs and innovation policy. As noted
by Muldoon and Yonai (2023), scholars in entrepreneurship and management have
often lacked a coherent body of theory that enables the study of industries and
business strategies vis-à-vis the political sphere. Future research on innovation
policy and MOIPs could benefit from the application of insights from public choice,
robust political economy (Pennington 2011; Lucas 2019), and behavioral political
economy (Schnellenbach 2024).
Second, the empirical studies in this volume have not covered MOIPs concerned
with transitions to sustainability, notably the so-called “green deals” of various
types. The primary reason for not studying such initiatives or attempts at green
industrial transformation is that this area is so vast and has grown so quickly over the
past decade that it deserves full attention in books or special issues explicitly focused
on that topic. Following the publication of this volume, we will invite scholars to
contribute to a new collective volume focused on exploring the effects of green deals
on firms, industries, and environmental outcomes.

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know it. https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/02/fact-sheet-
president-biden-reignites-cancer-moonshot-to-end-cancer-as-we-know-it/
White House (2022b). Remarks by President Biden on the Cancer Moonshot Initiative. https://
www.whitehouse.gov/briefing-room/speeches-remarks/2022/09/12/remarks-by-president-
biden-on-the-cancer-moonshot-initiative/
Yerger Jr, R. H. (2024a). Analyzing the effectiveness of state-guided innovation. In M. Henrekson,
C. Sandström, & M. Stenkula (Eds.), Moonshots and the New Industrial Policy: Questioning the
Mission Economy (pp. 95–108). Cham: Springer.
Yerger Jr, R. H. (2024b). Case study on DARPA: An exemplar for government strategic structuring
to foster innovation? In M. Henrekson, C. Sandström, & M. Stenkula (Eds.), Moonshots and the
New Industrial Policy: Questioning the Mission Economy (pp. 109–123). Cham: Springer.

Magnus Henrekson is Professor of Economics and Senior Research Fellow at the Research
Institute of Industrial Economics (IFN) in Stockholm, Sweden. He resigned as CEO of IFN in
2020 after 15 years of service. Until 2009, he held the Jacob Wallenberg Research Chair in the
Department of Economics at the Stockholm School of Economics.
He received his PhD in 1990 from Gothenburg University with his dissertation An Economic
Analysis of Swedish Government Expenditure. Throughout the 1990s, he conducted several projects
that aimed to explain cross-country growth differences. Since the turn of the new millennium, his
primary research focus has been entrepreneurship economics and the institutional determinants of
the business climate. In this area, he has published extensively in scientific journals and contributed
several research surveys to Handbooks in the field of entrepreneurship.
In addition to his academic qualifications, Henrekson has extensive experience as an advisor,
board member and lecturer in many different contexts, in both the business and public sectors.

Christian Sandström is Senior Associate Professor at Jönköping International Business School

and the Ratio Institute in Sweden. His research concerns innovation policy and the interplay
between technological and institutional change. Sandström is one of the editors behind Questioning
the Entrepreneurial State (Springer). He has published more than 30 papers in peer-reviewed
academic journals such as Technological Forecasting and Social Change, the Journal of Technol-
ogy Transfer and Industry and Innovation.
Sandström wrote his PhD thesis on the topic of disruptive innovation at Chalmers University of
Technology (2010). He has been a visiting scholar at the University of Cambridge and ETH Zürich
in Switzerland. Sandström has received several awards for his pedagogical skills and is a frequently
hired public speaker on the topic of technological change and industrial transformation.

Mikael Stenkula is Associate Professor of Economics and holds a PhD from the School of
Economics and Management at Lund University. He received this degree in 2004 with his
dissertation Essays on Network Effects and Money. After having worked for a year as a lecturer
at Lund University, where he taught microeconomics, he joined the Research Institute of Industrial
Economics (IFN) in the fall of 2005. His main area of research is entrepreneurship economics.
Stenkula is part of IFN’s taxation history project, which has systematically and comprehensively
described and analyzed the Swedish tax system from 1862 to the present day. This study is unique
28 M. Henrekson et al.

in scope—no equally comprehensive investigation of a national tax system has been conducted for
any other country. In addition to the meticulous year-to-year documentation of all relevant details of
the tax code, the project aims to examine how changes in the tax system affect the economy by
guiding people’s choices, particularly how the tax system affects entrepreneurial activity and firm
behavior.
He also teaches at the Stockholm School of Economics and serves as the executive secretary of
the award committee for the Global Award for Entrepreneurship Research, the foremost global
award for research on entrepreneurship.

Open Access This chapter is licensed under the terms of the Creative Commons Attribution 4.0
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adaptation, distribution and reproduction in any medium or format, as long as you give appropriate
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the copyright holder.
 Part II
Theoretical Perspectives
State and Markets: Not Whether But How

Diane Coyle

Abstract The public and political demand for simple answers to complex economic
problems generates its own supply. Moreover, policy narratives or “missions” can
play a useful role in aligning expectations and coordinating private sector actions.
However, the standard historical examples of successful missions (such as the
Apollo program or the smartphone) involve nuanced and contingent interaction
between the state and the market. In the current context of a revival of strategic
industrial policies, governments must avoid oversimplified rhetoric that obscures the
need for an analytical framework assigning policy instruments to specific identified
elements of the strategy. Without such a framework, responsibility and accountabil-
ity for policy delivery are impossible to allocate.

Keywords Industrial policy · Levelling up · Technology · Market failure

JEL Codes L50 · L52 · O31 · O38 · P00

Introduction

“There is nothing a government hates more than to be well-informed; for it makes

the process of arriving at decisions much more complicated and difficult”
(J. M. Keynes, quoted in Skidelsky 1992). Keynes, as ever, provides an apt quota-
tion. Policymakers make decisions under the pressures of time and political and
media scrutiny. This decision-making context generates the demand for simple
answers to problems that are often complex; the demand then creates its own supply.

Thanks to Magnus Henrekson and Christian Sandström for their helpful comments on an early draft.
Coyle is funded by The Productivity Institute and the Economic Statistics Centre of Excellence.

D. Coyle (✉)
Bennett Institute for Public Policy, University of Cambridge, Cambridge, UK
e-mail: [email protected]

© The Author(s) 2024 31

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_2
32 D. Coyle

There is therefore no shortage of external advice to governments about how they

should tackle long-standing, intractable, and multidimensional challenges such as
inequality, regional economic development, or low productivity growth. Such
advice often interacts with both political and intellectual trends and is crystallized
in a particular form that captures the imagination of politicians. One recent example
is the idea of a creative class of young creative and tech sector workers as a dynamo
of urban growth, with Richard Florida’s (2002) observation of the sociodemographic
changes in some cities combining with the resurgence of economic geography and
agglomeration economics and the political ambition for urban renewal in many
postindustrial cities. Florida founded a successful consultancy advising many
urban authorities around the world. However, his academic research tended to
reach the policy world in simplistic form, such as creating a “gay village” or
appointing a “nighttime economy” advocate, as key urban renewal policies.
The same fate is befalling the idea of a “mission economy.” Mariana Mazzucato’s
bestseller (2013) echoed the renewal of academic interest, noted above, in industrial
policies and a purposive or strategic role for government. This interest has coincided
with, and been stimulated by, the political challenge from “left behind” people and
places whose dissatisfaction has played a part in the emergence of populist votes in
many countries (Rodriguez-Pose et al. 2023). Many policymakers use the device of
“missions” to give apparent coherence to a set of measures that in general may have
an unclear economic rationale and are unlikely to solve the complex underlying
problems. The policy fashion for devising missions may at the same time obscure
well-founded economic rationales for specific government intervention in the supply
side of the economy, for there are good reasons for such policies, and more so now
than in previous decades.
This is not to argue that policy narratives are unnecessary or even detrimental. On
the contrary, successful policies need to align expectations and coordinate many
different actors to bring about policy success. A recent formulation of the need is the
case for “narrative economics” made by Robert Shiller and others (Shiller 2017;
Akerlof and Snower 2016), or the much older advocacy for a “guiding hand” by
development economist Albert Hirschman (1967). In many contexts, and particu-
larly where there are increasing returns or network effects (either in time or—as with
agglomeration—in space), positive feedbacks are more likely to occur if encouraged
by some framing device or policy rhetoric. However, as will be described in the
following sections, some of the popular examples of past missions oversimplify
important aspects of the historical experience, while the practice of devising policy
missions can diverge considerably from effective coordination narratives. This essay
concludes by setting out some principles for government intervention in the supply
side of the economy that will help avoid the pitfall of oversimple answers to complex
policy challenges.
State and Markets: Not Whether But How 33

The Case for a Strategic Supply Side Policy Framework

State activism in the form of industrial policy went out of fashion in the 1980s, at
least in policy rhetoric and in economic research, although many countries continued
to implement a variety of industrial policies in practice. The experience of economic
crises in the 1970s had decisively tilted received wisdom away from government
intervention and in favor of market forces. In academic economics the era of demand
management gave way to real business cycle theory and the efficient markets
hypothesis (Coyle 2009). In policy practice, the UK, the USA, and New Zealand
introduced deregulation of many sectors and the privatization of public utilities,
paving the way for other western economies to follow. By the time of the 2008
financial crisis, the “markets-first” approach combined with an expanded financial
sector had taken shape as the political economy framework often described as
neoliberal.
This broad consensus is crumbling rapidly. One reason is simply the succession
of major economic shocks, the financial crisis followed by the pandemic followed by
Russia’s invasion of Ukraine, and subsequent energy/inflation shock. Shocks on this
scale always lead to a questioning of standard practice, no matter how successfully
they are navigated in the moment. A majority of people—and particularly those on
low incomes or living in depressed places—are experiencing a substantial erosion of
their living standards. In any case, productivity growth has slowed since the
mid-2000s, leading to almost a decade during which living standards for most people
had failed to improve much.
A second factor is that a consequence of the recent economic shocks and
increasing geopolitical tensions has been a new awareness of supply chain vulner-
abilities. Initially due to the inherent lack of tolerance in tightly optimized just-in-
time logistics, subsequent shortages occurred for several reasons—including labor
shortages and energy price hikes—all serving to underline a lack of economic
“resilience” and the presences of unanticipated supply chain fragilities. Advanced
computer chips have been a particular political focus, with extreme dependence on
Asian and particularly Taiwanese production (Miller 2022) leading both the EU and
the USA to subsidize new domestic production. The uncertainties seem unlikely to
diminish quickly, for reasons both of geopolitics and an increasing number of
extreme weather events affecting production in some countries. In economic
research, recent experience has prompted a new interest in a production network
approach (Carvalho and Tahbaz-Salehi 2019; Acemoglu and Azar 2020).
Thirdly, the policy priority of speeding up the energy transition away from fossil
fuels toward renewables has—along with awareness of continuing digital
restructuring of the economy—raised questions about the role of the state in financ-
ing and incentivizing investment in the new infrastructure, built environment and
consumer durables; in setting standards; and in coordinating switchovers in products
such as electric vehicles. General purpose technologies—those that transform not
just one sector but the whole economy—usually involve either energy or commu-
nications; steam, electricity, and printing are examples. Currently both an energy and
34 D. Coyle

a communications transformation are under way globally. The case for coordination
of transition and management of significant disruption by the state will be
compelling.
Arguments of this kind—made eloquently by economists such as Rodrik (2007)
and Liu (2019) —help explain why policymakers are newly interested in the role of
the state in strategic economic management. Coordinating large-scale socio-techni-
cal transition in complex, interlinked modern economies and in the context of
repeated experience of “radical uncertainty” (Kay and King 2020) is daunting. Little
wonder policymakers have looked for ways of making their task seem more man-
ageable and explicable to their constituencies.
Take, for example, the widespread political priority of “levelling up” (to use the
UK’s recent political language), mitigating or reducing the increased spatial inequal-
ities that have emerged as a result of more powerful agglomeration effects (whether
due to technology, globalization, or both) (Autor et al. 2013). The income distribu-
tion has hollowed out in recent decades, with an increased wage premium to those
with degrees and especially STEM skills (Stansbury et al. 2023). Its geographic
expression is economic stagnation in places that are unconnected to thriving high
skill cities, including the extreme phenomena of “deaths of despair” (Case and
Deaton 2020) and falling life expectancy. Moreover, the geographic inequality has
political consequences, from the UK’s Brexit vote in 2016 to right populism in many
European countries and the USA.
The UK government responded to the pressures of spatial inequalities with a
substantial policy effort resulting in its Levelling Up White Paper (DLUHC 2022).
Although this policy document subsequently fell victim to broader political insta-
bility within the ruling Conservative Party, it captures much received policy wisdom
about how to tackle this deep-seated economic and political challenge. It sets out,
“an ambitious set of missions, galvanizing action across sectors to improve jobs,
incomes, health, skills, transport, pride in place, safety, and well-being across the
UK. These clear, quantified missions mean no-one can any longer be in any doubt
about what is meant by success in levelling up” (p. 10). The missions it set out are
summarized in Table 1, with their corresponding policy areas and an example of the
many numerical targets set for each.
It is immediately apparent that the terminology of missions is being used here to
bring apparent coherence to a wide-ranging set of policy aims of different types and
with targets or indicators admitting of different degrees of control. Whereas a
government can perhaps feasibly plan to achieve faster and wider broadband infra-
structure, changing life expectancy is an outcome of many different contributory
factors and not easily amenable to being influenced by policy on any normal political
timescale. The whole set of missions in the White Paper is worthy, for sure, but spans
most of any government’s domestic policy agenda. The rhetoric of missions in this
example cannot disguise the absence of a unified analytical framework for deter-
mining which policy interventions are required to achieve the aim of reducing spatial
economic inequality.
State and Markets: Not Whether But How 35

Table 1 The UK Levelling Up missions

Mission Policy areas Example of numerical target
Boost productivity, Living standards; research and “By 2030, the UK will have nation-
pay, jobs, and living development; transport connec- wide gigabit-capable broadband and
standards tions; digital connectivity 4G coverage, with 5G coverage for
the majority of the population”
Spread opportunities Education; skills; health; well- “By 2030, the gap in Healthy Life
and improve public being Expectancy (HLE) between local
services areas where it is highest and lowest
will have narrowed, and by 2035
HLE will rise by 5 years”
Restore a sense of Pride in place; housing; crime “The government’s ambition is for
community, local the number of non-decent rented
price, and belonging homes to have fallen by 50%, with
the biggest improvements in the
lowest performing areas”
Empower local Devolution of powers “By 2030, every part of England that
leaders and wants one will have a devolution
communities deal”
Source: Department for Levelling Up, Housing and Communities (2022)

Mission-Oriented Policies in History

This is perhaps an extreme example of stretching a concept too far, much as

policymakers did with the creative class construct; but others beyond the UK have
also leapt on the missions bandwagon. The EU, for instance, has commissioned
multiple studies of mission-oriented innovation policies.1 Mazzucato’s original work
(2013, see also 2018) largely focused specifically on policies to shape the direction
of innovation, and she states some broad principles for the role of government
captured by the acronym “ROAR”: routes and directions, organizations, assessment,
and risks and rewards. In other words, this concerns one area of policy, innovation
policies, and alludes to the role of setting a direction for societally relevant effort,
coordinating multiple actors, evaluating outcomes including by considering who
should bear what risks and with what returns. As discussed in the next section, these
are useful headings for considering the role of the state in supply-side policies.
However, the concept of mission-oriented policies has subsequently been broadened
beyond innovation policy to embrace wide societal aims, such as green transition,
plastic-free oceans, and economic development in Latin America and the Caribbean
(Mazzucato 2021, 2023; Miedzinski et al. 2019). Inevitably, such very broad aims
involve multiple policy instruments and actors, as in the UK Levelling Up White
Paper example, and involve fuzzy analysis of how to achieve the stated missions.

1
https://research-and-innovation.ec.europa.eu/funding/funding-opportunities/funding-
programmes-and-open-calls/horizon-europe/eu-missions-horizon-europe/mission-oriented-policy-
studies-and-reports_en.
36 D. Coyle

Are there lessons from the early examples of successful missions that would help
map the appropriate terrain for this approach? Two US examples recur frequently in
the literature: the Apollo program (the original “moonshot”) and the role of DARPA
in digital innovation. In a sense both are consequences of a far more fundamental
policy aim during the second half of the twentieth century, ensuring America’s
technological superiority over the USSR in the context of the Cold War. It is well-
documented that President Kennedy launched the space program in 1961 in response
to the shock of the early lead gained by the Soviet Union. His exact statement of the
ambition “to go to the moon. . .before this decade is out” was the subject of
negotiation with the leadership of NASA, to ensure that it was sufficiently loosely
worded to be more feasible (by giving them potentially an extra 2 years to hit the
deadline) in the context of a politically unpopular, costly program (Gisler and
Sornette 2009; Madrigal 2012). This offers perhaps the purest example of mission-
driven policy: a clear ambition, with an uncontestable success metric, and suffi-
ciently important that financial resource and organizational effort (as well as political
capital) was poured into the mission, effectively coordinated by NASA. Related
innovation outcomes (such as Teflon and the miniaturization of transistors) were
by-products.
The second example, which triggered a great deal of interest and commentary,
was the development of the iPhone and the Internet, ascribed in The Entrepreneurial
State to public sector investment. These would not have come about, the book
argues, without DARPA commissioning basic research, or without public sector
contracts enabling RAND to develop innovations subsequently picked up by entre-
preneurs like Steve Jobs. This history of the interplay between government and
private sector in the USA is very well known (see O’Mara 2019 for one recent
account of many).
The novel element in describing this as “mission-oriented” is the attribution of
intentionality and the conclusion that if it worked for inventing the Internet, it can
work for other societal aims. Mazzucato sets out her argument concisely in an
interview: “I describe in the longest chapter of my book, the US government has
been a leading player in funding not only the Internet but all the other technologies—
GPS, touchscreen display, and the new Siri voice-activated personal assistant—that
make the iPhone, for example, a miracle of American technology. Crucially,
mission-oriented policies are needed today to tackle climate change and other
large societal, technological challenges.”2
It is unquestionably true that public investment in research has been important for
many fundamental innovations. One can point to the basic research underlying
mRNA vaccines, CRISPR gene editing, graphene, and many, many more technol-
ogies. It is entirely uncontroversial among economists and policymakers alike that
governments have an essential role in funding basic research, where the private
sector will underinvest because of knowledge spillovers they cannot internalize. It
would also be very widely accepted that governments have a valid role in shaping

2
https://www.pbs.org/newshour/economy/the-entrepreneurial-state-appl.
State and Markets: Not Whether But How 37

the direction of innovation, setting priorities for funding research. For example, in
1971 Richard Nixon announced the “war on cancer” through funding research at
large scale through the National Institutes of Health; this was a broad and arguably
unsuccessful mission (Surh 2021). Since the Nurse Review in 2015, UK government
departments have expressed “Areas of Research Interest” linked to specific policy
questions or issues. There is a considerable literature—theoretical and empirical—
on how and why governments can and should influence the direction of innovation
(e.g., Rothwell and Zegveld 1984; Aghion and Tirole 1994; Acemoglu 2002; Bryan
and Lemus 2017; Bryan and Williams 2021; Acemoglu and Johnson 2023). The
literature addresses two types of market inefficiency: too little socially valuable
innovation and the direction of innovation away from those that would deliver the
greatest social value.
In this sense, the importance of innovation policies that can help achieve direc-
tional aims is motherhood and apple pie, in economic research and the policy world
alike. But can governments deliver specific outcomes? Contrary to the impression
some have taken from the debate, the US government did not intend to invent either
the iPhone or the Internet; these innovations were the result of many unplanned,
serendipitous actions by a multitude of public and private actors. Governments can
certainly incentivize innovation in specific areas, as the USA and EU are now by
funding research on green energy technologies or chip manufacture. Governments
also have a large portfolio of policies available to them to encourage both private and
public sector innovation (Bloom et al. 2019). But the standard mission-oriented
examples do not represent intentional and specific innovation by an “entrepreneur-
ial” government.
So on the one hand, there is scope for fruitful state intervention to bring about
better societal outcomes; but on the other hand, it is not immediately obvious how
broad or narrow in scope a government’s aims should be, whether these are
packaged as missions or in some other way.

State and Markets

Given the shift in the intellectual climate described above, how should governments
think about their role in supply side interventions? Although many of those who
advocate a more active state dislike the construct of “market failure” for thinking
about this (and understandably so, as market failure is pervasive), the different ways
in which private and social welfare can diverge offer a useful diagnostic approach
(Coyle 2020).
On the question of when a policy intervention makes sense—and what type—it is
useful to think about whether the private-social wedge is due to missing markets,
asymmetric information and knowledge spillovers, Pigouvian externalities, or the
gap between the social and private discount rates. The diagnostic will point to
different policy approaches. For example, markets for some future technologies
are highly uncertain, deterring private investors even if the societal payoff is likely
38 D. Coyle

to be large. Policy tools such as public sector advance market commitments (as with
Covid vaccines or new antibiotics) or prizes (Kremer et al. 2020; Murray et al. 2012)
may be the most effective approach. Some innovations will help tackle externalities
(such as CO2 emissions) but may not be initially profitable, due to learning-by-doing
or scale economies, for example, meriting taxpayer subsidies. Subsidies in the initial
stages to the production and installation of photovoltaics led to extremely rapid
declines in the price of generating solar electricity (Way et al. 2022).
The longer time horizon of the public sector—a lower social than private discount
rate—is relevant in contexts ranging from blue skies research to investment in
infrastructure. If a project has a longer payback period than private investors will
accept, or there is a high nonmarket, social return, a combination of direct public
investment and incentives for complementary innovations and assets may be appro-
priate (Offer 2022). Large infrastructure projects are also a good example of the need
to overcome coordination problems. The intention of large projects is to bring about
non-marginal changes in economic activity. The economy consists of a large set of
complicated nonlinear relationships. Multiple equilibria and tipping points charac-
terize such systems (Coyle 2022), creating the scope for purposive policies to
achieve a different equilibrium or to reach a critical scale that will overcome early
coordination challenges. While governments can consider criteria such as existing
strengths or resources in innovation and production or identify reasons for believing
production can attain a region of increasing returns to scale, there is bound to be an
arbitrary element in the selection of investments or points of intervention. These may
vary depending on current priorities and political preferences, as there is no “best”
way to run a complex modern economy. A mission—in other words, a societally
desirable aim—may, like a policy narrative (Shiller 2017; Akerlof and Snower
2016), be one way of expressing a goal intended to align private sector decisions
or achieve a tipping point in coordinating actions around a set of standards or
achieving a critical scale of activity. Coordination problems probably offer the
strongest case for mission-oriented approaches.
Even in this latter case, though, devising an appropriate mission involves more
specificity about the nature of the problem to be solved than is generally apparent in
current policy discourse. Some missions in the sense of coordinating policy narra-
tives may be useful, but not every policy can be shoehorned into a mission. Indeed,
the usual examples of successful mission-oriented approaches in the postwar USA
were not intentional in the way the subsequent literature has sometimes portrayed
them. The problems that have helped recently shift the climate of opinion in
economics and policymaking in the direction of a more activist state are highly
complex and create a decision-making context of huge uncertainty.
There is broad agreement about key societal aims such as achieving an energy
transition or improving productivity and incomes, and there will be no simple
solutions. How then should governments intervene in the economy to help bring
about the desired aims, which must involve multiple private sector businesses and
consumers, in this complex and uncertain environment? Although a coordinating
narrative or mission can be thought of as one of the instruments available to
government, nevertheless useful political rhetoric answering the demand for simple
State and Markets: Not Whether But How 39

solutions should not be mistaken for a consistent or sufficient framework for policy
action. A supply-side economic strategy requires assignment of specific instruments
to identified aims and the delegation of responsibility for implementation to the
relevant agencies or departments (and individuals within them). The outward-facing
rhetoric risks obscuring the chain of accountability essential for successful industrial
policies. Missions are not enough.

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Simon & Schuster.
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personal inequality, economic decline, and the rise of populism in the USA and Europe. Journal
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Diane Coyle is the Bennett Professor of Public Policy at the University of Cambridge. Diane
co-directs the Bennett Institute where she heads research under the themes of progress and
productivity. Her latest book is Cogs and Monsters: What Economics Is, and What It Should Be
on how economics needs to change to keep pace with the twenty-first century and the digital
economy. She was previously Professor of Economics at the University of Manchester.
State and Markets: Not Whether But How 41

Diane Coyle is also a Director of the Productivity Institute, a Fellow of the Office for National
Statistics, and an expert adviser to the National Infrastructure Commission. She has served in public
service roles including as Vice Chair of the BBC Trust, member of the Competition Commission, of
the Migration Advisory Committee and of the Natural Capital Committee. She was awarded a DBE
in the King’s Birthday Honours List 2023 for her “invaluable contributions to economic policy and
practice, as well as her unwavering commitment to public service.”

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Engineering Is Not Entrepreneurship

Randall G. Holcombe

Abstract The idea of mission-oriented government, or entrepreneurial government,

has been supported using examples of successful government programs such as the
Manhattan project or the Apollo program. These are examples of engineering
successes, but they were not entrepreneurial. Entrepreneurship consists of producing
innovations that produce more value than they cost, and in those examples there was
no attempt to compare benefits to costs. A realistic view of the political process
under which government actually operates shows that attempts to make government
more entrepreneurial will result in programs with vague goals and no clear indicators
of success. Voters like feel-good aspirations, and politicians like to propose pro-
grams that appeal to voters. The real entrepreneurs in the political process are
lobbyists and interest groups who find opportunities for rent seeking and regulatory
capture, reducing the efficiency of government. With sufficient resources, govern-
ments can produce engineering successes, but the political process works against
governments being entrepreneurial. Engineering is not entrepreneurship.

Keywords Industrial policy · Market failure · Entrepreneurship · Innovation ·

Engineering

JEL Codes O25 · O31 · O32 · O38 · L26 · L50 · L52 · P16

Introduction

Governments have produced some remarkable achievements throughout history.

The Roman Empire built a system of roads and aqueducts that enabled the Empire
to thrive and expand, medieval governments (in cooperation with the church) built
spectacular cathedrals that remain marvels in the twenty-first century, and the Great
Wall of China stands as a tribute to the accomplishments of that government. More

R. G. Holcombe (✉)
Florida State University, Tallahassee, FL, USA
e-mail: [email protected]

© The Author(s) 2024 43

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_3
44 R. G. Holcombe

recently, the United States government developed atomic bombs to hasten the end of
World War II, put a man on the moon in the 1960s, and created a system of GPS
satellites that provide people throughout the world with precise location information.
While moonshots and atomic weapons are probably things we would be at least as
well-off without, governments have produced much that has benefited many.
The accomplishments of government listed in the previous paragraph all are
accomplishments of engineering, not entrepreneurship. When faced with engineer-
ing challenges, governments often can meet them, given sufficient resources. Gov-
ernment’s engineering successes do not constitute entrepreneurship, however.
Entrepreneurship consists of identifying and implementing new production methods
or new or improved goods and services that create more in value than they cost to
produce. Was the value of the Apollo program that landed men on the moon worth
more than it cost? There is no way to tell, and the goal of the program was not to
produce value in excess of its cost anyway. It was to land a man on the moon, and it
succeeded.
Not all entrepreneurial activity is successful. The market test to see whether
entrepreneurial actions are successful is whether they are profitable. If an innovation
creates more value than it costs in resources to produce it, that innovation is
profitable and an example of successful entrepreneurship.1 If the innovation costs
more to implement than its value to purchasers, the innovator realizes losses and the
entrepreneurial act was unsuccessful. Whether successful or not, the entrepreneur’s
goal is to create value, which then generates profit.
To lead with an example, in 1981 John DeLorean began producing an
automobile with a stainless steel body. Production was short-lived. The DeLorean
automobile was never profitable, and the firm went out of business. Mr. DeLorean’s
automobile was an engineering success. It worked as promised, and the rust-proof
stainless steel body offered some advantages to consumers, although consumers
viewed those advantages as insufficient to return Mr. DeLorean a profit. The
DeLorean automobile was an engineering success but an entrepreneurial failure.
Building on that example, consider two government projects: the Manhattan
project that produced the atomic bomb and the Apollo program that landed a man
on the moon, both of which have been offered as examples of the successes of the
entrepreneurial state. The Manhattan project was initiated jointly by the governments
of the United States, the United Kingdom, and Canada in 1939, with the goal of
producing an atomic bomb. As is well-known, the project was successful, and the
use of two atomic bombs prompted the Japanese to surrender to end their involve-
ment in World War II. The Apollo program was officially initiated in 1961 when

1
A caveat that will become relevant later is that an innovation could be profitable and yet create
external costs large enough that the costs exceed the total value of the innovation. The entrepreneur
would still have been successful at producing a profit—the goal of entrepreneurship.
Engineering Is Not Entrepreneurship 45

President Kennedy announced the goal of landing a man on the moon and safely
returning him to Earth before the end of the decade.2
The Manhattan project and the Apollo program are examples of engineering
successes, much like the production of the DeLorean automobile. In all three
cases, the engineering goals were met. Stainless steel automobiles were produced,
atomic bombs were produced, and men landed on the moon. But there was no
entrepreneurship involved in the Manhattan project or Apollo program. Rather,
political leaders established engineering goals, much as John DeLorean did, and
spent enough money on those projects to see them to completion.
As Mazzucato (2021, p. 4) says about the Apollo program, “cost was not the
issue: the point was to get the job done.”3 Could those projects have been completed
more quickly had different methods been used? Could the same result have been
accomplished at lower cost had different methods been used? More important from
the standpoint of entrepreneurship, did the end products produce more in value than
they cost to produce? These questions cannot be answered because the programs
were produced through a top-down process in which resources were taken involun-
tarily from taxpayers to fund projects that could only fail in an engineering sense.
While the programs undoubtedly produced benefits, there is no way to evaluate
whether the benefits exceeded the costs. Those projects are not examples of
entrepreneurship.

Entrepreneurial Government

While the Manhattan project and the Apollo program are examples of engineering,
not entrepreneurship, one example of government entrepreneurship is the coopera-
tive effort of the British and French governments to produce a supersonic airliner.
That program had an engineering goal but also an entrepreneurial one—to enable
cost-effective commercial supersonic flight. That program was an engineering
success but an entrepreneurial failure.
Mazzucato (2021, p. 51) describes the Anglo-French supersonic Concorde air-
liner as “a technological triumph but cost vastly more than forecast to build and
never led to a supersonic revolution in commercial air travel.” The Concorde was, in
this sense, like the DeLorean automobile. Both were engineering successes, but
entrepreneurial failures. The difference between the Concorde and the Apollo
program or the Manhattan project is that the latter two did not have to justify the

2
The engineering on this project was begun in 1960 under the Eisenhower administration, but the
end-of-decade goal was announced by President Kennedy.
3
Mazzucato (2021, ch. 4) provides an excellent history of the Apollo program, the many challenges
it faced, and the way it succeeded in meeting them. But the successes she describes are engineering
successes, not entrepreneurial ones.
46 R. G. Holcombe

worth of their engineering successes. Using the same criteria Mazzucato uses to
evaluate the Apollo project, the Concorde was just as successful.
These examples illustrate how entrepreneurial government must be evaluated.
The setting and accomplishing engineering goals gives no evidence about whether
government is entrepreneurial. Entrepreneurship is at its foundation an attempt to
create value, not an attempt to achieve some technological goal. The engineering
successes of governments, such as the triumph of producing a supersonic airliner or
landing a man on the moon, offer no evidence about whether government has been a
successful entrepreneur. At least in the Concorde’s case, governments were trying to
be entrepreneurial. They just failed. In the case of the moon landing, there was no
consideration given to the creation of value in excess of its cost.
To be clear, the issue here is not over whether the value created by the Apollo
program exceeded its cost. Perhaps it did, but that is irrelevant. The goal of the
program was not to create value in excess of its cost. The goal was an engineering
one of accomplishing the mission, regardless of cost. This paper is not arguing
against governments establishing engineering goals. Rather, it is arguing that engi-
neering is not entrepreneurship.
The idea of entrepreneurial government is misguided. The above examples are
suggestive, but when one understands what entrepreneurship is and the role it plays
in economic development, it becomes apparent that attempts to design an entrepre-
neurial state cannot succeed. This is not just a matter of semantics. Mazzucato argues
that the success of the Apollo program, the Manhattan project, and other government
engineering successes lay the foundation for the employment of an entrepreneurial
mission-oriented government that can be equally successful at addressing other
challenges, such as climate change, inequality, improving health care, and narrowing
the digital divide. These issues are categorically different from the engineering
challenges like the Apollo program or the creation of a supersonic aircraft. This
paper explains why, but the short answer comes down to a simple distinction:
engineering is not entrepreneurship.

Engineering and Entrepreneurship

Schumpeter (1939) made a distinction between invention and innovation. Invention

is the development of a new idea or process. Innovation is the creation of a profitable
product as a result of implementing the invention. Entrepreneurs are the people who
transform inventions into innovations. Using Schumpeter’s taxonomy, the govern-
ment accomplishments listed in the preceding section are inventions, not innova-
tions, and they are not the result of entrepreneurial government. Emphasizing the
difference, Schumpeter (1939, p. 84) says “Innovation is possible without anything
we should identify as invention, and invention does not necessarily induce innova-
tion, but produces of itself. . .no economically relevant effect at all.” Engineering and
invention by themselves produce no tangible benefit to people. The benefits come
when those inventions are transformed into innovations that create value.
Engineering Is Not Entrepreneurship 47

Consider the example of the development of the graphical user interface for
computers. The graphical user interface, including windows on a computer screen
and the use of a mouse to navigate the screen, was invented at the PARC laboratory
of the Xerox Corporation in the early 1970s. The engineers at Xerox were the
inventors, but Xerox never made a profitable product using their invention. The
innovators were Steve Jobs, who introduced the Apple Macintosh computer, and Bill
Gates, who developed the Microsoft Windows operating system. The people at
Xerox did the engineering. Steve Jobs and Bill Gates were the entrepreneurs.
When one thinks of great entrepreneurs in markets, they are innovators, to use
Schumpeter’s terminology, but rarely inventors. Andrew Carnegie did not invent the
Bessemer process but made a fortune applying it to create the US Steel Corporation.
Henry Ford did not invent the assembly line, but he made his fortune applying the
concept to the manufacture of automobiles. As just noted, Steve Jobs and Bill Gates
did not invent the graphical user interface for computers. All of those entrepreneurs
took the inventions of others to create profitable products. Thomas Edison, founder
of the General Electric Company, is a rare example of an individual who was both an
inventor and an innovator.
Mazzucato (2015, ch. 5) discusses the growth of Apple in the consumer elec-
tronics market, pointing out that much of the technology Apple used was created
with some government backing. Her recounting of Apple’s success illustrates
Schumpeter’s distinction between invention and innovation. This is one of many
examples of government invention—engineering accomplishments—that have
enabled entrepreneurs to be innovative. Her discussion illustrates the difference
between invention and innovation—between engineering and entrepreneurship. As
she explains, government engineering produced inventions that opened the oppor-
tunity for Steve Jobs and his Apple Computer Company to be entrepreneurial.
Government contributed to the engineering. Apple and Microsoft did the entrepre-
neurship. Entrepreneurship creates value from inventions. On their own, inventions
have no value. Entrepreneurs transform inventions into innovations that people
value.
Apple provides an excellent example of innovative entrepreneurship because
product after product that the company introduced were panned by experts as having
no commercial potential. Computer experts argued that people did not want toy
computers like the Apple II. Marketing experts said the iPhone would be a niche
product because people wanted phones with mechanical keypads. Steve Jobs had the
entrepreneurial vision to turn the inventions of others into profitable innovations that
enhanced people’s lives. Mazzucato (2015, p. 112) also notes that the technology
behind Apple’s “virtual assistant Siri was developed at Stanford University.” But
again, the invention has no value until an innovator applies it. Jobs recognized its
potential and incorporated that technology in his iPhone in 2007.
Engineers are the inventors, but they are not entrepreneurs. Entrepreneurship,
when successful, adds value to the economy and improves human well-being.
Engineering provides raw material that can be used by entrepreneurs, but engineer-
ing by itself does not make people better off. Engineering is not entrepreneurship.
48 R. G. Holcombe

Profits and Progress

Capitalist economies are continually evolving. As Schumpeter (1947, pp. 82–83)

observed: “The essential point to grasp is that in dealing with capitalism we are
dealing with an evolutionary process.. . .Capitalism, then, is by its nature a form of
method of economic change and not only never is but never can be stationary.”
Biological systems also evolve, but there is no metric to judge whether a present
ecosystem is better or worse than those that preceded it. The same is not true of
economic evolution.
Schumpeter describes the evolutionary process of capitalism as one of creative
destruction. New and improved products and new production methods displace the
old. Much as with biological evolution, the process of creative destruction evolves
through the survival of the fittest, and fitness in a market economy is profitability.
Production occurs through the purchasing and combining inputs to produce output,
and profits result when the value of the output exceeds the cost of the inputs. If the
inputs cost more than the output, the result is a loss. Profitable firms thrive and grow.
Firms that incur persistent losses wither and die.
Profit is an indicator that the profitable firm adds value to the economy, according
to the judgments of those who are producing, buying, and selling profitable products.
Profit occurs because those who are consuming the output place a higher value on it
than those who are selling the inputs place on those inputs that produce the output. A
profitable firm takes inputs with less value and combines them into outputs with
more value than the inputs. Profit is not a measure of the full value generated by an
innovation. Profit is the benefit to the seller, but the buyer also receives benefits in
the form of consumer surplus—the utility the buyer gets in excess of the price of the
product. The evidence is that both buyers’ and sellers’ benefit is that they both want
to enter into the transactions that produce the seller’s profits.
When a firm introduces a value-enhancing product into the market, it generates
profits for the firm. Over time, competing firms have an incentive to introduce
similar products and even more, to introduce products that consumers prefer to
existing profitable products. Profits for the initial innovator decline as a result, but
the value of the innovation remains. As Holcombe (2014) describes, the result of
competing innovators is that the value produced by a firm’s innovations increasingly
shifts away from producers toward consumers in the form of consumer surplus. The
process of creative destruction displaces products in the market with products that
bring higher value to consumers. The fact that purchasers choose to purchase the
new products over the old is evidence that they place a higher value on the new
products.
People can see by casual observation that humankind is materially better off now
when compared to a century ago, or even 50 or 20 years ago. Entrepreneurship is the
engine that drives economic progress, as Holcombe (2007) explains. Innovations
enhance the standard of living well-beyond income growth by bringing new prod-
ucts to market. Air conditioning, jet aircraft, smart phones, and an endless list of
innovative products have been the result of entrepreneurs who have found ways to
Engineering Is Not Entrepreneurship 49

add value to everyone’s life. Engineering, by itself, adds no value. Entrepreneurship

transforms engineering advances into innovations that enhance human well-being.
The distinction between engineering and entrepreneurship is crucial for public
policy purposes because government missions detract from human well-being if they
cost more than the value they bring. Advances in human well-being are produced by
entrepreneurship, not engineering. Policymakers will be misled if they equate
engineering successes with entrepreneurship. The examples offered above clearly
show the distinction. The Apollo program was not entrepreneurial. The Concorde
project was. Engineering is not entrepreneurship.

Uncertainty and Entrepreneurship

Kirzner (1973) defines the act of entrepreneurship as the discovery of a previously

unnoticed profit opportunity. This definition would eliminate the Manhattan project
and Apollo program as examples of government entrepreneurship because they were
not intended to produce a profit or designed to return value greater than their cost,
even if they might have done that. Those programs had engineering goals, not
entrepreneurial ones.
Mazzucato (2021) emphasizes the risks involved in those programs and the
uncertainties about how their goals could be accomplished, or even if they could
be accomplished. There are always risks and uncertainties when trying to do
something that never has been done before. But there is a fundamental difference
between the risks and uncertainties in those projects and the risks and uncertainties
that entrepreneurs face.
Because entrepreneurial innovations introduce something new into the economy,
the entrepreneur can never know whether an innovation will be profitable. Henry
Ford’s judgment that his innovation would be profitable proved correct; John
DeLorean’s judgment turned out to be incorrect. These entrepreneurs faced engi-
neering uncertainties as they designed products and production methods that had not
previously been tried. But they also faced the uncertainty that even if their engi-
neering goals were met, they would not add value to people’s lives—they would not
be profitable.
Because entrepreneurs are speculating about the profitability of something pre-
viously untried, Foss and Klein (2012) emphasize that a major component of
entrepreneurship is making judgments in the face of uncertainty. One can only
speculate about how something that has not previously been tried will turn out.
Entrepreneurs use their judgment about the potential for engineering successes but
also about profitability. For government projects to be entrepreneurial, they must not
only set engineering goals but also embody measures to indicate whether the value
they produce exceeds the cost. Few government projects do this. The Anglo-French
Concorde, discussed above, is a rare exception. Discussion about entrepreneurs
tends to focus on the successful ones, the Henry Fords and Steve Jobs of the
50 R. G. Holcombe

world, rather than the John DeLoreans who had ideas they thought would be
profitable but turned out not to be.
The engineering uncertainties in the Manhattan project and Apollo program were
different types of uncertainty. To succeed, those projects required technological
advances beyond the technologies currently available, and there was genuine uncer-
tainty about whether those technological challenges could be met. But there was no
consideration of any entrepreneurial risk: whether the value of those projects would
be greater than their cost. That did not matter to the success of the projects.
The fact that there were risks and uncertainties as to whether the Manhattan
project or the Apollo program could achieve their engineering goals does not make
them entrepreneurial. Entrepreneurship is the attempt to create more value than the
cost of the entrepreneurial venture. Are we better off because we have nuclear
weapons and have landed men on the moon? A persuasive argument could be
made that people would be better off had nuclear weapons never been developed.
One piece of evidence that the Apollo project was not worth the cost is that four
decades after the last moon landing, nobody has found it worthwhile to go back. If
the goal of these programs was to be entrepreneurial, good arguments could be made
that they were entrepreneurial failures which, like the Concorde, cost more than they
returned in value.
This is not to say that these programs were failures. They accomplished their
goals. They were successful. They just were not entrepreneurial. The idea behind
entrepreneurial government is that it should add value to people’s lives. Most
missions that governments pursue have no way to judge whether they do
so. Engineering is not entrepreneurship.

Government Monopolies

Governments do market some output. Water and wastewater treatment is widely

produced and sold by governments, and in many cases electricity, telephone service,
internet service, and public transportation such as bus and train service are
government-produced. One might be tempted to view these as entrepreneurial
ventures, but in almost all cases, governments prohibit competitors and establish
themselves as monopolists. Because consumers have no choice if they want to
consume the service, this blunts any entrepreneurial incentives. Government-
enforced monopolies have a disincentive to innovate, because innovations can
cannibalize their existing products and devalue their capital investments.
Christensen (1997) called this the innovator’s dilemma. Several examples in the
computer industry illustrate the problem. In the 1960s IBM had a dominant position
in the computer industry with their exceedingly profitable mainframes. They were
slow to enter the minicomputer market because they did not want their minicom-
puters to cannibalize their mainframe business and were eclipsed by minicomputer
innovators such as Digital Equipment Corporation (DEC). While DEC had substan-
tial market share with their profitable minicomputers in the 1980s, many readers may
Engineering Is Not Entrepreneurship 51

be unfamiliar with the company, because they were slow to enter the PC market, not
wanting to cannibalize their very profitable minicomputer business. DEC was
bought by Compaq which then was bought by Hewlett Packard, fading out of the
computer market.
That is the way that the creative destruction of capitalism works, but that
innovator’s dilemma does not apply to government-enforced monopolies. Govern-
ment monopolies do not go out of business, and they do not face entrepreneurial
uncertainty. They do not have to worry about competitors undermining their oper-
ations with new and improved products and lower costs. This removes the incentive
to innovate. Innovation is always risky, and there is no reason for those in govern-
ment to interfere with a currently successful operation by taking the risk.
Economists usually conclude that monopolies are inefficient, and there is no good
reason to think that government monopolies are an exception. While they may
restrict output to raise their prices, Niskanen (1971) has explained that government
managers have an incentive to maximize their budgets and to invest in capacity well
beyond the efficient level. The incentive structure facing government decision-
makers leads them to allocate resources under their control inefficiently and does
not give them an incentive to be innovative or entrepreneurial.

Government Decision-Makers

Governments do not take actions or make decisions. Individuals act, and individuals
make decisions. Recognizing this, governments cannot be entrepreneurial in the
literal sense, and any suggestion that they are must be a shorthand reference to
individuals within government acting entrepreneurially. The idea of entrepreneurial
government must be analyzed by looking at the incentives and actions of individual
government decision-makers.
Mazzucato (2021, p. 24) describes the goal of her book by saying “Mission
Economy is about how government must change from within in order to deliver on
ambitious outcomes, as well as how it must change its interaction with other actors.”
She goes on to say (2021, p. 25, italics in original) that government “must transform
itself into an innovating organization with the capacity and capability to energize and
catalyze the economy to be more purpose driven.” These statements make govern-
ment appear as if it is a single individual. Looking at her italicized itself, it should be
clear that government cannot do anything to itself, although individual government
decision-makers may be able to initiate and enact changes.
This is not a minor point. Mazzucato treats government as an omniscient benev-
olent despot that can change its behavior at will. In fact, the actions of government
are the result of a collective decision-making process in which many individuals, all
with their own individual interests, interact within an institutional structure to
determine what collective actions it will undertake. If Mazzucato is correct that
“government must change from within,” one question is why government has not
already made these changes. The answer is that those who make the decisions that
52 R. G. Holcombe

determine the direction of government do not have an incentive to make the changes
Mazzucato recommends. Even if government decision-makers wanted to make those
changes, in many cases they lack the information needed to make them. Government
is not omniscient.
In democratic governments, public policies are made by elected officials whose
primary incentive is to win the next election. Even the most public-spirited elected
officials can only act in the public interest if they are reelected. Those policies are
carried out by government bureaucrats whose incentives are to maximize their
budgets, as Niskanen (1971) explains, and to perpetuate their jobs. Elected officials
have an incentive to address problems that resonate with voters. Bureaucrats have
little incentive to solve those problems, because if the problems go away, so do
their jobs.

What Goals Make Good Missions?

The Manhattan project and the Apollo program are examples of good missions, in
the sense that they had clearly defined goals and clear indicators of mission success.
Those were engineering missions, not entrepreneurial ones. Mazzucato argues that
the successes of these programs provide a template for employing an entrepreneurial
mission-oriented government to solve a wide range of problems. Unlike the Man-
hattan project and Apollo program, that had clearly defined goals, the missions
Mazzucato (2021) suggests do not have clearly defined goals and do not have
clear indicators of mission success.
Mazzucato (2021, pp. 104–105) lists 17 goals for a mission-oriented government.
Those goals are popular, making them good goals from a political standpoint, but
they make poor missions because they are not clearly defined goals and do not have
clear indicators of mission success.
The first goal in Mazzucato’s list is to end poverty in all its forms everywhere.
This is an aspiration that has no policy content. Poverty has no absolute definition.
Someone below the official poverty line in the United States would have a standard
of living above the median citizen of many countries. Sen (1999) concludes that
elimination of poverty requires more than just increasing people’s incomes—it
requires expanding their freedoms. The point is not to accept or reject Sen’s
definition of poverty, but to show that the goal is ambiguous. It gives no hint of
how it can be accomplished, or what would indicate that the goal has been accom-
plished. One can point to clear evidence that a man has landed on the moon. One
would be hard-pressed to offer a metric that would show whether poverty has been
eliminated. This is an aspiration, not a mission. Most of the goals Mazzucato lists
have that same quality.
The second goal is to end hunger, achieve food security and improved nutrition,
and promote sustainable agriculture. This is similarly vague. How would one
measure improved nutrition and know whether that goal was achieved? If nutrition
improved, would people declare that goal accomplished and move on, as they did
Engineering Is Not Entrepreneurship 53

with the moon landing? Unlike a moonshot, these goals are open-ended and can
never be achieved. It is disingenuous to set goals that never can be achieved.
Other goals are similarly open-ended. Good health; inclusive and equitable
education; access to affordable and reliable energy; safe, resilient, and sustainable
cities; and the building of resilient infrastructure are among the other goals
Mazzucato lists. The ends those goals envision are, for the most part, desirable,
but they are not missions like building atomic bombs or landing men on the moon.
They are not amenable to engineering solutions.
Among the vaguest of the listed goals is “take urgent action to combat climate
change and its impacts.” Governments are currently taking action on many different
margins to combat climate change, so reading this charge literally, it has already
been accomplished. Mazzucato (2021, pp. 137–146) discusses this mission at length,
framing it as the green new deal, but she is vague about specific steps that would lead
to a clear “mission accomplished” conclusion. Lofty aspirations to approach vague
goals are not the same thing as missions.
Another goal is to “Promote sustained, inclusive and sustainable economic
growth, full and productive employment, and decent work for all.” This is what
capitalism has been doing since the beginning of the Industrial Revolution, with no
central plan and no government direction. Indeed, many of the goals Mazzucato lists
have been advanced through entrepreneurial activity in decentralized economies.
Capitalist economies have reduced food insecurity, reduced poverty, provided
reliable energy, and more. Why set aside institutions that have already shown
success in exchange for turning them into government missions?
The “war on poverty” declared by United States President Lyndon Johnson in
1964 provides a good example of the way governments address missions with vague
goals. According to the government’s official poverty statistics, the percentage of the
population in official poverty at the end of the 1960s was about 12 percent and has
fluctuated around that number for the next half-century (Chaudry et al. 2016, p. 9). It
has risen to slightly above 15 percent and fallen to slightly above 11 percent over the
half-century, but one must be impressed by the remarkable stability of the US official
poverty rate for half a century, in the face of a mission to go to war against it.
The US government set mission goals to land a man on the moon and to eliminate
poverty at about the same time. The first goal was accomplished in less than a
decade, while there has been no progress (according to official statistics) in the
second. This section suggests why. Missions with vague goals and no clear indica-
tors of success are not amenable to attack by entrepreneurial governments.

Mission-Oriented Democracy

The missions discussed in the previous section are lofty aspirations, but whether they
can be effectively addressed depends on the capability of government to address
them. Rather than rely on wishful thinking, this section discusses the way that
government policies are made and considers how decision-makers in democratic
54 R. G. Holcombe

governments—voters, politicians, bureaucrats, lobbyists, and interest groups—will

interact to respond to those mission statements. The common elements in the mis-
sions discussed in the previous section is that they have vague goals and no clear
indicators of success.
Voters. Voters collectively determine who holds elective office, but each indi-
vidual voter has no political power. In elections with more than just a few voters,
voters know that their one vote will not be decisive, so they have little incentive to be
well-informed. They are rationally ignorant, as Downs (1957) explains, and follow-
ing Caplan (2007) may even be rationally irrational. Knowing that their one vote will
not be decisive, Brennan and Lomasky (1993) explain why voters may vote for
alternatives they would not choose if the choice were theirs alone. Because they
know election outcomes will be the same regardless of how they vote, or even
whether they vote, voters vote for alternatives that make them feel good, with little
incentive to analyze the public policy outcomes that would be likely under the
election alternatives they face.
Issues are complex, and voters cannot have the expertise to understand the details
of public policy. Few of those voters will understand enough about electricity to do
their own home electrical repairs. They will hire an electrician. Similarly, they will
hire a plumber to do plumbing repairs. Public policy issues like those Mazzucato
(2021) lists are more complex than plumbing or electrical wiring. The idea that
voters can make informed choices about the efficacy of specific policies to improve
food security, provide reliable and sustainable energy, or improve health outcomes is
wishful thinking.
Most voters adopt their views on public policy from those of their political
leaders, as Holcombe (2023) explains. They are offered alternatives by various
parties and candidates and choose one to anchor on as they form their public policy
preferences. They vote for the public policies that make them feel good about casting
their vote. It is easy to see why voters would vote for candidates who want to end
poverty, generate sustainable and reliable energy, and increase educational oppor-
tunities. Voters can feel good about supporting those aspirations.
Politicians. The first motivation of politicians is to win the next election, so they
can remain in power. Even the most public-spirited politicians can only do good
things if they remain in power. Voters like policy proposals that make them feel
good, so legislators offer policy proposals that make them feel good. Those policy
proposals tend to come in the form of vague aspirations rather than concrete policies.
Ending poverty or increasing food security are examples. They are worthy aspira-
tions, but without the suggestion of any actual policies that can accomplish those
goals.
Mazzucato’s (2021) book is in this sense a good script for a successful political
campaign. She offers vague “feel good” policy aspirations along with the claim that
government can do these things, without detailing specific policies that can accom-
plish those policy goals. People like the message, which explains why this is a
formula for a successful political campaign and explains the appeal of her book.
Political platforms are deliberately vague on the details because many people will
share those aspirations but will differ on how to best accomplish them. As Arrow
Engineering Is Not Entrepreneurship 55

(1951) shows, there is in general no set of public policies that will be preferred by all
others by a majority of voters.4 Feel-good aspirations generate political support.
Specific policy proposals risk generating opposition.
Vague policy aspirations have another advantage. Because they are vague on
actual public policies, they allow legislators the flexibility to design policies that
work to the advantage of organized interests, who can also offer political support.
Legislators shape specific policies to conform to the desires of organized interests,
who repay legislators with campaign contributions and support. Interest groups tend
to be well-informed about policies that affect them, in contrast with the rational
ignorance of voters.
From a political standpoint, whether politicians succeed in accomplishing the
aspirations they campaign on seems to be of little importance. Franklin Roosevelt
instituted his New Deal to mitigate the Great Depression, but the Depression
lingered on until the military buildup due to World War II brought it to an end.
The New Deal was not successful at ending the Depression, but it was politically
popular. Similarly, Lyndon Johnson declared a war on poverty in 1964, but ending
poverty remains one of Mazzucato’s (2021) goals well over half a century later.
Lofty aspirations win political support, regardless of whether they are achieved.
Bureaucrats. While public policies are chosen by legislators, they are
implemented by bureaucrats. Niskanen (1971) explains why, in the same way that
firms act to maximize profits, bureaucrats act to maximize their budgets. While their
budgets may be inefficiently large, bureaucrats have no incentive to actually accom-
plish vague missions such as ending poverty or ending hunger. If an agency’s goals
were accomplished, the jobs of those who work in the agency would be in jeopardy.
The Manhattan project ended. The Apollo program ended. Bureaucrats have no
incentive to produce themselves out of their jobs.
When missions are vague and do not have clearly defined metrics to determine
whether they are succeeding, bureaucratic incentives lead to self-perpetuating pro-
grams that never approach accomplishing those vague goals. To do so would
eliminate the jobs of the bureaucrats who administer the programs.
Lobbyists and interest groups. Missions with vague goals and with no clear
mechanisms to accomplish them invite entrepreneurial individuals to propose
actions they can take to address those goals. While citizens and voters have little
incentive to be informed about public policy or to actively engage in the political
process, organized interest groups have an incentive to negotiate with politicians to
gain benefits for themselves. Those who represent organized interest groups are the
real entrepreneurs in entrepreneurial government. They engage in rent seeking
(Tullock 1967; Krueger 1974) and agency capture (Stigler 1971) in which concen-
trated and organized interests have an advantage in gaining benefits for themselves at
the expense of larger but unorganized interests (Olson 1965).

4
A more formal exposition of this idea is found in McKelvey (1976), who demonstrates that when
voters are concerned about more than one issue, there is always some political platform that is
preferred to the status quo by a majority of voters.
56 R. G. Holcombe

The mandate in the United States that gasoline for motor vehicles contain ethanol,
passed in 2005, is a good example. The vague policy goals were to move the nation
toward energy independence and to move toward more sustainable and environ-
mentally friendly energy sources. Most ethanol is made from corn, and lobbyists
representing the corn farming and processing industries, with corn processor Archer
Daniels Midland heavily involved, argued that requiring motor fuels to contain
ethanol would move toward accomplishing those goals. Since 2010 the United
States has been a net exporter of petroleum, raising the question of whether energy
independence remains a justification for the mandate. Whether ethanol is more
environmentally friendly than petroleum is questionable, considering the amount
of land that must be cleared to grow the corn for ethanol.
The mandate remains in place because it benefits a concentrated and well-
organized interest group—the corn lobby—while it imposes costs on a larger but
poorly organized group, those who purchase motor fuels. Organized interests can
negotiate with government decision-makers to promote programs that benefit them,
while unorganized interests are left out of the bargaining process. This example
shows the way that entrepreneurship actually works in government. While legisla-
tors and bureaucrats have little incentive to be entrepreneurial, lobbyists and orga-
nized interests can take advantage of vague missions to propose actions to address
those missions. Lobbyists and interest groups are the entrepreneurs in entrepreneur-
ial government.
Amenta and Stagnaro (2022) show that subsidies to renewable energy in Europe
have produced little renewable energy but have benefited the subsidized firms.
Sandström and Alm (2022) document the failures of Swedish policies to subsidize
biogas, ethanol, and fossil-free steel to accomplish their environmental goals, while
benefiting the firms receiving government support. These are examples of a system
of what Holcombe (2018) calls political capitalism, in which profitability increas-
ingly comes from government connections rather than from producing value for
consumers.
Promoting mission-oriented government, Mazzucato (2021, pp. 32–35) is critical
of the conclusions arrived at by public choice approach to analyzing government—
an approach that explains why entrepreneurship in government favors concentrated
interests rather than the general public interest. But Mazzucato offers no explanation
why the public choice analysis leads to flawed conclusions. Public choice theory
uses the same tools of analysis that social scientists use to analyze markets to analyze
government decision-making. This is the way that social science should be
undertaken.
Government is not a single entity that makes decisions and designs public policy.
Rather, individuals make decisions and public policies are the result of a collective
decision-making process in which the interactions of many individuals are aggre-
gated to create public policy. When thinking about the missions government might
address, a complete analysis must set aside wishful thinking to analyze the way that
governments actually do arrive at collective decisions and make public policy.
Doing so points toward public policies that benefit well-connected interest groups
Engineering Is Not Entrepreneurship 57

while doing little to further the stated missions. Lobbyists and members of concen-
trated interest groups are the entrepreneurs in this process, not those in government.

Choosing Missions

Politicians look for missions that will gain political support. Voters favor missions
that make them feel good about supporting them. Few people will be opposed to
ending poverty and hunger, improving health outcomes, and generating sustainable
economic growth. In contrast with missions such as building a nuclear bomb or
landing a man on the moon, there is no metric to signal that their goals have been
accomplished. Indeed, that is part of the political appeal of such goals. They lay the
foundation for establishing perpetual bureaucracies to address them.
Governments are not institutionally designed to achieve goals like this. As
documented in many studies in Wennberg and Sandström (2022), issues like this
are better addressed by decentralized market institutions rather than the hierarchical
structure of government, but this idea is a difficult political sell. Voters are more
inclined to support candidates who claim they have the answers than those who say
decentralized private activity will better address these issues if government just gets
out of the way.
A mission-oriented state will choose its missions based on their political popu-
larity rather than their potential to benefit citizens or the likelihood that the stated
missions can be accomplished. Politicians and bureaucrats within government have
no incentive to be entrepreneurial. The entrepreneurs in mission-oriented govern-
ment are lobbyists and organized interest groups.

Conclusion

Successful government cannot run on slogans. The ideas of entrepreneurial govern-

ment, or mission-oriented government, are slogans that have little content for
actually developing successful public policy. Examples that advocates of entrepre-
neurial government have used to promote the idea have been examples of engineer-
ing, not entrepreneurship. Those examples, like the Manhattan project to create a
nuclear bomb or the Apollo program to land a man on the moon, had well-defined
goals, were not constrained by costs, and were not designed to create value in excess
of their cost. Indeed, there was no attempt to measure the value of the completed
projects.
This engineering approach to accomplishing missions cannot be applied when
goals are vague and when there is no clear indicator of what constitutes success. The
institutional structure of democratic government leads to interest group politics, rent
seeking, and bureaucracies more intent on protecting and increasing their budgets
rather than accomplishing a mission. Indeed, if the missions actually were
58 R. G. Holcombe

accomplished, those working on them would lose their jobs, creating a disincentive
to success.
Many real-world examples illustrate the divide between political success and
mission success. Roosevelt’s New Deal and Johnson’s War on Poverty were polit-
ically successful, despite the New Deal’s failure to end the Depression and the War
on Poverty’s failure to even reduce poverty (according to official government
statistics). The British/French Concorde supersonic airliner is an example of actual
government entrepreneurship, and while it was an engineering success—they did
build a supersonic airliner—it was an entrepreneurial failure.
Over time, a mission-oriented government would enable interest groups to
strengthen their political connections resulting in what Olson (1982) describes as
the decline of nations. The people who have the incentive to be entrepreneurial in a
mission-oriented government are not those in government, but members of concen-
trated and well-organized interest groups. The theory behind these conclusions is
well-established. The institutional challenge is to design political institutions to
prevent these welfare-reducing activities from taking place. Attempting to make
government more mission-oriented and more entrepreneurial will encourage these
counterproductive political activities.
The mission goals Mazzucato (2021) suggests, such as reducing poverty, increas-
ing food security, providing reliable and affordable energy, and increasing educa-
tional opportunities, are goals that capitalist economies have been accomplishing
since the beginning of the Industrial Revolution. She gives no good reason for
displacing those decentralized market institutions that have proven successful to
take a chance on government missions to address the same issues. The examples
Mazzucato (2015, 2021) uses to promote entrepreneurial mission-oriented govern-
ment are examples of engineering, not entrepreneurship. Engineering is not
entrepreneurship.

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Randall G. Holcombe is DeVoe Moore Professor of Economics at Florida State University.

Dr. Holcombe is a Senior Fellow at the Independent Institute in Oakland, California, and is a
Research Fellow at the Law & Economics Center at George Mason University. He served on
Florida Governor Jeb Bush’s Council of Economic Advisors from 2000 to 2006, and is past
president of the Public Choice Society and the Society for the Development of Austrian Economics.
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60 R. G. Holcombe

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A Behavioral Economics Perspective
on the Entrepreneurial State
and Mission-Oriented Innovation Policy

Jan Schnellenbach

Abstract It is argued that the concepts of mission-oriented innovation policy and

also of the entrepreneurial state will lead to the implementation of policies that are
highly vulnerable to behavioral biases and the inefficient use of heuristics. In
political practice, we can therefore not expect efficient mission-oriented policies.
In particular, I argue that missions as a political commitment mechanism intended to
devote massive resources to a specific cause will often only work if biases like the
availability bias and loss aversion are deliberately used in order to secure voter
consent. Furthermore, I also argue that the argument used by Mazzucato (Mission
Economy: A Moonshot Guide to Changing Capitalism. London: Penguin UK, 2021)
herself also contains several behavioral biases.

Keywords Behavioral political economy · Mission orientation · Innovation policy ·

Heuristics · Biases · Narratives

JEL Codes D91 · E71 · H11 · O30 · L52

Introduction

The concepts of the entrepreneurial state and of mission-oriented policymaking have

been subjected to thorough criticism from innovation economics and also from
political economics. The latter criticism recognizes specifically how policymakers
may be driven by motives other than promoting welfare-enhancing innovation pro-
jects. From this perspective, the power given to governments in defining and
executing missions likely is another lever for special interest policies with adverse
effects on overall economic efficiency.
What is missing so far, however, appears to be a reading of these concepts from
the point of view of behavioral economics. I make a first attempt to close this gap

J. Schnellenbach (✉)
Brandenburg University of Technology at Cottbus, Cottbus, Germany
e-mail: [email protected]

© The Author(s) 2024 61

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_4
62 J. Schnellenbach

somewhat with this contribution. I begin by giving a brief overview over the
emerging field of behavioral political economy, with some emphasis on typical
biases and heuristics that matter for innovation policy in general. This is followed
by a discussion of why the concept of a mission-oriented innovation policy is
particularly susceptible to behavioral biases, and why an efficient application of
this concept is unlikely. I then argue that Mazzucato’s (2021) argument for mission-
oriented policies itself suffers from behavioral biases. In other words, not only will
the application fail due to biases but the very concept itself as it emerged on the
market for ideas contains major biases. Finally, the last section concludes.

Behavioral Political Economy in Innovation Policy

What Is Behavioral Political Economy?

Before taking a closer look at Mazzucato’s specific understanding of the state as an

entrepreneur from a behavioral perspective, it is useful to briefly discuss on a more
general level how departures from fully rational decision-making can have an
influence on policymakers when deciding on innovation policy. In addition to the
behavioral element, I also depart from the still popular assumption of welfare-
maximizing policymakers and follow the standard public choice assumption of
politicians, voters, and bureaucrats pursuing self-interested motives (see
Schnellenbach and Schubert 2015, 2019).
Systematic deviations from full rationality are empirically well-established, and
their existence is now also widely accepted in mainstream economics. Being heavily
influenced by psychologists and their research methodology (Camerer and
Loewenstein 2004), behavioral economics does not focus on deductive, axiomatic
reasoning as theoretical microeconomics does, but on the empirical identification of
typical patterns in individual decision-making. This has led to a more realistic but
also a more complicated understanding of how decisions are formed and what
influences them. Even a short glance into current textbooks on behavioral economics
(e.g., Wilkinson and Klaes 2018; Angner 2021) shows that the established catalogue
of observed biases, heuristics, and other deviations from neoclassical rationality is
large. And it is not always clear which of these deviations are active or even
dominant in a particular setting.
The many degrees of freedom that one often has in applying behavioral
approaches to a particular decision-making situation often make it difficult to predict
ex ante how an individual will behave. There may, after all, be different decision-
making biases at work; they may even be counteracting each other; and they may be
of different relative importance in different individuals. But nevertheless, there often
are typical patterns of behavior. In explaining observed behavior (both in the
laboratory and in the field) ex post, behavioral economics can be very powerful.
And if a certain bias or a certain heuristic is consistently observed to matter in a
A Behavioral Economics Perspective on the Entrepreneurial State. . . 63

certain decision situation, then the behavioral approach also gains predictive power
(Angner 2021, pp. 252–254).
There is no reason to assume that innovation policy is not susceptible to the same
behavioral influences that also affect decisions in other areas. If anything, the
presence of complexity and uncertainty in innovation policy leaves room for a
relatively greater impact of simple heuristics and behavioral biases on decision-
making (Schnellenbach and Schubert 2019). Consider, for example, the discussion
on national and regional systems of innovation, defined by Freeman (1987) as a
network of private and public sector institutions that facilitate the interaction of
individuals and organizations in innovation processes. These networks are complex,
and while a comparative analysis of different systems of innovation may lead to hints
at underdeveloped links within a particular system of innovation, it is far from clear
that a single political intervention will causally improve its performance. For exam-
ple, Frenken (2017) argues that the claim by Mazzucato that Europe should emulate
government funding schemes from the United States may be unwarranted, because
other important elements of the American innovation system, such as strong private
research universities and a large military sector, are missing.
This high degree of complexity of innovation policy, combined with the frequent
lack of clear-cut causal evidence on the effectiveness and efficiency of single policy
measures, often invites reliance on intuitive reasoning, as well as the use of heuris-
tics. It also leaves room for giving preference to policies that are in line with broader
political prejudices and biases that every individual inhibits to a certain extent. This
is not a new insight, and not even one specific to behavioral political economy. In an
influential paper, Denzau and North (1994) already argued that under conditions of
uncertainty and complexity, what they called shared mental models influence and
facilitate decision-making. Communication, not only face-to-face but also through
mass media, allows large groups to develop shared perceptions of how the world
works and which policies may be successful or not. Recently, this line of research
has been rejuvenated as narrative economics (Shiller 2019). Roos and Reccius
(2023) argue that collective narratives are often the basis of economic policymaking,
both in terms of agreeing upon policy objectives, and in terms of making sense of
causal relationships in policymaking.
It is important to note that such narratives develop in a path-dependent fashion.
They ought not to be expected to be the result of unbiased deliberation and Bayesian
updating according to incoming new information. Rather, the collective nature of the
process of finding a common narrative and the mutual expectation among individ-
uals to stick to a narrative once it has been agreed upon often lead to persistence of
interpretations of the world even if they could already be identified as factually
wrong with available data (Schnellenbach 2005). In stabilizing narratives once they
have emerged, not only interpersonal influences such as peer pressure play a role but
also intrapersonal mechanisms.
Caplan (2005) coined the term “rational irrationality” to describe this phenome-
non. He implies that individuals can have a preference for holding beliefs that are
irrational in the sense that they are objectively false. The reason for a rational
demand for irrational beliefs is the very limited damage they do individually in the
64 J. Schnellenbach

political sphere. While inaccurate beliefs are likely to be quickly punished in terms
of individual income losses in private decisions, an individual who reckons that she
is one of millions with virtually no immediate influence on the collective decision
can harbor false beliefs at no cost. Why should she do so? Because the zero cost is
being outweighed by positive benefits. These may consist in being in line with her
peer group. But they also may consist in the pleasure of holding beliefs with
expressive value (see Hillman 2010; Hamlin and Jennings 2011). An individual
who generally considers herself to be a supporter of free markets would therefore
attempt to hold and defend beliefs that underpin this general orientation. They have
expressive value for her, because they signal the support for policies that are in line
with her general personal and political orientation.
In sum, the coincidence of complexity and absence of unambiguous, uncontested
evidence of causal relations on the one hand, and low to no immediate punishment
for individual errors in judgment make it easy for citizens/voters to be guided by
faulty or oversimplifying narratives and to act according to other behavioral biases.
One might argue that the situation is different for professional politicians, who are
much more likely to be punished, e.g., at the ballot, for bad decisions with unsatis-
factory outcomes. But politicians themselves are constrained in their actions by
dominating public narratives. And they can even use them deliberately to their
advantage, for example, by framing policies that actually serve influential vested
interests in accordance with some popular narrative (Schnellenbach and Schubert
2015). It is therefore highly unlikely that we will observe benevolent, rational
welfare-maximizers in the political arena. Rather, we will observe voters and
political professionals who are both influenced by behavioral biases and who
deliberately use behavioral biases to their own advantage.

Behavioral Political Economy in Innovation Policy

It can be argued that in practical innovation policy, behavioral biases and rational
irrationality frequently play a role. Clearly, I cannot give an exhaustive overview
here, but a few examples, drawing to a great extent from Schnellenbach and Schubert
(2019), can serve as an illustration. One example is the overconfidence bias. Since
early experimental studies by Alpert and Raiffa (1969), we know that under uncer-
tainty, individuals tend to have too high confidence in their own judgments. There is
also evidence indicating that individuals are particularly overconfident in areas
where they have some expertise (e.g., Liu et al. 2017). Angner (2006) discusses a
case study of economists acting as experts in policy advice and finds supporting
evidence for the hypothesis that overconfidence matters in economic policy consult-
ing, and learning from experience is imperfect. He argues that overconfidence in this
area may be amplified because only experts who are very confident in their own
judgment decide to enter the business of policy consulting in the first place.
One immediate effect of overconfidence in expert judgments is, plain and simple,
bad policy advice. If a choice between different projects is to be made for subsidizing
A Behavioral Economics Perspective on the Entrepreneurial State. . . 65

innovation with public funds, experts or politicians involved in the decision may be
subconsciously driven by their own prejudices and preferences and decide accord-
ingly in favor of supporting projects that a completely independent and unbiased
individual would not have chosen. If overconfidence occurs, it may also present
itself as a willingness to overpay once a decision has been made (Massey and Thaler
2013). Individuals become so convinced of the choice they have made that they
begin to overestimate the returns associated with their choice drastically.
In the realm of innovation policy, this implies that the overconfidence bias is
particularly threatening if the discretionary leeway of politicians and bureaucrats is
large. While a broad and rule-based system of subsidizing innovation, e.g., through
amplified tax credits for R&D-spending, would be largely immune to the
overconfidence bias, a system relying on experts picking winners for discretionary
subsidies would be extremely susceptible. Anecdotal evidence on cases where pro-
jects for innovation that eventually failed were picked is abundant. But this is not a
problem in itself: Clearly, not every subsidized project can succeed. However,
evidence indicates that politicians and bureaucrats are not more successful in picking
winners (Elert and Henrekson 2022, pp. 360–361; Kirchherr et al. 2023). If anything,
they are less successful (Murtinu et al. 2022). One important explanation for this
may be that private venture capital firms risk significant economic losses if they do
not learn to de-bias their process of decision-making to some extent.
Another question is how decisions on the winners to be picked are made. Real-
world selection processes can often be convincingly criticized with standard political
economy arguments. The risk of rent seeking and other types of favoritism granted to
well-connected interest groups obviously exists. In some empirical studies, it is
found that a Matthew effect in receiving innovation grants exists. Firms that already
have received a number of grants are more likely to receive another one (Czarnitzki
and Hussinger 2018). The explanations for this phenomenon are diverse. One is the
establishment of a stable rent-seeking relationship between firms and politicians.
Another explanation is that firms learn to specialize in writing successful grants
(Karlson et al. 2020). This can be problematic, because those firms that are success-
ful grant writers are not necessarily also the most efficient in putting subsidies to
good use, as many third-party-funded academics also know. A third explanation is
that politicians and bureaucrats may use the success of past grant applications as a
heuristic to gauge the expected success of future projects (Antonelli and Crespi
2013). This does not mean that these firms have also been extremely successful in
actually producing innovations with past grants. Political decision-makers normally
have no means to evaluate the efficiency of past grant usage relative to the hypo-
thetical performance of other firms. Rather, having received a grant and not having
failed (or at least not having failed too miserably) serves as a heuristic for future
grant-worthiness.
Clearly, using this heuristic does not systematically lead to an efficient allocation
of grants, but primarily to a very defensive, risk-averse allocation: Those who have
not done too much damage in the past are likely to receive money in the future. It can
be politically rational to act in such a way if the political cost of large errors in
picking winners is significant; in this case, one rather aims at avoiding picking losers.
66 J. Schnellenbach

And there is another problem in this process: Whether a subsidized firm has failed or
not is sometimes determined not in an objective evaluation, but in the creation of a
positive narrative. Collin et al. (2022) find a strong positive bias in a sample of
110 evaluations for Swedish innovation policy and cast strong doubt on the objec-
tivity of these evaluations.
Political costs associated with acknowledging failure may also exacerbate a
pre-existing sunk-cost fallacy. An unhinged overconfidence bias will also lead to
attempts of denying failure if denial is still possible. Projects are continued over an
inefficiently long period of time, burning public funds. This well-known bias in
decision-making also is easier to be left uncorrected if public, rather than private
funds, finances the continuation of a failed project. A famous example in economic
history is the development and production of the Concorde airplane, which also led
to the use of the term “Concorde fallacy” in this context. According to Bletschacher
and Klodt (1992), it was clear from relatively early on that, with permanently
increasing kerosene prices, the project was most likely to be economically unsuc-
cessful. Nevertheless, backed by the soft budget constraints secured through indus-
trial policy and a political reluctance to write off sunk investments, the development
was continued, and, once the planes were produced, they remained in service for
decades even though employing them was profitable only for short periods.
These are only a few examples of how biases and heuristics can negatively
influence innovation policy if it is characterized by a large scope for discretionary
decision-making. I will discuss further examples when engaging with the entrepre-
neurial state and mission-oriented policymaking directly in the following two
sections. An important takeaway thus far is that from a narrow behavioral perspec-
tive, rule-based and broad innovation policies that do not aim to define and imple-
ment single missions or pick winners to receive subsidies would be preferred
(Schnellenbach and Schubert 2019).

Is the Mission-Oriented Entrepreneurial State Susceptible

to Behavioral Biases?

Mission Orientation as a Political Commitment

Behavioral biases in political decisions are ubiquitous, and not only in innovation
policy. The discussion so far shows that limiting discretionary scope and
implementing rule-based policies instead may limit the damage done by biases.
But it is not always possible to rely solely on these rule-based types of programs.
However, the ideas of an entrepreneurial state and of mission-oriented innovation
policy propose a particularly far-reaching, active role for politicians and bureaucrats.
It is therefore an interesting question if, and if yes, in which way these concepts are
particularly prone to behavioral influences that limit their expected economic
efficiency.
A Behavioral Economics Perspective on the Entrepreneurial State. . . 67

It is useful to start with the basics: What exactly is mission orientation in

innovation policy? Interestingly, Mazzucato (2021) does not rely on a formal, dry
academic definition of mission orientation, but primarily uses historical examples to
illustrate her understanding of a mission economy. In general, mission-oriented
policies have the objective to “. . .target the development of specific technologies
in line with state-defined goals (mission)” (Robinson and Mazzucato 2019, p. 938;
emphases as in the original). In doing so, governments or government agencies are
supposed to actively create new markets, for example, by introducing new goods or
by guaranteeing a demand for new products that the private sector needs to develop.
But if we look at the Apollo program, which is the case study Mazzucato (2021)
chiefly uses to motivate her concept, another important characteristic becomes clear:
Missions serve as a commitment device for governments.
When Kennedy declares that he will put Americans on the moon, regardless of
the cost of doing so, he makes a political commitment to dedicate all resources
necessary to reach this goal. And he knows that the political cost, in terms of a loss of
reputation, will be tremendous if he (or his successor in office) fails. But we cannot
be sure that this kind of commitment always works. It did in the case of the Apollo
program, and one reason might have been the peculiar situation of the Cold War.
Many ordinary American citizens demanded a big success story for their space
program to signal technological superiority after the Sputnik shock. Being able to
beat the Soviet Union in the race to the moon had an extraordinarily high symbolic
value, and a large majority of the population was willing to devote substantial
resources to this cause. Under those circumstances, the government’s commitment
had a binding effect. The negative effect of failure would have been too high.
Would the commitment mechanism also work without such strongly aligned
preferences? Not necessarily. A recent example is the 2022 announcement by the
German government, in the face of the new Russian threat, to set up a fund of EUR
100 billion to acquire and develop better military material and to sustainably reach
the NATO goal of spending 2 percent of GDP on defense annually. Even with
Russian military aggressiveness presenting itself as a threat in the immediate neigh-
borhood, this self-commitment has recently been watered down in terms of reaching
the 2 percent goal after a general tightening of the fiscal leeway available to the
German federal government. Due to a lack of salience and popularity of the issue in
the German political debate, reneging on the earlier commitment was possible at low
(if any) political cost for the government.
A change of priorities within government is one possible reason for a mission to
be abandoned. A change of political priorities among voters is another. It is unlikely
that governments will pursue a mission-oriented innovation policy against strong
opposition within a population in any democracy.
68 J. Schnellenbach

Loss Aversion

In addition to the Apollo program, Mazzucato (2021, p. 92) also uses Covid vaccine
development as an example for a successful innovation mission. It is interesting that
she does so without mentioning the Biontech-Pfizer Covid vaccine anywhere in her
book, while Moderna being helped and guided by the US government’s DARPA
agency is used to illustrate the potential of mission-oriented innovation policy. In a
sense, Biontech is a good counterexample: The firm has existed as a research firm for
over a decade before producing its Covid vaccine. Before, it focused on using the
mRNA technology to treat cancer, and while having produced important knowledge
in basic research, it had no market-ready product before the pandemic. Biontech had
also never been a part of any mission-oriented scheme of innovation policy. It had
received some government research grants, but these were on a similar scale as
normal research grants received by university researchers, and they were granted for
well-defined, smaller projects, not for missions. Biontech never received a large
grant before the fall of 2020. At this stage, the vaccine development had already been
completed, and the purpose of the grant was to speed up the final stages of clinical
trials and to enable the rapid buildup of production facilities. At this point in time, the
German government did not conduct a mission-oriented innovation policy; it simply
rewarded the massive positive externalities of a quick and broad vaccine rollout.
Biontech is an example that shows how private entrepreneurship and serendipity,
rather than government planning, result in a highly successful innovation.
What is more interesting in our context, however, is what Moderna/DARPA and
the Apollo program have in common. They were both started in what behavioral
economists call a loss frame. Within the framework of prospect theory, a behavioral
and empirically founded alternative to neoclassical decision theory (see Kahneman
and Tversky 1979), expected losses and gains are evaluated differently, starting from
any given status quo reference point. Supported by extensive empirical research, the
theory assumes that losses are generally associated with a larger marginal disutility
compared to the positive marginal utility of gains. Individuals are loss averse. This
empirical regularity in individual decision-making can be deliberately exploited, if
individuals are put in a loss frame (Tversky and Kahneman 1981). One way of doing
so is to present them with a decision situation in a way that strongly emphasizes
losses, as well as the potential to avoid these losses by decisive action. Putting
individuals in a loss frame will increase the willingness to take risks if the risks are
associated with a chance to avoid the strongly negative outcome.
This has been the case both in the Moderna/DARPA and in the Apollo cases.
Enduring a longer pandemic without a vaccine would have been associated with
extremely high losses, both in terms of health, lives, and negative economic results.
Losing the space race against the Soviet Union similarly would not only have led to a
reputation loss but also been interpreted as an indicator of technological backward-
ness and ineffectiveness relative to the socialist Soviet Union, i.e., of negative real
effects. In both cases, making the case for a loss frame was plausible, and a strong
political support for investing large amounts of resources into the proposed missions
A Behavioral Economics Perspective on the Entrepreneurial State. . . 69

could be mobilized. This is different in the third example mentioned above. Contrary
to fears present in 2022, the war started by Russia in Ukraine now seems to be
limited to Ukraine. The risk of the conflict spreading over to Western Europe is
generally perceived as very low. Accordingly, it is not surprising that the German
political debate seems to gradually leave the loss frame, and political support for
investing heavily into a mission in defense policy is now much smaller than it was a
year before.
In Mazzucato’s 2021 book, the creation of loss frames is a central means to
motivate the analysis. In Chap. 2, entitled “Capitalism in Crisis” she discusses, inter
alia, distributional issues, the supposed fragility of the financial sector, the supposed
short-sightedness of private business decisions, and global warming. Some of these
issues have little or nothing to do with innovation policy. The purpose of that chapter
appears to be the establishment of a loss frame: Markets are leading us to negative,
potentially even catastrophic outcomes, and only strong interventionist governments
can prevent those outcomes. The same argumentative pattern is used when the
so-called Green New Deal is discussed (Mazzucato 2021, pp. 99–104). And in
fact, this allows Mazzucato to argue in a very simplistic fashion: If we do nothing,
the outcomes are catastrophic, therefore we must do something, and in this case that
something is the Green New Deal, which she uses as another example for mission-
oriented policymaking. What she does not do, however, is to establish that the Green
New Deal is the most efficient policy choice, or the one leading to success with a
higher probability than others. For her argument, once loss aversion is triggered in
the reader, it suffices to argue that this is something that can be done.

Picking Missions

Another interesting question concerns which innovation policy missions should be

selected, and which will be selected. Larsson (2022) has already discussed the
problem critically from a standard point of view. In particular, he highlights the
problems of politicians to account for the opportunity cost of projects and argues
that, often, missions that do the least good are chosen. His contribution allows us to
focus on the behavioral side of the problem. Under the rubric “Selecting a mission,”
Mazzucato (2021, p. 91) gives only very few criteria for picking a mission that is
worth to be pursued:
First and foremost, a mission has to be bold and inspirational while having wide societal
relevance. It must be clear in its intention to develop ambitious solutions that will directly
improve people’s daily lives, and it should appeal to the imagination.

There is a relatively large intellectual distance between these criteria and standard
economic thinking. From a normal economic point of view, we would expect a
criterion such as expected cost-effectiveness to play a role, or the extent of positive
externalities associated with the successful implementation of such a mission. That a
policy should be bold and inspirational, and appeal to the imagination of citizens, is
70 J. Schnellenbach

obviously not standard economic thinking, and these criteria are probably also
difficult to operationalize. And in the rest of the paragraph on selecting missions,
Mazzucato rather elaborates on the design of missions: They should, for example,
allow for different technological pathways to the defined goal, and they should cut
across different disciplines and economic sectors.
Given this very limited advice on how missions should be picked, it may be more
interesting to ask how they actually will be picked. Will governments reliably
address the most pressing societal needs by picking the corresponding missions?
Some behavioral arguments lead to skepticism in this respect. In general, politicians
are not very good at identifying the most pressing societal needs that need the most
urgent political attention. This may be surprising at first, since this is often assumed
to be a core competence of politicians. But the problem follows from a well-
documented pervasive difficulty that people have with estimating low but important
risks.
Research on the availability bias dates back to Tversky and Kahneman (1973).
This bias leads individuals to overestimate small risks if examples where these risks
have materialized in the past are available to their memories. A simple example is
that I will overestimate the likelihood of a plane crash for a while if I have only
recently read about a plane crash in the newspaper. On the individual level, the
damage that is typically done by the bias is not too large. On the contrary, it can even
be useful as it leads otherwise not very risk averse individuals to behave as if they
were more risk averse, and this may lead them to avoid dangerous decisions. On the
collective level, however, Kuran and Sunstein (1999) have shown how the avail-
ability bias may lead to mass scares about risks that are negligible. On the other hand,
more important risks that may warrant regulatory attention often go unnoticed when
all political attention is focused on availability cascades.
Cascades occur when an upward biased individual risk perception becomes
amplified through media coverage and collective communication. Interest groups
can deliberately trigger cascades in order to pursue their own self-interest through
risk regulation. Kuran and Sunstein show how, once established, availability cas-
cades are difficult to neutralize, even if clear scientific evidence contradicting them
surfaces. They discuss cases where it has simply become socially unacceptable to
state the correct, lower risks in public and where people who attempted to correct
biased public risk perceptions became ostracized, for example, for supposedly
showing too little empathy with the (imaginary) victims of (imagined) risks.
Mazzucato makes no attempt to propose any strategy that might help decision-
makers to identify missions that are actually worth pursuing. And more importantly,
she does not propose any mechanism to avoid a huge waste of resources on missions
that in fact should not be pursued. This is a major gap in her approach.
Relatedly, Kirchherr et al. (2023) criticize a normativity bias underlying the
mission-oriented policies. They argue that there is a danger that these policies are
pursued if their stated objectives sound normatively appealing, without any detailed
regard for the efficacy of the proposed measures, and for unintended side effects of
the mission pursued. Any trade-offs between competing goals are often largely
ignored. This is certainly also a major problem. Who would not want to stop climate
A Behavioral Economics Perspective on the Entrepreneurial State. . . 71

change, or end poverty, or cure diseases? But with limited resources and possible
trade-offs between different individually worthwhile and maybe even inspirational
goals, Mazzucato gives no advice on how to prioritize competing missions. And
again, the even more important question may be how to introduce safeguards that
avoid resources being wasted on missions oriented toward goals that sound norma-
tively appealing but are problematic on closer inspection.
Throughout her book, Mazzucato (2021) talks repeatedly about mission-oriented
policy being inspirational, visionary, even about “imagining a better future” (p. 18),
as well as about aligning public and private interests between broad societal goals.
Sympathetically, one might call such an approach charismatic; critically, one might
rather point toward the danger of inducing society-wide groupthink and the danger
of discrediting dissent and criticism of mission-oriented policies. The conjunction of
a normativity bias with the self-declared impetus to save the world, to present grand
visions rather than strive for piecemeal progress, is not entirely riskless in itself. The
economic and social damage inflicted by charismatic leaders who refuse to be
questioned and criticized is large enough in single projects (see, e.g., the case of
“Ethanol Jesus” in Sandström and Alm 2022) but may be significantly larger in a
mission-oriented framework.

The Cognitively Biased Argument for the Mission-Oriented

Approach

In several of Mazzucato’s publications, in particular in her popular 2015 and 2021

books, a strong narrative is created that is now shared by a substantial number of
scholars, policymakers, and also by interested laymen, who, as engaged citizens,
actively think about political solutions to current problems. But as I will argue in this
section, that narrative itself is not evidence-based, but the result of an interpretation
of the data that is influenced by cognitive biases.
Mazzucato’s concept of the entrepreneurial state has at its core a very positive
perspective on the ability and willingness of politicians and bureaucrats to design
and implement effective innovation policies. The word effective, rather than efficient,
is used here on purpose, because for efficiency, a clear-cut normative benchmark
such as welfare maximization or at least cost minimization of policies would need to
be explicated. But in her entire book on The Entrepreneurial State, Mazzucato
(2015) does not do this. She does not claim that her concept of innovation policy
is efficient in any meaningful way. Rather, she repeatedly claims that it is effective in
the sense that it yields the politically desired results, such as helping to invent
technologies that are deemed politically important (Mazzucato 2015, p. 153), or
becoming a co-owner of patents and administer the dissemination of innovation-
related knowledge (Mazzucato 2015, p. 203).
The same pattern is found in Mazzucato (2021), where she again tells a story of
how governments supposedly get things done in the realm of innovation policy. But
72 J. Schnellenbach

she does not discuss in any detail what the costs are, either fiscally, or in terms of
unintended side effects in the form of inefficient incentives. In this sense, her works
do not offer a careful weighing of countervailing arguments that could be found in
the literature. Rather, she presents the result of her own confirmation bias to the
reader, i.e., a one-sided presentation of those cases and arguments that lead the
reader to believe that governments could achieve nearly anything, if they only
wanted to and if their leaders would only be sufficiently inspired, inspirational,
and visionary.
Again, this approach is uncharacteristic for an economist. Economists normally
tend to advocate rational institutions that direct self-interested individuals to make
decisions that increase general social welfare. This is a central theme in economics at
least since Adam Smith argued that we expect to be able to eat dinner thanks to the
self-interest of the butcher and the baker, not thanks to their altruism. Mazzucato
presents no theory of good institutions. Rather, she appeals to policymakers to
become bold, visionary, inspirational political entrepreneurs. Certainly, we some-
times find similar voices also on the other side of the political spectrum, for example,
when classical liberals praise reform-savvy politicians such as Margaret Thatcher
(Kirchgässner 2002). But this is nevertheless not how economists typically reason:
Their focus is on institutions. And it is very difficult to find empirical foundations for
the belief that, once mission-oriented policymaking becomes common, politicians
will act in a manner so different from what is typical in contemporary democracies.
We have discussed the normativity bias in the application of mission-oriented
policymaking briefly above. It is noteworthy that Mazzucato (2021) extensively
exploits the normativity bias of her readers in making her argument. Applying the
mission-oriented approach to climate change is justified, because it is normatively
justified to stop climate change. Hardly anyone would disagree with the second
statement. But is a government mission in innovation policy the most efficient way
to reach this goal? Could not simply setting the right incentives for private entre-
preneurs by emission trading, together internalizing positive externalities through
subsidies for basic research be more efficient? What does the mission orientation
really add, compared to standard bread-and-butter innovation policy, apart from
lofty calls for vision, leadership, and inspiration? Such questions are not answered
conclusively; rather, the shortcut from the laudable goal to the justification of the
political approach is taken.
A normativity bias on steroids appears when Mazzucato (2021, pp. 75–112) uses
the 17 UN development goals to justify a number of worldwide missions. These
goals have reached high status in activist academic circles because they can be used
to justify almost every policy one desires. Again, it is not necessary to discuss the
actual efficiency of policy proposals, as justification seamlessly spills over from the
goal to the proposed means. More importantly, with 17 UN development goals,
trade-offs and the need to prioritize are unavoidable. Nothing of this is discussed,
and a false harmony of all kinds of desirable goals that should be pursued through
missions is assumed. Opportunity costs of missions are largely ignored, and this is a
behavioral bias in itself.
A Behavioral Economics Perspective on the Entrepreneurial State. . . 73

Moreover, Mazzucato frequently appeals to the availability bias of her readers

and sets them into a loss frame, as we have already seen above. Mission orientation
is the universal tool (and the only one discussed) to fend off the nearing apocalypse.
Do you fear climate change? Then governments should organize a mission to fight
it. Do you worry that you might suffer from dementia in your old age? Mission
orientation will help. Do you want to save the dolphins from plastic waste in the sea?
A mission will do. The so-called mission maps in Chap. 5 in her book tend to
confuse, rather than clarify. Everything is somehow connecting with everything, and
everyone needs to be mobilized for the mission. It is difficult not to see snake oil
being sold here, but once enough fear has been spread and the loss frame made
sufficiently vivid, some people seem to buy anything.

Conclusions

As in any field of policymaking, innovation policy can be significantly influenced

and its quality significantly impaired, through behavioral biases influencing
decision-makers on a subconscious level. As we have seen, politicians, interest
groups, or even social scientists can also deliberately appeal to cognitive biases of
their respective target audiences in order to promote their preferred policies. The
complexity of innovation policy and the lack of clear empirical evidence on causal
relations in this field increase the likelihood that behavioral influences work in both
of these ways.
A central problem with mission-oriented policy is that it increases the discretion-
ary leeway given to policymakers and bureaucrats. In a more rule-based framework
for innovation policy, involving, for example, tax credits for R&D spending, the
influence of biases will be low. In a framework where individuals define missions,
pick policy instruments, decide which firms receive grants, and which subsidies
should be continued, the door for behavioral influences to distort decisions and make
them worse than they would have to be is wide open.
I have also argued that implicitly, behavioral biases matter a lot for the internal
argument supporting Mazzucato’s concept of mission-oriented policymaking.
Firstly, she is influenced by heuristics and biases herself. Among them are an
extensive ignorance and/or intentional disregard of opportunity cost, a normativity
bias where policy measures are justified by virtue of the goals they are supposed to
implement, and a reliance on the quality of persons in office, rather than good
institutions. But secondly, I have argued that Mazzucato also appeals to biases
herself to influence her audience. An example is the frequent appeal to loss aversion,
by depicting catastrophic scenarios, for which mission orientation is advertised as a
solution.
In sum, from a behavioral perspective, this appears unlikely to be consistently
successful. Even if some spectacular “missions” such as the Apollo program may
have been effective in the sense that they reached their goal, generalizing this to a
new approach to policy is unlikely to yield consistently good results. A more
74 J. Schnellenbach

rule-based and broad innovation policy with less scope for behavioral biases to have
an effect seems preferable.

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Jan Schnellenbach is Professor of Economics at Brandenburg University of Technology in

Cottbus, Germany and an Affiliated Fellow at the Walter Eucken Institute at Freiburg, Germany.
He received his PhD in economics in 2003 at the University of St. Gallen, Switzerland with
his dissertation Decentralized Fiscal Policy as a Discovery Procedure, focusing on fiscal federalism
from a political economy perspective. In 2009, he was awarded the venia legendi for economics by
the University of Heidelberg.
His main research interests concern the understanding of the process of economic policymaking
from a behavioral economic perspective, as well as more conventional issues such as sustainable
public finances, regional structural change, and the economic analysis of fiscal federalism. He has
published over 30 articles in refereed journals and is currently in the process of editing a Handbook
on Behavioral Political Economy together with Christian Schubert (German University at Cairo).
76 J. Schnellenbach

He is also active in policy consulting, with a current focus on the political management of
structural change in German regions where coal mining and lignite power plants are being
phased out.

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Innovationism and the New Public
Intellectuals

Olof Hallonsten

Abstract Public intellectuals were once honest and knowledgeable academics who
engaged in critical debate and spoke truth to power, but seem today rather to be
celebrities who make vast amounts of money from selling an oversimplified message
to policymakers and the public. This chapter discusses the role of the new public
intellectuals for the rise of oversimplified and misguided innovation policy, both in
the wider context of the recent spread of the ideology of “innovationism” and with
specific attention to the sociological mechanisms involved. With the help of a
conceptual discussion and some key examples, the chapter issues some warnings
of what might happen when public intellectuals give up essential virtues of academic
work in favor of fame and fortune, and the role they can then come to play in the
spread of “innovationism” and misdirected innovation policy agendas.

Keywords Innovationism · Public intellectuals · Innovation policy · Academia ·

Vanity trap

JEL Codes O30 · O38 · I23 · Y80 · Z13

Introduction

Public intellectuals have always been around—in magazines and newspaper arts
sections, in talk shows and public affairs broadcasting, and on other media formats—
to add perspective and set the direction of public discourse around current affairs and
to influence decision-making. In earlier times, public intellectuals were mostly
academics of the humanities, who engaged in critical debate and could afford to
speak truth to power, out of the security of an academic position and/or elevated
status in society. But in recent decades, a new type of public intellectuals has
emerged, usually with a background and a parallel academic career in business or

O. Hallonsten (✉)
Lund University School of Economics and Management, Lund, Sweden
e-mail: [email protected]

© The Author(s) 2024 77

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_5
78 O. Hallonsten

economics, who promote a simplified and easily marketed message and enjoy a
contemporaneous celebrity status reminiscent of pop stars. They offer advice—both
solicited and unsolicited—to governments and their agencies as these engage in
innovation policy initiatives.
Society, we are told, is faced with “grand challenges”: Not only do we need to
undertake a profound transition to change our patterns of production and consump-
tion to accomplish continued economic growth that is sustainable and reverses
man-made climate change, a task that is simultaneously global, national, regional,
and local. We also need to—on the local and national level—continue to make sure
that our regions and cities nurture and develop knowledge-based economies and get
ahead in the global competition for talent. At least so the story goes, and this story
has been quite effectively promoted by new public intellectuals, whose usually
substantial academic qualifications and neatly packaged messages evidently speak
to decision-makers and bureaucrats and provide them with both content and justifi-
cation for far-reaching action.
It takes two to tango, and it takes a whole innovation system (for want of a better
term) to engage in the type of “mission economy” that is currently rolled out in
Europe and North America through billions of euros and dollars of investments and
elaborate strategies for an envisioned transition to a green economy. The new public
intellectuals are hardly alone in promoting oversimplified and misguided strategies
and campaigns. In this chapter, emphasis is therefore both on the systemic features—
the historical and sociological causes of the current societal obsession with innova-
tion and the misguided political efforts of promoting innovation that have
followed—and on the role of new public intellectuals and how their motives and
incentives can be explained. The former is analyzed with the help of the concept of
innovationism, coined by Valaskivi (2012), and based on recent work published
elsewhere (Hallonsten 2023). But the chapter also makes a novel effort to discuss the
intellectual foundations of innovationism, with a sociological perspective, and with
specific attention to the new public intellectuals who seem to have played active
roles in the rise of innovationism. The chapter discusses three examples of such
public intellectuals, from three successive (and partly overlapping) time periods:
Michael Porter, whose work on the “competitive advantage of nations” became
hugely influential in the 1990s; Richard Florida, who reached similar fame for his
concept of the “creative class” in the 2000s; and Mariana Mazzucato, whose ideas of
the “entrepreneurial state” and the “mission economy” became extraordinarily
influential in the 2010s.
The three examples are representative but by no means exhaustive, and the
chapter makes no claim to any comprehensive analysis of the causal mechanisms
of the impact of the new public intellectuals on policymaking. Instead, the overall
aim is to conduct a conceptually oriented discussion of an intriguing phenomenon in
need of greater attention in scholarly work. Within the bounds of this ambition, the
chapter explores the role of the new public intellectuals and academic research in the
rise of innovationism and its evident impact on policy, with the help of a sociological
understanding of individual agency, incentives, institutions, and academic work that
has hitherto been lacking in similar studies.
Innovationism and the New Public Intellectuals 79

Public Intellectuals

Ever since the institutions of modernity reached a first level of maturity toward the
end of the nineteenth century—the capitalist market economy, the democratic and
bureaucratic state, and the organized systems for the search, use, and proliferation of
scientific knowledge—one of the defining features of modern society has been
public life with an elite of its own. Max Weber commented on the rise of the
intellectual as a central actor in the organization of modern society, noting how
culture is reproduced by the influence on public discourse by educated men of high
status (Weber 1946c [1922], pp. 171–179). The twentieth century saw many such
men (and later also women) rising to positions of influence and great reputation,
usually occupying tenured positions in universities but also frequently engaging in
public debate together with writers and journalists from outside of academia that
share an interest in critical dialogue around public affairs.
In one of his early works, German sociologist Jürgen Habermas chronicled the
rise of intellectuals in the bourgeoise society of early modernity and their crucial role
in the creation of a public sphere that would expand to greater portions of society in
the first half of the twentieth century, as national welfare states began to be built up
and a new middle class arouse (Habermas 1989 [1962], pp. 79ff). While the
development and expansion of democracy and freedom in the world throughout
the twentieth century has been driven by the institutionalization of civil and social
rights, democratic principles of free and fair elections, and equality before the law, it
is also safe to say that the broad opportunity to take part in open and free discourse in
this Habermasian public sphere, with solid foundations in scientific approaches to
knowledge, has been just as decisive. Public intellectuals, anchored in deep scholarly
knowledge and insight and engaging in open debate with each other and society’s
various power holders, have a crucial role to play in this. They are bearers of what
C. Wright Mills (1963, p. 611) called a “moral conscience” of society—asking
inconvenient questions, pointing out wrongdoings and inconsistencies, and
demasking authority, all out of a position as honest and knowledgeable free intel-
lectual agents—a function identified as central for democracy and societal progress
in several important works by prominent scholars (e.g., Weber 1946b [1919]; Berger
1963; Habermas 1971 [1968]; Said 1994; Giddens 1996). We can therefore now
look back on a myriad of insightful and knowledgeable contributions to the open and
free debate that arguably forms a backbone of liberal, democratic society, throughout
the nineteenth and twentieth centuries, and conclude that they were made by critical
and well-educated public figures who used their expertise, academic credentials, and
status to engage in public debate on current issues, usually with the ambition to
broaden the discourse or offer a counternarrative to an all too dominant view. These
public intellectuals were surely specialists in training—sociologists, historians,
philosophers, economists, and in rare cases also natural scientists—but also com-
fortable with engaging in a broad range of topics and expected to supply their
audiences with deep insight and knowledge (Brouwer and Squires 2003). They
were typically thought of being committed not only to the knowledge development
80 O. Hallonsten

of their own discipline and to the internal well-being of academic collectives but also
to the public domain and the learning and cultivation (Bildung in German) of the
broader public (Jacoby 1987, p. 235). This included a mandate and a need to make
expert knowledge accessible to a broader public, a task accomplished not only by
simplification but also by engaging directly in current debates and connecting to the
(political) realities of people in general (Posner 2001, pp. 17–40). Although many of
the figures that typically come to mind when thinking about public intellectuals were
able to reach continued respect and recognition for decades—some even for life—it
is also generally true that the classic public intellectual had to “continuously prove
that they still qualify for their title” (Etzioni 2006, p. 4).
It would seem as if this classic public intellectual is a phenomenon of the past.
Commentators have declared public intellectuals “an endangered species” (Etzioni
2006), noticed their “decline” (Posner 2001), and wondered where they all have
gone (Furedi 2006). Today, it is way more common for newspapers, tv shows,
podcasts, and book fairs to be crowded with academics on part-time leave from their
regular teaching and research duties, who offer their services as consultants to
governments and business and tour the world promoting a comprehensive “theory”
or “approach” that is easy for special interests in politics, media, or business to adopt
and identify with. A few scattered examples include critique of free-market funda-
mentalism (Stiglitz 2002), underscoring the role of social equality for prosperity
(Wilkinson and Pickett 2009), warnings for a new “precarious” underclass (Standing
2011), optimism and continued trust in the values of enlightenment (Pinker 2018),
and rules for dealing with life’s challenges and becoming a better person (Peterson
2018). In the slightly narrower area of innovation policy, the most prominent
examples include the promotion of innovation-driven competitive advantage as the
key route to success for industries, nations, and regions (Porter 1990), attracting
members of the “creative class” and building especially attractive urban environ-
ments to accomplish such a development (Florida 2002), or expanding the role of the
state in promoting innovation for the transition to a greener and more sustainable
economy (Mazzucato 2013, 2021). Before going into some more depth on these new
public intellectuals and their motivations and incentives, we will discuss the current
political hype around innovation and the context and breeding ground it seems to
provide for lofty and oversimplified ideas.

Innovationism

Current society is obsessed with innovation, but the policymaking attempts to

mobilize innovation for all the purposes it allegedly is capable of fulfilling are
largely misdirected. State interventionist attempts to plan and direct innovation
cost huge amounts of money but have limited results and signal a lack of under-
standing of how innovation really works, and what it needs in order to thrive (Ridley
2020; Wennberg and Sandström 2022; Hallonsten 2023).
Innovationism and the New Public Intellectuals 81

While there shall be no doubt that innovation is good and has served humanity in
astonishing ways, it is also evident from ample empirical and theoretical works that
innovation for with few exceptions is a very slow, cumulative, complex, serendip-
itous, and social process distributed in time and space, and that hence, in the absolute
majority of cases, it cannot be planned (e.g., Basalla 1988; Arthur 2009; Harford
2011; Mokyr 2016; Ridley 2020). This is the opposite of how it is usually presented
in policy reports and in the everyday language of politicians and bureaucrats, and
how it is sometimes also described in academic studies. Politicians and public
administrators seem to believe that their centrally planned innovation programs,
their diluted but glossy innovation strategies, and their overpopulated innovation
agencies are the means by which real innovation can and should be achieved. From
one viewpoint, this is fully understandable: Given that innovation today evidently is
believed to be the solution to whatever problem society is facing, and that
oversimplified “theories” of the role of government and centralized decision-making
in innovation have reached considerable influence in the past few decades, it is
perhaps no surprise that politicians and public administrators want to make a
difference, and thereby run the risk of overdoing it.
Overdoing and overbelief seem to be at the core of the problem. Politics, public
administration, industrial firms, consultants, academia, mass media, and popular
culture are all co-responsible for crowning innovation as the key to continued
progress and the solution to whatever problem society is facing (Godin 2012;
Gripenberg et al. 2012). The obsession with innovation has led to both unrealistic
expectations (Borup et al. 2006) and a takeover of innovation policy and broader
society’s view of innovation by rhetoric and superficial imagery (Vinsel and Russell
2020; Hallonsten 2023). This all amounts to what Valaskivi (2012) has coined
“innovationism”—the spreading of innovation as a new “worldview or belief
system.”
The process is systemic and self-reinforcing and leads to the institutionalization
of misguided beliefs about how innovation works and how it can be accomplished
through planning and command—in politics, administration, and business (Godin
and Vinck 2017; Hall and Löfgren 2017; Wennberg and Sandström 2022). Innova-
tion policy, with a deficient knowledge base, gets overall priority and becomes
invasive, subsuming other important policy areas under its aims including research
policy, education policy, environmental policy, and industrial policy (Nauwelaers
and Wintjes 2008; Flanagan et al. 2011). Within this framework, concrete efforts are
made to steer and direct the innovation system in preferable directions, at enormous
costs to taxpayers and with significant risks of displacements, usually under topical
banners such as green energy, sustainable transitions, and circular economy (Karlson
et al. 2021; Wennberg and Sandström 2022). Major marketing efforts accompany
these policies, sometimes branded as information campaigns, producing a deluge of
nice talk and glossy brochures that paint the future in very bright terms, with the
between-the-lines addendum that such a future is only available to those who support
and play along with the policies (Pfotenhauer and Jasanoff 2017, p. 784; Hall and
Löfgren 2017, p. 311; Pfotenhauer et al. 2019, p. 895; Hallonsten 2020, pp. 246ff).
Similarly, innovationism is manifested in a torrent of workshops, conferences, and
82 O. Hallonsten

other events where entrepreneurs, academics, elected officials, and public servants
meet and mingle under visionary slogans and imaginative rhetoric. The purpose is
clearly not to innovate, but to breed and manifest “a form of collective endorsement
of belief” in innovation (Andersson Cederholm and Hall 2020, p. 1416) and build a
collective identity around it (Valaskivi 2012, p. 150; Hall and Löfgren 2017, p. 314).
To sustain all these events and marketing efforts, a growing cadre of “innovation
experts” in the borderlands between academia, public administration, and consul-
tancy, occupy themselves with formulating, executing, documenting, and evaluating
innovation policies and all that surrounds them (Wisnioski 2019). They command
the efficacious but essentially empty “innovation-speak” that simultaneously pro-
claims the crucial importance of innovation for everything and everyone and dilutes
the term beyond any operational significance (Vinsel and Russell 2020, p. 10). And
at the center stand the new public intellectuals, at once the celebrities and prophets of
innovationism, preaching or selling an oversimplified and not seldom overambitious
concept or plan for decision-makers, bureaucrats, communication officers, and
“innovation experts” of all kinds, to absorb and reproduce in their essentially
empty but also very costly programs and initiatives.
There are many reasons behind all this. Historical developments in the world
economy—most of all the end of the postwar economic boom and the broad
downturn in the 1970s, followed by globalization, digitalization, and new competi-
tion from faraway labor markets—made competition and renewal into key priorities
in industries and national economies alike, and economic growth into the highest
priority of government policy (Kuttner 1999; Wentzlaff 2019; Berman 2022).
Meanwhile, not only private actors but also governmental and supra-governmental
agencies have their own interests to guard (Niskanen 1971), among which are
attention and funding for their specific areas. The political economy of
innovationism therefore entails its fair share of paradoxes and contradictions.
While the democratic and bureaucratic state for several decades has been viewed
mostly as a complication for economic development—a basic infrastructure for free
markets to rely on, at best—the economy and its well-being also became the highest
priority for governments and thus an expanding policy area.
While the market economy was crowned as a superior form of organizing value
creation and value distribution, the notion of market failure was also revived,
especially in innovation policy, and the belief was widely accepted that private
enterprises do not have sufficient incentives to invest in the research and develop-
ment necessary for the long-term renewal of the economy through innovation
(Nelson 1959; Arrow 1962), so that governments must step in and secure renewal
through innovation. And while an enterprise culture and entrepreneurship ideal
spread and took root as ideal for the organizing of society (Keat and Abercrombie
1991), subsidies and rent seeking also became increasingly common (Helm 2010).
Some of these contradictions still characterize innovation policy: In order for the
economy to grow, for society to develop, and for challenges to be met, innovation
has to happen. And since actors on markets won’t do it voluntarily, or at least not
enough, or at least not in preferable ways, the government has to intervene.
Innovationism and the New Public Intellectuals 83

The Role of the New Public Intellectuals

Academics were not late in offering their support to the rise of innovation policy and
later innovationism. In the 1980s, the first broad “theories” (or shall we say,
“doctrines”) of innovation policy started to spread, when the economic sciences
had caught up with world developments and begun to pay close attention to the role
of institutions, knowledge, and human creativity in the dynamic renewal of econo-
mies. The “chain-linked model” of innovation, which emphasized its nonlinear,
dynamic, iterative, and interactive nature (Kline and Rosenberg 1986) and the
systemic approach to innovation, which emphasized the heterogeneity of the net-
works (or systems) within which innovation occurs (Nelson and Winter 1982;
Freeman 1987), both put the spotlight on the linkages between research, develop-
ment, and commercialization, and the opportunities for (state) intervention to create
and improve such linkages. As mentioned, market failure became a watchword:
Originally conceptualized in the 1950s and 1960s, this hypothesis of deficient
incentives among private actors to invest in necessary innovation was refurbished
and used as theoretical rationale for the expansion of the role of the state in
innovation processes.
The recent decades have seen several similar examples of theoretical concepts
and explanatory models for the dynamics of innovation and related processes in the
economy and society at large that have emerged out of a scholarly context and
become axiomatic principles for policy. In Sweden, the innovation systems
approach (Lundvall 1992; Edquist 1997) became hugely influential in the 1990s,
together with the triple-helix framework (Etzkowitz and Leydesdorff 1997), and the
recombination of these even led to the creation of a new government funding agency,
Vinnova, in 2001 (Eklund 2007; Hallonsten 2020, pp. 65–77). Almost simulta-
neously, the diamond framework for the competitive advantage of nations was
launched and promoted by management scholar and guru Michael Porter (1990). It
became very influential in several countries, as a basis for attempts to accomplish an
“innovation-driven” economy as the route to success (through competitive advan-
tage) (Davies and Ellis 2000; Wilson et al. 2014).
Developments in human geography, not entirely unrelated to Porter’s work and
intellectually indebted to the systems approach to innovation, led to a new focus on
regional development and the role of innovation in the structural transformation of
local and regional economies and labor markets, with competitiveness and innova-
tion as watchwords. Based on theories of geographic proximity as a key factor for
innovative capacity, such work evolved into a regional innovation systems approach
(Cooke et al. 1997; Maskell et al. 1998). Around the turn of the millennium, these
ideas formed the basis for the theory of the “creative class” and the agglomeration of
not only talent but also technology and tolerance as the most conducive factors for
innovation, dynamic progress, and prosperity of cities and regions (Florida 2002,
2005). Most recently, the ideas of the “mission economy,” based on a kind of
expanded systems of innovation approach that takes a far broader set of actors,
84 O. Hallonsten

institutions, and processes into account, have become immensely popular largely
through the work of Mariana Mazzucato (2013, 2021).
Today, calls for “evidence-based” decision-making are perhaps stronger than
ever (Cairney 2016). While this could signal a higher status of scholarly knowledge
in society, there is also a lot to suggest the opposite. Especially in politics, “evidence-
based” decision-making seems to be a way for policymakers to avoid taking full
responsibility for their priorities, by appropriating credibility of academic studies
and the academic titles of their authors (Hallonsten 2021, p. 19). Of course, aca-
demics are not innocent victims of such a development but share some responsibility
for how their work is used. Most academic researchers remain in academic positions
for their entire careers, making substantial but unspectacular contributions to the
cumulative knowledge development within their fields and cannot reasonably be
expected to take much responsibility for how their results are used after publication.
Some move cleverly between contexts of academic research (and teaching) and
consultancy work for both the private and public sectors and manage to play both
roles without compromising the quality of either. Others still—by all accounts a
small number of particularly influential figures—transcend the institutional
delimitations of academia and become celebrity public intellectuals. This move
usually means exposure to heavy critique from academic peers, regarding weak
empirical underpinnings and faulty theoretical logic in their works, but it is safe to
assume that the material and vanity rewards are more than enough to compensate.
Three such public intellectuals, of enormous fame, have been mentioned already:
Michael Porter, Richard Florida, and Mariana Mazzucato. All three are academics,
with professorships in business administration and/or economics at renowned uni-
versities, but all three have also earned wider reputation by the publication of books
of broader circulation and interest, by serving as consultants for governments and
private companies, and by public appearances in news media, at conferences and
events, and broadcast interviews. Table 1 summarizes (some of) their
accomplishments.
What unites these three public intellectuals is not only their fame and contribu-
tions to innovationism but also that they have received ample critique not least from
academic peers, who have undertaken systematic examinations of the concepts and
arguments they publish and promote. Porter has been criticized for methodological
flaws, unclear definitional work, and lack of explication of the concrete processes of
building national competitiveness, which has left policymakers with an
oversimplified “laundry list” rather than a thorough understanding of what policy
can and should do to increase national competitiveness (O’Shaughnessy 1997;
Davies and Ellis 2000). Florida’s work, though in many respects merely the gran-
diose and appealing front of a whole school of economic geography, has diminished
greatly in popularity and been dismissed as insufficiently underpinned and largely
empty of any real guidance for policymakers in search of means to enhance or
reawaken the productivity and innovativeness of their regions (Peck 2005;
McGuigan 2009). And Mazzucato has been systematically criticized for using
anecdotal evidence and confusing laboratory R&D with innovation on consumer
markets, and for overemphasizing the (essentially theoretical and only sparingly
Innovationism and the New Public Intellectuals 85

Table 1 Basic facts for the three examples

Mariana
Michael Porter Richard Florida Mazzucato
Born 1947 1957 1968
PhD Business economics, 1973 Urban planning, 1986 Economics, 1999
Famous for Five forces Creative class Entrepreneurial
Competitive advantage/ state
Diamond model Mission Economy
Value chain
Notable works Competitive Strategy The Rise of the Crea- The Entrepreneur-
(books) (1980) tive Class (2002) ial State (2013)
Competitive Advantage Cities and the Creative The Value of
(1985) Class (2005) Everything (2018)
The Competitive Advan- The Flight of the Crea- Mission Economy
tage of Nations (1990) tive Class (2005) (2021)
On competition (1998)
Number of publi- 116 65 52
cations (WoS)
Number of cita- 36,407 4472 2224
tions (WoS)
Followers on 170,764 190,418 245,295
twitter
Speaking fee (live n/a USD 50,000–100,000 USD
event) 50,000–100,000
Source: Wikipedia, Web of Science (WoS), Twitter, AAE Speakers (www.allamericanspeakers.
com, accessed May 25, 2023)

empirically underpinned) argument of market failure (Karlson et al. 2021; Wennberg

and Sandström 2022).
Nonetheless, as scholars, they are renowned. Although the figures on publications
and citations listed in the table above come with methodological challenges and
possible errors (given inaccuracies in the reporting and representation of data), and
although such indicators generally should be taken with a huge grain of salt (see,
e.g., Hallonsten 2021), these figures show three academics that have been
immensely successful in accumulating academic merit. Furthermore, all three are
professors. But all three have also reached fame and fortune outside of academia,
which shows in the followership they have attracted on social media, and the fees
they charge for giving speeches.1 However, this career move seems to come with
some significant risks that might even become threats to the core of proper academic
practice.

1
It deserves to be mentioned that USD 100,000, the maximum fee charged by both Richard Florida
and Mariana Mazzucato for a single speech at a live event, is more than the average annual salary of
a Swedish university professor (Hallonsten 2022b, p. 9).
86 O. Hallonsten

The Vanity Trap and Tedious Academia

In 2016, in a blog post on the website of Nesta, a UK governmental foundation for

funding of innovation, chief executive Geoff Mulgan wrote about “a new generation
of public intellectuals, selling books in big numbers, doing talks at TED and other
events, and gaining star status.” In his essay, Mulgan refers to a conversation he had
with political scientist and political advisor (to US president Jimmy Carter, among
others) Samuel P. Huntington, most famous for the best-selling book The Clash of
Civilizations (1996), and by all accounts a public intellectual, where Huntington
allegedly spoke about the phenomenon of celebrity public intellectuals managing to
break free of the institutional boundaries of academia. Huntington “commented that
many of his peers had become bored of the scrutiny of academic life” and developed
a celebrity-like “lifestyle” where they only would attend events “where they were
keynote speakers” and only interact with people who “were fans.” Huntington issued
a warning: The phenomenon entailed the process of “turning great minds into great
performers who were losing the capacity to think” (Mulgan 2016).
Based on this anecdote, Mulgan conceptualizes the “vanity trap” of being a public
intellectual and the contrast it presents to academic life and its “rough egalitarianism
which forces even the grandest professors to deal with critics, however much lower
their status.” For public intellectuals, he claims, at least some of them, “different
rules apply”—ignoring critics becomes a habit and a rational course of action in
order not to draw attention to the (presumably weak) underpinnings of their argu-
ments and simplified messages.
Among Mulgan’s key examples are Michael Porter, briefly mentioned, and
Mariana Mazzucato, discussed in some more detail. Mulgan refers to a systematic
scrutiny of Mazzucato’s first major success, The Entrepreneurial State, in a blog
post by fellow Nesta executive Stian Westlake, who allegedly is generally sympa-
thetic to Mazzucato’s ideas and finds her argumentation “superb” and “compelling,”
but who is also able to spot several serious errors and gaps in it (Westlake 2014). The
key point is, Mulgan explains, that Westlake’s critique was “offered in a constructive
spirit” but that Mazzucato (until the time of writing, in 2016) had not bothered to
respond. This is both puzzling and irresponsible conduct, Mulgan rightly points out.
If Mazzucato’s analysis is indeed flawed, it will be “problematic, to say the least, if
policymakers follow it,” whereas if she is right and her work “is in fact solid,” then
she should make an effort to demonstrate this by offering a substantial response.
“Intellectuals who, like her, have received very generous public funding over many
years, surely have a duty to engage,” writes Mulgan (2016).
Mulgan is of course right, both in arguing that public intellectuals have an
obligation to make a serious effort to refute their critics, and in launching as plausible
explanation for the lack of such response is a “vanity trap” that risks making public
intellectuals “too grand to engage in debate,” “so concerned with embellishing their
brand that they find it hard to admit to error,” and thus end up as “the enemies of
learning” (Mulgan 2016).
Innovationism and the New Public Intellectuals 87

These words are strong, but so is the logic of Mulgan’s argument, although it is in
some need of proper sociological foundations. Such foundations can be found in the
functionalist tradition of the sociology of science, pioneered by Robert Merton
(1973) and refined by followers (e.g., Hagstrom 1965; Whitley 2000 [1984]; Gieryn
1999; Hallonsten 2022a), and in latter-day institutional theory that promotes the
analysis of society as composed of institutional orders with distinct “institutional
logics” (Thornton et al. 2012; Alvehus and Hallonsten 2022). In the functionalist
tradition, with roots in classical sociological works (Durkheim 1969 [1893]; Simmel
2015 [1890]; Weber 1946a [1904]), different institutions or spheres of society are
viewed as exhibiting distinct norm systems that are functional for maintaining their
inner workings and contributions to society as a whole. Merton made especially
thorough efforts of explicating the norm systems of (academic) science and how it
comes in conflict with other norm systems and the “culturally defined goals” of
society’s other institutions (Merton 1973, pp. 254ff, 267ff).
Simply put: Academia, media, and government are governed by different norm
systems, operate according to different logics, and have different reward systems.
Academic work is inherently conservative and proceeds in small steps through the
forming of consensus among peers, which includes the tiresome but elementary
exchanges of ideas and critique, arguments and counterarguments, in a myriad of
settings ranging from informal exchanges between colleagues, via seminars and
conferences, to highly formalized and usually anonymous journal and grant peer
review (Hagstrom 1965; Whitley 2000 [1984]). This is called “organized skepti-
cism” (Merton 1973, pp. 277–278) and has a central function in the social organi-
zation of (academic) science (Hallonsten 2022a). In contrast, mass media and social
media, not entirely simple to keep apart today, and politics and public administra-
tion, have logics and norm systems that correspond to the culturally defined goals of
these spheres or institutions—swift disclosure and circulation of information, legit-
imate allocation, discharge, and exercise of power and public resources. Today, both
media and the decision-making processes of politics and public administration seem
beset with simplifications and the hunt for immediate gratification (Roberts 2015;
Alvesson 2022 [2013]; Hallonsten 2023).
A highly plausible partial reason that public intellectuals such as Porter, Florida,
and Mazzucato can evade critique is that they have taken a step outside of academia
and thereby get access to other reward systems and can afford to discard or ignore the
norm and key social mechanism of organized skepticism. Simply put, when they
have access to policymakers and media platforms, they can sell their message
without having to pass peer review, apply for funding, or build a reputation based
on rigor, ingenuity, and the respect from colleagues that this earns. The lure is likely
great, and the win-win is easily recognized by all parties involved. But the loss is
also major, albeit not as simply visible in the current media and information
landscape: If these public intellectuals become figureheads for entire lines of
research, or entire academic disciplines, while also being immune to basic critique
of the type that (academic) science arguably depends crucially on for its legitimacy
and credibility, the same legitimacy and credibility is seriously undermined. While
this might indeed pose threats to the entire modern social order, which in no small
88 O. Hallonsten

part is dependent on the social legitimacy of expert knowledge, the issue here is the
effects this has on contemporary innovation policy.
It is rather evident, from recent works (e.g., Ridley 2020; Wennberg and
Sandström 2022; Hallonsten 2023) and the other chapters in this volume, that
misunderstandings, simplifications, and flawed logic characterize the conceptual
and empirical underpinnings of current innovation policy under the “entrepreneurial
state” and “mission economy” paradigm. The “vanity trap” of being a public
intellectual, and the forsaking of crucial guiding norm systems and institutional
structures of (academic) science that the trap entails, is a likely contributing factor.

The Old and the New Public Intellectuals

The old public intellectuals, discussed in the first section of this chapter, are typically
portrayed as reproducing ideals and virtues of the academic profession and the
institution or value sphere of (academic) science: They spoke truth to power,
asked inconvenient questions, engaged in demasking of authority, and put their
own work and the work of their peers up for scrutiny in accordance with the
institutional mandate of organized skepticism. They brought these ideals to society
and the institutions of society, including politics, business, and media. Whether or
not this is an oversimplified, romanticizing, or naïve description of a class of public
intellectuals that in reality neither embodied nor practiced these ideals, it is clear that
the new public intellectuals of today do the opposite of what this image conveys.
They give up essential virtues of academic work in order to serve as policy advisors,
and in the process, they throw aside the ideals and norm systems that have supported
them in their careers and arguably given them the platform from which they can take
the step into stardom.
The question is why. The answer provided in this chapter is that it seems to make
sense, for these individuals, to try to escape the tiresome work processes of acade-
mia, including the constant scrutiny of peers and the apt meritocratic conservative-
ness of promotion and demotion of ideas and people, in favor of the vanity of fame
and fortune. Strangely, and interestingly, the move they have made comes at very
little cost if only looking at shallow measures of academic success: As shown in
Table 1, all three examples brough up in this chapter are highly cited. This suggests
that they are still able to influence the agenda of academic research in the areas where
they are active, a dangerous prospect given their seeming immunity to the scrutiny
and critique of peers.
The theoretical underpinnings and the logic of the argument behind this conclu-
sion, provided in this chapter, perhaps raise more questions than they answer. At the
center is of course the issue whether these new public intellectuals—and the
politicians, high-level public administrators, and consultants who repeat and repro-
duce the messages—really believe what they preach, or if they indeed are only in it
for the vanity and the money. Empirical studies are needed to answer these and other
important questions.
Innovationism and the New Public Intellectuals 89

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Olof Hallonsten is sociologist and senior lecturer of organization studies at the Lund University
School of Economics and Management, Lund, Sweden.
His research focuses on the sociology of science and innovation, organizational sociology, and
sociological theory. His most recent book in English is Empty Innovation (Palgrave Macmil-
lan, 2023) and he has also published several journal articles in recent years on the funding and
organization of contemporary academia, as well as theory development within organizational
sociology. He has also published a number of popular science books and articles in Swedish, on
similar and adjacent topics.

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 Part III
Empirical Evidence
Analyzing the Effectiveness of State-Guided
Innovation

Rodney H. Yerger Jr

Abstract A crucial debate exists over the effectiveness of government-guided

innovation efforts, which recently through economist Mariana Mazzucato’s argu-
ments for an entrepreneurial state that encourages the public sector’s active role in
technological change and value creation, is considerably shaping global policy. This
essay addresses a key assertion by Mazzucato that the government is the boldest
innovator accountable for the greatest value in society. Through use case analysis, I
argue that Mazzucato’s claims of the state providing mission-oriented directionality
that drives technology development do not survive the scrutiny of the Supply-Chain
Fallacy, the belief that every item in a line of production or chain of events is
necessary and causal. I do find occasions of public sector innovation success in the
development of military technologies, particularly during times of war, which can
have beneficial spillover effects. However, I show that the potentiality of such
successes in a persistent peacetime environment is limited by the viability of the
public sector entrepreneur.

Keywords Public goods · Entrepreneurship · Innovation · Political economy

JEL Codes H41 · L26 · O31 · P16

This chapter’s contents were mostly part of the author’s dissertation Analyzing the Effectiveness of
State-Guided Innovation for the degree of Doctor of Philosophy at George Mason University,
USA, 2023. Reused with permission.

R. H. Yerger Jr (✉)
Department of Economics, George Mason University, Fairfax, VA, USA
e-mail: [email protected]

© The Author(s) 2024 95

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_6
96 R. H. Yerger

Introduction

A cardinal rule of economic development holds that real income growth stems from
increases in real productivity, which in turn results from improvements in physical
capital, human capital, and governing institutions. At the cornerstone of these
improvements lies the concept of technological innovation. While institutions play
a critical part, there exists a lack of clarity over the specifics of the institutional
functions and their impact on incentive alignment that most effectively drive tech-
nology advancement. Specifically, a crucial debate exists over the effectiveness of
state-guided innovation efforts.
The traditional notion of government’s involvement in economic matters, at least
within the domain of the democratic free world, comprises the role of addressing
market failures. This view of a more static function for the state has been reinforced
over time given the disastrous economic consequences suffered by those countries
that have adopted socialist governance mechanisms to institute centralized industrial
planning. Yet, a strong and vocal counterview endures that governments throughout
the Western world should take a more dynamic approach away from bureaucratic
stagnation and towards a strategic structuring that promotes agility and flexibility to
promote and foster innovation.
The most prolific advocate in recent times for state-guided innovation is Mariana
Mazzucato, an economist whose work on the study of the entrepreneurial state,
which entails the public sector’s active role in technological change and value
creation, is considerably shaping global policy. Indeed, her calls for a mission-
oriented approach to innovation has influenced elements of recent United States’
(US) public policy agendas such as the Green New Deal and the Biden administra-
tion’s Build Back Better plan. Mazzucato not only argues that the driving force
behind innovation is state investment but also proffers a rethinking of the state to
alleviate institutional constraints to innovation through the transformation of the
government civil service and their respective organizations toward the role of value
creators (Mazzucato 2015a, 2021a, 2021b, 2022).
This essay addresses a key argument promoted by advocates of the entrepreneur-
ial state: that government is the boldest innovator accountable for the greatest value
to society. According to Mazzucato (2015b, pp. 134–135), “most of the radical,
revolutionary innovation that have fueled the dynamics of capitalism—from rail-
roads to the Internet, to modern-day nanotechnology and pharmaceuticals—trace the
most courageous, early, and capital-intensive ‘entrepreneurial’ investments back to
the State. Such radical innovations did not exist before the State envisaged and
developed them. . .” I critically examine the theoretical underpinnings of
Mazzucato’s worldview as well as relevant counter-positions. I emphasize that
many of Mazzucato’s assertions of the state providing mission-oriented directional-
ity that drives technology development do not survive the scrutiny of the Supply-
Chain Fallacy, the belief that every item in a line of production or chain of events is
necessary or causal. I explore two use cases of successful technology advancement,
touch screen technology and the Global Position System (GPS), to assess the validity
Analyzing the Effectiveness of State-Guided Innovation 97

of Mazzucato’s declarations that these underlying technologies for the iPhone are
exemplars of state-guided innovation. Additionally, I detail observations resulting
from my use case analysis to include ascertaining the potentiality of government-led
creative destruction in a peacetime environment and assessing the viability of the
public sector entrepreneur.

The Debate

In The Entrepreneurial State: Debunking Public vs. Private Sector Myths,

Mazzucato (2015a) attempts to show via several use cases that the public sector is
best equipped to make investments that provide critical directionality for technolog-
ical growth and innovation, to include in areas “defined by high capital intensity and
high technological and market risk” that “tend to be avoided by the private sector. . .”
(Mazzucato 2015a, p. 29). Throughout her demonstration of public sector innovation
successes, Mazzucato credits the state’s role in each stage of the research and
development (R&D) process, and the examples she touts almost entirely emphasize
the post-World War II era of state-guided R&D. Importantly, World War II altered
the landscape of public sector innovation by pushing the United States into
government-funded defense research. Not only did these efforts lead to spectacular
successes in military innovation, none more so than the Manhattan Project, but also
justified the continuation of large-scale government investment for innovation
following the war. Thus, Mazzucato (2015a, pp. 80–84) focuses on model public
sector organizations that were established during this vast shift in R&D funding, like
the National Aeronautics and Space Agency (NASA) and the Defense Advanced
Research Projects Agency (DARPA), which she credits with creating the initial
manifestations of what would become the modern day internet.
In The Myth of the Entrepreneurial State (2020), Deirdre McCloskey and Alberto
Mingardi capture a critical issue with Mazzucato’s reasoning in that the credit she
allocates to state action fails to consider economic substitutes. By ignoring “private
substitutes as counterfactuals,” Mazzucato can leverage the state’s increased
involvement in innovation affairs as evidence of causality for an accomplishment
(McCloskey and Mingardi 2020, p. 196). This Supply-Chain Fallacy addresses the
fact that we are conditioned to a world where public funding is omnipresent and has
exponentially increased throughout the course of the twentieth and early twenty-first
centuries. It is likely impossible to trace the origins of a human accomplishment
without finding some relevant government-funded pre-event. However, in accepting
these conditions, one should still question the opportunity costs of each pre-event as
well as assess the potential crowding out of private investment from so many
government-funded endeavors. Furthermore, even if such analysis passes the oppor-
tunity cost and economic substitution test, what credit does the state warrant for
contributing to a chain of events considering its ubiquitous involvement in society?
As McCloskey and Mingardi (2020, pp. 107–108) cleverly point out, while innova-
tion can stem from a cumulative effect, it is not common practice to overly credit
98 R. H. Yerger

every private sector tinkerer or agent along the path leading to each innovation, such
as crediting the inventor of the piano for a beautiful concerto or even crediting the
composer’s parents.
The Supply-Chain Fallacy underscores state action over human action in induc-
ing innovation, which McCloskey and Mingardi compare to the flawed reasoning in
combining the fixed-coefficient inputs of the neoclassical production function to
yield routine output. Instead, McCloskey and Mingardi argue that the causal force
behind innovation is human creativity, which they claim is ignored in Mazzucato’s
view of entrepreneurship. Nevertheless, Mazzucato’s push for a mission-oriented
approach to innovation involves nuance that warrants further elaboration on the
relationship between entrepreneurship and R&D investment.
A private sector view of innovation stresses the profit motive coupled with market
demand for new products and processes as important factors that spur creative
activity. At the cornerstone of this coupling process is Israel Kirzner’s theory of
entrepreneurship, which involves alertness to unnoticed profit opportunities. R&D
investment can be a fruitful activity within the innovation process but should be
aligned to entrepreneurial profit opportunities. Holcombe (1998, p. 53) summarizes:
“Research and development expenditures are not the cause of entrepreneurial oppor-
tunities, they are the result of entrepreneurial opportunities.”
However, Mazzucato (2015a, p. 43) also acknowledges the vital importance of
entrepreneurship (the root word is in the title of her book!) by stressing that
successful innovation relies on “feedback loops between markets and technology,
applications, and science.” Moreover, she recognizes the “serendipity and uncer-
tainty that characterize the innovation process” yet argues that innovation should be
driven by “long-term strategies and targeted investments” (p. 43 and p. 65). These
elements that comprise Mazzucato’s worldview of innovation connote a government
that takes extreme risks, picks winners and losers, and invests not to increase demand
à la Keynesian economics, but to increase the capacity of innovation by attempting
to engage in a state-guided version of creative destruction.
A significant difference in Mazzucato’s view of entrepreneurship is the agent
involved: the public sector entrepreneur. Holcombe (1998, pp. 58–59) convincingly
argues that when entrepreneurship is recognized as the key to innovation, then
“emphasis should be placed on market institutions” to ensure success. However,
regarding public sector entrepreneurship, the concept of demand can encompass a
broader meaning that captures the notion of necessity, which according to the
proverb, serves as the mother of invention. Importantly, Godin and Lane (2013,
pp. 26–31) stress that ideally the concept of demand should reflect societal or
national interest-based “need,” which concerns decisions made in the public domain
and has a clear tie to military innovation during times of war. Need is a more
nebulous concept than economic demand and has been largely ignored in empirical
research. Despite its murkiness, previous studies have been conducted on how to
efficiently make R&D decisions based on military objectives or needs. Understand-
ing and attempting to respond to societal needs could shape state-guided innovation
efforts, which depends on government agents providing directionality through
entrepreneurial action.
Analyzing the Effectiveness of State-Guided Innovation 99

With a fuller understanding of what entails the entrepreneurial state, I next shift
focus to an analysis of particular cases of public sector innovation touted by
Mazzucato regarding the iPhone and its underpinnings by state-guided technologies:
“every technology that makes the iPhone ‘smart’ (i.e., the Internet, GPS, touch
screen display, and Siri) was publicly funded directly” (Mazzucato et al. 2015,
p. 122). McCloskey and Mingardi (2020, pp. 71–74) confront one such case of
purported state-guided innovation, the Internet, and effectively demonstrate that
although this achievement partially resulted from military spillover benefits, this
was an unintended consequence having no relation to a long-term strategy. In fact,
McCloskey and Mingardi cite that any mission-oriented directionality involved in
this case were considerations by the Air Force in the 1960s for decentralized
communications grids, research that was subsequently terminated by the Department
of Defense. Based on this assessment, credit given to public sector efforts regarding
the internet innovation might classify under what Kirzner (1985) refers to as the
“wholly superfluous discovery process.” In this scenario, government research and
investment has altered entrepreneurial actions, but these actions and their associated
outcomes cannot be anticipated due to the inability of public sector agents operating
with imperfect information to perceive profit opportunities. The next section
explores in detail additional novel innovations connected to the iPhone to assess
their alignment with Mazzucato’s vision.

Use Case Analysis

Use Case #1: Touch Screen Technology

The origins of touch screen technology can be traced back to the 1960s with the
creation of the first finger-controlled touchscreen by Eric Arthur (E.A.) Johnson
while employed at a British government defense agency called Royal Radar Estab-
lishment. Johnson’s creation could only handle one touch at a time and was not
pressure sensitive. The resistant touch screen that responded to pressure sensitivity
was invented by Samuel Hurst in the 1970s at the University of Kentucky, while
studying atomic physics. Hurst commercialized the technology through his start-up
company despite the university’s view that the technology had little application
outside of a laboratory. Early work on multi-touch technology occurred in the 1980s
in various private and public research labs, the biggest advancement took place at
Bell Labs, which created the first transparent multi-touch screen overlay (Ion 2013;
History-Computer n.d.). However, the truly revolutionary technology advancement
in this arena started in 1999 with Wayne Westerman’s doctoral dissertation at the
University of Delaware on multi-touch scrolling and gesturing via hand tracking and
finger identification, which would become key features of the future iPhone
(Westerman 1999). Soon thereafter, Westerman and his professor John Elias formed
the company FingerWorks to develop their groundbreaking technology until Apple
acquired them in 2005 (Ion 2013).
100 R. H. Yerger

While tracing the history of touch screen technology development, Mazzucato

(2015a) credits the state’s role in each stage of the process, most visibly when she
maligns FingerWorks’ accomplishments because of the government grants provided
to Westerman during his dissertation research at a public university. If Mazzucato
wants to convincingly argue for the successes of public sector innovation, especially
as directed by a mission-oriented approach, then her claims regarding FingerWorks
are truly a stretch.
In the case of touch screen technology, Mazzucato’s reasoning is a clear illustra-
tion of the Supply-Chain Fallacy. Many of the state-funded pre-events can classify as
basic research. Johnson’s finger-controlled touchscreen was eventually adopted for
air traffic controllers, and so some degree of national interest demand might come
into play. However, the primary advancements in this field from Hurst and
Westerman occurred through individual entrepreneurial instinct and alertness to
profit opportunities, which succeeded via the key linkage of attending to consumer
demands. Mazzucato’s argument fails to provide convincing evidence that the
advent of touch screen technology was precipitated by government mission-oriented
directionality, and by ascribing so much causality to government-funded pre-events,
she seems to contradict her own view that innovation is serendipitous and
unpredictable.

Use Case #2: GPS

The fascinating story of the GPS innovation starts with the launch of the Sputnik
satellite by Russia in 1957. Soon thereafter, two scientists from the Johns Hopkins
University Applied Physics Laboratory (APL), William Guier and George
Weiffenbach, began tracking Sputnik’s signal and figured out a method to determine
from a fixed point the satellite’s position in orbit. Legend has it that this analysis
started casually while on a lunch break. Fellow colleague, Frank McClure, who was
working on the challenge of submarine navigation under the direction of his US
Navy sponsor, suggested flipping the Guier and Weiffenbach method in order to
determine the locations of submarines from a known satellite position. This revised
method led to the APL’s development of the Navy Navigation Satellite System
(NNSS), which was fully operational by 1964 and provided positioning for the US
submarine ballistic missile force, a critical Cold War deterrent (Parkinson and
Powers 2010a, 2010b).
The modern GPS program was launched in 1973 by the Department of Defense,
improving on the accuracy and technologies of the NNSS primarily via the contri-
butions of the Naval Research Laboratory and the Aerospace Corporation, a feder-
ally funded research and development center. The first satellite prototype was
completed in 1978, and the full complement of 24 satellites was fully operational
by 1993. Originally intended for military use, President Ronald Reagan granted
civilian use privileges via executive order in the 1980s (Parkinson and Powers
2010a, 2010b). The economic impact from civilian use of GPS is substantial. A
Analyzing the Effectiveness of State-Guided Innovation 101

study by RTI International estimates economic benefits totaling USD 1.4 trillion for
the US private sector since the 1980s across the industrial sectors that depend on
GPS for their daily business activities. Furthermore, the study estimates the impact
of losing GPS would cost USD 1 billion per day for the United States (McTigue
2019).
Clearly, the GPS case qualifies as a strong representative of public sector inno-
vation. Even if some credit is appropriately allocated to the private sector for the
entrepreneurial success in the diffusion of the technology, the government still
provides the critical service of sustaining and improving the system, which is
budgeted at over USD 1.5 billion a year (GPS.gov n.d.). The GPS success story
provides two important features that warrant further consideration as to their unique-
ness and potential for translation to future public sector innovation endeavors.
First, if Mazzucato’s vision of a public sector mission-oriented approach to
innovation is to win the day, then organizations like the APL would serve as the
linchpin of that victory. The tracking of Sputnik’s position by Guier and
Weiffenbach is a great representation of creative engagement, which captures the
curiosity component of basic research that leads to technology-push effects on
innovation. Furthermore, the tracking of Sputnik began as a leisure activity similar
to the origins of the Wright brothers’ flying machine invention. Studies have shown
that leisure can foster better innovative thinking in pursuing what is more important
to the creator, “shielded from the work time pressures of groupthink and hierarchical
decision-making” (Davis et al. 2009, p. 22). Accordingly, if government-funded
research labs or university-affiliated research centers can provide the sufficient
conditions that allow human creativity to flourish, then this competes well with a
major tenant of private sector innovation.
The success of GPS also depended on a second critical feature, the military’s need
for submarine navigation positioning, which provided the directionality to convert a
basic research discovery into an applied research mission. Thus, the GPS story in
terms of both the discovery and development of new technologies serves as an
exemplar for Mazzucato’s mission-oriented approach to innovation. Nevertheless, it
is important to note that the “need” factor was clearly identifiable in the GPS case as
it stemmed from the United States’s engagement in the Cold War. This less nebulous
version of government demand typifies military innovation.

Observations

My analysis of the two use cases selected to represent successful public sector
innovation endeavors reveals several observations worthy of comment. First, I
contend that the development of touch screen technologies does not represent a
public sector innovation achievement, especially of the Mazzucato style, where
government funding provides the mission and direction to guide success. In fact,
this technology should classify as a private sector innovation achievement consid-
ering that the public sector contributions stem primarily from basic research and the
102 R. H. Yerger

Fig. 1 Transilience map for innovation. Source: Author’s own application of Fig. 1 in Abernathy
and Clark (1985)

cumulative effect of innovation. Unfortunately for Mazzucato’s argument, many of

the state-guided innovation achievements she cites in The Entrepreneurial State fall
within this category, where her claims do not withstand the Supply-Chain Fallacy.
Furthermore, she biases credit away from private sector contributions. For exam-
ple, in the case of the iPhone, Mazzucato (2015a, p. 99) asserts that Apple is only an
integrator of new technologies, not a developer of them. Yet, according to the
noteworthy Abernathy-Clark innovation model, Apple’s role in this regard should
be deemed the most radical. Figure 1 reproduces the transilience map from the
Abernathy-Clark model depicting four quadrants of innovation types as measured by
market linkage and technology competence impacts. The iPhone is an example of
architectural innovation, plotting high on the y-axis by disrupting existing markets
and creating new ones as well as plotting high on the x-axis by disrupting or
rendering obsolete existing competencies (Abernathy and Clark 1985). In other
words, Apple’s launch of the iPhone achieved the very Schumpeterian creative
destruction that Mazzucato hopes to accomplish through her mission-oriented
approach to innovation.
Second, I submit that the development of GPS does represent a public sector
innovation achievement within a mission-oriented directionality construct. The GPS
example also showcases government or quasi-governmental organizations fulfilling
Mazzucato’s vision by both excelling at creative thinking during the basic research
phase and effectively executing the mission in the applied research stage. Consid-
ering the clarified military need aspect, the question remains, however, as to whether
such accomplishments can be replicated in a persistent peacetime environment.
Analyzing the Effectiveness of State-Guided Innovation 103

Furthermore, absent military need, can such government directionality produce

transformational results given a nonlinear innovation model of various feedback
loops between markets, science, and technology?
War and preparing for war has spurred a massive amount of invention and
innovation over time; so much in fact, that some economists ponder the likelihood
that our current period of relatively persistent peace is a causal force for the recent
trend of slow economic growth. Nuclear power, the computer, radar systems,
microwave technology, the modern aircraft, and yes, GPS can trace their origins to
military-directed efforts as dictated by the needs of war (Cowen 2014). McCloskey
and Mingardi (2020, p. 52) acknowledge the spinoff benefits from war, but question
the cost in terms of lives lost and destruction reaped upon property and society.
Nonetheless, if war is a frequent and necessary evil, assuming a Hobbesian view of
human nature, then at least society can exploit its benefits.
War streamlines the government’s focus, influencing a more effective decision-
making process (Cowen 2014). Still, this typically involves a single pre-defined end
for which a mission-oriented approach may yield technological success, which
differs from economic success where costs have to be taken into account to deter-
mine the best possible use of available resources (Hayek 1935, pp. 3–8). By
conflating technological success with economic success, a mission-oriented
approach risks rationalizing industrial planning efforts in a persistent peacetime
environment where the state’s ability to effectively solve the economic problem or
the technological problem remains in question. In order to assess the effectiveness of
state-guided innovation efforts in a persistent peacetime environment, it is critical to
analyze the viability of the public sector entrepreneur, who must play a pivotal role
in any government-led creative destruction process.

Public Sector Entrepreneurship

Mazzucato’s worldview of a mission-oriented approach to innovation depends on

public sector agents and organizations providing directionality through entrepre-
neurial action. In Mission Economy: A Moonshot Guide to Changing Capitalism,
Mazzucato (2021a, p. 175) calls for a complete reinvestment in government civil
service to transform modern bureaucracies away from the “role of simple market
fixer” toward a role as value creator. While there is a strong case for the functionality
of public sector entrepreneurs considering the close relation to their private sector
counterparts in terms of traits, characteristics, and motivations, a full determination
of viability requires an assessment of public sector institutional effects on entrepre-
neurial behavior.
Schnellenbach (2007) argues that government institutions in democratic societies
are not conducive to the bold, non-incremental changes envisioned by proponents of
Schumpeterian public sector innovation. He cites the existence of both formal and
informal institutional constraints; the former consisting of the role of veto players,
either through collective action or organizationally, and the latter consisting of voter
104 R. H. Yerger

behavior, which all serve to resist changes to the status quo or those changes
occurring at the margin that drive innovation. These constraints relate to the median
voter theorem and are attributed to the desire for political stability.
Schnellenbach (2007) provides empirical evidence demonstrating that significant
political/policy changes occur almost solely when the status quo is deemed
unsustainable by decision-makers and voting majorities. Therefore, political inno-
vations will primarily “occur in times of crisis and not be implemented with ample
foresight by bold public entrepreneurs” (p. 16). Not only is alertness raised during
crisis situations, but the need for novel solutions influences rapid, non-incremental
change within the public sector sphere as was the case with the success of the GPS.
Schnellenbach (2007, p. 12) concludes that at best the public sector agent can act as a
Kirznerian entrepreneur responding to “windows of opportunity” where latent
demand for novel solutions has manifested; but, importantly, the agent “can do little
to influence the emergence of such windows,” and consequently, policy innovations
often experience delayed implementation inhibiting their effectiveness.
To mitigate the institutional constraints defined above, Schnellenbach refers to
frequent proposals among economists for a reduction in checks and balances (i.e.,
the number of veto players) within a given system. This involves a tradeoff between
a perceived increase in public sector innovation and an increased threat to political
stability. The extreme outcome of this solution likely results in political dictatorship;
however, from the perspective of micro-level firm theory, decision-making can be
improved by reducing transaction costs through the adoption of centralized control
governance mechanisms that foster independence, speed, and flexibility in problem-
solving (Miller 1992, pp. 77–101). Translating to the public sector, this can be
thought of as streamlining and reducing the red tape of bureaucratic agencies so as to
increase their agility and creativity, which aligns closely with Mazzucato’s vision of
government silos providing mission-oriented directionality to innovation.
Analyzing the effects to entrepreneurial activity within a scenario of dismantled
checks and balances requires the consideration of additional institutional constraints
inherent in the public domain. Using a combined Austrian-public choice approach as
per Boettke and Lopez (2002), I first relax the omniscience assumption of the public
sector entrepreneur, which exposes the existence of information problems involved
with any central planning endeavor as illustrated by Hayek (1945). The dispersion of
knowledge “of the particular circumstances of time and place” makes problematic
any involvement by the government in picking winners. Furthermore, from a purely
entrepreneurial trait perspective, Kirzner (1982, p. 275) emphasizes market compe-
tition as critical to fostering alertness, guiding the economic calculation of “socially
worthwhile” innovation via profit and prices that allows the entrepreneur to “push
the economy forward in the direction of a possible Nirvana” (Douhan et al. 2007,
pp. 217–218). Without this guidance which is revealed via the dynamic and rivalrous
market process, directions toward social betterment are unknown. Central planners
are instead guided by their judgment or the judgment of their superiors and yet
assume a role as perceived experts.
This expert role played by central planners exposes the issue of technical feasi-
bility versus economic feasibility. Given the institutional constraints inherent in the
Analyzing the Effectiveness of State-Guided Innovation 105

public sector, the planning expert within a specific domain or industry is not
equipped to perform economic calculations. Lavoie (1985, p. 53) highlights this
issue by detailing the engineering expert’s role in assessing the best use of a
commodity such as wood: “This is not an issue about which the engineer has any
special expertise. It is not a question to which quantitative measurement of any
physical dimension is relevant. It is a question of the relative value of wood in
alternative uses.” Government planners have no ability to assess the opportunity
costs of these alternative uses.
Given the criticality of opportunity costs in the calculation problem, the success
of central planning efforts cannot be proven. As Powell (2005, p. 311) elaborates:
We can point to evidence of failures in calculation, because firms demonstrate they should
exist as structured by succeeding in the free market despite discouragement by the govern-
ment or when firms continually subsidized by the government fail to become privately
profitable. In both cases feedback from the market indicates a knowledge failure on the part
of the planners. Successful planning, however, cannot ever be established by observing that
a subsidized firm eventually becomes privately profitable. No market feedback mechanism is
in place to show that the gain in the subsidized industry is greater than the opportunity cost of
the industry that would have developed in the subsidy’s absence.

This holds true for the advent of the GPS, where the opportunity costs of the next
best alternatives are unknown. The implication of the calculation problem for public
sector entrepreneurs is that personal or political incentives reign supreme due to the
absence of residual claimancy; therefore, at a minimum, entrepreneurial discovery
will lag behind the private sector (Douhan et al. 2007, p. 218).
Moreover, when the benevolent assumption is next relaxed, public sector entre-
preneurial action could result in considerably unfavorable ends. Baumol (1990) first
introduced the concept of unproductive and destructive entrepreneurial outcomes as
entrepreneurs in general are biased more toward profit rather than innovation.
Consequently, if the rules of the game promote higher profit channels via rent-
seeking activities, then the level of productive entrepreneurial activity will decline.
Holcombe (2002) expanded upon the scope of entrepreneurial consequences by
incorporating the public sector entrepreneur and tracing the political profit motiva-
tion to two outcome types. The first type is efficiency-enhancing in that collective
benefits are supplied or socially and economically worthwhile innovation is gener-
ated. The rewards to the public sector entrepreneur politically manifest in a myriad of
ways that align with the agent’s self-interest to include gains in recognition, power,
and compensation.
The second type is via the forcible transfer of wealth from one person(s) to
another, where the public sector entrepreneur stands to benefit from the payment
of the transfer recipient. Such political profit is a form of predation and occurs via
coercion, which is one of the primary attributes of government action that contrasts
with private enterprise where transactions are entered into voluntarily. It is important
to stress that these unproductive activities are still considered entrepreneurial
because they require an alertness to potential rents and then action taken to acquire
them (Douhan and Henrekson 2010). Holcombe (2002, pp. 149–150) further alleges
that predatory opportunities are typically more profitable than productive ones given
106 R. H. Yerger

the logic of concentrated benefits and dispersed costs. Public sector entrepreneurs
stand to gain more from specific lobbyists and special interest groups than they do
from the general public’s welfare improvement via productive policies.
In summary, the entrepreneurial signals that enable the state to frequently repeat
public innovation successes like the GPS in a persistent peacetime environment are
dubious considering the incentives and abilities of the average bureaucrat. Lavoie
(1985, p. 201) describes the dangers of government-directed industrial policy as a
catastrophic combination of the knowledge problem and the totalitarian problem.
The former problem suggests that planners cannot “possibly know which industries
ought to be picked in order to enhance industrial growth,” while the latter problem
dictates “power will instead be wielded in response to political clout rather than
careful debate”; and the irony as cited by Lavoie is that these policies are allegedly
purposed to minimize the influence of special interests.

Conclusion

This chapter examined the effectiveness of state-guided innovation by assessing the

claim by advocates of the entrepreneurial state that government drives innovation
better than the private sector. I find that many assertions of the state serving as the
boldest innovator through a mission-oriented approach fail the test of McCloskey’s
Supply-Chain Fallacy. However, my use case analyses did find occasions of state-
guided innovation success, particularly when societal demand is made clearer as
witnessed during times of crisis. In order to assess the effectiveness of state-guided
innovation efforts in a persistent peacetime environment, I next analyzed the viabil-
ity of the public sector entrepreneur. I contend that the checks and balances provided
by political institutions severely constrain Schumpeterian innovativeness, while
information and incentive problems can channel Kirznerian alertness to political
profit toward unproductive or destructive ends.
My research has one important implication: advocates and executors of a
mission-oriented directionality toward public sector innovation take a pause, or at
a minimum, proceed with humility and consider the effectiveness of their approach
through an economic lens. Within and across inherently governmental organizations,
encouragements to enact a culture of innovation need to account for the lack of
residual claimancy and rivalrous competition that place the public sector at a distinct
disadvantage. Recognizing the sufficient conditions that allow human creativity to
flourish and understanding the impacts of government’s influence over entrepre-
neurship will be critical components in improving the effectiveness of state-guided
innovation efforts. At a minimum, increasing the understanding of what fosters
innovation is a valuable aim considering that innovation is the key to driving
economic growth and development.
Analyzing the Effectiveness of State-Guided Innovation 107

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Rodney H. Yerger, Jr is a member of the Principal Professional Staff at the Johns Hopkins
University – Applied Physics Laboratory. Previously, he served in the U.S. Navy and as a civilian
supervisory program analyst on the staff of the Chief of Naval Operations. He holds a PhD in
Economics from George Mason University, a Master of Science in Cost Estimating and Analysis
from the Naval Postgraduate School, a Master of Business Administration from the University of
Maryland, and a Bachelor of Science in Mechanical Engineering from the U.S. Naval Academy.

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A Case Study on DARPA: An Exemplar
for Government Strategic Structuring
to Foster Innovation?

Rodney H. Yerger Jr

Abstract Advocates for a mission economy contend that government bureaucracy

can be transformed through a strategic structuring that would improve upon the
dynamic capabilities necessary to pursue and direct innovation. The Defense
Advanced Research Projects Agency (DARPA) is touted as a model organization
of strategic structuring for inducing public sector innovation of emerging technolo-
gies. Applying economic theory and employing empirical analysis, I objectively
examine key factors that are attributed to DARPA’s success, such as the organiza-
tion’s autonomy, small size, and limited tenure of its program managers, in order to
assess the worthiness of the agency’s exemplar status of empowering a mission-
oriented approach to innovation. I find that while DARPA undoubtedly provides
value for national defense and has distinct advantages over other government
organizations, it falls short in representing a sustainable and scalable source of
strategic structuring that would befit the entrepreneurial state.

Keywords Public goods · Entrepreneurship · Innovation · Political economy

JEL Codes H41 · L26 · O31 · P16

Introduction

Advocates for a mission-oriented directionality to innovation tout the Defense

Advanced Research Projects Agency (DARPA) as one model improvement within
the public sector that provides the agility and flexibility to pioneer revolutionary

This chapter’s contents were mostly part of the author’s dissertation Analyzing the Effectiveness of
State-Guided Innovation for the degree of Doctor of Philosophy at George Mason University,
USA, 2023. Reused with permission.

R. H. Yerger Jr (✉)
Department of Economics, George Mason University, Fairfax, VA, USA
e-mail: [email protected]

© The Author(s) 2024 109

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_7
110 R. H. Yerger

technology advancement (Mazzucato 2021). The purpose of this chapter is to

execute a case study analysis of the DARPA organization, exploring its origins
from 1958 and detailing changes in its focus and processes over time and how those
changes track with its effectiveness at Schumpeterian entrepreneurship. The bulk of
the case study describes and documents the institutional mechanisms that DARPA
possesses to promote innovation. Much has been espoused regarding the success of
the DARPA model in the form of various attributes (Gallo 2021 and DARPA 2016),
which I categorize by the following three key factors:
1) Trust and autonomy.
2) Small size and the externalization of research.
3) Limited tenure and urgency.
This research objectively analyzes each factor, applying economic theory to
corroborate or counter the expected outcomes from DARPA’s purported strengths
and defending these assessments empirically where possible. I find that the organi-
zation’s touted autonomy is unstable over time due to political transaction costs as
evidenced by increased congressional oversight, shifting focus toward incremental
technology advancement to fulfill short-term military priorities, and a transfer of
expert power to established vendors. While DARPA has distinct advantages over
other government organizations, it falls short in representing a sustainable and
scalable source of strategic structuring.

DARPA’s History and Construct

Following the Soviet Union’s success in the space race with the launch of Sputnik,
the Eisenhower administration established the Advanced Research Projects Agency
(ARPA) in 1958, chartered with preventing “technological surprise” (Van Atta and
Windham 2019a, pp. 3–4). The agency was initially focused on large missions such
as missile defense and nuclear test detection with a brief foray in space-related
technology development until that function was absorbed by the standup of the
National Aeronautics and Space Administration (NASA). However, within a few
years, ARPA assumed an additional role in pursuing a “set of smaller, technically
focused programs” in areas such as materials science, information technology, and
behavioral science (Van Atta and Windham 2019a, p. 4). These pursuits led to what
is typically acclaimed the agency’s two greatest contributions to innovation: the
precursor to the Internet and the foundation of personal computing.
In 1972, because of increased scrutiny on military spending for many reasons
including the unpopularity of the Vietnam War, the agency encountered its most
significant focus change when Congress limited research efforts to only those having
direct military application. This not only resulted in the name change from ARPA to
DARPA but also added increased process and oversight (Fong 2019). The effects of
these process changes to DARPA’s purported strengths are explored in subsequent
sections.
A Case Study on DARPA: An Exemplar for Government Strategic Structuring. . . 111

DARPA continued to evolve and shift focus throughout the decades following its
renaming, primarily aligning with changes in national security priorities, such as the
Global War on Terror in the 2000s. Despite these shifts, the underlying organiza-
tional mission has remained basically the same: “to prevent and create technological
surprise” (Gallo 2021, p. 5; DARPA 2016, p. 4). DARPA asserts a commitment to
achieve transformative research and development (R&D) with a stress on higher
risks and higher rewards over incremental advances. To accomplish its mission,
DARPA adheres to a process that externalizes research through an annual budget of
approximately USD 3.5 billion to fund performers primarily from industry (62 per-
cent in 2020), and secondarily from universities (18 percent in 2020), federal
laboratories and research centers (15 percent in 2020), other nonprofits (4 percent
in 2020), and foreign entities (1 percent in 2020) (Gallo 2021, p. 10). DARPA’s
funding levels have stayed fairly constant over time. So too has the agency’s
manpower footprint, which is primarily composed of approximately
100 “empowered program managers coordinating high-risk high-reward external
research” (Reinhardt 2020). This feature along with special hiring and contract
authorities sets DARPA apart from other government agencies in terms of its
independence, which advocates claim provides flexibility for both ideas generation
and enhanced engagement opportunities with potential performers. These elements
of the DARPA model frame my case study approach in analyzing the three key
factors that purportedly promote innovation. The first factor is trust and autonomy.

Factor 1: Trust and Autonomy

DARPA’s autonomy stems from its explicit separation from the larger Department of
Defense (DoD) to include the military services, which allows for disruptive tech-
nology pushes beyond the constraints levied by specific military requirements and
missions (Gallo 2021). This uncoupling represents a mitigation of the institutional
constraints that drive median results in the government domain and obstruct
Schumpeterian entrepreneurship (Schnellenbach 2007). Less checks and balances,
especially the avoidance of excessive oversight from Congress, provides DARPA a
level of opacity that promotes speed and flexibility in decision-making, garners
independence in problem-solving, and incentivizes risk-taking (Miller 1992; Rein-
hardt 2020). Ter Bogt (2003, p. 151) connects the “autonomization” of a public
organization to transaction cost economics (TCE); specifically, DARPA represents
an “internally autonomized organization,” which stakes a claim in the lowering of
economic transaction costs by limiting political influence.
The trust and autonomy bequeathed by the DoD and Congress to DARPA also
extends to within the organization from the agency director to the aforementioned
empowered program managers, who can select and terminate projects through their
ability to deploy money rapidly and independently (Gallo 2021; Reinhardt 2020).
Thus, DARPA’s organizational structure consists of a unique combination of cen-
tralized and distributed control mechanisms. Miller (1992) stresses that causes of
112 R. H. Yerger

market failure such as information asymmetry and team production externalities lead
to hierarchical solutions for social dilemmas. Moreover, disadvantages of democracy
such as preference instability and indecisiveness and/or manipulation in decision-
making lend favor toward centralizing power (cf. Arrow 1963). In DARPA’s case,
autonomy has been purposefully granted to the agency director, and other stake-
holders like the military services and Congress are restrained in their decision-
making authority as it pertains to DARPA’s purview.
Nonetheless, a hierarchy contains its own set of issues. Central planning efforts
suffer from Hayek’s knowledge problem and what Tullock (2005 [1965],
pp. 148–152) refers to as “whispering down the lane,” where agile coordination is
constrained by the multiple levels of superior-subordinate interactions that impede
knowledge diffusion and discourage entrepreneurship alertness and discovery.
Miller (1992, p. 80) argues that firms can address these issues by injecting an
additional level of autonomy within the organization via delegation: “. . .a dictator
who needs good information and good ideas must create the basis for independence
inside the hierarchy.” The DARPA equivalency is delegating real shares of decision-
making authority to program managers, who are hired from industry and academia
and serve as experts in their specific domains of research within the fields of science
and engineering (Gallo 2021).
Provided the strengths of DARPA’s unique form of independence through the
combination of centralized and distributed control governance structures, theoretical
counters exist to this organizational construct’s stability in maintaining autonomy,
which also calls into question the appropriateness of possessing high levels of
opacity for inherently governmental entities. The first counterpoint considers the
overall agency level and its relationship to its external stakeholders. Because
DARPA classifies as an “internally autonomized organization,” it is neither truly
independent nor private; therefore, political influence can still erode efficiency, at
least over time. In attempting to incorporate TCE into the public sector domain, Ter
Bogt (2003) proffers a political transaction cost framework to account for the lack of
emphasis placed on economic efficiency in government organizations. This frame-
work analyzes each of the primary characteristics of TCE as promulgated by
Williamson (1981)—asset specificity, frequency and scale, and uncertainty—in
order to assess the political willingness to increase or decrease an organization’s
autonomy. According to Ter Bogt’s analysis, the willingness to “autonomize” will
increase for basic government functions such as the provision of student loans or
road maintenance. DARPA’s case is the opposite of basic functionality. Its product,
innovation, involves high asset specificity in terms of uniqueness and importance
and high uncertainty in terms of the frequency with which it can be produced and the
ability to measure success.
Furthermore, Ter Bogt’s (2003) framework considers additional political trans-
action costs associated with maximizing electoral support, the influence of special
interest groups, and political opportunism with a focus on increasing political
efficiency for inherently governmental organizations. Applying these consider-
ations, DARPA’s independence as an organization could be jeopardized by two
key sources. The first source consists of special interest groups working through the
A Case Study on DARPA: An Exemplar for Government Strategic Structuring. . . 113

larger DoD and military services, who might desire to control the shape and direction
of DARPA-related technology development efforts. This source includes large
public-private partnership companies that perform a huge proportion of defense-
related R&D. The second source are the taxpayers, who typically demand the very
checks and balances that have been removed through “autonomization” to ensure
their money is being spent wisely and competently. The higher the level of opacity
within an inherently governmental organization, the more difficult the challenge to
safeguard against abuses. Given that DARPA explicitly regards each program
manager as filling the role of a technical subject matter expert, this high level of
opacity can result in what Koppl (2018, pp. 189–200) refers to as a “rule of experts”
scenario, where a monopoly of experts increases the likelihood of unreliability,
which can lead to bad decision-making.
Another critical counterpoint involves DARPA’s autonomy internal to the orga-
nization residing with the individual program managers. Miller (1992, pp. 86–89)
highlights the downside of distributed control governance as explained through the
Sen paradox: “. . .any organization that delegates decision-making authority to more
than one subset of individuals must suffer from either incoherent behavior or
inefficiency for some combinations of individual preferences.” The tradeoffs given
the Sen paradox involve the individual self-interest of each DARPA program
manager and the agency’s best interest. Thus, distributed control can evolve into a
threatening construct to both the dictator and external stakeholders. However, the
DARPA model exhibits additional strengths purported to combat inefficiency in
outcomes and intransitivity in preferences. The second and third key factors of my
case study analysis elaborates further on these strengths.

Factor 2: Small Size and Externalization of Research

To avoid the Sen paradox, Miller (1992, pp. 94–95) contends that the hierarchy must
“shape and mold individual preferences into patterns that are mutually consistent.”
One way DARPA mitigates the threat of incoherent behavior and inefficient coor-
dination is through its small manpower footprint. DARPA’s core staff size gravitates
toward Dunbar’s number (~150), which is the suggested limit at which social
relationships flourish as each member can get to know every other person in the
organization. Knowing everyone creates peer pressure through scrutiny, which pro-
vides a check against abusing opacity and fosters an adherence to a common set of
goals (Dunbar 1992; Reinhardt 2020). Remaining small in size may also help
counter external threats to DARPA’s independence from special interest groups
and the taxpayer. By staying below the radar, DARPA might avoid targeting for
predation and regulation despite the higher political transactions costs associated
with extremely uncertain and disruptive innovation efforts.
DARPA maintains its small footprint by externalizing research, which is pro-
moted as another strength of its governance model. The agency avoids the high
transaction costs involved in obtaining the unique knowledge and equipment
114 R. H. Yerger

required in pursuing groundbreaking research. DARPA does not establish its own
labs or the bureaucracy involved in managing them (Cummings 2018; Reinhardt
2020). Instead, it outsources these assets through discrete project funding that yields
a lower overhead and streamlines accountability by ensuring each project is respon-
sible to one person, the program manager (Reinhardt 2020).
Despite the perceived advantages of DARPA’s small size and externalization of
research, there may also exist associated drawbacks. Overcoming the Sen paradox
by internally streamlining preferences might restrict a sense of competition among
independent program managers and instead promote expert failure by enhancing
synecological bias through motives that Koppl (2018) argues are inherent in max-
imizing expert utility. These motives include identification that is tied to a common
mission as well as a sympathy for and a desire to please fellow experts.
Moreover, even though the organization’s small footprint might help to ward off
threats to predation, it increases the detrimental effects of politicization should the
willingness to decrease autonomy dominate as predicted by Ter Bogt’s political
transaction framework. If all program managers are aligned tightly with DARPA’s
director, absent bureaucracy, politicization of the director could lead to a prioritiza-
tion of goals and efforts entirely dictated by external forces rather than the organi-
zation’s stated mission (Reinhardt 2020).
An intentional restriction in size also shapes broader ramifications for
Mazzucato’s vision of strategic structuring that calls for a replication of the
DARPA model to induce the entrepreneurial state. Breznitz and Ornston (2013,
p. 4) argue that bastions of successful public sector entrepreneurship will more likely
“occur at the periphery of the public sector, in low-profile agencies with relatively
few hard resources and limited political prestige.” They cite DARPA as a peripheral
organization that does not suffer from the political interference found with a larger
and “centrally positioned” agency. These strengths pose a significant challenge in
attempting to scale the DARPA model in order to achieve a vision of transforma-
tional value creation by the public sector.
Finally, there are disadvantages in externalizing research that involve tradeoffs in
transaction costs. While DARPA avoids the high overhead costs associated with
providing its own labs and equipment, it incurs the costs of finding and establishing
relationships with appropriate and competent performers and ensuring that these
performers produce value on time and on budget. These costs involve large under-
takings, which typically require hierarchical control to monitor and prevent shirking
(Reinhardt 2020). Koppl (2018) argues that synecological redundancy is a key
tenant in mitigating expert failure. Instead, the DARPA model relies on a lone
program manager tasked with multiple ventures, which exacerbates the risk of
unreliability due to expert error to include making unintentional or “honest” errors
given the limited cognition of an expert’s bounded rationality. Therefore, by
outsourcing its potentially transformative research efforts, DARPA might find it
tempting or even necessary to outsource the centralized control mechanisms required
to produce such results. Such requirements can limit research partnerships to larger,
more mature companies and increase the likelihood of rent-seeking behavior. Nev-
ertheless, the DARPA model provides a check against these alleged disadvantages
A Case Study on DARPA: An Exemplar for Government Strategic Structuring. . . 115

by motivating active program management, which involves the third key factor of
my case study analysis.

Factor 3: Limited Tenure and Urgency

Congress grants DARPA special privileges in hiring and contracting authority.

Specifically, DARPA can directly and expeditiously hire science and engineering
experts from industry and academia for term appointments, typically 3 to 5 years.
DARPA’s special contracting authority lowers the transaction costs of the govern-
ment acquisition process in not only bypassing burdensome procurement regulations
to develop flexible agreements with R&D performers but also by empowering the
program manager to reprioritize and reallocate funds based on performance (Gallo
2021; DARPA 2016). These authorities give DARPA distinct advantages through
the motivation of active program management and ideas generation as well as in
providing a counter to the Sen paradox.
Limited tenure encourages program managers to take risks in funding ideas for
short-term durations but with a long-term view in mind, where both the need and
value proposition are uncertain (Bonvillian et al. 2019; Gallo 2021). The hiring
process sets expectations upfront that the program manager position is not career
oriented. Excelling in the position will not result in a promotion within the organi-
zation, and funding unsuccessful long shot ideas will likely not adversely impact
one’s career (Reinhardt 2020).
To achieve long-term impact, program managers seek ambitious project ideas and
tolerate associated failures as “the cost of supporting potentially transformative or
revolutionary R&D” (Gallo 2021, p. 6). However, checks are inherent in the
DARPA process that attenuate the effects of failure via the short-term funding of
seedling projects, which allows the program manager to track progress and terminate
and redeploy funding for those projects that underperform (Van Atta and Windham
2019a). In this manner, while DARPA externalizes research, it bears the risk for the
performer, which advocates insist is a major advantage over private sector venture
capitalism. Furthermore, DARPA can also bear the risks for other funding mecha-
nisms by signaling technology validation, which encourages larger industry per-
formers to front their own money or other government entities like the National
Science Foundation to provide grants to continue development (Reinhardt 2020).
In addition to incentivizing risk taking via active program management, limited
tenure creates constant turnover of personnel (~25 percent per year) that should
ideally result in a continued infusion of ideas. Not only does this turnover model help
with new idea generation but also allows a revisiting of old ideas that might have
been tried previously and failed. Subtle tweaks to an old idea or simply the timing
and environment in which the idea reemerges may result in improved outcomes that
would not have otherwise materialized had the organization preserved the memory
of past naysayers (Gallo 2021).
116 R. H. Yerger

A final advantage of limited tenure is that along with the aforementioned small
manpower footprint, DARPA’s hiring flexibility provides a counter to the Sen
paradox associated with distributed control governance mechanisms. The DARPA
director can shape coherent behavior by hiring similarly minded and motivated
subordinates with preferences that align to the DARPA mission of creating and
preventing technological surprise.
As with the other key factors, there exist theoretical counterpoints to the pur-
ported benefits of DARPA’s limited tenure and flexible hiring policies. An obvious
drawback to excessive risk taking is that associated failures are a cost to the taxpayer
and moreover, could result in destructive entrepreneurial outcomes. While logic
supports the need to tolerate failure when pioneering disruptive technology advance-
ment, understanding the returns to such efforts via cost-benefit analysis remains an
appropriate consideration. This includes taking into account the costs in revisiting or
duplicating old ideas that simply will not work despite the fact that program manager
turnover reinvigorates their appeal (Gallo 2021). Furthermore, while limited tenure
may motivate risk-taking, it cannot completely displace familiarity bias, which
influences agents to invest in and with those they trust (Reinhardt 2020). In the
case of the DARPA program manager, this bias might result in allocating funding to
those researchers with sound and stable reputations over less mature, smaller
enterprises, which runs counter to Schumpeterian entrepreneurship.
With regard to flexible hiring practices, the methods DARPA uses to streamline
preferences and foster coherent behavior do not fully embrace the theoretical
underpinnings required in overcoming the Sen paradox. As government employees,
neither DARPA program managers nor the director are residual claimants, which is a
striking difference between public sector entrepreneurs and venture capitalists. The
standard solution to address the agency problem caused by decision managers not
being residual claimants is via compensation that accurately reflects performance in
the overall market for management (Fama 1980). Miller (1992, pp. 100–101)
stresses that the streamlining of preferences via socialization is insufficient because
adverse selection causes measurement error in determining the potential fit of a
candidate for hire. Instead, the most effective means of “reconciling transitivity,
efficiency, and delegation” is through the compensation system. While DARPA’s
unique status allows for the authorization of higher salaries than compared to other
government agencies, a pay gap certainly exists between similarly skilled private
sector counterparts in the science and engineering communities. Consequently,
DARPA must depend on the aforementioned personal gain incentives.
A final concern exists with the overall concept of active program management,
which has sparked debate over the benefits of DARPA’s changes to process over
time. In the days of ARPA (1958–1972), program managers exercised less control
over the efforts of performers, while maintaining responsibility of overall vision and
funding (Worrydream 2017; Kleinrock 2014). Tracking progress and performance
via standard program management techniques can focus too much priority on near-
term results and derail long-term vision (Cummings 2018). This focus is bureau-
cratic in nature, which ironically is what DARPA is chartered to avoid.
A Case Study on DARPA: An Exemplar for Government Strategic Structuring. . . 117

Empirical Analysis

The next step of my case study analysis explores quantitative and qualitative
evidence that bolsters either the points or counterpoints described above regarding
the three key factors of the DARPA model. First, regarding independence, ample
evidence exists that DARPA has become less autonomous over time, which is an
indication that political transaction costs have influenced the willingness of political
actors to tolerate a high level of opacity. Starting with the transition of ARPA to
DARPA in 1972, increased oversight has influenced how DARPA spends its money.
Lump sum authorization of funding by Congress has shifted to demanding annual
budgets for each program that include a description of the work to be performed.
Despite DARPA’s streamlined processes over other government institutions, grants
for seedling projects must still go through an open and involved solicitation process.
As a result of orienting DARPA’s work more to the needs of the military to counter
existing threats, DoD has shaped and dictated shorter-term areas of R&D efforts to
support active conflicts such as the Vietnam War in the 1970s and Global War on
Terror in the 2000s. Finally, and perhaps the biggest example of increased politici-
zation, the appointment of DARPA directors is now aligned with presidential
administrations (Reinhardt 2020).
Regarding the pros and cons of organizational size, DARPA has maintained a
relatively small manpower footprint over time. In remaining small and flat, DARPA
has successfully resisted Parkinson’s Law, a crucial contributor to bureaucratic
inefficiency where success is measured by the growth in the number of subordinates
under a director’s control (Tullock 2005 [1965]). However, evidence exists that
DARPA’s externalization of research suffers from the high transaction costs
involved in searching for competent researchers and monitoring performance. In
2001, DARPA started awarding prime contracts almost exclusively to “established
vendors,” which relegated universities and start-up firms into a teaming concept that
reports through the prime contractor (Fuchs 2010, p. 1138).
Sound reasons exist for the shift in awarding prime awards to established vendors.
Fuchs (2010) cites the decline of corporate R&D labs over time as responsible for
raising the transactions costs. An established vendor can better perform the systems
management necessary to see technology advancement through to production and
thereby avoid “the Valley of Death.” Conversely, the relegation of start-ups to a
supporting role in the DARPA process is concerning considering the view that newer
entrepreneurial firms are the linchpin for breeding successful innovation because of
ownership incentives and information advantages (Karlson et al. 2021). Further-
more, the dependence on larger, more mature companies to provide the hierarchal
control mechanisms for the externalization of research increases DARPA’s vulner-
ability to rent seeking by special interests, which directly stunts productive entre-
preneurial opportunities.
In a sense, DARPA’s arrangement with established vendors might represent a
transfer of expert power from the program managers to the large industry R&D
performers. Koppl (2018) proffers an information choice theory model of an
118 R. H. Yerger

epistemic system utilizing a sender-receiver game construct. As applied to DARPA

following the shift in awarding prime contracts to established vendors, the program
manager now represents the receiver (or nonexpert) beholden to a monopoly of
senders (or experts) as represented by the large defense contractors. The receiver
grows more powerless as rivalry among senders is reduced. Not only does this lack
of rivalry increase synecological bias, but the intentional relegation of start-up
companies also restricts free entry, which Koppl cites as a key contributor to expert
failure: “‘Potential competition’ is more important than the number of incumbent
competitors” (Koppl 2018, p. 205; cf. Baumol 1982).
DARPA’s adherence to active program management might offset the increased
likelihood of expert failure and vulnerability to rent seeking caused by the shift in
contracting strategy. Anecdotal evidence supports the view that DARPA program
managers have a healthy tolerance for failure. Over DARPA’s history, project losers
ranging from research into paranormal activity to developing mechanical elephant
transports to more recently, testing rapid space launch capabilities have showcased a
willingness to try out challenging and quirky ideas (Gallo 2021). Of a more
quantitative nature, Goldstein and Kearney (2017, 2020) conducted studies measur-
ing past project selection and performance for ARPA-E, the Department of Energy’s
transformational R&D organization, which can serve as a proxy for DARPA.
Goldstein and Kearney (2017) find that ARPA-E program managers exercise auton-
omy via their tendency to select projects for funding that receive less consensus from
external peer reviews.
Furthermore, Goldstein and Kearney (2020) find that program managers do not
shirk from playing an active role in the management of their portfolio by frequently
redeploying money to increase funding for stronger performing projects and decreas-
ing or terminating funds for those that perform weakly. In this manner, they are
exercising real options similar to the way venture capitalists monitor their invest-
ments and unlike the hands-off approach that other public sector entrepreneurial
mechanisms such as the Small Business Innovation Research (SBIR) program take
via the provision of grants.
In terms of the effectiveness of DARPA’s flexible hiring practices, compensation
gaps between program managers’ salaries and their private sector counterparts loom
as a significant concern. Reinhardt (2020) estimates that experienced scientists and
engineers at large tech companies receive at least twice as much compensation,
whereas this gap was much less severe (~20 percent) in the 1960s during the days of
ARPA. The commercial high-tech sector promises to be even more competitive
going forward, which may not bode well for attracting top talent to a position that
entails no promotion and requires relocation to Washington, DC.
In analyzing possible frictions between DARPA’s dual roles in executing trans-
formative R&D and responding to threat-based time-sensitive challenges for the
military, a review of DARPA’s history tells a tale of two different organizations. The
first tale involves the ARPA years from 1958–1972, when Congress and DoD
exercised much less oversight over the agency and the program managers exercised
much less oversight over research performers. One of the earliest DARPA directors,
Jack Ruina, “valued scientific and technical merit above immediate relevance to the
A Case Study on DARPA: An Exemplar for Government Strategic Structuring. . . 119

military” and delegated a high level of autonomy to his program managers (Fuchs
2010, p. 1137). The best example of this delegation involves one of the organiza-
tion’s greatest successes, the R&D that led to the advent of the Internet and personal
computing. J. C. R. Licklider, the program manager for these efforts, advanced an
ambitious vision that foresaw computers serving as “interactive intellectual ampli-
fiers for all humans, pervasively networked worldwide” (Worrydream 2017, para 14;
Kleinrock 2014). This vision was only loosely connected to solving command and
control challenges for national defense, and it did not entail a specific set of goals nor
a roadmap. Instead, Licklider leveraged the power of his vision to find and organize
an impressive network of researchers and sustain investments in the underlying
technologies to achieve success (Van Atta and Windham 2019b, pp. 39–40;
Bonvillian 2019, pp. 94–98).
It is important to note that ARPA’s considerable level of independence did not
always result in productive entrepreneurial outcomes. Project AGILE supported
combat operations in Vietnam and involved mismanaged efforts to improve weap-
onry, which included chemical agents. The project was an unmitigated disaster,
which led to the conviction of the program manager, William Godel, for embezzle-
ment. Yet, because of its covert nature, the project avoided scrutiny allowing it to
survive for over a decade (Van Atta and Windham 2019a; Reinhardt 2020). This
example of a destructive entrepreneurial outcome calls into question the sustainabil-
ity of unfettered independence for inherently governmental organizations, which
provides a convenient segue to the second tale of DARPA.
The shift from ARPA to DARPA in 1972 increased oversight and focused the
organization’s efforts more directly on military application. By 1975, DARPA’s new
director, George Heilmeier, instituted what became known as the “Heilmeier Cate-
chism,” which was the genesis of active program management. Heilmeier influenced
more of a top-down and mission-oriented approach for the management of projects
that involved setting intermediate and long-term goals, tracking progress, and
estimating the costs and benefits of each research effort as it pertained to the
customer (Van Atta and Windham 2019a, pp. 14–15; Fong 2019, pp. 193–194;
Cheney and Van Atta 2019, pp. 233–234). Although active program management
mitigates the risks of longer-term, highly uncertain technology advancement efforts
and increases the success rate of technology transition, it also entails greater costs to
autonomy and disincentives toward risk-taking over ARPA’s more vision-oriented
approach.
The ultimate empirical evidence in evaluating the effectiveness of DARPA over
time would be to accurately measure return on investment in terms of innovative
output. Attempts at measuring patents per award and funding per patent illustrate
that DARPA performs considerably well compared to other government agencies;
however, these cannot be considered apples-to-apples comparisons given the varied
charters and missions of these agencies, nor do these assessments address the more
important question as to how well DARPA performs compared to the private sector
(Piore et al. 2019, pp. 49–52).
Reinhardt (2020) reviews the agency’s own advertised accomplishment timeline
and bins what he refers to as “outlier successes” into two categories: pre-1972
120 R. H. Yerger

(ARPA) and post-1972 (DARPA). An outlier success can be considered synony-

mous with architectural innovation, which disrupts and creates markets while also
outmoding existing competencies (Abernathy and Clark 1985). The results of
Reinhardt’s binning excursion reveal that the vast majority (over 70 percent) of
DARPA’s architectural innovation occurred during the ARPA years. The ramifica-
tions of this revelation do not detract from the value DARPA has provided and
continues to provide to its single customer, the military; albeit this value is harder to
appreciate given its specific military utility and narrow applicability.

Conclusion

This chapter analyzed the institutional mechanisms of DARPA as a model for

strategic structuring that fosters Schumpeterian public sector entrepreneurship. In
reviewing three key factors that expound the DARPA model, I explored theoretical
points and counterpoints that make for a complex and inconclusive assessment as to
the potentiality of DARPA’s distinctive form of organizational governance in ful-
filling the vision of an entrepreneurial state.
Through a unique combination of centralized and distributed control mecha-
nisms, DARPA possesses a higher level of autonomy, at least compared to other
government organizations; however, I find this autonomy to be unstable. Political
transaction costs associated with state-guided innovation efforts decrease the will-
ingness to autonomize, which erodes independence via three discrete sources. First,
concerns from the taxpayer over abuses to opacity and expert failure have led to
more congressional oversight over time. Second, vulnerability to rent seeking by
special interests has increased, which is evidenced by a transfer of expert power to
and a growing dependence on established vendors to provide the hierarchal control
mechanisms for the externalization of research. Third, pressures from external
stakeholders such as the military have influenced a greater focus on shorter-term
military or administration priorities, which can incentivize technology transition
over risk-taking. While DARPA is better equipped than others to ward off threats
to its autonomy through such advantages as flexible hiring practices and special
contract authorities, its model depends on employing highly competent and moti-
vated program managers, and yet, subsequently cannot depend on compensation to
overcome the residual claimant agency problem.
My research reveals that the vast majority of DARPA’s architectural innovation
occurred prior to the critical shift from ARPA to DARPA in 1972, which was a time
characterized by much less external oversight and a much lower pay gap between
government and private sector high-tech labor. It is important to note, however, that
this correlation between ARPA’s greater autonomy and innovation success should
not imply causation. Another factor at play could be the characteristics of the post-
World War II era, or perhaps more specifically, the height of the Cold War, which
involved a level of crisis that dictated a demand for rapid and novel change and
raised alertness to entrepreneurial opportunities. Indeed, DARPA’s founding is
A Case Study on DARPA: An Exemplar for Government Strategic Structuring. . . 121

steeped in a collective mobilization across the public sector domain to counter the
crisis of technological surprise. Since that time as the Cold War diminished, prepar-
ing for “system-level war” shifted toward a focus on responding to “shorter-term
tactical missions.” Ruttan (2006, pp. 183–184) contends that the absence of a major
war, or at least the threat of one, diminishes the probability that our political system
could generate the willpower and resources “required to initiate and sustain the
development of major military and defense-related general-purpose commercial
technologies of the past.”
Another crucial concern in assessing DARPA as a model for Mazzucato’s
strategic structuring vision is its scalability. Even if DARPA can effectively sustain
a resistance to political interference, this would be attributed to its small footprint
and its existence as a peripheral organization. The fact that DARPA’s disruptive
technology efforts can threaten status quo defense acquisition processes, which can
drive opposition within the military, does not support the claim that the high-risk,
high reward approach inherent in Schumpeterian entrepreneurship could expand to
transform large areas of the government. Even attempts at cloning DARPA for the
sake of establishing other peripheral organizations dedicated to long-term revolu-
tionary R&D have met with resistance and limited success. For example, despite
consultation on adopting the strengths and processes of the DARPA model, ARPA-
E suffers from greater hierarchical control both internally and externally. Within the
organization, the program managers are outnumbered by support staff, which entails
a higher level of process-driven activity. External to the organization, ARPA-E is
directly funded by the Department of Energy instead of Congress, which threatens
independence of basic functions such as program selection and idea generation
(Fuchs 2009; Reinhardt 2020).
In conclusion, DARPA undoubtedly provides value to the defense of the United
States and has generated productive public sector entrepreneurial outcomes. How-
ever, the agency falls short in representing a sustainable and scalable source of
strategic structuring that would befit the entrepreneurial state.

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30-alan/

Rodney H. Yerger, Jr is a member of the Principal Professional Staff at the Johns Hopkins
University – Applied Physics Laboratory. Previously, he served in the U.S. Navy and as a civilian
supervisory program analyst on the staff of the Chief of Naval Operations. He holds a PhD in
Economics from George Mason University, a Master of Science in Cost Estimating and Analysis
from the Naval Postgraduate School, a Master of Business Administration from the University of
Maryland, and a Bachelor of Science in Mechanical Engineering from the U.S. Naval Academy.

Open Access This chapter is licensed under the terms of the Creative Commons Attribution 4.0
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The State of the Entrepreneurial State:
Empirical Evidence of Mission-Led
Innovation Projects around the Globe

Maral Batbaatar, Johan P. Larsson, Christian Sandström,

and Karl Wennberg

Abstract This chapter reviews theoretical rationales for mission-oriented innova-

tion policy and provides an empirical overview of extant 28 papers and 49 cases on
the topic. We synthetize varieties of mission formulations, actors involved, and
characteristics of missions described as more or less failed or successful. Fifty-
nine percent of the studied missions are still ongoing, 33 percent are considered
successful, and 8 percent as failures. Sixty-seven percent of the studied missions
have taken place in Europe, 24 percent in North America, and 8 percent in Asia. The
majority of innovation projects referred to as missions do not fulfill the criteria
defined by the OECD. Results suggest that missions related to technological or
agricultural innovations are more often successful than broader types of missions

All authors contributed equally and are listed alphabetically. Batbaatar gratefully acknowledges
funding from the Ratio Institute, Wennberg from Riksbankens Jubileumsfond (P22-0651), and
Larsson from the Kamprad Family Foundation for Entrepreneurship, Research & Charity
(P20220048).

M. Batbaatar
Stockholm School of Economics, Stockholm, Sweden
The Ratio Institute, Stockholm, Sweden
J. P. Larsson
The Ratio Institute, Stockholm, Sweden
Department of Land Economy, University of Cambridge, Cambridge, UK
e-mail: [email protected]
C. Sandström
The Ratio Institute, Stockholm, Sweden
Jönköping International Business School, Jönköping, Sweden
e-mail: [email protected]
K. Wennberg (✉)
The Ratio Institute, Stockholm, Sweden
House of Governance and Public Policy (GaPP), Stockholm School of Economics, Stockholm,
Sweden
e-mail: [email protected]

© The Author(s) 2024 125

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_8
126 M. Batbaatar et al.

aimed at social or ecological challenges. Challenges regarding the governance and

evaluation of missions remain unresolved in the literature. We find no case that
contains a cost-benefit analysis or takes opportunity cost into account.

Keywords Innovation · Government agencies · Mission-oriented policies · Grand

societal challenges

JEL Codes H11 · H50 · L26 · L52 · O32

Introduction

Industrial policy has experienced a renaissance over the past decade (Juhász et al.
2023; Aghion et al. 2023). Ideas of an Entrepreneurial State and a Mission Economy
are currently permeating policy departments, notably in Europe, as the concepts are
put into practice and rolled out across the globe. A mission is best understood as an
encompassing endeavor seeking transformational change with large potential soci-
etal benefits; missions span several sectors and are tightly linked to regulatory bodies
(see, e.g., OECD 2021).
Much effort has been invested into deepening our theoretical and conceptual
knowledge of mission-led growth and state entrepreneurship. But the state of our
knowledge about their effects is still incomplete, not to say entirely uncertain.
Researchers and policymakers increasingly look to probe the logic behind the
mission “organisms” by studying the empirics of missions, their contents, and
outcomes.
To begin with, we have no established empirical operationalization of what a
mission really is. What types of missions have been conducted and in which
contexts? How are those missions deployed, by whom, with what constellation of
actors, and what have the outcomes been thus far?
We are not aware of a systematic review of the empirical literature on the subject,
hitherto. There are indeed few empirical evaluations or studies of how missions are
designed and executed (cf. Essén et al. 2022; Kantor and Whalley 2023). Crucially,
we seem to know little about when missions are more or less likely to work as
intended. In response to these gaps in the literature, we provide an empirical
overview of 49 concluded or ongoing missions from around the world. We
synthetize varieties of mission formulations and policy tools attached to such mis-
sions and critically discuss what precise characteristics that may qualify them as
missions. We then analyze characteristics of missions depicted as more or less failed
or successful, and compile policy recommendations and future research recommen-
dations on mission-oriented innovation policy. In pursuing this endeavor, we also
provide a database for overview of articles on the subject.
The State of the Entrepreneurial State: Empirical Evidence of Mission-Led. . . 127

Methods and Literature Overview of Missions

To examine documented mission-oriented innovation policies that have been

launched and analyzed, we conduct a policy mapping exercise (Burgess et al.
2007; Kivimaa and Kern 2016). We make use of international academic databases
such as EBSCO, ABI-INFORM, and Google Scholar. The result is a compilation of
missions from various continents to aid analysis of missions. Key terms include
“missions*,” “mission-oriented*,” “mission innovation*,” and related terms.
Considering that mission-oriented innovation policy is a relatively recent term
that is gaining popularity, we expected to find a sizable number of papers on the
subject. However, most of the papers that we identify through systematic search are
purely conceptual. We scanned reference lists, including in conceptual and method-
ological papers, to identify papers containing descriptions of missions, and
conducted wider internet searches for “grey” literature (policy reports, evaluations,
non-peer-reviewed articles, etc.).
Departing from reference papers, including Mazzucato’s publications and
corresponding reviews, we searched through citations using a snowball technique.
We did not perform tailored searches for any specific large-scale government
initiatives (e.g., the US Marshall Plan). We screened all our identified papers for
available empirical data.
In the following, we include all papers that use some sort of empirical data in
describing missions. Altogether, we found 28 papers containing descriptions of
49 unique missions. The data encompass both first-source information, such as
interviews conducted with agents involved in specific missions, and secondary
data, including archival records related to past missions.
We added key data from all these publications to a comprehensive spreadsheet,
available in an online Appendix (Batbaatar et al. 2023). Some papers include a case
study of a single mission, while others encompass several missions. Papers covering
several missions were bifurcated so that each row in the spreadsheet contains a single
mission. Our analysis covers 49 missions in total.
From the identified studies, we extracted and coded key information about each
mission into the spreadsheet. Each row contains a paper and mission, and each
column reflects one form of information about the mission. If a paper contains
several missions, and therefore features the same overarching future research rec-
ommendations, research question, and discussion points, then they are bundled
together in one column in the online Appendix. The spreadsheet table is to be read
from left to right.
The studies are numbered in column A. Column B numbers the mission cases,
which are then described in column C. The study and mission case numbers simply
reflect the order at which the studies were added to the spreadsheet. Column D
contains the geographical setting of the mission. If a mission spanned more than one
country, all countries are listed. The period during which the mission is studied is
recorded in column E. If a mission is still ongoing, the year listed denotes the period
covered by the study in question. Column F contains the key research questions
128 M. Batbaatar et al.

posed. The reasons for studying the missions vary, e.g., to assess the practical
implication of missions, to provide recommendations for agents involved in specific
missions, or to study how a mission unfolds in terms of collaboration, governance,
and outcomes.
The columns “Mission Description” (column C) and “Grand Challenge” (column
G) describe specific sectors or contexts of the missions analyzed. The Grand
Challenge column states either the Grand Challenge that the mission aims to address
or the mission’s desired outcome. Some missions contain time-bound and quantifi-
able elements (e.g., “80 percent reduction of green-house gas emissions by 2050”),
while others simply state the success of a specific aspect as their goal, without
explicitly defining success (e.g., “contribute to transformative change in Norway”).
In column H it is indicated whether a study explicitly utilizes the term “missions”
(Yes/No).
Column I describes more precisely how the mission was studied. In most papers
different agents involved in the respective missions were interviewed, while histor-
ical missions utilized press releases, government archives, and other publicly avail-
able information.
The main findings from each mission as reported in the studies are presented in
column J, and the authors’ policy recommendations are summarized in column
K. The degree of success of the mission (column L) was coded based on the mission
descriptions as “Success,” “Failure,” or “Ongoing.” The final two columns in the
online Appendix contain suggestions for future research (column M) and for mis-
sions in general (column N).

Results

In this section we summarize key findings. We begin this section with an overview
of the missions in our selection, their geography, and core contents. An initial
observation is that there appears to be no such thing as an “average” mission. The
span is considerable in terms of durability, level of ambition, and available policy
tools. Hence, a swift overview is in order.

Mission Types and Settings

The missions reviewed span a diverse set of sectors, geographic locations, and levels
of ambition more generally. Several of the historical, often successful, missions were
motivated by wartime needs (Agarwal et al. 2021). Missions aiming to generate
scientific advances and applications, particularly pertaining to biotechnology and
medicine, are also common (Essén et al. 2022; Prochaska and Schiller 2021;
Grillitsch et al. 2019; Grundy et al. 2023). Several missions have been aimed at
infrastructure and solutions to transportation problems such as in Singapore
The State of the Entrepreneurial State: Empirical Evidence of Mission-Led. . . 129

(Quirapas Franco et al. 2018), Sweden (Edquist and Zabala-Iturriagagoitia 2012),

Finland (Kivimaa and Rogge 2020), and the United States (Reinecke 2022).
A rather large number of more recent missions target environmental sustainabil-
ity, and CO2 emissions (Kivimaa and Kern 2016), renewable energy (Brett et al.
2023), paludiculture (Ziegler 2020), clean energy (Tosun et al. 2023), nutrient
recycling (Nylén et al. 2023), and circular food systems (Begemann and Klerkx
2022). Other missions are aimed at addressing social equality and inclusion: chil-
dren’s perspectives and democratic competence (Thøgersen 2022), inclusion in the
mobility sector (Kivimaa and Rogge 2020), and quality of life of older people
(Fisher et al. 2018). One mission addresses how government defense funding
spurs general economic growth (Deleidi and Mazzucato 2021), while other missions
are aimed at economic and innovative collaboration across borders (Cappellano and
Makkonen 2020; Tosun et al. 2023).
When we compare the identified missions to accepted definitions of missions, the
term has clearly been liberally used in both the academic and policy literatures. Our
review reveals that most of the projects referred to as missions do not live up to
OECD’s (2021) definition. According to this definition, missions are “measurable,
ambitious, and time-bound targets that have the potential to become significant
vehicles for important societal change.” Moreover, missions must carry potential
benefits for many, extend across several fields, both scientific and institutional
regulatory, and have technological “general purpose” characteristics so that discov-
eries can be widely exploited (Nelson 2011). Few of the 49 missions adhere to these
defining characteristics.
Several missions are formulated as traditional innovation policy goals without
measurable outcomes, or time-bound targets, such as “Establish a vital and innova-
tive biotechnology landscape” (Prochaska and Schiller 2021), “Develop new forms
of flexible automation in the footwear industry for the region to be a leading
producer in the world” (Foray 2018), or “Bring transformative effects from science
and research in Finland” (Kivimaa and Rogge 2020). Yet other missions are
formulated in terms of “directional” statements of broad social or economic goals,
but similarly tend to lack measurable and time-bound targets, such as “Increase
children’s influence in childcare facilities” and “Support children’s democratic
competences” (Thøgersen 2022). Some missions are formulated as “grand chal-
lenges” but lack explicit targets, e.g., “Reduce deforestation and CO2 emissions”
(Olbrei and Howes 2012) and “Curb traffic congestion rates” (Quirapas Franco et al.
2018).
The heterogeneity of projects (public, private, or public-private) framed as mis-
sions in our analysis highlights a significant gap between how missions are envis-
aged and motivated and how the term mission is used in practice to motivate a highly
diverse set of innovation policies. The topics identified in the above examples from
the 49 reviewed missions can all be classified under the rubric “innovation policy,”
broadly construed, although some of the missions should rather be classified as
social policy or regional policy more broadly.
130 M. Batbaatar et al.

Fig. 1 Missions by sector

Types of Mission Deployment

The majority of the 49 missions (29 cases or 59 percent) are described as ongoing,
33 percent as successful, while 8 percent are deemed to have failed. Two-thirds of
the missions (33) were launched in Europe, followed by 14 in North America
(24 percent) and four in Asia (8 percent), while the three remaining missions were
launched in Latin America.1
As shown in Fig. 1, the mission cases covered a wide range of sectors/purposes:
environmental sustainability (27 percent, 13 cases), public sector concerns (20 per-
cent, 10), medicine (16 percent, 8), ICT (14 percent, 7), energy (8 percent, 4),
transportation (8 percent, 4), and agriculture (6 percent, 3).

Mission Launch Date and Duration

Most missions analyzed to date in the literature are historical missions launched
during or after the Second World War, or from the 1990s onward when the concept
of mission innovation started to become popularized. The peak around 2010 and
subsequent drop likely indicates that missions initiated after 2010 simply have not
yet been as frequently analyzed.
A necessary mission criterion is time-boundedness (Mazzucato 2021). However,
our summary of the 49 mission cases shows that only about half of these missions
(25 cases) stipulate a deadline for mission completion. Hence, some missions are

1
Some missions such as the production of Covid-19 plasma and the green revolution in agriculture
took place in more than one region. Therefore, the sum of the regional shares exceeds to more than
100 percent.
The State of the Entrepreneurial State: Empirical Evidence of Mission-Led. . . 131

likely “perpetually ongoing” or otherwise associated with an uncertain duration.

Most ongoing missions that have an associated due date are set to be completed
during the next decade, or by 2050 at the latest. Four missions analyzed failed to
reach the initially agreed deadline. With close to half of all missions not having any
deadline at all, and several missions extending their deadline as this was
approaching, it is hard to gauge the overall magnitude of missions completed by
the set deadline. This may be related to a problem identified in the conceptual
literature: difficulties in deciding when a failed mission should be terminated
ahead of the original plan (Larsson 2022).

Governance and Actors Involved in Missions

In the missions studied, many are initiated by academics or industry experts who
raise concerns and garner attention from public sector agents (Agarwal et al. 2021).
However, the majority of missions analyzed were directed primarily by the respec-
tive national government (69 percent, 34), such as Singapore’s traffic congestion
mission (Quirapas Franco et al. 2018). In these cases, some were administered by a
committee or agency created temporarily to execute the mission (14 percent, 5).
Such “working groups” include the UK Climate Change Committee (Kivimaa and
Kern 2016) and the US Office of High-Speed Ground Transportation (Reinecke
2022). Around 22 percent (11) were governed by a specialized innovation agency.
Although these innovation agencies are part of the national government, they are
distinguished from the national government for higher level of responsibility of the
missions as opposed to other missions that are otherwise more prone to changes in
the administration. Such innovation agencies include the Academy of Finland
(Borrás and Schwaag Serger 2022), Vinnova in Sweden (Essén et al. 2022), the
Netherlands Enterprise Agency (Janssen et al. 2021), and the United Kingdom’s
Research Councils in collaboration with Innovate UK (Deleidi and Mazzucato
2021). At times, mission governance is delegated by the government to another
actor such as an innovation agency. This may be done to ensure that different
missions do not compete with one another (Kivimaa and Kern 2016; Grillitsch
et al. 2019).
In some instances, the constellation of actors features agents from the public,
private, and academic sectors (Agarwal et al. 2021; Foray 2018), a governance mode
frequently stressed in the conceptual literature (Mazzucato 2021; OECD 2021).
Interestingly, the historical missions in Mexico and Southern Asia that brought on
the green revolution in agriculture experienced the inverse effect, where the govern-
ment agents raised concerns regarding agriculture and world food supply to private
sector agents, notably the Rockefeller and Ford Foundations, which became the
primary responsible bodies for the governance of the mission (Wright 2012).
The mission targeting forest preservation and reduction of CO2 emissions in
Indonesia, based on funding from the Australian government, was incrementally
dismantled and can now be described as a failure (Olbrei and Howes 2012). By
132 M. Batbaatar et al.

contrast, historical missions funded by and implemented by the Rockefeller Foun-

dation to enhance agricultural efficiency in developing countries were successful
(Wright 2012).
An OECD study with 227 respondents from different mission-driven innovation
programs worldwide reported that funding primarily came from state funds (30 per-
cent), followed by the EU (13 percent) (Hanson et al. 2022). The fact that the
initiative and problem formulation are created centrally has several advantages
(clear locus of control, prerequisite for long-term funding, direct governance). On
the other hand, centralization increases the risk that some important perspectives or
potential approaches are overlooked (Mazzucato 2021). There is also a risk that
top-down missions get stuck in the existing institutional structure rather than chal-
lenging prevailing institutions, a feature frequently stressed as an important compo-
nent of missions. Thus, missions easily become sensitive to changing political
priorities.
In one case the mission arena consisted of 42 parties (Wesseling and Meijerhof
2021). However, when analyzing the constellation of actors involved in each
mission, it is difficult to precisely identify the number of agents. The more distinct
the actors are, the more ways a mission can be interpreted as a success (Agarwal et al.
2021). We will return to this point in the discussion of how to interpret successful
missions.

Leadership and Institutional Entrepreneurship in Missions

One way to understand the leadership complexities involved is by considering a

mission’s geographic reach. If the mission is dealing with a global problem, it stands
to reason that its implementation should often transcend national borders. Particu-
larly for cross-border or cross-regional missions but also, more generally, institu-
tional leadership in addressing bureaucratic and legal challenges is the key issue.
Remember, the team executing a mission should have the authority to wield the
necessary regulatory power over the problem at hand.
How to exercise power in the international arena is of course a long-standing
problem in many more areas, from conflict resolution to infrastructure. When one
large state was the change agent—as in, e.g., the Apollo Program—this can work,
subject to the previously discussed requirements.
A considerable number of missions in the collection apply a regional and cross-
regional focus on grand societal challenges that, in our view, clearly belong at a
higher geographic and governance level. Some papers in the collection do address
the functioning of innovation and entrepreneurship in the face of geographic barriers
or cross-border regional development (Cappellano and Makkonen 2020). Geograph-
ically delineated missions include reaching net-zero emissions in different Swedish
regions (Brett et al. 2023) or to develop Covid-19 Plasma in six different countries
(Grundy et al. 2023). International collaboration in the form of foreign aid is also
noted in a few missions (Olbrei and Howes 2012; Wright 2012).
The State of the Entrepreneurial State: Empirical Evidence of Mission-Led. . . 133

One cross-national mission revealed that while policymakers could fly back and
forth between Washington State in the USA and Canada, scientists could not easily
move and collaborate across borders (Cappellano and Makkonen 2020). These legal-
administrative problems posed restraints on the mission and strained its leadership.
Similar issues could emerge in relatively integrated cross-national missions, such as
those spanning national borders in the European Union (Edquist and Zabala-
Iturriagagoitia 2012). Clearly, optimal geographic area of missions appears to be
an issue in urgent need of academic study.
Several missions lacked national leadership and change agents, especially large-
scale cross-border missions launched in the European Union (Tosun et al. 2023).
Several of the studies stress the importance of middle managers who shoulder the
main responsibility in implementing missions, which points to talent management as
a crucial component for missions to be successful (Thøgersen 2022; Nylén et al.
2023; Kivimaa and Rogge 2020).

Evaluating Missions

Nelson (2011, p. 684) argues that “one cannot learn from experiments if one does not
have ability to identify, control, and replicate effective practice.” Among the 49 mis-
sion projects analyzed, very few include formal evaluations of effectiveness, and
none include a cost-benefit assessment. At present, there simply does not appear to
exist a solution to the problem of evaluation. We begin by considering what the
evaluations are based on and what they can and cannot do.

Learning from a Selected Sample

By necessity, this is a “small n” field, with few studies of few projects. The material
presented in this chapter is subject to certain selection bias. While we systematically
included studies according to the above criteria, this in and of itself does not
guarantee an exhaustive or representative list of missions in the wider sense. Most
notably, survivor bias is likely to have skewed our selection toward missions that
survived for some period.
The papers made use of historical and archival data to understand the missions,
and so selection of missions is determined by data availability. Since successful and
surviving missions benefited from data collection and media attention, our collection
likely overstates the true success rate of missions.
Recall that one of the features of missions is high risk, wherein the governing
agent of a failed mission is likely to attract negative media attention and result in
overall organizational dejection. Consequently, there are grounds for governing
agents of missions to attempt to downplay unsuccessful missions, or unsuccessful
aspects of otherwise successful missions. The data presented elsewhere in this
134 M. Batbaatar et al.

volume indicate that government agencies do so systematically (Björnemalm et al.

2024) and an important avenue for further research is to seek a fuller understanding
of the extent and nature of forgotten or downplayed failures if we are to learn from
such failures (Denrell 2003).
It is also useful to keep opportunity costs in mind. Missions are designed as
directional innovation processes, intended to “tilt the playing field.” But little
attention has been paid to ideas and solutions that were consciously put aside in
cases where the playing field was tilted. What would have been the offshoots of
those solutions? Addressing such counterfactual questions remains a fundamental
issue in the scientific analysis of mission-oriented innovation policy (Bloom et al.
2019).
With authorities acting as main funders and backers in mission-oriented projects,
there are no market mechanisms to inform when a project has realistically passed its
due date. In our analysis of mission progress among the missions analyzed in this
paper, at least four have been extended beyond their original target date. Missions
that were delayed include manufacturing of the X2000 train in Sweden (Edquist and
Zabala-Iturriagagoitia 2012) and the failed mission surrounding high-speed passen-
ger rail in the USA (Reinecke 2022). Moreover, the agricultural mission in relation
to the Green Revolution in Southern Asia experienced delays despite having
achieved its agricultural developments (Wright 2012). It is certainly also the case
that many projects of this size should probably be aborted long before their due
dates.
Do we have reason to be hopeful that credible evaluation methods may emerge?
To begin with, it is of course correct that missions must at the very least be concrete.
But even in the case of something concrete, like “cutting carbon emissions by
50 percent in 10 years,” a myriad of problems remains to be dealt with. Even if
this is a national target, for an accurate evaluation in the broad sense, we would need
to have ideas about both direct and indirect effects of the policy, including oppor-
tunity costs imposed on seemingly unrelated sectors.
Existing methods of policy evaluation are not equipped to deal with these
problems. To conduct a cost-benefit analysis, for instance, we need measurable
costs (Prest and Turvey 1965). For smaller projects where alternatives are easier to
identify, these methods represent a pragmatic way forward. This is hardly the case
for the Mission Economy. To summarize, it is difficult to identify systematic answers
to the following key questions: How do we identify the right missions to pursue?
How do we assess the importance of the problems and means forgone by our answer
to the first question?

Mission Types, Risks of Failure, and Mission Capture

In our analysis of failed and successful missions, historical and contemporary mis-
sions that center around technological or agricultural innovations stand out as more
successful than broader missions, aimed at social or ecological challenges. This
The State of the Entrepreneurial State: Empirical Evidence of Mission-Led. . . 135

distinction has also been highlighted in the conceptual literature on mission-oriented

innovation policy. It has been argued that missions aiming for faster scientific and
technological advancement and missions targeting societal challenges are different
in key dimensions (Kuittinen et al. 2018; OECD 2021; ESIR 2017).
The distinction helps us understand why picking missions is so difficult. OECD
(2021, p. 35) notes: “When selecting the challenge to be addressed, governments
thus face a trade-off: The challenge must be broad enough to engage a broad set of
actors across policy fields and sectors without ‘picking winners’ (i.e., be overly
prescriptive in terms of potential solutions), but sufficiently concrete and well-
defined so that it provides strong orientation and is ‘actionable’.” This challenge
plays into how stakeholder groups and strategies are identified and put into action.
OECD (2021) warns against resulting “mission capture” because someone in charge
of a mission must identify and rely on established communities and stakeholders.
Often, these communities relate to incumbents in key sectors that tend to avoid
transformational agendas involving reshuffling established economic positions
(Mazzucato 2021). This risk is present independently of any malicious intent
among incumbents.
Incumbents can be incentivized to play an active role in transformation and aid in
creating momentum for the transition (Kivimaa and Kern 2016). The study of
Danish healthcare frontline workers reveals how incumbents can adapt to new
mission aims and methods of working at different paces (Thøgersen 2022). How-
ever, our analysis also illustrates how incumbents, intentionally or unintentionally,
can tend to gravitate back to the old regime (Begemann and Klerkx 2022). We regard
the latter as an effect of status quo bias inherent in most “governed” systems,
including systems of innovation.
Finally, lobbyists may also serve as powerful constituents for innovation direc-
tionality. The case of the Kalimantan Forests and Climate Partnership between
Indonesia and Australia reflects such a case where a project with an initial ambitious
aim to reduce deforestation and CO2 emissions is incrementally downscaled over
time until it resembles a simple demonstration project, with significant project
delays, internal conflicts, and lack of transparency (Olbrei and Howes 2012).

Discussion

Our overview of the literature and analysis of 49 historical and contemporary mis-
sions show that a wide array of policy programs aimed at technological, social, or
environmental improvement are united under the umbrella term missions. We can
only speculate why this is the case. It is possible that policymakers find it convenient
to “rebrand” ongoing policy programs as missions to gain increased attention,
funding, and capabilities. A similar logic has been long noted in international
relations and policy studies (Meseguer and Gilardi 2009; Sebhatu et al. 2020) as
well as in research or “management fashions” in the private sector (Abrahamson
136 M. Batbaatar et al.

1996). In light of this material, and in our view, it is reasonable to ask whether there
is a buzzword component involved in determining what is called a mission.
It could also be the case that scholars relabel past policy programs with transfor-
mative outcomes—such as the green revolution in Mexico and Southeast Asia—as
missions, despite the lack of explicit mission formulations (Wright 2012). If this
mechanism is meaningful, we should recall what we said about selection issues
above. It means that today’s academics and policymakers are likely oversampling
success stories when we learn about missions through case studies.
If policymakers, practitioners, and researchers mean different things when using a
term that is becoming increasingly central in growth and innovation policy, then in
and of itself that must be considered a problem.
The term definition deserves a much more central place in the study of mission-
oriented innovation policy. Strictly speaking, if a project does not aim to be
revolutionary, but rather incrementally adding to what is already there, it does not
fulfill the criteria for a mission as specified by OECD (2021). A mission must also
span several sectors and be “general purpose” in its potential private sector applica-
tions. Our results show that a considerable portion of the missions studied do not
fulfil the criteria for being labelled as missions. It would be desirable to have an
agreed-upon terminology in the literature, where a mission is used in its “revolu-
tionizing and game-changing way.” There is a pertinent parallel here to the discus-
sion in entrepreneurship research about the precise meaning of that term (Henrekson
and Sanandaji 2014).
In our view and to sum up, missions suffer from three overarching weaknesses
that have not yet been fully addressed in the literature.
First, it is still not clear how to best pick or operationalize missions. Previous
overviews (Kuittinen et al. 2018; OECD 2021; ESIR 2017), as well as our analysis,
suggest that those that build on technological or agricultural innovations seem to
succeed more often than broader types of missions aimed at social or ecological
challenges. Nelson (2011) reasoned that technological missions tend to have clearly
defined parameters and can be approached with scientific methods, while sociolog-
ical or ecological missions reflect deeper elements of human and organizational
behavior. Projects like Project Apollo aiming to land a man on the moon, that in
terms of the interpretation of their success are less influenced by social factors, tend
to have higher success rates. However, closely defined technological missions may
certainly fail as was the case with the Metroliner mission launched during the same
time and in the same region as the Apollo mission (Reinecke 2022). Despite sharing
technological and governmental context with the Apollo mission, the Metroliner
mission failed in its push for high-speed passenger rail in the USA. Evidence is
emerging that mission governance is a perilous task for a myriad of reasons. What
constitutes successful governance, when, where, and under what circumstances are
urgent issues for future research.
Second, we have not generated ways to systematically evaluate mission successes
and failures. At this point, any effort to evaluate a mission may be likened to
assessing a moving and undefined target. We must also consider that opportunity
costs are not only likely to be sizable; they also arise in incredibly complex ways.
The State of the Entrepreneurial State: Empirical Evidence of Mission-Led. . . 137

Third, it is inherently difficult to make a flesh-and-blood person accountable for

the failure of a mission, which greatly increases the risk that an unproductive, or
even destructive, project is initiated, as well as supported past its due date. A firm
that is hijacked by a bad idea suffers financially. A state that is hijacked by a bad idea
is unlikely to suffer by any parameters it cares about. It might even find parameters
by which it appears successful and tout its success.
In his book The Moon and the Ghetto (Nelson 1977), Richard Nelson asks how it
came to be that humankind managed to put a man on the moon but could not teach
ghetto kids to read. It is of course a hopeful proposition that resources and political
willpower are the missing pieces, as embodied in the call for missions. But when
Nelson reflected on his book almost 35 years later (Nelson 2011, p. 685), he recalled
that a central argument of the book, and something he still considered central to
things we could not do, was “not so much political, as a consequence of the fact that,
given existing knowledge, there were no clear paths to a solution.” With problems
where the “what to do” is reasonably straightforward, where it is obvious who the
experts are, where we can draw on already well-developed knowledge in science and
private enterprises, and where there is currently a lack of critical mass, missions may
work in theory. The question is how many problems of significant importance fit
those criteria.
Contrary to the Apollo or Manhattan projects, it is unlikely that one technological
solution will take us past the global warming scare (Mowery et al. 2010). High
degrees of complexity lower the likelihood that a mission can solve the problem.
Alas, those are the kind of missions that we are steering against. If we allow our
states to take on these issues, they risk failing in more ways than one.
If missions are going to work, we believe that the following four points need to be
urgently addressed. First, we need better tools to select missions and to distinguish
them from other large-scale innovation policies. These tools must inform us about
whether an area is likely to produce general purpose technologies. Second, how do
we address the implications of a mission’s geographic boundaries, whether regional
or global? Third, how do we assign the appropriate due date associated with a
mission and how do we know when to switch off the lights? Fourth, in an evolu-
tionary economy, how can we understand the foregone value of those solutions
eliminated by a mission that has won political and bureaucratic support?
As this review highlights, the quality of research on missions is plagued by the
fact that the cases are not randomly selected; they are usually selected among the
winners and success cases. Many missions lack an explicit end point, and if they
have one, it is often postponed. We therefore remain uninformed about the success
rate of innovation missions.
138 M. Batbaatar et al.

Conclusions

In this chapter we review the empirical literature on mission-oriented innovation

policy and identify 49 mission-oriented initiatives. Fifty-nine percent of these
initiatives are still ongoing, 33 percent are described as successful, and 8 percent
are described as failures. Two-thirds of the missions reviewed were instituted in
Europe, followed by 24 percent in North America, 8 percent in Asia, and 6 percent in
Latin America. More than one quarter of the missions concerned environmental
sustainability, followed by public sector concerns, medicine, ICT, energy, transpor-
tation, and agriculture.
By analyzing the characteristics of these initiatives more closely, we find that
initiatives referred to as missions are no different from traditional goals of innovation
policy or social/regional policy, and rarely meet OECD’s criteria for an innovation
mission. We find the cases reviewed to be lacking when it comes to, e.g., common
understanding, an integrated and coherent vision, clear, measurable, and time-bound
goals, and milestones, which in turn would enable follow-up and evaluation. Our
review also shows that only half of the missions had laid down a deadline for the
mission’s completion.
While the theoretical literature has emphasized that missions should ideally be
sufficiently general and span many fields in order to accomplish institutional regu-
latory, scientific, and commercial advances with potential for broad-ranging spill-
overs (Nelson 2011), our review shows that almost none of the missions we have
identified fulfill these criteria in a satisfactory way.
None of the 49 mission evaluations included a cost-benefit analysis or an attempt
to assess opportunity costs. This calls into question the standard by which 33 percent
of the missions were rated as “successful.”

Appendix: Studies in the Literature Review

Study Reference
1 Agarwal, R., Kim, S., & Moeen, M. (2021). Leveraging private enterprise: Incubation of
new industries to address the public sector’s mission-oriented grand challenges. Strategy
Science, 6(4), 385–411.
2 Kivimaa, P., & Kern, F. (2016). Creative destruction or mere niche support? Innovation
policy mixes for sustainability transitions. Research Policy, 45(1), 205–217.
3 Deleidi, M., & Mazzucato, M. (2021). Directed innovation policies and the
supermultiplier: An empirical assessment of mission-oriented policies in the US econ-
omy. Research Policy, 50(2), 104151.
4 Mateos-Garcia, J. (2019). Mapping research & innovation missions: With an application
to the UK government mission to transform the prevention, diagnosis and treatment of
chronic diseases using artificial intelligence. Available at SSRN:https://ssrn.com/
abstract=3483203
(continued)
The State of the Entrepreneurial State: Empirical Evidence of Mission-Led. . . 139

Study Reference
5 Prochaska, L., & Schiller, D. (2021). An evolutionary perspective on the emergence and
implementation of mission-oriented innovation policy: The example of the change of the
leitmotif from biotechnology to bioeconomy. Review of Evolutionary Political Economy,
2(1), 141–249.
6 Wesseling, J., & Meijerhof, N. (2021). Developing and applying the mission-oriented
innovation systems (MIS) approach. Working paper. https://doi.org/10.31235/osf.io/
xwg4e
7 Janssen, M. (2020). Post-commencement analysis of the Dutch “mission-oriented top
sector and innovation policy” strategy. Mission-Oriented Innovation Policy Observatory.
Utrecht: Utrecht University, Copernicus Institute of Sustainable Development.
8 OECD (2021). The design and implementation of mission-oriented innovation policies:
A new systemic policy approach to address societal challenges. OECD Science, Tech-
nology and Industry Policy Paper No. 100. Paris: Organisation for Economic
Co-operation and Development.
9 Grillitsch, M., Hansen, T., Coenen, L., Miörner, J., & Moodysson, J. (2019). Innovation
policy for system-wide transformation: The case of strategic innovation programmes
(SIPs) in Sweden. Research Policy, 48(4), 1048–1061.
10 Thøgersen, D. (2022). Windows of translation in public service innovation. Introducing a
new mission in public childcare. Journal of Change Management, 22(4), 401–421.
11 Kivimaa, P., & Rogge, K. (2020). Interplay of policy experimentation and institutional
change in transformative policy mixes: The case of mobility as a service in Finland.
SPRU Working Paper SWP 2020-17. Brighton: University of Sussex, Science Policy
Research Unit.
12 Begemann, S., & Klerkx, L. (2022). Scrutinizing the construction of transformative
missions through the lens of policy assemblages: The case of the Dutch Circular
Agriculture Mission. Available at SSRN: https://ssrn.com/abstract=4137893
13 Grundy, Q., Campbell, C., Ali, R., Herder, M., & Holloway, K. (2023). “A most
equitable drug”: How the clinical studies of convalescent plasma as a treatment for
SARS-CoV-2 might usefully inform post-pandemic public sector approaches to drug
development. Journal of Law, Medicine & Ethics, published online.
14 Quirapas Franco, M. A., Aboagye-Gyan, R., & Gul, M. F. (2018). Sources, drivers and
barriers of innovation in Singapore’s Electronic Road Pricing. Asian Journal of Public
Affairs, 11(1), e3.
15 Olbrei, E., & Howes, S. (2012). A very real and practical contribution? Lessons from the
Kalimantan Forests and Climate Partnership. Climate Law, 3(2), 103–137.
16 Janssen, M. J., & Abbasiharofteh, M. (2022). Boundary spanning R&D collaboration:
Key enabling technologies and missions as alleviators of proximity effects? Technolog-
ical Forecasting and Social Change, 180(July), 121689.
17 Ziegler, R. (2020). Paludiculture as a critical sustainability innovation mission. Research
Policy, 49(5), 103979.
18 Wright, B. D. (2012). Grand missions of agricultural innovation. Research Policy,
41(10), 1716–1728.
19 Foray, D. (2018). Smart specialization strategies as a case of mission-oriented policy—A
case study on the emergence of new policy practices. Industrial and Corporate Change,
27(5), 817–832.
20 Tosun, J., Heinz-Fischer, C., & Luo, R. (2023). Who takes the lead? A disaggregate
analysis of the EU’s engagement in the Clean Energy Ministerial and Mission Innova-
tion. Journal of Cleaner Production, 382(7), 135240.
(continued)
140 M. Batbaatar et al.

Study Reference
21 Brett, N., Magnusson, T., & Andersson, H. (2023). From global climate goals to local
practice—Mission-oriented policy enactment in three Swedish regions. Science and
Public Policy, published online.
22 Reinecke, D. (2022). Moonshots to nowhere? The Metroliner and failed high-speed rail
in the United States, 1962–1977. Journal of Transport History, 43(1), 33–53.
23 Borrás, S., & Schwaag Serger, S. (2022). The design of transformative research and
innovation policy instruments for grand challenges: The policy-nesting perspective.
Science and Public Policy, 49(5), 659–672.
24 Brown, R. (2021). Mission-oriented or mission adrift? A critical examination of mission-
oriented innovation policies. European Planning Studies, 29(4), 739–761.
25 Cappellano, F., & Makkonen, T. (2020). The proximity puzzle in cross-border regions.
Planning Practice & Research, 35(3), 283–301.
26 Fisher, R., Chicot, J., Domini, A., Misojic, M., Polt, W., Turk, A., Unger, M., Kuittinen,
H., Arrilucea, E., & van der Zee, F. (2018). Mission-oriented Research and Innovation:
Assessing the Impact of a Mission-oriented Research and Innovation Approach. Brus-
sels: European Commission.
27 Nylén, E. J., Johanson, J. E., & Vakkuri, J. (2023). Mission-oriented innovation policy as
a hybridisation process: The case of transforming a national fertilising system. Science
and Public Policy, published online.
28 Edquist, C., & Zabala-Iturriagagoitia, J. M. (2012). Public procurement for innovation as
mission-oriented innovation policy. Research Policy, 41(10), 1757–1769.

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The State of the Entrepreneurial State: Empirical Evidence of Mission-Led. . . 143

Maral Batbaatar is a student in business and economics at the Stockholm School of Economics.
Her research interests include public economics, social innovation, and development studies.

Johan P. Larsson is Associate Professor of Economics and Public Policy at the University of
Cambridge, Department of Land Economy. He is also affiliated with the Ratio Institute. His
research interests are centered on geographical aspects of industrial dynamics, innovation and
entrepreneurship. A particular interest is in the empirics of agglomeration economies and associated
neighborhood effects. Johan has also written at length on issues such as social capital, innovation
policy and social interaction effects.

Christian Sandström is Senior Associate Professor at Jönköping International Business School

and the Ratio Institute in Sweden. His research concerns innovation policy and the interplay
between technological and institutional change. Sandström is one of the editors behind Questioning
the Entrepreneurial State (Springer). He has published more than 30 papers in peer-reviewed
academic journals such as Technological Forecasting and Social Change, the Journal of Technol-
ogy Transfer and Industry and Innovation.
Sandström wrote his PhD thesis on the topic of disruptive innovation at Chalmers University of
Technology (2010). He has been a visiting scholar at the University of Cambridge and ETH Zürich
in Switzerland. Sandström has received several awards for his pedagogical skills and is a frequently
hired public speaker on the topic of technological change and industrial transformation.

Karl Wennberg is Professor at the Stockholm School of Economics, where he received his PhD
in 2009. He is also a visiting professor at TUM School of Management and affiliated with Ratio. His
research interests include entrepreneurship and innovation policy, education economics, and orga-
nizational diversity. He has published on this and related topics in the Journal of Business
Venturing, Strategic Entrepreneurship Journal, Management Science, Journal of International
Business Studies, Small Business Economics, Academy of Management Perspectives, Research
Policy, Entrepreneurship Theory and Practice, Journal of Management, Long Range Planning,
Proceedings of the National Academy of Sciences and in 15 books. Since 2022, he is the scientific
director of the House of Governance and Public Policy, an interdisciplinary institute that seeks to
generate and spread new knowledge for governance in public and private organizations alike.

Open Access This chapter is licensed under the terms of the Creative Commons Attribution 4.0
International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing,
adaptation, distribution and reproduction in any medium or format, as long as you give appropriate
credit to the original author(s) and the source, provide a link to the Creative Commons license and
indicate if changes were made.
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Commons license, unless indicated otherwise in a credit line to the material. If material is not
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the copyright holder.
When “What Works” Does Not Work: The
United States’ Mission to End Homelessness

David S. Lucas and Christopher J. Boudreaux

Abstract This chapter presents a case study of the United States’ federally led
mission to eradicate homelessness, focusing on the early twenty-first century. We
document the emergence of a federal strategic plan to prevent and end homelessness
in the wake of the Great Recession, paying special attention to the role of “evidence-
based” solutions and state leadership in this effort. We then review the disparities
between the stated goals and realized results. Despite a doubling of federal funding,
broad cross-sector collaboration, and a successful imposition of government-
preferred practices in the homeless services industry, none of the four goals defined
in 2010 were completed over the next decade. We assess these lackluster results and
elicit new insights for other “moonshot” missions aimed at grand societal challenges.

Keywords Homelessness · Mission · Evidence · Grand challenges · Innovation

JEL Codes I38 · L38 · R31

Homelessness is solvable; we have learned a lot about what works. (United States
Interagency Council on Homelessness 2010)
We don’t know how to end homelessness. Not in the aggregate, anyway. (O’Flaherty
2019)

D. S. Lucas (✉)
Syracuse University, Syracuse, NY, USA
e-mail: [email protected]
C. J. Boudreaux
Florida Atlantic University, Boca Raton, FL, USA
e-mail: [email protected]

© The Author(s) 2024 145

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_9
146 D. S. Lucas and C. J. Boudreaux

Introduction

Much of the discussion in Mission Economy (Mazzucato 2021)—and from other

contributors to this book—focus on the relationship of the state to for-profit com-
panies as they collectively engage with major social objectives. However, it is also
instructive to consider how the principles of state-directed, mission-oriented think-
ing have fared in contexts where third sector-state relations dominate. Indeed, in the
United States and elsewhere, government and nonprofits (rather than companies) are
the key players in a broad array of initiatives aimed at social problems like poverty,
education, healthcare, and homelessness, among others. In addition, the focal target
for Mission Economy prescriptions are the UN’s Sustainable Development Goals
(SDGs). Many of the SDGs involve contexts where extensive (and expensive)
public-private partnerships already abound, wherein governments provide public
services via grants, contracts, and policies that are primarily channeled through
nonprofit organizations (Smith and Lipsky 2009). As such, it is useful to consider
the prospects of mission-focused state leadership in these contexts.
This chapter provides such an analysis. Specifically, we provide a case study of
the US federal government’s (mis)adventures in its mission to prevent and end
homelessness, focusing on the period from 2008 to 2022. Homelessness in the
United States is an illuminating case to consider in relation to the Mission
Economy’s core principles and focus. First, homelessness looms large as an endur-
ing and pervasive social issue—stubbornly persisting across impoverished nations
and wealthy, market-oriented economies alike (Toro et al. 2007). Second, home-
lessness has been referred to as “intractable” (Eide 2020), a “wicked problem”
(Brown et al. 2013), and a “grand challenge” (Henwood et al. 2015)—i.e., exactly
the kind of social issue that proponents of the Mission Economy would see amenable
to an innovative, collaborative, government-led response. Third, and most impor-
tantly, the US government’s engagement with homelessness in the twenty-first
century is distinctive in its almost-prescient alignment with Mazzucato’s prescrip-
tions for successful “moonshot” initiatives (Mazzucato 2021). Rather than a passive
remediator of market failures, the federal government played a catalyzing leadership
role in defining and pursuing a bold and innovative mission against homelessness.
Spearheaded by the United States Interagency Council on Homelessness (USICH), a
“federal agency with a sole mission on preventing and ending homelessness in
America” (USICH 2023), the government worked throughout this period to facilitate
broad coordination, dramatically expand funding, and mobilize a shift toward
innovative, evidence-based approaches to homeless services—all while engaging
diverse stakeholders across areas and levels of government, sectors, and communi-
ties to pursue a suite of clearly defined goals related to the prevention and eradication
of homelessness.
But despite a clear mission, good intentions, bipartisan political support,
evidence-based innovations, major funding increases, thorough stakeholder engage-
ment, and unequivocal state leadership, the results during this period were
underwhelming at best. A more-than-doubling of federal expenditures and the
When “What Works” Does Not Work: The United States’ Mission to. . . 147

widespread diffusion of evidence-based practices saw a mere 9 percent reduction in

total homelessness; in fact, the downward trend stalled early, with no single year-
over-year decline in homelessness since 2016. Not a single one of the four objectives
initially outlined in 2010 were met, and each one was eventually delayed, revised, or
dramatically curtailed. Even those supportive of the government’s efforts to date
acknowledge that “most plans to end homelessness have fallen far short of the mark”
(Lee et al. 2021, p. 15).
In what follows, this chapter will analyze the government’s “rescue mission” of
homelessness. We first outline the historical conditions that gave rise to a new era of
homeless response in the wake of the Great Recession, documenting the emergence
of a government-led, evidence-based mission unlike previous efforts. We then
review the results during the ensuing period, marking the divergence of realized
outcomes from the original objectives. Next, we highlight several unintended con-
sequences generated by the government’s interventions during this period. Finally,
we assess the repetition of history with the most recent federal strategic plan for
homelessness, which features a suite of updated goals and a renewed state-led
strategy to achieve them. The case study reveals the limits associated with a
government-coordinated mission to address a particular form of human suffering—
even when that mission is designed to promote evidence-based policies and engage
“bottom-up” solutions.

A Very Brief History

Homelessness is not a new phenomenon, nor is a government-led response to engage

with it. As part of the New Deal programs enacted in response to the Great
Depression, a program called the Federal Transient Service was created specifically
to address the apparent rise of what were then referred to as “tramps” or “hoboes”—
mostly White, older men with highly migratory lifestyles. While the program only
lasted for 2 years, it exemplified an “era” of homelessness lasting throughout the
early twentieth century that was characterized by this demographic.
By the 1980s, however, there was a growing consensus that the problem of
homelessness had taken on a new chapter. Homelessness was affecting broader
swathes of society, including greater numbers of people, more families, and more
people of color. Activists emerged as prominent national voices to elevate home-
lessness into a cultural crisis. Highly politicized debates about the extent of home-
lessness raged; one activist claimed 2–3 million, while a 1984 report from the
Reagan administration estimated roughly 350,000 (United States Department of
Housing and Urban Development 1984). Whatever the number, the sense was that
this new homelessness also required a new approach—one where the federal gov-
ernment played a key role in funding and mobilizing homeless responses. In 1987,
the Stewart B. McKinney Act (later updated to the McKinney-Vento Act) emerged
as the centerpiece of federal homelessness legislation, ushering in what many refer to
as the “modern era” of homelessness.
148 D. S. Lucas and C. J. Boudreaux

Through the end of the twentieth century, the nation’s homeless response infra-
structure matured and reached a relatively stable equilibrium. By the 1990s, home-
less services began to be coordinated via Continuums of Care (CoCs), networks of
nonprofit, and local government organizations serving the homeless in a particular
geography. The federal government was a major source of funding, channeling
resources through the CoC system. Notably, this infrastructure of homeless service
providers evolved distinctly from (and often disconnected from) other programs
related to affordable housing (e.g., the Low Income Housing Tax Credit), public
housing, and most housing subsidies (e.g., Sect. 8 Housing Vouchers).

From the Linear Model to Housing First

The modern homeless services infrastructure consists of organizations providing

four main forms of housing programs: emergency shelter, transitional housing, rapid
rehousing, and permanent supportive housing. Emergency shelter fits with the
layperson’s understanding of a homeless shelter, typically characterized by many
beds in larger, mostly public sleeping areas. These exploded in the 1980s as a
stopgap meant to keep individuals in crisis from “sleeping rough.” As such, they
are the lowest common denominator, intendedly meant to address bouts of housing
displacement as manifested emergency.
To understand transitional housing, however, requires a brief foray into the notion
of service models—the programmatic strategies for facilitating exits from homeless-
ness. Table 1 illustrates the two main alternative service models. The early modern
homeless era was characterized by what scholars call the “linear model” of homeless
services. Because homelessness was viewed as a problem of individual behaviors
and responsibility, providers sought to cultivate and ensure “housing readiness” in
their clients—through e.g., some combination of mental health stability, work, and
control of substance abuse. Typically ranging from 6 to 18 months, transitional
housing programs provided more private housing units but also targeted case
management and support services. In the linear model of homeless services, transi-
tional housing was viewed as a key intermediate step out of emergency shelter and
toward an exit into stable housing. For some, this meant moving back into tradi-
tional, independent housing. For others, the ultimate destination was permanent
supportive housing—fully or heavily subsidized housing on a long-term basis,
often with case management.
Eventually, a second service model arose in stark contrast to the linear model:
Housing First. While the next section will discuss the political circumstances that
propelled Housing First to the front-and-center of the government’s mission to end
homelessness, we will first review the approach and philosophy. Housing First is an
approach that emphasizes rapid and unconditional placement into supportive hous-
ing. As its proponents indicate, the original “Pathways Housing First” program,
originating in New York City, featured a “(1) program philosophy and practice
values emphasizing consumer choice; (2) community based, mobile support
When “What Works” Does Not Work: The United States’ Mission to. . . 149

Table 1 Alternative homeless services models

Linear model Housing first
Philosophical premises
Supportive When client is “ready” Immediately
housing
timeline
Case Required Offered, but optional
management
Psychiatric Precondition Not a precondition
stability
Approach to Elimination Harm reduction
behavior
Geographic Concentrated Scattered-sitea
context
Theory of Personal stability precedes Housing stability can precede behavioral sta-
change and facilitates housing bility, but consumer choice prioritized over
stability behavioral change
Types of programs
Emergency Yes Yes
shelter
Transitional Yes No
housing
Rapid No Yes
rehousing
Permanent Some Yes
supportive
housing
a
While scattered-site programming is a part of the original Pathways Housing First model, the
evidence suggests that many providers do not utilize this in their adaptations (Gilmer et al. 2013)

services; and (3) permanent scatter-site housing” as well as “harm reduction”

(Padgett et al. 2016, p. 3). As such, the Housing First model’s main program is
permanent supportive housing—long-term subsidized units for individuals or fam-
ilies with (optional) case management. Alongside this, however, was the introduc-
tion of “rapid rehousing” a medium-term option following the Housing First
philosophy. As such, rapid rehousing effectively replaces transitional housing in
the Housing First model, because it offers a similar timeframe but removes all
preconditions and notions of readiness.

The Emergence of a Mission for Homelessness

The Preconditions

As hinted above, the linear and Housing First models stand in stark philosophical
and practical contrast. In the 1980s, when the homeless services industry emerged
150 D. S. Lucas and C. J. Boudreaux

alongside targeted federal legislation, the linear model was the dominant paradigm.
However, Housing First was introduced in the 1990s by a pioneering organization in
New York City, Pathways Housing First. Led by Sam Tsemberis, Pathways focused
on the long-term, hard-to-house subset of the homeless population—arguing that the
behavioral and psychiatric expectations of the linear model programs functioned as
unnecessary barriers to housing for this group. Seeing housing as a human right,
Tsemberis developed Pathways Housing First to remove these barriers—and, in
doing so, to pursue a harm reduction rather than behavioral change focus.
Importantly, Tsemberis also developed randomized trial studies of Pathways’
programs. Tsemberis and a team of researchers published a series of papers demon-
strating much higher rates of housing retention for those served by his program than
the traditional services for this particularly hard-to-house population (Tsemberis
et al. 2004; Tsemberis and Eisenberg 2000). These studies proved pivotal for an
emerging body of academic research that would lay the foundation for Housing First
to become one of the most prominent examples of evidence-based policy in the
United States (Lucas 2018).
Lucas (2018) elaborates on this to describe how policy entrepreneurs, including
Tsemberis, leveraged academic evidence to elevate Housing First as a centerpiece of
a renewed policy discussion around homelessness. Importantly, the housing reten-
tion success of Tsemberis’ New York City program dovetailed nicely with other
researchers’ findings about the taxpayer costs of homelessness. Specifically, Dennis
Culhane’s pioneering scholarship showed that the costs of homelessness in terms of
public services were essentially power-law distributed: a very small subset of
homeless individuals utilized a very large share of shelter services and also imposed
high costs in terms of hospitals, jails, and police expenses (Culhane et al. 2002;
Poulin et al. 2010). The vast majority, by contrast, utilized shelter services in a
manner that was brief and nonrecurring.
Taken together, the two components of the evidence showed that (i) a small group
of homeless individuals the “chronically homeless”—accounted for a disproportion-
ate share of the economic burden of homelessness, and (ii) the Housing First
approach could dramatically improve housing retention for this group—at a lower
cost than that imposed through these individuals’ use of public services in the status
quo. As such, a narrative emerged around Housing First as both a fiscally responsible
use of taxpayer dollars and a compassionate alternative to the linear model.
Championed both by journalists (e.g., Gladwell 2006) and policy advocates alike,
Housing First steadily garnered increasing bipartisan support through the early
2000s (Stanhope and Dunn 2011). Housing First was championed within the George
W. Bush administration by Phil Mangano, Executive Director of USICH. In a telling
profile in The Atlantic, Mangano is quoted as saying, “Research is the new advo-
cacy” (McGray 2004). Indeed, evidence proved pivotal to mobilize political energy
around a renewed vision and mission for homelessness policy (Lucas 2018). Given
the ideologically divisive nature of entitlement spending in the United States,
stakeholders in the homeless services ecosystem recognized a profound opportunity
to transform homelessness policy for the first time in decades.
When “What Works” Does Not Work: The United States’ Mission to. . . 151

But it was not only advocates’ efforts to elevate Housing First that initiated the
emergence of a national policy mission for homelessness. Rather, the 2009 global
financial crisis created fertile conditions for dramatic policy change. It was evident
that the Obama administration’s policy response was intendedly revolutionary. As
Obama’s then-Chief of Staff, Rahm Emanuel, famously asserted in November 2008,
“Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to
do things you couldn’t do before” (Wall Street Journal 2009). Homeless services
proved a suitable target for this opportunity, given the housing market’s role in the
Great Recession. Therefore, alongside the federal government’s sweeping stimulus
package came the HEARTH Act of 2009, a major revamp of the McKinney Vento
Act that established the scope of federal homelessness response. The HEARTH Act
redefined homelessness policy, promised a dramatic increase in federal funding, and
set forth a mandate for the federal government to develop a strategic plan aimed at
ending homelessness (Lucas 2017).

Opening Doors: The Federal Plan to Prevent and End

Homelessness

Under the mandate of the HEARTH Act, USICH produced a revolutionary strategic
plan that outlined a federal mission for homelessness: “Opening Doors: The Federal
Plan to Prevent and End Homelessness.” Opening Doors introduced four ambitious
goals:
• Finish the job of ending chronic homelessness in 5 years.
• Prevent and end homelessness among Veterans in 5 years.
• Prevent and end homelessness for families, youth, and children in 10 years.
• Set a path to ending all types of homelessness.
Of these four goals, the first three have a well-defined success criterion. It is worth
noting that USICH does note that these goals could be seen as “aspirational” (p. 52).
Yet, the plan also exuded significant optimism about the effectiveness of the
strategies recommended: “Solutions exist. New collaborative leadership, more coor-
dination, and wise investments in proven strategies. . .will lead to major reductions
in homelessness” (USICH 2010, p. 24, italics added).
The plan also provided ten objectives related to these goals. Notably, the last
objective falls under the theme of “Retool the Homeless Crisis Response System.”
Hence, although “collaboration” is emphasized throughout the plan, this functionally
translated to top-down pressure to conform to “expert” policy prescriptions: “The
Plan also proposes the re-alignment of existing programs based on what we have
learned and the best practices that are occurring at the local level, so that resources
focus on what works” (p. 4, emphasis added). As then-HUD Secretary and USICH
Chair Shaun Donovan writes, “The Council members and the Administration are
fully committed to taking these best practices and proven solutions to scale across
152 D. S. Lucas and C. J. Boudreaux

the federal government” (p. 3). The plan makes clear that the “proven solutions”
being considered were based on the presumed superiority of Housing First.
Discussing the goal of ending chronic homelessness, the plan states: “Permanent
supportive housing using Housing First is a proven solution that leads to improve-
ments in health and well-being. Supportive housing also has been shown to be a
cost-effective solution in communities across the country” (p. 38). Elsewhere, the
plan declares the “documented success” of Housing First over the linear model
(p. 49), chiding communities that have not yet emphasized a transition toward a
Housing First-based system of care.
In sum, the plan was equal parts optimistic, focused, and evidence-based, artic-
ulating a confidence in the ability to make significant impact by leveraging evidence
to initiate systems change. In other words, the federal government set forth a
top-down mission to alleviate homelessness. Furthermore, this mission focused on
federal leadership, cross-agency and cross-sector collaboration, provider coordina-
tion, and rigorous applications of evidence—all hallmark prescriptions offered by
the advocates of centralized policy missions to address grand challenges.

Results

The Four Goals

We begin our assessment of the results with respect to the 2010 strategic plan’s four
overarching goals. Of the four goals outlined in USICH’s 2010 strategic plan, zero
had been met by 2020. Figure 1 details these results. The dashed lines report the
government’s goal projections; for simplicity, we take the target deadline for
eliminating homelessness among each subpopulation and linearly interpolate the
trajectory. The solid lines are the observed trends as reported by the Department of
Housing and Urban Development in its Annual Homeless Assessment Report to
Congress.
Chronic homelessness. Among the four goals, eliminating chronic homelessness
appeared to offer the greatest certainty of success ex ante. This is because the
chronically homeless were the group for whom the evidence supporting the govern-
ment’s preferred service model, Housing First, was deemed to be strongest. As the
2010 strategic plan boldly declares, “For people experiencing chronic homelessness,
the research is clear that permanent supportive housing using a Housing First
approach is the solution” (p. 18, emphasis added). By many accounts, this goal
also seemed positioned to do the “most good,” in that it focused on housing a group
acutely suffering from the cooccurrence of long-term or repeated bouts of home-
lessness and the presence of disabilities. Although a small fraction of the homeless
population, chronically homeless persons are perhaps the most visible subpopulation
and most aligned with the typical lay notion of a person experiencing homelessness.
It is important to recognize that chronic homelessness was also central to the
“economic” arguments for Housing First. Individuals facing long-term or recurrent
When “What Works” Does Not Work: The United States’ Mission to. . . 153

(a) Ending chronic homelessness by 2015 (b) Ending veteran homelessness by 2015

(c) Ending family and youth homelessness by (d) Setting a path to end all homelessness
2020

Fig. 1 US government goals vs. observed trends in key homeless populations, 2008–2022. Source:
Point in Time Counts of Homelessness, United States Department of Housing and Urban
Development

bouts of homelessness have long been identified as heavy users of public services
like hospitals and jails—imposing disproportionate costs on taxpayers. The federal
government projected Housing First would save taxpayers money and provide long-
term housing to those whom had otherwise been unable to secure it. At the heart of
this claim was the elimination of chronic homelessness. In turn, much of the
bipartisan support for the federal homelessness strategy was grounded in the dual
claim that Housing First was not only compassionate but also cost-effective (Stan-
hope and Dunn 2011).
154 D. S. Lucas and C. J. Boudreaux

However, despite a dramatic increase in permanent supportive housing beds and a

widespread commitment from communities across the country to implement Hous-
ing First, chronic homelessness persisted and even worsened. Not only was the end
of chronic homelessness far from being realized in 2015, but the chronic homeless
population was estimated to have increased by roughly 30 percent from 2010 to
2022. Furthermore, chronic homelessness had not only increased but also become a
more pervasive experience among the homeless, increasing from 16 to nearly
24 percent of the homeless population.
Anecdotal evidence also affirms that this particularly harsh, long-term, and
visible form of homelessness is indeed worsening—especially in major urban cities.
National media regularly covers the “crisis” of homelessness in San Francisco, a city
increasingly associated with long-term tent encampments and open-air drug markets.
Despite the Bay Area’s affluence and prominent reputation for cultivating tech
giants—along with USD 680 million in direct programmatic homeless spending
by the city each year—chronic homelessness nearly doubled from 2015 to 2019
(1629 to 3030). By the end of the period, roughly 1 in 100 residents was counted as
homeless (Enzinna 2021). Other California cities like Los Angeles have seen
similarly bleak trends in chronic homelessness and an increasingly visible “street
homeless” population, transforming the safety profile of many neighborhoods.
The abject failure to eliminate or even reduce chronic homelessness is striking,
and we will consider some of the factors for these trends later in this chapter. In sum,
the raw data make clear that chronic homelessness proved not to be the “golden
goose” of the evidence-based policy as had been anticipated, but rather the “canary
in the coal mine”—indicative of a profound disconnect between the intentions and
outcomes of this state-led mission.
Veteran homelessness. The second goal, ending veteran homelessness by 2015,
appeared to fare better than the chronic homelessness goal. Indeed, veteran home-
lessness saw the largest reduction of any subgroup throughout the period. While still
far short of the initial goal, veteran homelessness did decline by roughly 50 percent
from 2010 to 2020. Understandably, then, proponents of the US policy interventions
typically hold veteran homelessness as the proof of success. It is typically contended
that this proves the efficacy of the government’s leadership and the validity of its
evidence-based initiatives.
Yet, inquiry into this trend casts significant doubt on the lessons that can be drawn
for other homeless populations. One key reason is a dramatic secular decline in the
number of veterans at risk of homelessness during the period. O’Flaherty (2019)
documents how the number of adult veterans aged 18–65 dropped by 26.7 percent
from 2010 to 2016. Because the total number of veterans at risk of homelessness
declined dramatically, O’Flaherty estimates that the trends in the incidence or rate of
homelessness among this group mirrored overall trends. Recent work has also shown
that exposure to combat is an important predictor of homelessness among veterans
(Ackerman et al. 2020), indicating that the antecedents and experience of veteran
homelessness is likely atypical.
Furthermore, the veteran homeless population receives far more targeted home-
lessness funding than the rest of the homeless population (Perl 2023). From 2010 to
When “What Works” Does Not Work: The United States’ Mission to. . . 155

2020, while moving down in the share of the total homeless population from 11 to
6 percent, veterans moved up in the share of targeted homelessness funding from the
federal government from 16 to 26 percent. On a per capita basis, the spending
difference is particularly stark. Back-of-the-envelope calculations indicate that
each homeless veteran is allocated about USD 47,000 in federal spending compared
to USD 9100 for each nonveteran. To increase nonveteran per capita funding to
spending parity would require an additional USD 20.5 billion per year (over a
300 percent increase from 2020 levels). And even this would not account for the
myriad other government programs to support veterans beyond homelessness.
Taken together, the secular decline in the population of veterans at risk of
homelessness along with the massive and targeted investment into this group reveal
that the “strongest” evidence of any margin of success in the state’s mission to end
homelessness is, in fact, dubious. O’Flaherty (2019, p. 21) summarizes the results of
the federal efforts toward veteran homelessness in the early 2010s: “This great
initiative appears to have accomplished little.”
Family and youth homelessness. Family and youth homelessness trends fall
between veterans and the chronically homeless, with modest but notable declines.
USICH’s 2010 goal was to end family and youth homelessness by 2020. Over that
decade, family and youth homelessness declined by roughly 30 percent. It is worth
noting that families are typically said to experience homelessness as a brief and
nonrecurring experience—and rarely as “unsheltered” homeless outside of the
established shelter system. This has implications for the long-term potential for
this downward trend to persist as will be discussed below.
Total homelessness. Total homelessness declined only modestly during the
period. In fact, no single year-over-year reduction in total homelessness was
observed from 2016 to 2022, such that the second half of the period unraveled the
vast majority of the modest gains made during the initial years of the mission. The
lackluster trend has been difficult to ignore. In fact, scholarly consensus has also
shifted significantly away from the confidence of a decade prior. As noted in the
epitaph quote from a leading homelessness economist, “We don’t know how to end
homelessness. Not in the aggregate, anyway” (O’Flaherty 2019). Overall, the goal to
“set a path to end all types of homelessness” has not been met.

Federal Strategies Through the Period

The federal government did not sit idly by while these underwhelming trends
unfolded. Its mission engagement and leadership continued throughout the period,
revolving around three main areas: funding increases, Housing First prioritization,
and strategic revisions.
156 D. S. Lucas and C. J. Boudreaux

Federal Homelessness Funding

First, although some pundits blame limited funding availability for the results above,
the federal government dramatically increased the fiscal footprint of its homeless
services spending throughout the period. Figure 2 presents the nominal expenditures
for targeted federal homelessness programs from 2010 through 2022. Funding
increased steadily throughout the period; by 2022, funding had more than doubled
from 2010 levels to USD 7.9 Billion annually. This amounts to roughly USD 13,500
per person counted as homeless in the 2022 point-in-time count—greater than the
annual median gross rent in the United States.1 It should also be noted that these
trends were unaffected by the election of Donald Trump in 2016; funding continued
to increase at a similar rate as in the Obama era. This casts significant doubt on the
claim that the new administration’s policy shifts slowed progress toward the home-
lessness goals in the later end of the period. Overall, there is little evidence that
funding constraints hindered the plan’s success, even though this is a relatively
common assertion.

Advancing Housing First

The second role of the government to pursue this mission was in its “leadership” role
in pressuring homeless service providers to implement Housing First and its asso-
ciated programs. As the 2010 strategic plan clearly indicated, the federal government
aimed to lead an evidence-based “retooling” of the homeless services industry—
away from the linear model and toward Housing First. While the federal government
did not explicitly require these changes, the competitive funding model prioritized
Housing First programs both within and across communities. The largest grant under
this mission, the CoC grant, was structured such that organizations in a community
would apply jointly for funding. The representative organization for that community
was tasked with ranking each program on a set of criteria provided by HUD. As of
2013, existing programs that aimed to revise away from linear model practices
toward Housing First received extra points and a high likelihood of funding
(USICH 2020, p. 9). By contrast, new programs were very unlikely to be competitive
for federal funding if they did not commit to following Housing First practices; these
projects were scored to rank near the bottom in each community’s annual grant
request. Similarly, existing programs that did not fit the Housing First ideology—
most notably, transitional housing—faced a high risk of defunding.

1
https://www.census.gov/quickfacts/fact/table/US/HSG860221. Accessed 5/3/23. There are more
people than this experiencing homelessness throughout the year; HUD estimated roughly 934,000
people interacting with the homeless shelter system in 2021. This would imply approximately USD
8400 per person if all spending went toward individuals who interact with the provider network.
When “What Works” Does Not Work: The United States’ Mission to. . . 157

Fig. 2 Federal targeted homelessness expenditures, 2010–2022 (billion USD). Source: President’s
Budget: Fact Sheet on Homelessness Assistance, United States Interagency Council on
Homelessness

Figure 3 shows how these funding priorities corresponded to a rather successful

“retooling” of local homeless providers’ programs. Each line indicates the total
number of year-round beds associated with shelter programs of each main type.
The two hallmarks of the Housing First model, permanent supportive housing and
rapid rehousing, exploded over the period. Permanent supportive housing more than
doubled to nearly 400,000 beds. Rapid rehousing, which was not tracked until 2013,
also increased rapidly, reaching 150,000 beds by 2022. It should be noted that there
is limited data on how faithfully these two programs have been implemented with
respect to Housing First principles. However, it is clear that the reason for the bed
increases in these two program types was a federal emphasis on Housing First. We
will revisit this point in a later section.
By contrast to permanent supportive housing and rapid rehousing, linear model
programs dwindled precipitously. The clearest evidence of this is in transitional
housing. The supply of transitional housing beds was halved over the decade. While
some providers did retool their transitional housing programs to a rapid rehousing
(the most direct “substitute” in the Housing First model) or other approach, the data
also suggest that many providers simply closed these programs as funding
decreased. Little is known about how different transitional housing providers nav-
igated this period, and this is an important area for organizational scholarship.
Overall, the federal government was highly effective at mobilizing local public
and nonprofit providers to abandon what the government deemed to be outdated
practices and replace them with the “evidence-based” innovations they believed to
be effective at preventing and ending homelessness. This is particularly notable in
that transitional housing had been a bedrock component of homeless service
158 D. S. Lucas and C. J. Boudreaux

Fig. 3 Retooling the homeless shelter system. Source: Housing Inventory Counts, United States
Department of Housing and Urban Development

provision across the United States since the 1980s. In this sense, a crucial component
of the strategic plan to prevent and end homelessness was carried out with remark-
able precision and rapidity.
Another important point is that the trends do not appear subject to changes in
political power. As with the funding continuations during the Trump adminis-
tration, the trajectory away from transitional housing programs and toward the
Housing-First-friendly programs continued with no visible evidence of
disruption.

Revisions to the Federal Mission

It was evident long before 2020 that the nation was not on pace to complete the
mission set out in the initial Opening Doors plan. As such, in addition to the funding
increases and institutional pressures imposed on providers during the period, the
federal government also actively revised the strategic plan in response to the
lackluster trends. In 2015, the federal government introduced an updated version
of the plan and revised the goal of preventing and ending chronic homelessness—
moving this deadline from 2015 to 2017. Other goals remained in place.
When “What Works” Does Not Work: The United States’ Mission to. . . 159

In the 2015 update, the revised strategic plan also doubled down on Housing First
commitments and strategies. For instance, even while updating the goal of ending
chronic homelessness due to the limited results to date, the plan boldly reiterates:
“For people experiencing chronic homelessness, the research is overwhelmingly
clear that permanent supportive housing using a Housing First approach is the
solution” (USICH 2015, p. 25, emphasis added). The plan also indicates that the
mission’s strategies were, in fact, being pursued: “Consistent with Opening Doors,
communities are increasingly adopting evidence-based practices and replicating
promising program models that incorporate a Housing First approach, leveraging
resource commitments from the public and private sectors and from homeless
assistance and mainstream systems” (ibid., p. 11). According to the revise plan,
the ostensible reason for limited successes to date was due to “a lack of Congres-
sional support for the expansion of permanent supportive housing” (ibid., p. 8), even
though funding allocations and permanent supportive housing inventory had
increased steadily and significantly, as noted above.
The 2015 strategic plan update doubled down on efforts to prioritize, fund, and
spread Housing First practices: “This crisis response system involves the coordina-
tion and reorientation of programs and services to a Housing First approach that
emphasizes rapid connection to permanent housing, while mitigating the negative
and traumatic effects of homelessness” (ibid., p. 55). Notably, rather than grappling
with the growing number of questions about the ability of the federal government to
achieve its stated mission via these strategies, the plan stated an unwillingness to
consider alternative solutions: “To attain value for money, agencies and communi-
ties alike must direct resources towards evidence-based and cost-effective solutions
like permanent supportive housing, Housing First, and rapid re-housing, and away
from models and programs that are outdated, unsupported by evidence, or are not
cost-effective” (ibid., p. 61).
In 2018, USICH put out a new strategic plan entitled “Home, Together”
(USICH 2018). This strategic plan update was notable in that it departed from
offering “deadlines” for the goals articulated in prior plans—which, as noted
above, were either past or far short of the stated targets. Still, the plan reaffirmed
efforts to end homelessness among the same groups as before (ibid., p. 6). In
addition, the plan reiterated the prioritization of Housing First once again, indi-
cating that the new administration was continuing in the mission of its predecessor.
When looking retrospectively over the period, the plan even appears to assert that
past efforts had been little short of a great success. For instance, the document
confidently states that “evidence-based Housing First approaches have helped
serve more people with better results” (ibid., p. 12). Such statements, paired
with the trends in funding and program evolution above, affirm that the shortcom-
ings in the federal plan are not well explained by shifts in political power or by a
lack of “political will.”
Another important update in the 2018 was the first recorded instance in the
strategic plan efforts to define “success.” Recall that the prior plans had set out to
160 D. S. Lucas and C. J. Boudreaux

“set a path to end all types of homelessness.” In Home, Together, USICH offered a
working definition thereof: “Achieving these goals is grounded in a shared vision of
what it means to end homelessness: that every community must have a systemic
response in place that ensures homelessness is prevented whenever possible, or if it
can’t be prevented, it is a rare, brief, and one-time experience.” This is notable
because the plan clarifies that “ending homelessness” functionally means having a
“systemic response” in place—i.e., a permanent, federally funded homeless services
industry (Lucas 2017).

A Brief Tide-Turning

However, as the end of a decade of the federal homelessness mission loomed, the
tides began to turn. Executive branch leaders offered a striking series of reports that
offered a rigorous and contemplative assessment of the past decade’s efforts, while
revisiting these strategies for the future. In October 2020, prior to the presidential
election, USICH put out a remarkably different plan called “Expanding the Toolbox:
The Whole-of-Government Response to Homelessness” (USICH 2020). This plan
dovetailed with a report issued by the Council of Economic Advisors just 1 year
prior: “The State of Homelessness in America” (CEA 2019).
The CEA report offered a series of careful critiques of the federal mission. After
affirming that federal policy and funding was responsible for the surge in perma-
nent support housing, rapid rehousing, and the corresponding Housing First
approach, the report offered two major critiques. First, the report reviewed aca-
demic literature studying the trends of the period, concluding that “research
suggests that previous Federal policy is not capable of explaining a large portion
of the reported decline in homelessness between 2007 and 2018.” Second, the
report questioned whether homelessness was in fact decreasing at all—even at the
minimal rate reported in annual estimates. Although the raw numbers indicated a
15 percent reduction in total homelessness from 2007 to 2018, the report noted that
definitional inconsistencies may have driven this change. Specifically, persons in
transitional housing programs—the intermediate-length, linear model program
disfavored by the Housing First hegemony—are counted as homeless. But persons
in rapid rehousing programs—the Housing First substitute—are not counted as
homeless. Because the inventory of transitional housing beds plummeted by over
100,000 beds and was replaced by rapid rehousing programs, a similar number of
people could be served by the homeless services industry while numbers were
improving.
The remarkable CEA report garnered considerable debate in academia
(O’Flaherty 2020) as well as opposition from many homelessness advocates
(National Alliance to End Homelessness 2019). Nonetheless, when USICH
When “What Works” Does Not Work: The United States’ Mission to. . . 161

introduced a revised strategic plan in 2020, it was evident that the report reflected a
substantive shift in the administration’s homelessness mission. “Expanding the
Toolbox” cited the CEA report on page one. The plan also acknowledged that
“despite significant increases in funding and beds, overall homelessness has been
increasing in the United States” (USICH 2020, p. 1).
In addition, for the first time in a decade, the plan indicated a significant
reconsideration of the supremacy of Housing First: “prioritizing housing first as a
one-size-fits-all approach has not worked to reduce homelessness for all populations
and communities” (ibid., p. 1). In the plan, an entire section devoted to Housing First
provided a potent critique of the federal emphasis on Housing First. The plan
asserted that the government’s mission effectively imposed housing first as a “one-
size-fits-all” approach that “has produced concerning results” (p. 11). In turn,
“Housing First should be considered as one tool in the toolbox, but not the only
tool in the toolbox” (p. 11).
In contrast to the prior plans, this approach called for a more heterogeneous set of
locally driven solutions. Some of the most notable deviations from prior strategies
included support for programs that emphasized job training and related work
requirements, trauma-informed care, and flexible programming for various homeless
subpopulations. Furthermore, the plan also removed the specific goals of the earlier
plans entirely. Instead of targeting the end of homelessness for particular subpopu-
lations, the plan emphasized the development of solutions that would facilitate
innovation in program delivery and self-sufficiency for clients. In this, the plan
asserted (p. 12):
Our aspirational goals should expand our thinking to move beyond the basic goal of
providing subsidized housing assistance. As Congress has suggested, we must optimize
self-sufficiency through the reduction of reliance on public assistance and implement
policies that pursue this as an end goal. Communities should prioritize projects that increase
self-sufficiency. Regulatory constraints should be removed, and innovation should be
encouraged. Program quality should be measured by reductions in homelessness and by
increases in exits from any kind of subsidized housing to unsubsidized market rate housing.

Another goal revision was a call for an emphasis on “outcomes” instead of “out-
puts,” where the latter relates to the programs themselves (e.g., success as
implementing Housing First), while the former relates to substantive, long-term
changes in the experience and prevalence of homelessness. In sum, the end of the
Trump administration marked a thoughtful and honest assessment of the prior
decade’s homelessness mission considering the observed results.
162 D. S. Lucas and C. J. Boudreaux

Lessons (Not) Learned

Unfortunately, the revised vision of “Expanding the Toolbox” was short-lived.

Following the 2020 election, the Biden administration’s USICH returned with
vigor to the earlier period’s policies. Given that then-Vice President Biden was a
part of the administration that had so strongly championed Housing First, this return
to the Obama-era federal policies was somewhat unsurprising. However, the confi-
dence with which these strategies were reasserted stood in stark contrast to their
observable results. In December 2022, USICH published “All In: The Federal
Strategic Plan to Prevent and End Homelessness” (USICH 2022). The new plan
“restores the importance of Housing First” (ibid., p. 5). Notably, while prior plans
were cautious in the application of Housing First evidence to the chronic homeless
population, the new plan aspires “To truly bring Housing First to scale for all
populations” (p. 42). “All In” also doubled down on claims of the effectiveness of
Housing First: “When implemented to fidelity, the model is a proven solution that
leads to housing stability as well as improvements in health and well-being” (p. 45).
As such, the new qualifier when implemented to fidelity effectively asserted that
providers were not implementing Housing First “correctly”—a point to which we
will return below. While similar statements were made earlier in the period, the
evidence for such conclusions proved far weaker by this time. Most dubious are the
claims about health and well-being, as summarized in a 2018 consensus study,
“Overall, except for some evidence that [permanent supportive housing] improves
health outcomes among individuals with HIV/AIDS, the committee finds that there
is no substantial published evidence as yet to demonstrate that PSH improves health
outcomes or reduces health care costs” (National Academies of Sciences, Engineer-
ing, and Medicine 2018, p. 4). Nevertheless, the plan reiterated the intention to
leverage federal funding to pressure the adoption of Housing First principles by
providers (pp. 46, 49, 60). As of spring 2023, USICH’s website stated, “USICH
believes in evidence-based practices, particularly Housing First. Compared to other
interventions, Housing First has been proven to quickly rehouse people and to
reduce the likelihood of experiencing homelessness again.”2
Along with this recommitment to Housing First, the plan also reintroduced a
single, measurable goal. Far shy of the ambitious benchmarks of the prior decade,
the plan’s goal was to “reduce overall homelessness by 25 percent” from 2022 to
2025 (p. 70). Estimates from 2022 are the most recent ones available as of this
writing. Only time will tell if doing the same thing over again will produce different
results this time around.

2
https://www.usich.gov/about-usich/. Accessed May 8, 2023.
When “What Works” Does Not Work: The United States’ Mission to. . . 163

Takeaways

The United States’ federal mission to prevent and end homelessness through the
twenty-first century offers profound lessons that call into question the prospects of
an expanded role for the State to mobilize and drive societal responses to grand
challenges. The case illustrates how most or all of the necessary ingredients for a
successful moonshot mission were present: bipartisan political support, increased
government expenditures, a laser-like focus on evidence, clear indicators of success,
strong federal leadership, broad and cross-sector collaboration, and a stated empha-
sis on local engagement and solutions. In fact, few initiatives in history can boast
such a constellation of promising factors. And yet, even if such conditions are
necessary for success, it is unambiguously clear that these factors were not sufficient
to achieve the desired results.
A number of scholars have carefully assessed federal homelessness policy to offer
specific explanations for the shortcomings observed (Corinth 2017; Eide 2022;
Lucas 2017). Rather than delving into this literature, we conclude by considering
how the case of homelessness offers general insights into the prospects of state-led
missions directed at grand challenges.

The Mirage of “What Works”

One of the most striking aspects of the federal homelessness mission was the
relentless emphasis on “evidence.” That Housing First was an “evidence-based”
policy became a quasi-religious axiom in homelessness discourse across public
agencies, homeless service providers, and advocates alike. It is safe to say that it
would have been difficult to mobilize a comparable level of bipartisan, cross-agency
political support for massive increases in homelessness spending and programs
without the rallying cry behind “the evidence.” In turn, calls to focus on “what
works” were repeated so frequently that Housing First’s ability at ending homeless-
ness became something of a taken-for-granted fact among stakeholders in the
homelessness context. By letting evidence “guide” policy, proponents argue, the
only obstacle becomes something like “political will” needed to fund that policy to
fruition.
The federal homelessness mission reveals several flaws in this premise. The first
is that evidence cannot “guide” anything. Evidence comes from experts, and experts
are human beings subject to imperfect knowledge and error (Koppl 2018). Evidence
is not applied automatically to social problems, but is interpreted, negotiated, and
extrapolated by policy actors with limited information and a variety of interests (both
well-meaning and self-serving). As such, evidentiary information must be consid-
ered in the context through which the evidence is produced and utilized. In this
context, Lucas (2018) suggests that evidence-based policy can be understood
through the analytical lens of “public entrepreneurship,” wherein actors leverage
164 D. S. Lucas and C. J. Boudreaux

and apply evidence subjectively to achieve their private interests for policy change.
He documents how the cultivation of “evidence” was pivotal to the policy domi-
nance of Housing First and the broader emergence of a federal homeless mission.
However, the problem was that Housing First quickly came to be prescribed for
many purposes beyond what the academic research actually showed (Eide 2020).
Most of the studies about Housing First’s efficacy at housing retention showed
results (i) for a specific homeless subpopulation, the chronically homeless, and (ii) at
the individual level. It was clear that individuals who had repeated or long-term
bouts of homelessness with a cooccurring physical and/or psychiatric disability
were, on average, more likely to become and stay housed through the Housing
First programs that followed the Pathways Housing First approach as introduced in
New York City. Notably, however, these studies said nothing about the actual goals
of homelessness policy: the substantive reduction of homelessness across many
groups at the population level. In other words, the question of whether a Housing
First program improves housing retention for an individual is not the same question
as whether “retooling” the homeless shelter system to a Housing First approach will
reduce the amount or rate of homelessness in a community. The federal homeless-
ness mission inappropriately extrapolated the evidence beyond this unique group of
chronically homeless individuals to many different homeless subpopulations, who
experience homelessness very differently in terms of duration, repetition, and ser-
vices utilized. It also inappropriately extrapolated the insights about individual-level
housing outcomes to community level results—an archetypal example of the “atom-
istic fallacy.” In fact, the research that has emerged since that time casts doubt on
whether increases in permanent supportive housing bed provision correspond to any
reductions in community-level homelessness (Corinth 2017). Ultimately, federal
funding’s main function has been to provide more beds in the shelter system and
thereby increase the total number of people who are counted as homeless (Lucas
2017).
The two epitaph quotes reveal a core problem of “what works,” i.e., the limits of
evidence as a tool for state-led social and environmental missions. The evidence
does not speak for itself but the political process uses it in a manner that over-
simplifies, overpromises, and underperforms. Whereas the federal strategic plan
from 2010 emphasized that “homelessness is solvable,” careful academic
researchers a decade later were quick to conclude that we have yet to find clear
evidence on how to achieve this goal. It appears that “what works” remains an open
question.
An increasingly common response by Housing First advocates to the above
analysis is that Housing First was not actually tried at scale throughout the period.
To be fair, researchers have developed careful scales of fidelity to the programmatic
tenets of Housing First. Using these, they have found considerable variance across
programs that purport to utilize the approach (Gilmer et al. 2013). As such, it is
unclear how much of the growth of permanent supportive housing and rapid
rehousing bed types conforms to a Housing First approach. Like modern-day
socialists, the claim is something like, “actual Housing First has never really been
tried.”
When “What Works” Does Not Work: The United States’ Mission to. . . 165

For our purposes, this argument only weakens the federal homelessness policy’s
premises. For one, consider the claim of the relative cost-effectiveness of Housing
First, which is questionable considering the massive funding increases over the
period and limited results. To evaluate and monitor each local provider’s program-
ming for fidelity to Housing First is both a major oversight challenge and practical
cost that would dramatically increase the requirements to implement. In addition, the
word “fidelity” does not appear in any of the strategic plans until 2022—indicating
that this predictable concern was not a consideration in program success even as
funding was doubling to nearly USD 9 billion annually.
While one might say it is hard to predict such a setback in advance, that is
precisely the point. Whether fidelity concerns “could” have been foreseen by policy
makers, they evidently were not. The fidelity counterargument thus illustrates a
pragmatic reality endemic to many efforts to engage with all complex social chal-
lenges: many obstacles to success are only observable ex post. Because problems
like hunger, homelessness, health, and crime are complex and interdependent,
promising solutions often run into unforeseen obstacles and failures. What is needed
for such problems is not “prescription” of “the solution,” but support for the
emergence of new solutions and the development of feedback mechanisms to reward
those that may show promise in a particular context. By contrast, top-down efforts to
mobilize a specific “solution” to such a problem in ways not backed by research and
for purposes beyond the extant research basis mistakenly prioritize “outputs” over
“outcomes”—and are almost certain to fall short in the process.

Whither State Leadership?

Finally, the case of the federal homelessness mission illustrates the profound ten-
sions associated with state “leadership” that is also supposedly “collaborative” and
open to “bottom-up” solutions. In the development of its strategic plans, notices of
funding availability, and implementation of programs, the federal government
relentlessly worked to emphasize “local” context, knowledge, and collaboration in
the fight against homelessness. The word “local” is mentioned 74 times in the 2010
federal strategic plan, which even indicates that each community’s homelessness
strategies “should be locally driven, reflecting local conditions, since a one-size-fits-
all plan does not exist.” The plan goes on: “interdisciplinary, interagency, and
intergovernmental action is required to effectively create comprehensive responses
to the complex problem of homelessness” (USICH 2010, p. 30).
On the surface, the federal government’s leadership was thus structured to
facilitate the use of local knowledge and context-specific, bottom-up solutions—an
approach that some scholars explicitly call for (Lucas 2020). However, the reality
was far removed from the stated commitment to bottom-up, emergent organizing.
Communities were invited to develop their own strategies and introduce innovative
programs. . .so long as these accorded with “best practices”—aka Housing First.
Federal funding decisions, in turn, were not based on the success of programs, but on
166 D. S. Lucas and C. J. Boudreaux

organizations’ and communities’ commitment to the programs that the federal

government prioritized. The demise of transitional housing during this period is
clear evidence of this; such programs were essentially penalized simply for their
programmatic features—regardless of how successful they may (or may not) have
been. Little to no funding was reserved for alternative but promising programs that
some organizations were implementing. For instance, the New York City Doe
Fund’s Ready, Willing and Able program was a work empowerment program
purporting to offer highly effective programming for previously homeless persons.
Austin Texas’ Community First was a tiny home community that offered a variety of
social and economic activities and programs alongside housing. Unfortunately, there
is not yet robust evidence about the efficacy of these alternative programs. But this
does not mean they are inferior; it only means they are understudied. True federal
leadership would facilitate such locally driven experimentation and support the
evaluation of promising alternatives so that effective programs can be identified
and replicated as appropriate. Overall, the “collaborative leadership” of the federal
government in fact moved significantly toward centralizing the approach to an
already top-heavy homeless response system, functionally eliminating any substan-
tive collaboration that would enable the emergence of entrepreneurial, flexible, and
bottom-up solutions to this complex problem.

Conclusion

The philosopher George Santayana famously wrote, “Those who cannot remember
the past are condemned to repeat it.” While the United States’ misadventures in its
mission to prevent and end homelessness in the early twenty-first century are but
recent history as of this writing, its lessons are notable for those who would seek to
promulgate a future where the state is the lead player in developing and driving
missions to face grand social challenges. Homelessness is an important problem for
societies to grapple with, especially those societies that have generated immense
wealth and technological advance. However, if the federal government persists with
a monolithic focus on failed solutions of the past—as the most recent federal
strategic plan indicates—then we must be prepared for the letdowns of the past to
reemerge as well.

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David S. Lucas is the Edward Pettinella Assistant Professor of Entrepreneurship and a Research
Fellow with the Institute for an Entrepreneurial Society in the Whitman School of Management at
Syracuse University. His research focuses on the intersection of public policy, entrepreneurship,
and social challenge. He has testified before Congress for his research on homelessness.

Christopher J. Boudreaux is Associate Professor of Economics at Florida Atlantic University, a

Research Fellow for the Phil Smith Center, and an Editor at Small Business Economics. His
teaching and research expertise are in entrepreneurship, innovation, industrial economics, and
institutional economics.

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The Cost of Missions: Lessons from
Brazilian Shipbuilding

André Cherubini Alves

Abstract This chapter focuses on the challenges of implementing mission-oriented

policies (MOPs) in developing countries, with a particular emphasis on the Brazilian
shipbuilding sector. The aim is to analyze the difficulties associated with setting
MOPs and their impact on market creation and innovation. Despite the implemen-
tation of comprehensive institutional arrangements to foster technological and
industrial development, the sector’s progress has been hindered by coordination
uncertainties and high capability-building costs. The policies initially provided a
boost, but the industry ultimately failed to catch up with international competitors.
The article highlights the blurred boundary between policy expectations for market
creation and the practical limitations of building a thriving industry.

Keywords Mission-oriented policies · Innovation · Capability-building costs ·

Shipbuilding · Industry

JEL Codes L16 · L52 · O32 · O38 · M11

I’m grateful for financial support from the Brazilian National Council for Scientific and
Technological Development (CNPq) under grant number 486501/2012–4 as well as to the
program Erasmus+ Staff Mobility 2022, and to Christian Sandström and Magnus Henrekson for
their invitation, comments, and insights.
Selected content is from Author’s Doctoral Dissertation Industrial Organization Dynamics:
Bounded Capabilities and Technological Interfaces of the Brazilian Shipbuilding and Offshore
Industry at Universidade Federal do Rio Grande do Sul, Porto Alegre, Brazil.

A. C. Alves (✉)
Fundacão Getulio Vargas, São Paulo School of Business Administration, São Paulo, Brazil
e-mail: [email protected]

© The Author(s) 2024 169

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_10
170 A. C. Alves

Introduction

Innovation has long been acknowledged as the primary driver of economic devel-
opment and prosperity, a concept that gained prominence through the contributions
of Schumpeter. As a result, it is considered a top priority and often an ultimate
objective for policymakers. Although innovation stems from the entrepreneurial
endeavors of companies aimed at introducing valuable solutions to the market,
firms do not exist in a vacuum. They are embedded social/market relations (Polanyi
and MacIver 1957; Granovetter 1985) and institutions (North 1991), where govern-
ments have a direct and indirect influence on the rate of innovation and development
that can be achieved. However, “getting institutions right” to foster development
presents considerable challenges and is fraught with uncertainty.
In recent literature, there has been a growing recognition of the historical signif-
icance of governments in influencing the course of change and market dynamics
through their role in fostering innovation. In this sense, governments should go
beyond the regulation of markets and correction of “market failures,” but they can
actively contribute to the creation and shaping of markets by implementing targeted
policies that prioritize innovation-driven missions (Mazzucato 2013, 2015). How-
ever, the effectiveness of the employment of such government tools is open for
debate (Ergas 1987; Brown and Mason 2014; Foray 2018; McKelvey and
Saemundsson 2018).
This holds a particular significance for developing nations, as they prioritize
innovation policies and investments in research and development (R&D) to enhance
their overall sectoral capabilities within specific industries and markets, both
established and emerging (Kim 1980; Kim and Nelson 2000). In these contexts,
traditional sectors concentrate on an initial stage of catching up, which can poten-
tially serve as a pathway for leapfrogging in the future (Lee and Lim 2001). The dual
nature of innovation policies in developing countries creates ambiguous boundaries
when it comes to market creation. However, this observation also sheds light on the
challenges associated with mission-oriented policies and claims for the creation of
markets. The question is, at what cost? In this chapter, it is argued that MOPs need to
cope with the puzzle and impreciseness of both “building innovation capabilities for
market creation” and “market creation for building innovation capabilities” (Alves
et al. 2021).
Given bounded rationality and the inherent uncertainty in decision-making pro-
cesses, it becomes challenging to anticipate the behavior of economic agents and the
extent to which they can be trusted to build the required innovation capabilities. The
inability to rationally convert policy innovation efforts into concrete packages of
technological and operational capabilities that will produce the expected positive
outcomes leads to an innovation paradox where developing countries often have
negative returns on R&D and innovation investments (Cirera and Maloney 2017).
This process also contributes to the stagnation of these nations into what is called the
middle-income trap (Griffith 2011; Lee 2013).
The Cost of Missions: Lessons from Brazilian Shipbuilding 171

This chapter examines and explores the key challenges associated with
implementing effective mission-oriented policies in developing countries. To illus-
trate these challenges, I analyze the successes and limitations of a specific mission-
oriented policy implemented in the Brazilian shipbuilding sector. This sector expe-
rienced a significant growth in recent years, supported by a comprehensive institu-
tional framework aimed at technological catch-up, industrial development, and
innovation. The policy gained a momentum in 2005 following the discovery of
giant oil fields in the ultra-deep waters along the Brazilian coastline, known as the
Pre-Salt region. Measured against such high expectations, the strategy cannot be said
to have fully succeeded. While the set of policies put in place managed to mobilize a
large number of actors and resources around the country in the pursuit of becoming a
global player in this market, the industry ultimately failed to catch up and innovate.

From Institutions to Missions

Institutions and policy play a crucial role in setting the course of inventive and
economic activity (Bush 1945; Arrow 1962; Langlois and Mowery 1996). They set
the “rules of the game” by which economic agents make decisions (North 1991), but
they are also often used to foster endeavors toward technological change, innova-
tion, and the underlying production systems within an economic structure (Edquist
1997).
As an evolutionary process, institutions and the technological structure of regions
co-evolve to produce comparative advantage (Nelson 1995), which creates potential
windows of opportunity for technical and economic transformation (Lee and
Malerba 2017). Yet, getting these institutions and policies right remains a major
challenge (Williamson 2009), which often creates unintended consequences and
unpredicted costs as they are based on optimistic views of complex and intractable
problems (Morris 1980). These challenges may be even more critical in the context
of emerging economies given the cruder estate of preexisting technological capabil-
ities, internal market, and industrial and general institutions for innovation (Rodrik
2009). Mission-oriented policies (MOPs) have presented themselves as a potentially
attractive policymaking vehicle to overcome the lack of appropriate institutions and
complexities behind the implementation of industrial and innovation endeavors in
emerging economies.

Mission-Oriented Policies and Industrial Innovation

The twentieth century, especially after the post-war period, has presented several
mission-oriented programs. In the United States, this process has been notorious
through endeavors such as the Apollo space program, research on cancer, and
several other defense-related programs (Mowery 2010; Pisano and Shih 2012).
172 A. C. Alves

Fisher et al. (2018) provide an extensive coverage and interpretation of mission-

oriented policies with significant innovation results across various countries
stressing the need for a mix of appropriate policy instruments, social approval,
accountability, and a sense of urgency. The question lies in the continuation and
sustainability of such initiatives without governmental incentives.
According to the mission-oriented policy advocates, different than the conven-
tional economic approach of government whose intervention focuses on the regula-
tion and correction of failing markets, mission-oriented policies (MOPs) look
beyond by “creating new markets” as a result of the proactive state’s role in fostering
innovation-led growth and development (Mazzucato 2013). The state’s role can
create new markets through significant public procurement (Edquist et al. 2015).
MOPs are also expected to achieve the specific goal by setting up institutions to
promote education and skills, by building infrastructures to support innovation, and
by shaping long-term behavior (Mazzucato and Penna 2015), as well as by giving
governments a strategic role in providing the necessary finance for innovation
(Mazzucato and Penna 2016).
However, successful MOPs require the strong buy-in and engagement of the
private sector beyond governmental policy. While governments can create the right
conditions, ultimately management decisions will determine what happens (Pisano
and Shih 2012, p. 20). In this sense, it is argued that MOPs differ from the so-called
old missions, which are said to be top-down policy decisions (such as the creation of
government agencies such as NASA and major initiatives relating to national
defense, space exploration, and public health). New missions, on the other hand,
should encourage bottom-up stakeholder-based initiatives (Mazzucato and Penna
2015). Table 1 below brings forth some of the argued differences between types of
missions.
Thus, it is understood that missions must be well-defined, comprise a portfolio
beyond research and development (R&D) projects, involve different types of actors,
and engage in joint policy decision-making (Mazzucato and Penna 2016). Policies
should include specific targets, organization, evaluation and assessment, risk, and
rewards (Mazzucato 2013, 2018; Fisher et al. 2018).
MOPs are expected to achieve specific goals by creating the necessary incentives
to save and invest, setting institutions to promote education and skills, building
infrastructures, and shaping a long-term behavior. To achieve such goals, MOP is
based on a fourfold set of elements (Mazzucato 2018): it should (a) apply an
ambitious challenge translated into routes and directions, (b) nurture organizational
capabilities, (c) establish new forms of assessment, and (d) offer a better sharing of
rewards and ease risk-taking so that innovation-driven growth can also result in
inclusive growth. With this said, we explore some potential limits to market creation.
The Cost of Missions: Lessons from Brazilian Shipbuilding 173

Table 1 Characteristics of old and new mission-oriented projects

New: Environment technologies
Elements Old: defense, nuclear, and aerospace and societal challenges
Definition “The mission is defined in terms of the “The mission is defined in terms
criteria number of technical achievements, with of economically feasible technical
little regard to their economic feasibility” solutions to particular societal
problems”
Diffusion of “Diffusion of the results outside the core “Diffusion of results is a central
results of participants is of minor importance or goal and is actively encouraged”
actively discouraged”
Directionality “The goals and the direction of techno- “The direction of technical change
logical development are defined in is influenced by a wide range of
advance by a small group of experts” actors, including government,
private firms, and consumer
groups”
Government “Centralized control within a government “Decentralized control with a
degree of and administration” large number of agents involved”
centralization
Breadth of par- “Participation is limited to a small group “Emphasis on the development of
ticipation of of firms due to the emphasis on a small both radical and incremental
actors number of radical technologies” innovations to permit a large
number of firms to participate”
Complexity “Self-contained projects with little need “Complementary policies vital for
for complementary policies and scant success and close attention paid to
attention paid to coherence” coherence with other goals”
Source: Based on Soete and Arundel (1995) and directly quoted from Mazzucato (2018, p. 805)

Can MOPs Really Create Markets?

One of the main claims for MOPs is the supposed capacity of creating markets rather
than correcting for market failures (Mazzucato 2013). To understand this claim, it is
important to first address what markets are and how they arise and work. Functioning
markets presume the co-existence of producers and consumers that interact and
exchange by means of economic transactions to supply and satisfy the needs of
value. Hodgson (1988) maintains that the closest definition of a market is the one
provided by Mises (1949, p. 257) where he states:
The market economy is the social system of the division of labor under private ownership of
the means of production [. . .] The market is not a place, a thing, or a collective entity. The
market is a process, actuated by the interplay of the actions of various individuals
cooperating under the division of labor.

Firms are the key players in this process as they, by means of transaction, are the
direct interface to the consumer or buyer. As the main institutions of the economic
system, firms and markets are inexorably inseparable or even considered alternative
ways to organize the economic activity (Coase 1937). Thus, a workable market
presumes, on the one hand, a relation of needs and demands to be satisfied by some
economic agents and, on the other, the ability to fulfill those needs through
174 A. C. Alves

production by other economic agents. Firms are only valuable as long as they are
able to fill some market gap and, consequently, transact and profit from whatever
solution it provides.
From the perspective of “transaction cost economics” (TCE), a hierarchical
structure will “naturally” arise and grow until it inevitably meets with the market
for buying or selling, in other words, where it can engage in transactions with other
economic entities, such as other firms or consumers. Firm boundaries and ability to
grow, therefore, arise from this techno-economic logic of mastering the same
routines and capabilities (Nelson and Winter 1982), managing efficiently the allo-
cation of a pull of resources (Penrose 1959) and specific assets (Williamson 1985),
and relying on complementarities (Richardson 1972; Teece 1986) to solve problems
efficiently and profitably. For “market creation” to be sustainable, it relies on the
ability to create firms and capabilities to transact and profit from such a market.
While innovation is perhaps the “purest” way to achieve market creation by firms,
the question is: what is the role of governments and missions in the process and how?
According to Rodrik (2009), one way for governments to create a market is
through the use of mechanisms such as local content policies, tax cuts, trade barriers,
and special funding for production or even R&D. This results in a temporary
reduction of transaction costs, letting economies internalize and make feasible
formerly inexistent or economically impracticable capabilities. Such public incen-
tives can work as “windows of opportunity” in laggard countries (Lee and Malerba
2017). Latecomers use such incentives to offset cost differences associated with the
lack of capabilities. Geographic considerations in terms of technological and market
proximities must also be considered to increase the chances of success (Orlando
2004). In countries behind the technological frontier, such types of markets are
created for the sole purpose of catching up (Lee 2019).
However, windows of opportunity are always temporary, and the “artificial
transformation” of marginal transaction costs is not sustainable in the long term
without generating costs. To be able to take advantage of market entry incentives
created by governments, latecomer economies must find faster ways to develop
capabilities at the lowest possible cost. This also requires the absorptive capacities of
economic agents to convert R&D output existing technologies into production, sales,
and growth (Aldieri et al. 2018).
While, in theory, MOPs can be set to directly change and create new markets,
fostering the conditions to build local capabilities that will support firms to populate
the market is unavoidable. A precondition of market creation requires the building of
capabilities that are often difficult to master and costly to develop. The mismatch
between the positive expected intent and what is achievable based on the availability
capabilities at any point in time creates a “fuzzy boundary” that often leads to the
unsuccessful implementation of missions (Alves et al. 2021).
The Cost of Missions: Lessons from Brazilian Shipbuilding 175

Capability-Building Costs in Catching up and Innovation

Catching-up theory postulates that backwardness learning provides an opportunity

for fast growth from latecomer economies with lower costs (Abramovitz 1986).
However, this process is dependent on previously existing conditions including
knowledge, education across economic agents (firms and individuals), and manage-
rial skills that when not present create high uncertainty and decrease the probability
of success (Cirera and Maloney 2017). That’s where the intent for market creation
becomes blurry. While policies, as stated in the MOP literature, can define the goal
and direction of change, the unavailability of ex ante capabilities generates higher
capability-building costs. These costs are hard to predict even with the best estimates
as they depend highly on the speed of learning of firms in each context.
For instance, R&D investments are required to accelerate the learning of firms to
both use freely available knowledge (Nelson and Winter 1977) and access a network
of information (Rosenberg 1990). Adoption or imitation costs will vary dramatically
based on the technological level achieved by firms in a country (excluding the costs
of factors). This becomes even more problematic for less industrialized countries
unless there is a window of opportunity to be exploited (Rip and Kemp 1998).
The ability to create a market and conduct transactions economically is
undermined by the failure to master and coordinate various complementary compe-
tencies. Complexity in the knowledge and the number of technological interfaces
can generate friction beyond transaction and production costs (Alves 2015). Some of
these are technological transfer costs (Teece 1977). Others are related to coordina-
tion decisions such as suppliers switching costs (Monteverde and Teece 1982).
Capability-building costs are similar to what Langlois (1992, p. 113) calls dynamic
transactions costs, that is, the “costs of persuading, negotiating and coordinating
with, and teaching others” or, simply, “the costs of not having the capabilities when
you need them.” Capability-building costs are dynamic learning costs that must be
taken into consideration by mission-oriented policies in emerging economies as they
will influence the economic scope and the rate at which new industries can and will
dynamically grow.

The “New” Mission Case: Policy for Innovation

in the Brazilian Shipbuilding and Offshore Industry

The new mission for the resurgence of Brazil as a shipbuilding superpower was
grounded on a window of opportunity and a wave of optimism coming from
international growing markets before the 2008 financial crisis.
Brazil has a long history of shipbuilding, dating back to the sixteenth century. It
experienced a significant growth during the 1950s. The establishment of the Mer-
chant Marine Fund (FMM) and the National Development Bank (BNDES) aimed to
rejuvenate the national fleet, reduce ship imports, and stimulate exports (Foster
176 A. C. Alves

2013). This led to substantial foreign direct investment and the establishment of
major shipyards in Rio de Janeiro and international companies such as Ishibras and
Verolme. By 1975, Brazil was the world’s second-largest shipbuilding nation.
However, the industry faced a downturn in the following decades due to economic
challenges, tight monetary policies, reduced subsidies, and strict local content
requirements. This resulted in a decline in technological capabilities, delivery delays,
cost overruns, and an inability to compete (Cho and Porter 1986).
A revival occurred in the 2000s after Brazil successfully addressed its fiscal
deficit and rolled back inflation. With a stable economy, a new wave of confidence
emerged fostering industrial private investment and growth. A key factor in this
resurgence was the discovery of significant offshore oil reserves. This created a
demand for advanced oil platforms and transportation vessels, providing a boost to
the shipbuilding sector. The discovery of an estimated 15 billion barrels of oil
equivalent (BOE) positioned Brazil as one of the world’s top 10 oil producers.
This development serves as a focal point in the subsequent narrative, emphasizing
the industry’s re-emergence and its connection to the oil discoveries.

Routes and Direction: Setting Policy to Create the Market

The exploration of Brazil’s deep-sea oil reserves required advanced technologies.

Petrobras, the state-owned oil company, played a leading role in deep-water explo-
ration, employing complex strategies and developing new technologies. The oper-
ational depth increased from 410 feet in 1977 to over 8000 feet in 2010, necessitating
the expertise of specialized professionals in engineering, geology, and geophysics.
These challenges generated enthusiasm and drew comparisons to the “space race”
of the 1960s, as the pursuit of technological advancements and oil production
created a demand for various vessels. However, high costs and waiting times in
international shipyards led Brazil to build ships and oil rigs domestically. To
accomplish this quickly, comprehensive public policy interventions were
implemented, culminating in a mission-oriented approach (Alves et al. 2021).
In 2002, Petrobras announced the procurement of two offshore oil rigs, P-51 and
P-52, from foreign companies. This sparked opposition from labor unions, arguing
for domestic construction to create job opportunities. President Luiz Inácio Lula da
Silva responded to these concerns by supporting domestic production of the plat-
forms (Foster 2013). This decision set in motion a series of legislative acts and policy
changes that took place in the following years presented in Fig. 1.
The creation of the National Program for Mobilizing the Oil & Gas Industry
(PROMINP) through a legislative act was aimed to maximize the participation of
national suppliers of goods and services to the oil and gas industry. PROMINP was
responsible for mapping national capabilities and providing training in several
related fields of shipbuilding to the oil industry. In 2007, the Brazilian government
established the Program for Growth Acceleration and identified the shipbuilding
industry as a key national strategic sector for wealth generation and job creation
 The Cost of Missions: Lessons from Brazilian Shipbuilding

Fig. 1 Chronology of policies targeting the Brazilian shipbuilding industry. Source: Alves (2015)
177
178 A. C. Alves

(De Negri and Lemos 2011). The same year, the National Oil Regulatory Agency
created a resolution establishing minimum local content requirements.
In 2010, Petrobras announced a historic capitalization of USD 120 billion to fund
the exploration, development, and production of the Pre-Salt fields. The company’s
purchasing power was directed toward national shipyards to stimulate the national
industry to develop a supplier base capable of meeting the demands for the renewal
of their fleet of platforms, tankers, and support boats. In 2011, Petrobras, alongside
other major construction companies, established Sete Brasil SA, a company respon-
sible for the drilling operations of the Pre-Salt fields, which placed several orders for
drill ships to various shipyards.
The demand for oil rigs, tankers, and support vessels primarily came from
companies involved in offshore oil exploration and production activities, with
Petrobras playing a central role in this endeavor. In 2007, the National Oil Agency
(ANP) introduced the Local Content Resolution. According to this resolution, oil
concessionaires operating in Brazilian offshore fields were required to procure a
minimum of 70% of goods and services from national suppliers. The National
Organization of the Oil Industry (ONIP) was tasked with certifying suppliers for
participation. This local content policy aimed to create a reserved domestic market
for national suppliers, providing incentives for the gradual development of capabil-
ities and capacity. This, in turn, formed the basis for Brazilian legislation defining
three exploration regimes: production sharing, concession, and transfer of rights
regime.1
Under the production sharing agreement, all oil from the Pre-Salt fields is owned
by the state which was guaranteed participation in the exploration in all fields. The
operating firm contracted through a public bid was responsible for exploration and
extraction, bearing all operational expenses, in exchange for a portion of the oil
field’s value assuming all costs and risks associated with the specific field. In the
concession regime, the extracted oil belongs to the operating firm for the duration
specified in the contract upon payment of taxes and royalties. Lastly, the transfer of
rights agreement allows the government to grant Petrobras the rights to explore and
produce in specific Pre-Salt areas, up to 5 billion barrels of oil and natural gas, at the
company’s own expense and risk. This serves as compensation for Petrobras’
capitalization efforts to promote the supporting industry.
Local content requirements, along with incentives such as tax exemptions and
financial support, provided a foundation for promoting domestic supply. By
establishing contractual connections between oil-producing firms, national ship-
yards, and engineering, procurement, and construction firms (EPCs), a national
market for shipping vessels and parts was created, facilitating capability building
across the domestic supply chain. Complementary training programs involving
universities and technical schools aimed to identify national suppliers and provide
necessary training in various fields.

1
Lei 9.478/97 (Lei do Petróleo), Lei 12.351/10 (Lei da Partilha de Produção), Lei 12.304/10 (Lei da
criação da PPSA), Lei 12.276/10 (Lei da Cessão Onerosa).
The Cost of Missions: Lessons from Brazilian Shipbuilding 179

Table 2 Institutional incentives to stimulate the supply side

Incentives Description Legislation
Local Local content requirements for vessels used in the activities ANP Resolutions 36a
content of exploration and production of oil and gas in the Brazil- 39/2007
ian offshore oil fields
Fiscal Exemption of tax (IPI) for industrial production on parts Act 6.704/2008 and
and materials for the construction of ships in domestic Law 11.774/2008
shipyards. Zeroing of PIS/PASEP and COFINS taxes on
equipment for the marine industry
Finance Facilitating financing conditions to the sector through the Re-edition Provisory
Navigate Brazil Program, which introduced changes in Act 1.969/67
access to credit for ship owners and yards, increasing the
participation of the Merchant Maritime Fund (FMM) from
85 to 90% in the operations of the shipbuilding industry
and increase in the maximum loan term from 15 to 20 years
Establishment of differential interest rates and participation Resolution CMN
in financing with FMM resources for those contracts that 3.828/2009
ensure local content rates of over 60 or 65%
Creation of the Shipbuilding Guarantee Fund (FGCN) with Law 11.786/2008
the purpose to ensure risk credit to financing operations for
the construction and production of vessels and the risk of
performance of Brazilian shipyards
Training The institution of the Program for Mobilization of the Act No. 4.925/2003
National Oil and Natural Gas – PROMINP, which aims to
enhance the participation of the national goods and services
industry, competitively and sustainably, in the implemen-
tation of oil and gas projects in Brazil and abroad
Source: Alves (2015)

The comprehensive set of laws, resolutions, and incentives aimed at reducing the
comparative cost disadvantages faced by existing Brazilian suppliers compared to
foreign competition. They also stimulated the entry of new national players into the
supply chain. Credit facilitation measures also enabled firms to secure loans at lower
interest rates to invest in activities related to the shipbuilding industry. Table 2
presents the resolutions aimed at stimulating capability building and providing
financial support for innovation.

From Market Creation to Building Production

and Technological Capabilities

With the institutional conditions in place “creating the market,” Petrobras assumed
the central role as the lead firm driving the sectoral development. Petrobras was
assigned three key roles: securing demand, coordinating suppliers, and managing
cross-sectoral investments. These responsibilities entrusted Petrobras with the task
180 A. C. Alves

Table 3 Order book and investment by type of vessels by company (2012)

Vessel type by program Number Investmenta Average cost/vessela Investor
Support vessels 223 16.7 billion 75 million Petrobras
PROREFAM 1, 2, and 3
Platforms FPSOs 22 53.9 billion 2.45 billion Petrobras
Large crude carriers 49 6.8 billion 139 million Transpetro
PROMEF 1 and 2
Drill ships 29 54 billion 1.8 billion Sete Brasil
Total 131.4 billion
Source: Campos Neto and Pompermayer (2014). Data from reports of contracted orders
a
Values in BRL. One USD was equal to BRL 1.95 in 2012

of ensuring a steady demand for products and services, organizing the network of
suppliers and overseeing investments that spanned multiple sectors.
Petrobras held the responsibility for operational activities related to oil production
and the procurement of platforms and support vessels. To handle transportation and
storage operations for oil products, the company utilized its subsidiary Transpetro,
which required a substantial fleet of crude carriers and LNG carriers. In 2011, a
separate entity named Sete Brasil was established with a focus on exploration and
drilling activities. Sete Brasil took charge of placing orders for drill ships. Table 3
provides an overview of the number and values of the order books as of 2012.
The sector’s re-emergence was characterized by the establishment of multiple
shipbuilding sites along the Brazilian coastline in 11 major states, with employment
in shipyards expected to reach 100,000 employees (SINAVAL 2014). While modern
infrastructure and equipment were being implemented in these shipyards, techno-
logical capabilities were recognized as a crucial element for the sector’s successful
resurgence. Partnerships for technology transfer aimed to bridge knowledge gaps,
although not all intended partnerships were formally established through contracts.
The initial requirement for shipyard operators was to either have prior experience
in the industry or demonstrate a partnership with an experienced international
company. National companies without significant shipbuilding experience needed
to demonstrate their engineering, procurement, and construction (EPC) capabilities
based on their track record in complex projects and commit to establishing techno-
logical partnerships with recognized shipbuilding firms to facilitate technology
transfer. Technology partners from countries such as Japan, South Korea, China,
and Singapore brought specialized know-how to Brazil.
The primary objective of the examined MOP was to establish a foundation for
innovation throughout the shipbuilding industry. This entailed fostering innovation
capabilities across the entire value chain, starting from the main contractor
(Petrobras) and extending to the “last” supplier. Additionally, Petrobras and other
operators were obligated by the National Petroleum Agency to invest 1% of their
operating revenues in research providers within the country, further promoting
research and development activities.
As an operator, Petrobras took on the responsibility of overseeing the contractual
interfaces in the shipbuilding projects. To ensure compliance with technical
The Cost of Missions: Lessons from Brazilian Shipbuilding 181

requirements and delivery schedules, Petrobras deployed staff members to different

shipyards. This was crucial for the smooth management of such a large-scale
operation. The minimum local content requirements for various types of vessels,
ranging from 45 to 70% of locally sourced materials and components, were deter-
mined based on factors such as technological complexity, availability, and the time
required for local suppliers to master the necessary technologies.
The company conducted a thorough mapping of potential suppliers across Brazil
for each specific technology, equipment, ship parts, and materials specified in the
engineering projects. According to Petrobras president’s assessor for local content at
the time, the company possessed a comprehensive understanding of the gaps within
the national industry with detailed documentation in several publications outlining
various technologies and their feasibility for implementation in Brazil. To further
enhance their knowledge and keep abreast of potential suppliers, Petrobras conducts
continuous surveys through its inspectors.
These efforts are complemented by studies conducted by other institutions, such
as the Development Bank, on the competitiveness of the Brazilian industry. These
combined initiatives contribute to a comprehensive assessment of the national
industry and enable Petrobras to make informed decisions regarding local content
requirements and supplier selection. Backed by a set of major institutional setups and
financial prospects, planning for local content, the shipbuilding industry was able to
rapidly emerge in Brazil under the strong coordination by Petrobras to develop and
manage technological interfaces and contractual complexities (Alves 2015).

The Cost of a Mission-Oriented Policy: From Market

Creation to Market Failure

Since its inception in 2005, the implementation of a mission-oriented policy in

shipbuilding has sparked a series of transformations in Brazil’s industrial landscape,
impacting areas such as infrastructure, the value chain, research and development, as
well as capital and labor. This policy mobilized significant resources, leading to a
notable growth in employment within the shipbuilding sector, which eventually
became the second-largest industry in the country, trailing only behind the automo-
bile industry.
For approximately a decade, there were high hopes and great expectations
surrounding the mission-oriented policy’s establishment, aimed at fostering the
development of Brazil’s shipbuilding industry. However, despite the intuitional
mission-oriented incentives and extensive planning, over time, these expectations
started to crumble. The industry’s employment trajectory tells a story of drastic
shifts, from a state of near despair in the 1980s to a rapid rise in the 2000s.
Employment within the shipbuilding sector reached its peak in 2014, with a total
of 82,000 jobs (Fig. 2).
182 A. C. Alves

82,5 84

78 77

70

63
59 57
56

Employment in thousands
4
Production in millions of CGT

3,3 49
46,5
3 39,2 42

34,7 35
2,5 34
29,5
2 28

1,4 21

1 14

7
1,9

2015
2016
2017
2018
1960
1961
1965
1970
1971
1974
1975
1976
1978
1979
1980
1981
1985
1990
1990
1997
1998
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Fase 12 22 32 42 52 72 82 92 102 112

DWT Ordered DWT Delivered Employees

Fig. 2 Labor and production evolution. Source: Updated from Alves et al. (2021), adapted from
Barat et al. (2014) based on data from Clarkson (2018) and SINAVAL (2018)

Despite the significant employment growth, the shipbuilding industry in Brazil

faced major challenges in terms of productivity. The industry struggled to achieve
substantial output growth and grappled with high construction costs, which hindered
its ability to compete on the international stage. Moreover, a lack of competitiveness
combined with corruption scandals, notably the “car-wash” investigations centered
around Petrobras, dealt a severe blow to the industry. As a result, by the end of 2018,
the number of employees in the shipbuilding sector had dwindled to just 29,539.
As a state-owned company, Petrobras participated in shipbuilding (EPCC), with
variable involvement levels. It provided shipyards or firms with the General Tech-
nical Description (GTD) developed at CENPES. Two groups at CENPES collabo-
rated on technical descriptions and engineering projects. The Research and
Development in Engineering and Production group collected surveys and advanced
technology, while the Basic Engineering in Exploration and Production group
focused on fundamental requirements and sometimes created basic engineering
projects. When Petrobras leased oil fields, it provided technical descriptions to the
operating firm, which engaged national suppliers. Petrobras inspected vessels and
participated in commissioning. As the primary operator, Petrobras had three contract
approaches, yielding different cost and delivery results. “Charter” contracts with less
Petrobras involvement had fewer issues. Increased Petrobras’ involvement in
The Cost of Missions: Lessons from Brazilian Shipbuilding 183

Table 4 What prevents building capabilities

Sources of
frictions Reason Internal response Results
External interfer- Need to comply with Extra task force efforts Higher costs and
ence of the regulations and to guarantee compliance re-work
Petrobras in the specifications
process
Pressure from Need to capitalize on oil Speeds up and starts Eventual
Petrobras for production process with incomplete mismatching of parts,
time schedules projects re-work, and need to
and deadlines update the original
project
Insufficient engi- Re-building of the engi- Uses different systems Slow project updates
neering teams neering team in the to produce drawings and risk of
with the right shipyard mismatching project
tools and skills and construction
Lack of key sup- Difficulty in obtaining all Outsource Delays and higher
pliers nearby required environmental costs
licenses, onerous
bureaucracy
Lack of an Lack of accessible logis- Needs to plan in Higher costs, risk of
industrial eco- tics, infrastructure, eco- advance, organizes cash material waste,
system of key nomic incentives, and flows, and makes delays, and quality
materials and regional disputes for inventory
suppliers resources
Project specs not Oil field characteristics Finds standard parts to “Living” project
fully defined by still being studied be produced and adapts subjected to frequent
Petrobras later continuous meet- changes, re-work,
ings with Petrobras and higher costs
Low labor Underdeveloped skills Frequented meetings, Delays and re-work
productivity and managerial training, and supervision
disorientation
Source: Adapted from Alves (2015)

complex projects posed difficulties, including sudden changes and project reviews
during production.
In Brazil, public bids for shipbuilding projects were predominantly won by a
select few domestic companies. These firms specialized in civil engineering projects
of a complex nature, such as roads, bridges, dams, and industrial complexes like
refineries and petrochemical facilities. These companies possessed the necessary
capabilities to mobilize large resources, including labor and materials. However, it is
important to note that infrastructure projects have a distinct technological foundation
compared to shipbuilding. The shipbuilding industry faced critical bottlenecks,
including a shortage of engineering teams, inadequate systems and tools, a lack of
local suppliers near shipyards (Pires et al. 2007), and frequent delays and re-work.
Table 4 illustrates some of the most cited reasons, as mentioned by interviewees in
the shipyard that hindered the capability-building process.
184 A. C. Alves

Frequent project changes, a lack of standards and adherence, high overhead costs,
external pressures, and client demands all contributed to these challenges. Addition-
ally, the industry lacked engineering capacities, and the institutional processes for
licensing and permits were slow, further impeding progress. These factors resulted in
cost escalation, making it difficult to build capabilities due to the need for constant
project changes and the pressure to meet deadlines. The limited window of oppor-
tunity proved insufficient given the existing local capabilities. While mission-
oriented policies generate high expectations for market creation and capability
building, two factors make the transition from the current state to the desired new
state uncertain.
First, the duration of the window of opportunity is challenging to predict due to
changing competitive conditions. Brazil’s mission-oriented policy to build local
shipbuilding capabilities capitalized on high demand from Petrobras and the fact
that international shipyards had a long waiting list of orders and were unable to meet
the desired timelines by the Brazilian oil company. However, after the 2008 crisis,
the demand for cargo ships plummeted worldwide, significantly shortening Brazil’s
window of opportunity.
Second, the speed of learning and the costs associated with transitioning from
existing capabilities to new or more advanced ones were also difficult to anticipate.
The complexity of coordinating various interfaces and acquiring technological and
organizational capabilities hindered shipyards’ ability to reach full production
capacity. Without reliable organizational capabilities, meeting market demand
became a significant challenge. Despite having state-of-the-art facilities and neces-
sary assets, mastering the required routines demanded extensive knowledge, skills,
and organizational capabilities.
Ten years after the implementation of the policy, the cost of producing ships in
Brazil still exceeded the costs of importing them. The lack of industry-specific
knowledge necessitated numerous technological interfaces with other firms. This
made it harder to orchestrate the necessary capabilities and control technology
transfer costs, dynamic transaction costs, and supplier switching costs. Conse-
quently, reaping the benefits of learning curves became more challenging. Uncertain
challenges requiring dynamic problem-solving capabilities contradicted the need for
stability to excel in routine operations.
The deficiency in technical and organizational capabilities led various stake-
holders to act opportunistically, resulting in moral hazards and corruption scandals.
Beyond technical and operational inefficiencies, the “car-wash” scandals served as
evidence of institutional collapse. The highly anticipated “passport to the future”
envisioned by the complex mission-oriented policy fell short. An unstable institu-
tional framework coupled with government-driven personalistic maneuvers further
exacerbated institutional instability.
In retrospect, the primary policy efforts focused on macroeconomic and institu-
tional conditions rather than addressing the balance between macro- and micro-
challenges. There was a relative lack of focused policies and programs aimed at
developing strong technological and organizational capabilities. While markets were
created through institutional and fiscal incentives, and local content policies reserved
The Cost of Missions: Lessons from Brazilian Shipbuilding 185

market shares, the complexity of mastering shipbuilding capabilities within the

suddenly limited window of opportunity was underestimated by public authorities.

Concluding Remarks

Mission-oriented policies (MOPs) have primarily aimed to stimulate market creation

and foster innovation (Mazzucato 2013). However, as Morris (1980) noted, good
policy intentions often come at a high cost. While “new” MOPs emphasize the
state’s role in directing change to tackle grand environmental and societal grand
challenges, the Brazilian shipbuilding case brings insights into the difficulties
associated with governmental efforts to market creation. Well-functioning markets
rely on producers’ ability to meet the technical and economic requirements for
delivering desired outcomes. The misalignment between policy intent and the real
possibilities of market creation that considers the concrete availability of technolog-
ical and organizational capabilities at any given time results in policy ambiguity that
hinders the successful implementation of missions (Alves et al. 2021). Moreover,
this unclear view of the gap between policy expectations and the technological and
organizational requirements is riddled with uncertainty, leading to unanticipated
costs.
Although the Brazilian shipbuilding mission-oriented policy exhibited important
“success factors” outlined in the MOP literature – including a window of opportu-
nity, ambitious technological goals, institutional incentives, significant public
financing, extensive private sector investment and involvement, detailed planning,
a sense of urgency, and social and national engagement (Mazzucato 2018), it failed
to really create and sustain a market.
While in the short term, markets can be created through an active interventionist,
real markets must be sustained in the long run through competitive transactions
and technological innovation. A crucial requirement is matching current regional
and national capabilities to be leveraged with those necessary for comparative and
competitive advantage. The difficulty in quickly finding this balance can result in
high costs and undermine the prospects of success. These costs encompass technol-
ogy transfer, supplier switching, and dynamic transaction costs (Langlois 1992),
which involve the efforts of persuading, negotiating, coordinating, and teaching
others or simply the costs incurred by lacking necessary capabilities when needed.
Mission-oriented policies, through institutional frameworks (e.g., knowledge
base, S&T system, business propensity and culture, supply chain, and regulation),
may come as a tempting strategy in developing countries to escape the middle-
income trap and build the foundations of viable markets. However, to fully capitalize
on market entry incentives, latecomer economies must find faster and cost-effective
ways to learn and develop capabilities or selectively choose specific packages that
align with their technological levels and economic context.
186 A. C. Alves

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André Cherubini Alves is Assistant Professor of the São Paulo School of Business Administra-
tion at Fundação Getulio Vargas and Researcher at FGV Innovation Center. André holds a PhD in
management of technology and Innovation from the Federal University of Rio Grande do Sul
obtained in 2015 with the doctoral dissertation entitled Industrial Organization Dynamics: Bounded
Capabilities and Technological Interfaces of the Brazilian Shipbuilding and Offshore Industry.
Throughout his academic and professional career, André has accumulated national and inter-
national experience developing innovation research projects aimed at understanding how firms and
industries develop innovation capabilities and are shaped in face of transactions costs, especially in
emerging markets. His research interests are management of technology, innovation capabilities
and strategy, lean manufacturing and systems, and knowledge-intensive entrepreneurship.
The Cost of Missions: Lessons from Brazilian Shipbuilding 189

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You Can’t Develop What You Don’t Know:
The Realities and Limitations of Foreign
Aid Missions

Kathryn Waldron and Christopher J. Coyne

Abstract Mariana Mazzucato argues that capitalism needs to be rebuilt around

private-public partnered “missions.” To facilitate these missions, Mazzucato pro-
vides seven pillars to serve as guidelines. Using Mazzucato’s pillars, we critically
review US government efforts to develop the local economy and establish new
political institutions through foreign aid. We analyze the successfulness of these
“missions” by assessing government officials’ ability to overcome the “knowledge
problem” and “political economy problems.” We conclude that Mazzucato’s pillars
are unlikely to be satisfied due to these dual problems.

Keywords Mazzucato · Foreign aid · Intervention · Knowledge problem · Political

economy problem · Missions

JEL Codes B53 · F54 · F51

Introduction

Mariana Mazzucato has garnered significant attention during the past decade for her
work advocating a more proactive role for government in steering and creating
markets. In her most recently published book, Mission Economy: A Moonshot
Guide to Changing Capitalism, Mazzucato (2021) argues that we need to rebuild
capitalism to create a “solutions-based economy” (p. xxiv). She envisions the
economy not as an emergent order but as a collection of directed goals guided by
collaborations between public and private organizations.
Mazzucato points to several pre-existing public-private partnerships that, to her
way of thinking, exemplify ideal missions. These include the US government’s
mission to send a man to the moon, DARPA’s role in creating the Internet, and the
European New Green Deal. Another key example is the United Nations’ Sustainable

K. Waldron (✉) · C. J. Coyne

Department of Economics, George Mason University, Fairfax, VA, USA
e-mail: [email protected]; [email protected]

© The Author(s) 2024 191

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_11
192 K. Waldron and C. J. Coyne

Development Goals (SDGs), which Mazzucato calls “the perfect starting point for
considering the challenges missions might address” (p. 109). The SDGs are merely
one of the latest attempts by the international community to encourage economic
development and state capacity. But international economic and political develop-
ment projects have long existed, with much controversy over their efficacy. The
history of foreign aid thus makes an excellent proving ground for Mazzucato’s
arguments.
In this chapter we judge the various missions by the US and multinational
organizations to develop economies and shape institutions through foreign aid
against the seven principles for creating a new political economy identified by
Mazzucato in Mission Economy. These principles are (1) collectively creating
value; (2) focusing on market shaping, not market fixing; (3) creating dynamic
capabilities within organizations; (4) budgeting based on desired outcomes;
(5) pre-sharing risks and rewards; (6) focusing on stakeholders instead of share-
holders; and (7) utilizing open systems to co-design the future.
Our theoretical framework is grounded in two related problems that all economic
decision-makers face. The first is the “knowledge problem,” as identified by Aus-
trian economists (Mises 1974 [1936]; Hayek 1948; Lavoie 1985). Scholars in this
tradition highlight that economic knowledge—knowledge of the best use of scarce
resources—is not objective and given, but rather emerges through the process of
interaction in different institutional environments. The second is the range of
“political economy problems” identified by public choice scholars. Scholarship in
this area identifies the frictions and perverse incentives that often exist in political
institutions which can frustrate even the most well-intentioned policies. Together,
these two challenges threaten to hinder the ability of key mission actors to adapt in
the face of changing conditions or error. In order to adapt, actors require both
knowledge that adjustment is necessary and the incentive to act on that knowledge.
Absent either component, errors will persist, and failure is more likely.
Drawing on these theoretical insights, our analysis seeks to answer the following
question. Given the knowledge and political economy problems, can we expect
Mazzucato’s pillars to be effectively implemented and adjusted to achieve the ends
stated by proponents of missions? If government officials suffer from knowledge
problems regarding the best use of resources or perverse incentives due to political
dynamics, then we should be less optimistic about the likelihood of Mazzucato’s
principles successfully guiding missions. Similarly, if foreign aid missions that
adopted similar principles still struggle to achieve objectives, then we should
question whether the implementation of Mazzucato’s principles is likely to lead to
future mission success.
We proceed as follows. The next section presents Mazzucato’s seven pillars, as
well as the knowledge and political economy problems, in more detail. We then
apply our theoretical framework to Mazzucato’s pillars in the context of foreign aid
programs. We conclude with some thoughts regarding more fruitful avenues for
economic development.
You Can’t Develop What You Don’t Know: The Realities and Limitations. . . 193

Theory

What Is a Mission Economy?

In the first chapter of Mission Economy, Mazzucato writes (p. 7):

We cannot move on from the key problems facing our economies until we abandon this
narrow view [viewing government as simply a tool for leveling the playing field]. Mission
thinking of the kind I outline here can help us restructure contemporary capitalism. The scale
of the reinvention calls for new narrative and new vocabulary for our political economy,
using the idea of public purpose to guide policy and business activity.

Mazzucato offers seven “key pillars” or principles to successful missions. The first
pillar is collectively creating value. “Missions are about bringing a high level of
strategic purpose to value creation. They are an admission that growth has not only a
rate but also a direction—and that direction should have purpose” (p. 168). Missions
need to work to promote the public interest. This requires rejecting the traditional
economic framework wherein individuals seek to maximize their own utility
according to their own subjective preferences. Additionally, it requires rejecting
the price system as a guideline for value. Instead, Mazzucato argues the government,
and the community must come together to determine what is valuable.
Rejecting the price system leads directly to Mazzucato’s second pillar—market
shaping, instead of market fixing. Mazzucato views the absence of real-world perfect
competition as an opportunity for governments to proactively reshape markets by
using policy to direct entrepreneurs to certain technologies. To do this, governments
will need to develop “dynamic capabilities” (p. 174), changing the way bureaucra-
cies think about evaluation and administration and increasing their tolerance for risk-
taking (pillar 3). Governments also need to engage in outcome-based budgeting
(pillar 4). Mazzucato argues that the government’s ability to print money allows the
public budget to accommodate additional spending. As a result, missions should be
funded with the success of the mission in mind and not by affordability.
The next two pillars, pre-distributing risks and rewards (pillar 5) and embracing
stakeholder value instead of shareholder value (pillar 6), are both centered around
the question of who should benefit from a mission. Unlike redistribution, which
seeks to reallocate wealth after its creation, pre-distribution involves shaping mar-
kets before wealth creation in such a way that any wealth generated will be
distributed so that all contributors will be getting their “fair share” (p. 189). To do
this, Mazzucato suggests building public wealth funds paid for through government-
funded activities or equity stakes in companies that have received public invest-
ments. Similarly, Mazzucato argues that companies that focus on creating value for
their stakeholders ignore the impact of company decisions on others in the commu-
nity. Governments should intervene to shape markets so that all stakeholders in a
mission will profit.
The final pillar is utilizing open systems to co-design the future through increased
citizen engagement and participation. Additionally, it includes incorporating feed-
back loops and embracing uncertainty and ambiguity. In this, Mazzucato draws upon
194 K. Waldron and C. J. Coyne

the evolutionary theory of the market espoused by Joseph Schumpeter and the
political theory of Alexis de Tocqueville. She envisions citizens participating in
the creation of the vision of the mission and the method of achieving the said
mission.
Together, Mazzucato believes these pillars will help ensure mission success. But
there are two significant challenges any government program has to overcome in
order to have any hope of being successful—the knowledge problem and political
economy problems.

The Knowledge Problem

The knowledge problem originated from the socialist calculation debate of the early
twentieth century. The debate took place between proponents of central government
planning and proponents of markets. The former argued that the abolition of private
ownership over the means of production, coupled with state planning, was superior
to private markets for rationally allocating scarce resources; the latter argued that
markets served a crucial function in enabling economic actors to discover how to
best allocate scarce resources among an array of possible alternatives. The main
market proponents—Ludwig von Mises and Friedrich Hayek—argued that the
socialist model of planning was doomed to failure because it ignored the role of
market prices in coordinating knowledge.
Their argument against planning was as follows. Without private property in the
means of production, there could be no market for the means of production. Without
a market for the means of production, there could be no exchange. And without
exchange there could be no market prices which capture the relative scarcities of
resources. Efforts to address this issue through a mixed system of “market socialism”
inappropriately presumed that economists can identify equilibrium conditions. But
equilibrium data does not exist outside the market process that generates the relevant
knowledge.
The knowledge problem, then, consists of three components. The first is that
knowledge necessary to production is often dispersed throughout society. The
market is thus an important mechanism for coordinating this knowledge. The second
is that much of this knowledge is inarticulable because it arises from the lived
experiences of individuals. Monetary prices, however, are able to communicate
this knowledge through people’s decisions to buy and sell. The third is that the
dynamic process of the market leads to the creation of new knowledge that cannot be
generated absent the market context. Hayek (2002, p. 13) notes that it is only through
the use of markets that people discover “Which goods are scarce, however, or which
things are goods, or how scarce or valuable they are. . . .” This knowledge, crucial for
effective production and economic development, is only generated through individ-
uals exchanging goods and services. Thus, markets both serve as a coordinator and
creator of economic knowledge.
You Can’t Develop What You Don’t Know: The Realities and Limitations. . . 195

Government intervention disrupts the market’s ability to communicate “knowl-

edge of circumstance” while also distorting the process of discovery that takes place
in markets. The result is what Kirzner (1985) refers to as the “stifled discovery
process,” which refers to the distortions caused by government regulations and
interventions in markets.
Lavoie (1985) makes the important distinction between “comprehensive” and
“non-comprehensive” planning. Comprehensive planning refers to government
efforts to plan the entire economy. Non-comprehensive planning refers to govern-
ment efforts to plan and control certain aspects of economic activity.
Non-comprehensive planning fits with Mazzucato’s vision of missions. Private
markets still exist, but they are guided by the public sector. Importantly, Lavoie
(1985) noted that, from an economic standpoint, the difference between comprehen-
sive and non-comprehensive planning are the ones of degree and not kind. That is,
planners still suffer from the knowledge problem under non-comprehensive plan-
ning because the process of knowledge creation and coordination is attenuated due to
government involvement whereby the political process, at least partially, replaces
the market process.
To understand why this is important for missions, return to Mazzucato’s pillars.
The first pillar is that missions will collectively create value. This assumes that
decision-makers possess knowledge of how to collectively create value as if this
knowledge already exists and is available to collect. Missions are supposed to be
“market shaping” (pillar 2) based on “dynamic capabilities” (pillar 3) possessed by
government. Absent the market’s discovery process, it is unclear how planners will
know how to shape markets to achieve their ends. Similar logic applies to the issues
of pre-distributing risks and rewards (pillar 5) and embracing stakeholder value
(pillar 6). Both assume that decision-makers possess the economic knowledge
necessary to ex ante influence markets to achieve the desired outcomes in terms of
resource distributions and stakeholder value.

Political Economy Problems

Public choice scholars have identified several frictions and perverse incentives in
democratic politics which can result in government policies failing to achieve their
stated ends (Buchanan 1954; Tullock 1965; Reksulak et al. 2014; Wagner 2016). For
instance, voters will tend to be rationally ignorant, meaning they will not obtain
available political information because the cost of doing so is greater than the
expected benefit. Because the impact of a single vote is limited, voters have a
weak incentive to gather, and process, detailed political information on elected
officials.
Another issue with voting is bundling: the fact that each voter casts a single vote
for a candidate who represents a diverse range of major issues. Thus, individual
voters cannot express their preference for specific issues. For instance, a voter may
value a candidate’s education policy but dislike the same candidate’s health-care
196 K. Waldron and C. J. Coyne

policy. With a single vote, there is no way to communicate nuanced preferences

across policies.
Exacerbating feedback between voters and policymakers are information
asymmetries, as parties have different information. Rational ignorance assumes
that information is available to voters, but they choose not to obtain it because the
expected costs outweigh the expected benefits. Additionally, some information is
unavailable to voters. For instance, the detailed workings of government bureaus are
not available to voters. This is partially due to the complexities of agencies and
partially due to the fact that congressional oversight committees often rely on agency
reporting to carry out their monitoring. Agencies can strategically frame or withhold
information which weakens oversight.
A final factor is special interest groups: collections of voters with a shared
interest. While individual voters have little impact on electoral outcomes, special
interest groups can have a bigger impact. The group’s combined influence means
members often have access to political actors that non-member voters lack. Where
special interest groups are effective, they concentrate benefits on members while
dispersing costs on taxpayers. These groups’ success in influencing policy for their
own benefit undermines the public interest justification for government action.
Furthermore, in the process of currying favor, special interests can destroy wealth
through rent-seeking activities, as they expend resources to secure resource transfers.
This is wealth destroying because scarce resources are spent redistributing existing
wealth instead of creating new wealth.
These political economy problems are prevalent in foreign aid. It is difficult for
individual voters to track the specifics of foreign aid flows. Even if they were
interested in gathering information to monitor political actors, the bureaucracy of
foreign aid is so dense that important information is simply not available. Moreover,
both domestic and foreign special interests are at work in foreign affairs, further
intensifying the pathologies of politics. Absent the appropriate incentives, political
officials will not pursue the interests of voter-citizens, or “stakeholders,” as dictated
by the mission model. Instead, there will be space for narrow opportunism whereby
those in privileged decision-making positions, or those who have access to those in
those positions, can pursue their own interests under the guise of inclusive rhetoric.
Like the knowledge problem, political economy problems present potential
concerns for Mazzucato’s key pillars. Consider, for example, how easy it might be
for outcome-based budgeting (pillar 4) to be influenced by the political process.
There are numerous government actors involved in the process who have an
incentive to expand budgets for the benefit of their agency (Tullock 1965; Niskanen
1971). Officials can control flows of information to limit accountability. Moreover,
special interests will seek to influence missions to benefit their members. The
influence of these factors is likely to lead to missions that satisfy a subset of interests
as compared to some overly broad and non-operationalizable conception of the
“public interest.”
You Can’t Develop What You Don’t Know: The Realities and Limitations. . . 197

Foreign Aid: Mazzucato’s Principles in Action

The overall effectiveness of foreign aid has been a matter of much debate among
economists (see, for instance, Easterly 2001, 2006; Sachs 2005). A well-known
study by Burnside and Dollar (2000) finds that aid can indeed have a positive effect
on GDP growth, so long as countries receiving the aid have good fiscal, monetary,
and trade policies. In the absence of these policies, aid has little impact. However, the
empirical robustness of Burnside and Dollar’s findings has been questioned by
many, including Hansen and Tarp (2001), Lensink and White (2001), and Easterly
et al. (2004). These studies suggest far more dismal outcomes; outcomes that seem
corroborated by the reality that many countries who have been lavished with foreign
aid over the past few decades are still mired in poverty and corruption.
Foreign aid is a good arena in which to explore Mazzucato’s principles for several
reasons. First, foreign aid is nearly always mission-minded, given, or implemented
with specific goals in mind. Second, it often involves collaboration between gov-
ernment and non-government players. Third, the significant number of foreign aid or
economic development projects carried out over the past few decades allows us to
compare results across varied institutional and cultural backdrops. Fourth, previous
failures have theoretically allowed economists, political scientists, and the broader
international community myriad opportunities to identify errors and implement
potential solutions. Recently, there has been greater critique of aid programs that
ignore the wishes of the recipient governments and even the local populace when
designing programs, which dovetails with pillars 1 and 7 (Lancaster 2008, p. 51).
There has also been a greater focus on building up state capacity and improving
institutions, which arguably reflects pillar 3 (Lancaster 2008, p. 48). This provides
the opportunity to explore whether the implementation of Mazzucato’s pillars is
crucial to mission success.

Collectively Creating Value

According to Mazzucato, missions should be determined based on a sense of public

value and public purpose, which will guide the public and private together in
co-creating value. Within our context, we can translate this into a collective deter-
mination of when foreign aid should be given, to whom and for what purposes.
Foreign aid hasn’t always been considered a core function of governments. Prior
to 1945, foreign aid was nowhere near as common as it is today. There are a few
examples that can be pointed out. For example, US President Herbert Hoover headed
up the Committee for Relief in Belgium during World War I, which aimed at
relieving war-induced food shortages (Nash 1983). But the idea of utilizing public
resources to help those outside a nation’s borders, even in the case of humanitarian
crisis, was anathema to many. As illustration, note that in the mid-1800s the US
198 K. Waldron and C. J. Coyne

Congress debated whether to send assistance during the Irish potato famine and
eventually decided against it (Lancaster 2008, p. 26).
But by the end of World War II, politicians increasingly argued that promoting
democracy required focusing on problems outside one’s borders. Moreover, an
active (government) hand needed to cultivate an international order sympathetic to
US leadership. This change in perceived public purpose radically impacted both the
scale and channels of foreign aid. The immediate concern of foreign aid in the wake
of World War II was assistance for the war-torn countries of Europe. The ambitious
spread of the USSR further unnerved US government officials, who also began
giving aid to Asian countries in the aftermath of the Chinese civil war, hoping to
stem the influence of communism in Asia. Both Moscow and Washington began
using aid as bids to strengthen their own spheres of influence, although the United
States was better able to establish long-term aid relationships, while the USSR was
constrained by their domestic economic situation. Other countries also increased
aid-giving as the international order shook off old ties and tested new alliances,
particularly as former European colonies in Africa and Asia gained independence.
By the 1970s, most countries were involved in the aid “business” in one way or
another. Simultaneously, the number of NGOs involved in aid grew. These NGOs
not only provided relief but also petitioned governments to provide additional
resources.
Aid increasingly focused on economic development in the 1970s and 1980s and
on meeting basic human needs among the global poor. Donors preferred projects that
provided immediate benefits. And there was greater focus on aid from multilateral
organizations, especially the World Bank’s International Development Association.
The collapse of the USSR in 1991 caused another reshuffling of aid relationships.
While there was less pressure to use aid as a tool in the ideological struggle between
capitalism and communism, there were also a host of typically impoverished newly
created Eastern European states attempting to transition to a market-based economy.
This furthered aid’s transition to being primarily focused on economic development
and as an incentive for policy reform (Lancaster 2008).
As this brief history attests, foreign aid has always been a heavily politicized
process. Politicians often used it as a carrot to encourage cooperation from other
regimes or to protect the giving country’s own economic or political interests, with
humanitarian goals coming second (Lebovic 1988; Alesina and Dollar 2000). Drury
et al. (2005) and Coyne (2013) note even with humanitarian aid, such as disaster
relief, and political considerations typically dictate both how much aid is given and if
aid is given at all.
Of course, in Mazzucato’s conception of the public interest, the government is not
the sole value creator. NGOs, generally altruistically motivated (Büthe et al. 2012),
have grown increasingly influential. But despite good intentions, NGOs often work
with governments, entangling their work in political mire. Kim (2017) argues that
countries with a higher presence of US-based NGOs are more likely to receive
increased amounts of US-based aid. Additionally, the longer an NGO is present in a
particular country, the more successful they are at petitioning for foreign aid. And
government officials may view private aid as a potential tool for carrying out foreign
You Can’t Develop What You Don’t Know: The Realities and Limitations. . . 199

policy goals. For example, Baldwin (1969, p. 445) quotes a report from the Advisory
Council on Private Enterprise in Foreign Aid, created by the Foreign Assistance Act
of 1963, saying “private institutions may be far more effective instruments of
national policy in some situations than government institutions.” A significant
portion of private aid from the Western world is tied to promoting liberal values
and institutions.
Can aid be sufficiently disentangled from political mechanisms to allow for the
missions Mazzucato envisions? It seems quite unlikely, without completely cutting
government from the mix, the opposite of what Mazzucato calls for in Mission
Economy. Not only are government officials unlikely to let go of a tool for influenc-
ing other governments, but some recipient countries prefer to restrict foreign to
public channels. These governments view private aid as a politically destabilizing
force and legally restrict these groups’ funding (Dupuy et al. 2016). All of which
suggests that Mazzucato’s first principle is unlikely to hold in light of our public
choice argument.
Even in cases where government officials or multinational or private actors seek
to grant foreign aid in as depoliticized manner as possible, there is no guarantee that
they have the relevant knowledge to identify the correct missions or how to imple-
ment those missions to create value, relative to alternative uses for those resources.
Missions at the level of the UN SDGs may seem so universally noble as to be almost
unobjectionable goals. But considering potential paths of implementation immedi-
ately reveals the need to determine more specific priorities and make calculated
tradeoffs. Perhaps this is why the announcement of the SDGs generated derision as
“worse than useless” by The Economist (2015) or “senseless, dreamy, and garbled”
by Easterly (2015).
Missions require specificity to determine whether success has been achieved. The
SDGs are arguably broader and less-quantifiable than their predecessor, the Millen-
nium Development Goals (MDGs). Yet it’s worth noting that despite their more
targeted nature, the MDGs were typically considered failures, particularly in Africa.
Because so many African countries started so far behind compared to other geo-
graphic regions, even countries that showed improvement were considered program
failures (Easterly 2009). The MDGs’ creators could not account for the unique local
challenges countries faced. Nigeria, for example, lagged behind partially due to the
Boko Haram insurgency in the north of the country and a spate of kidnappings in the
south (Oleribe and Taylor-Robinson 2016). The unsuitability of the MDG goals to
local realities is dominant in the extensive literature on the limitations of the MDGs
(Fehling et al. 2013). Other common critiques include the goals’ overly simplistic
nature, lack of accountability, and inadequate inclusion of relevant stakeholders in
goal creation. (This latter point is particularly relevant to Mazzucato’s framework.)
200 K. Waldron and C. J. Coyne

Market Shaping

Mazzucato’s principle of market shaping follows naturally from her first principle of
co-creating value, because market shaping requires a goal, a vision of what a specific
market should look like. As she states, market shaping requires “goal-oriented
investment on the supply side, market creation on the demand side, and governance
mechanisms to achieve inclusive, innovation-led and sustainable growth” (p. 174).
Because missions require intervention by the government, they are inherently
market shaping in that they change market activity relative to the counterfactual.
However, what Mazzucato does not address is that all market interventions cause
unintended consequences, and these unintended consequences often undermine the
original intention behind the intervention. Because planners cannot have full knowl-
edge of existing conditions or future conditions, they necessarily operate on very
limited knowledge of the world. The result of simple interventions in a complex
system is that unintended consequences emerge in forms and ways that planners
cannot fully know or anticipate (Coyne 2013, pp. 143–168).
One of the most devastating of these unintended consequences is the increase in
rent seeking and the subsequent politicization of nearly every aspect of life within
aid recipient countries. P. T. Bauer (1981, p. 104) noted that, “[t]he tendency toward
politicalization operates even in the absence of these transfers [of foreign assistance],
but is much buttressed and intensified by them.” As an example, consider how
influxes of foreign aid can incentivize wealth-destroying behavior, as individuals
recognize profit earning opportunities from lobbying for additional aid and shift
resources into the political realm. Instead of focusing on the productive creation of
economic wealth, individuals and firms choose to compete for political favors,
diverting resources better used elsewhere and rewarding corruption for those in
positions of power over how foreign assistance is spent. Economides et al. (2008)
break down foreign aid transfers into two effects on growth—the positive impact
that stems from increased financing of infrastructure and the negative impact that
stems from increased incentives to rent seeking. They find that any positive impact
on growth is significantly mitigated by adverse rent-seeking behavior. This issue is
exacerbated by a large public sector.
Aid can also distort government spending into unproductive channels. Svensson
(2000) argues that foreign aid may decrease productive spending on public goods
because the influx of assistance reduces the pressure to use public spending in an
effective manner. Aid money serves as a substitute for funds raised by taxation or
other domestic sources, freeing up budgets for rewarding special interests.
Tying assistance to specific outcomes may seem like a solution for aid advocates
trying to avoid abuse, but tied aid still shifts public spending. In a study of public
spending in Malawi by Seim et al. (2020), government officials who became aware
of aid programs at certain local schools were less likely to target these schools for
local development projects. Feyzioglu et al. (1998) also assert that earmarked loans
or assistance reduce spending in the designated areas. As a result, the rate of return of
a particular aid-funded program is not accurately reflective of the overall impact of
You Can’t Develop What You Don’t Know: The Realities and Limitations. . . 201

the said program. Chatterjee et al. (2012) attempt to put numbers to the problems and
suggest that 70% of aid is fungible and that aid given to spur public investment
actually crowds out between 80 and 90% of domestic public investment.
The distribution of private aid also tends to be centered around which countries or
issues are most likely to lead to receiving public funding, rather than determination
of the greatest need. For example, there was a massive influx of NGOs in both
Kosovo and Haiti after the international community made large funding commit-
ments, following the respective country’s conflict and earthquake (Coyne 2013,
p. 97). Called the “NGO scramble” (Cooley and Ron 2002, p. 26), this phenomenon
demonstrates how NGOs focus on highly publicized, short-term projects to attract
future funding. It also leads to “disaster hype,” as humanitarian organizations
exaggerate the extent of a specific crisis in order to encourage additional donations.
One example of such is the Darfur conflict, where the US government estimated
fatalities of 60,000–160,000, while the Coalition for International Justice claimed
fatalities were as large as 400,000 (Coyne 2013, p. 98).
Although mission-creating experts may be aware of the existence of issues such
as corruption or NGO scrambles, without the feedback loops of the market, and the
incentive to act on that knowledge, it is impossible for them to determine what the
unintended consequences of a given foreign aid program will be. Thus, market
shaping also falls prey to both the knowledge problem and political economy
problems.

Building Up Government Capabilities

Perhaps the problem is the quality of government institutions. Mazzucato argues that
in order to successfully shape markets, the public sector needs to build dynamic
capabilities similar to that of the private sector. She identifies five capabilities she
thinks are central to modern bureaucracy’s ability to “manage complex and wicked
problems”: leadership and engagement, coordination, administration, risk-taking
and experimentation, and dynamic evaluation. To Mazzucato, the government has
been efficiently neutered by the broad acceptance of market failure theory. This has
created a broader culture antithetical to the idea of government officials engaging in
the risk-taking prevalent in the private sector.
What Mazzucato doesn’t consider is that the behavior she admires, the ability to
bear greater quantities of risk, may not be compatible with the bureaucratic structure
of government. If government capabilities are indeed simply held back by citizens
who only want the government to intervene as a last resort, then bolstering these
attributes starts with changing public perception of the public sector. However, if the
level of risk tolerance and other government capabilities is a result of government
officials responding to the incentives generated by the bureaucratic structure, it is not
public perception, but rather the non-market nature of government that determines
which capabilities are developed by government officials.
202 K. Waldron and C. J. Coyne

As evidence of the influence of bureaucratic structure on behavior, consider the

work of Arel-Bundock et al. (2015), who look at the 15 aid-giving agencies that are
part of the US government. They argue that dependent agencies are more likely to
give aid that closely tracks with the foreign policy goals of the president, while more
independent agencies are more likely to be more responsive to the needs of the
recipient country. This suggests that incentives differ across bureaucratic structure.
Far from being neutered by market failure theory, over the past few decades, the
scope of the US government is arguably the largest ever. Indeed, a greater concern
than government impotence is mission creep, as the activities expand beyond what
was originally intended. The phrase was originally created in the 1990s to describe
US actions in Somalia and Libya but has been applied to several non-military
scenarios, including foreign aid. Consider this admission from former World Bank
Managing Director Jessica Einhorn (2001, p. 22) that the World Bank’s “mission has
become so complex that it strains credulity to portray the bank as a manageable
organization.”
Unlike domestic government-involved missions, foreign aid involves a nexus of
two different areas wherein government capabilities potentially play key roles: the
abilities of both the giving government and the recipient government. Hodler (2007)
notes that the quality of the recipient country’s institutions impacts aid effectiveness
and that countries with poor institutions that insufficiently protect public funds from
being appropriated by government officials are less likely to see positive growth
associated with aid. Similarly, Dollar and Levin (2005) evaluate World Bank
development projects in the 1990s and find that the institutional quality of the
recipient country matters far more for the likelihood of success than the project type.
A significant portion of foreign aid today is centered around attempting to build
state capacity. However, it is dubious whether assistance can achieve this end.
Djankov et al. (2008) look at 108 countries over a period of nearly 40 years and
find that foreign aid negatively impacts democratic institutions. Knack (2001) finds
that receiving higher aid levels actually erodes a country’s governance quality, due
to poorer bureaucratic quality, increased corruption, and weaker rule of law. Aid
reduces government accountability, essentially subsidizing poor behavior, since
badly managed countries typically receive the most assistance. Aid can even increase
the likelihood of violent conflict, since whoever is in charge of the government often
gains control of the rents provided by aid (Grossman 1992).
The erosion of foreign governance institutions suggests that economic develop-
ment comes not from relaxing constraints on government officials, but on devising
constraints that will prevent political opportunism while enabling ordinary citizens
to engage in productive entrepreneurship. However, no expansion of government
scope will enable bureaucrats or politicians to overcome the knowledge problem
because this constraint is not an issue of capacity, but rather a fundamental inability
of planners to solve the core economic problem outside of the context of private
markets.
You Can’t Develop What You Don’t Know: The Realities and Limitations. . . 203

Budgeting Based on the Desired Outcomes

Recognizing the incentive problems caused by aid dependency, the past two decades
have led some aid advocates to try to find less harmful methods of providing
assistance. For example, the Center for Global Development, a development-
oriented think tank, has argued for a form of outcome-based budgeting for foreign
aid which they call cash on delivery (COD). COD aid programs try to limit aid abuse
through practices such as tying payments to outcomes and requiring independent
verification of progress. COD aid is tied to specific projects, but funding is doled out
gradually, in exchange for achieving specific outcome goals. With this system,
donors refrain from stating how goals are achieved, using independent monitoring
to verify only outcomes instead of inputs, which is supposed to encourage recipients
to take full responsibility for achieving goals (Birdsall et al. 2010).
COD aid is essentially an attempt to reduce or eliminate political economy
problems from foreign aid. By requiring hands-off implementation, donors eliminate
their ability to direct aid funding to beltway experts or special interest groups.
Independent verification and public transparency keep performance in the public
eye, where it is harder to get away with corruption. And payment for outcomes
requires programs to actually be carried out in order to receive additional funding,
reducing the ability of aid recipients to forestall achieving the donor’s desired goals
in order to prevent cutting off their stream of revenue.
Hands-off implementation also allows for some local knowledge to be incorpo-
rated into determining the best method of delivering the outcome. However, inclu-
sion of local knowledge into the production process still doesn’t eradicate the
knowledge problem because there is no way to capture economic knowledge in
determining the goal itself which must be pre-determined. Absent the market
context, mission decision-makers are unable to correctly assess the true cost or
benefit of a given mission relative to all other possible alternatives. Furthermore,
because outcome-based budgeting requires quantifiable outcomes that can be easily
measured, aid projects are likely to be centered around whatever outcomes can be
verified and not necessarily where there is the greatest value. In comparison to other
funding structures, COD aid may provide a superior option for policymakers. But
this does not mean COD aid can determine the best desired and the best use of scarce
resources to achieve that end.
The other danger of outcome-based budgeting is that budgets for programs will
simply grow relatively unchecked regardless of whether the benefit is greater than
the cost. Exacerbating the issue is the fact that government bureaus must spend down
their yearly budgets in order to justify receiving additional funding in the next year.
As a result, there is little incentive to withdraw funding from projects, even if
projects are not meeting the desired thresholds (Coyne 2013, pp. 108–142). This is
a problem within NGOs as well, particularly those who receive funding tied to
carrying out specific projects. Even in cases where aid programs are theoretically tied
to certain evaluations, the proposed consequences may be unlikely to be carried out.
204 K. Waldron and C. J. Coyne

Pre-Distributing Risks and Rewards

Mazzucato argues that missions should be “pre-distributive,” instead of merely

redistributive. Pre-distributive policies, at their core, seek to shield actors from
fully facing the forces of the market. But unlike redistributive policies, which seek
to compensate the “losers” of a particular market through welfare transfers,
pre-distributive policies seek to change “the way in which the market distributes
its rewards in the first place” (Hacker 2011, p. 35). This desire can manifest itself in a
myriad of different public policies, such as minimum wage laws and universal basic
income proposals. These policies reduce the risk for many types of actions, encour-
aging people to engage in riskier behavior. That risk is instead borne by the
government. Mazzucato argues that pre-distributive policies are crucial to mission
success because the private sector underinvests in riskier projects.
Mazzucato’s preferred method of pre-distribution is the creation of public wealth
funds, where the wealth is built up by returns to government-funded activity or
equity stakes in companies that benefit from government investments. As such, we
will focus on public wealth funds and their internationally oriented analogue, the
sovereign wealth fund. Whereas public wealth funds are typically invested domes-
tically, sovereign wealth funds (SWF) consist of investments made by a government
primarily outside the borders of its own country. However, the definitions are not set
in stone, with some scholars using the term sovereign wealth fund in both cases.
How do public or sovereign wealth funds impact foreign assistance missions?
Sharma (2017) argues that sovereign wealth funds are key to the success of the UN
SDGs, since the SDGs require significant amounts of long-term investment, and that
governments should direct sovereign wealth fund investments toward economic
development initiatives. As an example, he points to India’s National Investment
and Infrastructure Fund (NIIF), which funnels investment into different infrastruc-
ture sectors, such as railroads.
Numerous experts have debated how, if at all, sovereign wealth funds change the
tenor of international relations. In testimony for the House Committee on Foreign
Affairs, Edwin Truman (2008, p. 1), a Senior Fellow with the Peterson Institute,
argued that while sovereign wealth funds weren’t a significant threat to US foreign
policy, “[t]he U.S. should continue to press countries with sovereign wealth funds to
design and embrace best practices for these funds to enhance their accountability to
citizens of the countries with the funds as well as to the citizens and markets in which
they invest.” He describes five concerns that will become increasingly pertinent as
wealth is increasingly concentrated in public hands. These concerns are that gov-
ernments will mismanage the funds; that governments will manage SWFs to subsi-
dize state-owned or state-controlled national champions; that financial protectionism
will be encouraged, especially if states perceive future policies would benefit; that
SWFs will increase market turmoil due to their opaque natures; and that government
ownership of international assets makes it more complicated to balance the benefits
of open markets and regulation.
You Can’t Develop What You Don’t Know: The Realities and Limitations. . . 205

Pre-distribution advocate Jacob Hacker (2015, p. xxix) argues, “a predistribution

agenda does not make all the hard choices easy. But like the engineer who is allowed
to open his toolkit, we are at least able to recognize what the real choices are.” As
with market shaping, the successfulness of pre-distribution relies on whether or not
the economy can be “engineered” by experts. Truman’s solution to this question is
encouraging international commitments to SWF best practices. But the best practices
are toothless checks on government behavior. Nor do they solve the government’s
inability to access and incorporate dispersed, local, and tacit knowledge into their
decision-making. The government’s inability to pick winners is not due to a lack of
the best practices, but to the absence of market prices and profit and loss and the
resulting economic knowledge.

Embracing Stakeholder Value

So far, we have primarily focused on the constraints of government planning in

missions. But Mazzucato’s vision isn’t that the government carries out missions
alone. In order for missions to be successful, they need to include both the private
sector and the general public. Mazzucato’s sixth pillar comes out of the shareholders
versus stakeholders’ debate regarding corporate governance. Whereas shareholder
theory argues that companies should seek to maximize shareholder returns, stake-
holder theory argues that financial considerations must be balanced by consideration
of the interests of others impacted by the business in some way, whether that be
employees, customers, or the surrounding community (Smith 2003). Shareholder
advocates generally support a laissez-faire approach to the market, believing that the
“business of business is business” (Pfarrer 2010). Stakeholder theory, in contrast,
argues that the business of business extends far beyond maximizing market returns.
Predominant within stakeholder theory is corporate social responsibility (CSR).
CSR programs can run the gamut from donating to local food pantries to participat-
ing in fair trade practices to diversity, equity, and inclusion programs. Michael
(2003) identifies three schools of thought for CSR: company-led CSR, state-led
CSR, and civil society-led CSR. These categories are determined not by actions
taken by the corporation, but by the actor who incentivized the actions in question.
Company-led CSR develops endogenously from within the company, often because
the firm seeks to promote a reputation of being good for the local community or
because they wish to attract and retain employees by offering a high-quality work
environment. State- and community-led CSR programs, however, are programs a
company pursues due to external pressure.
There are several ways CSR can impact international development, including
lobbying for better legal and political practices, creating educational programs, or
even just refusing to engage in bribery in countries with prominent corruption.
Because stakeholder theory focuses on the relationship between corporations and
the local community, stakeholder-ruled governance is sometimes viewed as an
alternative to government regulation (Buchholz and Rosenthal 2004). Blowfield
206 K. Waldron and C. J. Coyne

(2005) posits that corporate social responsibility theory contains unique implications
for international relations because it rewrites the perceived relationship between
businesses and broader society. He argues that CSR even has the potential to
discourage conflict among different sectors of society through creation of inclusive
stakeholder partnerships.
Does CSR fall prey to the knowledge problem? It depends on the type of CSR
program. Company-led CSR largely manages to escape the knowledge problem,
since the decision to engage in such programs is internal to the firm and is thus part
of their profit-loss calculation. However, businesses in developing countries, which
tend to have less secure political and civil rights, may face increased responsibilities
to their stakeholders compared to businesses that operate in countries with superior
institutional environments (Reed 2002). This may discourage firms committed to
CSR from entering the market in a developing economy, limiting their capacity in
assisting mission success.
State-led and community-led CSR, on the other hand, are more likely to push
programs based on external standards, such as pushing for more women to be
included on boards. These external goals may or may not be driven by some amount
of local knowledge, but since firms would arguably be already including such
programs if they thought it would be profitable, the need to exert external pressure
to achieve such external goals suggests these programs run counter to the economic
calculation provided by the market.
How do CSR programs fair regarding political economy problems? Once again,
externally motivated CSR programs are more likely to fall prey, particularly state-led
CSR. State-mandated or state-subsidized CSR programs inherently politicize the
concept of stakeholder. Michael (2003) points out that while advocates of state-led
CSR argue externally encouraging such programs is necessary to build a “brighter
capitalism,” what it really does is pit government and businesses against one another.
Externally motivated CSR “represents a site of contestation for the right to determine
social objectives and the funding of these objectives” (p. 123). With political rents up
for grabs, state-led CSR could lead to a “CSR scramble” similar to the aforemen-
tioned “NGO scramble” where businesses who seek to benefit from government
subsidies seek to implement programs they otherwise wouldn’t and waste resources
lobbying for additional subsidies.

Open Systems and Co-Designing the Future

Mazzucato’s final pillar is intended to hold the government accountable through

community engagement. But incorporating community engagement isn’t easy. Who
should participate in the conversation and whose feedback should be given the most
weight during disagreements when it comes to making decisions about mission goals
and methods? Should taxpayers in donor countries have a say about how aid money
is spent in another country? Milner and Tingley (2011) note that there are strong
partisan divides in the United States when it comes to supporting economic aid but
You Can’t Develop What You Don’t Know: The Realities and Limitations. . . 207

that the opposite is true for military aid. There are also divides alongside economic
class and racial ethnicity. Public opinion, however, typically focuses on broad
buckets of aid (economic vs. military) and not on the details of specific projects.
There are relatively few large sample studies that look at the opinions on aid
recipients. Findley et al. (2017) conduct one among 3000 Ugandans and find more
support for projects funded by foreign aid, because they view aid projects as less
politicized than they do for projects funded by their domestic government. They also
find some support that Ugandans prefer multilateral aid to bilateral aid.
Of course, positing that governments ought to incorporate public opinion into
their decisions regarding foreign aid doesn’t mean that this will occur. Otter (2003)
finds mixed evidence for whether or not first-world governments care about public
opinion regarding foreign aid. While there are some cases where aid is increased or
decreased in concordance with public opinion, there are many other cases where the
opposite is true. Otter suggests faulty polling techniques may be partially at play, but
also that government policies are determined by elites who only care about public
opinion when it is sufficiently threatening to their electability. Another explanation
might be the rational ignorance of voters who are likely to lack details as to specifics
of aid flows. To the extent rational ignorance is at work, it would allow political
decision-makers to pursue policies contrary to public opinion with little
consequence.
Perhaps even more disappointing for Mazzucato is Winters’ (2010) study on
whether participation encourages accountability in aid programs. He finds that “in
terms of donor accountability to aid-receiving countries and the end users in them,
recent pushes for increased participation have not resulted in more accountability in
the design of aid programs” (p. 218). This might be due to a lack of information, a
lack of incentive to gather information, and a lack of voice or exit.
Experts’ inability to properly incorporate public desires into their plans often
undermines their goals. Ottaway (2002) argues that the initial stages of post-conflict
rebuilding are particularly fragile and that the international community often pushes
for institutional development too quickly in these situations. Reform is more likely to
happen with a significant, prolonged engagement by the international community,
but as Ottaway notes (p. 1021), this is a strategy that:
relies on force, or better on the threat of force, to coerce the groups that have caused the state
to collapse to submit to external ‘best practices’ solutions. It involves the presence of foreign
troops and the direct intervention of international agencies willing to make and impose
policies. It is not a democratic option.

Here Ottaway acknowledges an uncomfortable truth many aid advocates are loath to
understand and admit—missions are often inherently coercive. They involve experts
imposing their wills upon others under the guise of freedom, individual rights, and
self-determination (Easterly 2006, 2013). Mazzucato’s pillars do not offer a clear
path to avoiding this reality.
208 K. Waldron and C. J. Coyne

Conclusion

We have spent much of this chapter discussing the ways that foreign aid missions are
doomed to fail. But there is one last argument in favor of missions that must
be addressed: the argument of compassion. Even if the goals of missions may not
be achieved successfully, what else is there to do? Surely the answer cannot simply
be to turn our backs on human misery and do nothing? Isn’t something better than
nothing?
Sadly, it is indeed possible that doing nothing is better than doing something. If
doing something runs the risk of doing more harm than good, then we should refrain
from action. Granted, it is not always easy to gauge overall harm, but the possibility
of harm is the reason enough to appreciate the challenges posed by knowledge and
political economy problems. Any treatment of missions to aid others should take
these factors into account.
Furthermore, there is an alternative to missions, and one with a proven track
record of success—the expansion of free trade and movement of people. Although
the narrative around capitalism today is too often a story of wealthy countries using
the guise of free markets as yet another opportunity to oppress poorer countries, a
look at where economic growth actually occurs shows this is simply not true.
Empirically, countries that embrace capitalism reap the rewards of their decision,
while those who restrict or nationalize markets suffer. Individuals from more
capitalist countries on average experience better lives, becoming wealthier and
healthier, and benefiting from greater amounts of education and political freedom
(Leeson 2010). And allowing people the freedom to migrate offers them an oppor-
tunity to improve their own lives while contributing to broader wealth creation
(Clemens 2011; Kukathas 2021).
Mazzucato’s book is dedicated to the idea of reshaping capitalism through the use
of missions. But as we see from the voluminous history of foreign aid, missions
cannot overcome the knowledge and political economy problems, even when guided
by Mazzucato’s pillars. True capitalism doesn’t need to be reshaped in order to be
effective. If we truly believe in promoting human flourishing, the ultimate goals of
the UN SDGs, then we should embrace the best path forward for doing so—
individual freedom that enables people to unleash their creativity, which is the
fountainhead of human progress (Norberg 2020).

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Kathryn Waldron is a PhD student of Economics at George Mason University and a Hayek
Fellow with the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
at the Mercatus Center at George Mason University.

Christopher J. Coyne is Professor of Economics at George Mason University and the Associate
Director of the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at
the Mercatus Center at George Mason University. He is the Co-Editor of The Review of Austrian
Economics and The Independent Review. He also serves as the Book Review Editor for Public
Choice.
212 K. Waldron and C. J. Coyne

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A Public Choice Perspective
on Mission-Oriented Innovation Policies
and the Behavior of Government Agencies

Rickard Björnemalm, Christian Sandström, and Nelly Åkesson

Abstract Mission-oriented innovation policies put government and state agencies

at the forefront of the innovation process. Currently, little is known about the
interests of the government agencies in charge of implementing mission-oriented
innovation policies. In this chapter, we set out to explore the incentives and behavior
of such government agencies. We do so by analyzing 33 annual reports from three
government agencies in charge of implementing innovation policies in Sweden over
a 10-year period: Sweden’s Innovation Agency (Vinnova), the Swedish Energy
Agency (Energimyndigheten), and the Swedish Agency for Regional and Eco-
nomic Growth (Tillväxtverket). First, we track all cases in these annual reports
where an evaluation is mentioned. Identifying 654 instances, we subsequently
make a sentiment analysis and code whether these statements are positive, neutral,
or negative. Our findings show that 84% of these instances are positive, 12% are
neutral, and 4% are negative. Second, we relate these results to more critical
evaluations and show that these agencies often ignore research that generates more
critical results. In sum, our results suggest that government agencies in charge of
implementing mission-oriented policies benefit from the enlarged role they are given
and that they act according to their own self-interest.

Keywords Innovation · Government agencies · Public choice · Self-interest

JEL Codes O25 · O31 · O38 · O44 · Q42 · Q55

R. Björnemalm
Stockholm School of Economics, Stockholm, Sweden
C. Sandström (✉)
Jönköping International Business School, Jönköping, Sweden
The Ratio Institute, Stockholm, Sweden
e-mail: [email protected]
N. Åkesson
Lund University, Lund, Sweden
e-mail: [email protected]

© The Author(s) 2024 213

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_12
214 R. Björnemalm et al.

Introduction

Over the past two decades, the West has experienced an increasing implementation
of interventionist innovation policies. The focus of innovation policy has evolved
beyond creating favorable conditions for firms and enhancing the supply of research
and development, which can lead to positive spillovers and economic growth.
Scholars such as Mariana Mazzucato (2014, 2021) have elevated the European
Union, national governments, and regional policymakers to the forefront of the
innovation process. Consequently, a plethora of policies with larger budgets and
higher expectations regarding their contribution to innovation and renewal have
been launched.
These policies, which explicitly recognize the state as the primary driver and
initiator of innovative change, need to be evaluated. While existing research has
primarily concentrated on firms and specific industries, limited attention has been
given to the government agencies that play an increasingly important role in steering
the innovation process. As budgets expand at both the EU and national/regional
levels, it becomes imperative to study the behavior of these government agencies.
What are their incentives, and do they act in their own interest or in the best interest
of society at large?
In this chapter, we delve into an examination and explanation of the conduct
exhibited by government agencies responsible for implementing mission-oriented
policies and advocating for the state as an important entrepreneurial force in society.
Our analysis centers on the annual reports of three Swedish government agencies—
Vinnova (Sweden’s Innovation Agency), Energimyndigheten (the Swedish Energy
Agency), and Tillväxtverket (the Swedish Agency for Regional and
Economic Growth)—spanning a full decade. By examining the content of these
33 annual reports, we identify 654 instances where specific evaluations are men-
tioned. Utilizing sentiment analysis, we demonstrate that an overwhelming majority
of these instances (84%) feature positive statements, while 12% remain neutral, and
4% can be considered negative or critical. Intriguingly, only 12 of these 654 instances
(1.8%) are substantiated by references, making it challenging to locate original
sources supporting claims made. Our findings align with the theory of public choice,
which posits that government agencies act in their own self-interest.
The chapter is organized as follows. We begin by introducing the concept of
mission-oriented policies and the notion of the state as the driving force in the
innovation process. We also discuss relevant public choice literature and associated
theories that elucidate the incentives and behaviors of government agencies. Then
we present our methodology and data, followed by a comprehensive discussion and
concluding remarks.
A Public Choice Perspective on Mission-Oriented Innovation Policies. . . 215

Background: Innovation Policy and Missions

While numerous scholars have proposed more directed innovation policies, no one
has been more effective in disseminating and conveying these ideas to policymakers
than Mariana Mazzucato (2014, 2021). Drawing on examples such as the Apollo
Project and the Manhattan Project, Mazzucato argues that the state should embark on
bold endeavors in uncharted territories, acting as a guide and driver of societal
change toward social and economic progress. In her own words:
The key insight of this report is that missions are both a means of setting economic growth in
the direction of where we want to be as a society and a vehicle we can use to get there.
(Mazzucato 2018, p. 28)

From this perspective, policymakers assume a prominent role as the primary agents
responsible for bringing about desirable transformations. As stated by Kattel et al.
(2021, p. 18):
Moving towards a greener, low carbon economy entails redirecting all sectors and actors—
public, private, and civil society—towards sustainable and inclusive economic growth.

The fact that the aforementioned publication by Mazzucato serves as an official

document of the European Commission underscores the growing popularity of
mission-oriented policies among policymakers.
With few exceptions, the literature on mission-oriented policies asserts that
governments possess both the capability and the altruism necessary to effectively
implement specific missions. These assumptions are clearly articulated in numerous
reports, book chapters, and academic papers authored by Mazzucato and her col-
leagues. Here is an illustrative example (Mazzucato 2022, p. 93):
Governments are the only actors capable of underwriting the scale of investments required;
of coordinating multiple actors around the common goal of decarbonization; and of ensuring
the costs and benefits of a green transition are distributed equitably across society so that
social injustices are tackled alongside environmental crises.

Furthermore, in the mission-oriented literature, various government initiatives are

often invoked to support its arguments. In these instances, government actors are
portrayed as both competent and motivated by good intentions (Sachs et al. 2019,
p. 811): “Lessons should be learned from mission-oriented organizations like
DARPA and ARPA-E in the U.S., Yozma in Israel, SITRA in Finland, and Vinnova
in Sweden.”

Public Choice Theory and Mission-Oriented Policies

While policymaking is often perceived as an altruistic process free from self-interest,

there exists a body of literature that challenges this notion. In their work The
Calculus of Consent, James Buchanan and Gordon Tullock (1965) posited that
politics is an ongoing process occurring amidst distributed agency. In other words,
216 R. Björnemalm et al.

stakeholders are assumed to have diverse and sometimes conflicting incentives when
seeking to influence the policy-making process.
In their efforts to expand upon the public choice aspects discussed in Questioning
the Entrepreneurial State (Wennberg and Sandström 2022; Bergkvist et al. 2022),
Muldoon and Yonai (2023) provide a comprehensive analysis of how policymaking
in innovation policy can lead to suboptimal outcomes due to divergent incentives
and the influence of interest groups on the policy process. Stam and Vogelaar (2023)
also underscored the importance of regarding government as a collection of groups
and actors and that referring to the state as one homogenous entity would be an
oversimplification.
Public choice scholars assume that actors in the policymaking process behave as
economic agents, aiming to maximize their own utility. Powerful and concentrated
interest groups, such as large corporations, labor unions, and industry associations,
leverage superior relational and financial resources, often combined with asymmet-
ric knowledge, to influence policies. As a result, they shape regulations, compensa-
tion schemes, and tax structures to their advantage.
Applying the public choice perspective to Mazzucato’s ideas about an entrepre-
neurial state, Muldoon and Yonai (2023, p. 2) summarize their argument in the
following manner:
She [Mazzucato] fails to recognize that increased government involvement will lead to rent-
seeking and unproductive entrepreneurship (Kirzner 1985, pp. 144–245). This oversight is
problematic because rent-seeking erodes support in institutions, politicians, and the larger
society, leading to the decline of a nation (Olson 1982). We argue that scholars should pay
closer attention to the Public Choice literature in economics when analyzing the partnership
between governments and business.

Muldoon and Yonai further state that the notion of an entrepreneurial state (p. 3)
conjures an image of disinterested and competent technocrats who make decisions based on
knowledge, with their sole motivation being the common good. In addition, because these
technocrats are nonpartisan and not self-interested, their motivation will be in the long-
term good.

Hence, mission-oriented policies are, according to Muldoon and Yonai, based on the
idea of the entrepreneurial state as “a dynamic, thoughtful body that makes decisions
based on relevant information” (p. 3).
Remarkably, Mazzucato briefly acknowledges the critique posed by the public
choice literature in the chapter entitled “Bad theory, bad practice” in her 2021 book
(pp. 33–34):
But just as MFT [Market Failure Theory] is a theoretical construct, so is its alter ego, public
choice theory. The axiom underlying public choice theory is that bureaucrats and politicians
behave like free-market actors: they rationally seek to maximize their ‘utility’. Self-
interested bureaucrats and politicians are effectively entrepreneurs who compete to gain
control of a monopoly, the state.1 But, rather as with MFT, no empirical evidence was

1
A. Innes https://blogs.lse.ac.uk/europpblog/2018/09/29/the-dismantling-of-the-state-since-the-1
980s-brexit-is-the-wrong-diagnosis-of-a-real-crisis/ (accessed 2 January 2020).
A Public Choice Perspective on Mission-Oriented Innovation Policies. . . 217

advanced to support this idea. It was just assumed that social, constitutional and ethical
concerns never motivated bureaucrats and politicians.

A detailed examination of the lack of empirical research on public choice, a field of

study that has gained significant importance over the past 70 years (Mueller 2003),
falls beyond the scope of this paper.

Public Choice and the Incentives of Government Agencies

Public choice scholars often posit that reducing government expenditure is chal-
lenging. Attempts by a government to cut funding for an agency are met with
resistance, as the agency presents persuasive arguments highlighting the societal
significance of their operations. A recent study by Bednarczuk (2022) yielded
similar findings, demonstrating that government officials tend to support increased
government expenditure when their own agencies receive more funding.
Nevertheless, the existing literature on mission-oriented innovation tends to
portray the responsible agencies as competent and driven by altruistic motives. A
notable example of this perspective is evident in Mazzucato’s (2021, pp. 74–75)
description of NASA, where she portrays the agency in the following manner:
Running a mission-oriented system of innovation requires leadership that – like NASA –
encourages risk-taking and adaptation and can attract the best talent. It is important that
agencies carrying out missions have sufficient autonomy to take risks without their authority
being questioned.

Furthermore, Mazzucato (2021, p. 123) depicts the role of the government driven by
altruism in mission-oriented innovation as follows:
The point is: to think in a mission-oriented way is revolutionary because it requires
rethinking the role of government in the economy, putting purpose first and solving
problems that are important to citizens. It means transforming government from being
merely an “enabler” or even a “stifler” of innovation to becoming the engine of innovation.

Upon reviewing the public choice literature, Mazzucato (2021, p. 33) disparagingly
summarizes the public choice view upon government:
In public administration, the lack of competitive pressure leads to “bureau-maximizing”
behavior, whereby departments and agencies look after their own survival rather than the
“common good.”

The extent to which the behavior of government agencies is aligned with the
predictions of public choice theory is an important question. A deeper understanding
is required regarding the actual conduct of government agencies responsible for
implementing innovation policies. Hence, the objective of this paper is to investigate
the motivations and actions of the government agencies that are put in charge of
mission-oriented policies.
218 R. Björnemalm et al.

Method

We conducted an analysis of the annual reports, spanning a period of 11 years, from

three of Sweden’s innovation agencies: Tillväxtverket (the Agency for Regional and
Economic Growth), Vinnova (the Innovation Agency), and Energimyndigheten (the
Energy Agency). These reports were obtained from the agencies’ websites (or web
shop in the case of the Energy Agency), covering a total of 33 annual reports
published between 2011 and 2021, covering the years between 2010 and 2020.
The use of annual reports as the unit of analysis offers several advantages. First,
these reports are a mandatory requirement for all agencies, ensuring compliance with
legal obligations (as stipulated in SFS 2000:605 and SFS 2019:577 after January
1, 2020). This guarantees a certain level of comparability between annual reports,
both within and across agencies over time. Importantly, annual reports are
expected to:
provide a brief basis for the government’s follow-up, examination or budgeting of the
agency’s activities.

In addition, the annual reports are supposed to provide a fair representation of the
agency’s activities according to Chap. 2, § 6 in the ordinance SFS 2000:605:
The elements of the annual report shall be established as a whole and give a fair represen-
tation of the results of the activities as well as of costs, income and the financial position of
the agency.

These two requirements are significant for our study. First, they provide us with
insights into the utilization of these annual reports, such as their purpose in
budgeting. Second, the legal obligation to provide a fair and accurate representation
of their activities ensures the reliability and validity of these reports. Hence, we can
confidently assert that the utilization of annual reports as a unit of analysis is justified
and valuable for our research.

Data Analysis

Our analysis involved a comprehensive two-step approach. First, we employed a

systematic coding scheme to examine the material. We reviewed all 33 annual
reports, specifically focusing on sections where statements related to evaluations
were mentioned. To ensure inclusivity, we utilized the Swedish search term “utvärd”
(equivalent to “evalua” in English) to identify relevant passages. Each statement was
assessed within its context and evaluated for its relevance to our research objectives.
A statement was deemed relevant if it pertained to evaluations of the agency’s
activities. These pertinent statements were then documented in an Excel spreadsheet
and coded based on the following criteria:
A Public Choice Perspective on Mission-Oriented Innovation Policies. . . 219

Table 1 The coding results Researcher 1 Researcher 2 Researcher 3

of the three different
Positive 554 528 530
researchers
% positive 85 81 81
Neutral 78 96 101
% neutral 12 15 15
Negative 22 30 23
% negative 3 5 4
Total 654 654 654

1. Positive, negative, or neutral tone.

2. Presence of a source for the evaluation.
The first criterion aimed to capture how evaluations were portrayed in the annual
reports and how they impacted the agency’s activities. The second criterion sought to
determine whether the mentioned evaluations were properly attributed. Additionally,
we recorded the title of the annual report, the respective agency, the year, and the
name of the evaluation if referenced.
Initially, one researcher meticulously reviewed all 33 annual reports and com-
piled the Excel spreadsheet following the aforementioned methodology. Subse-
quently, two separate researchers independently coded the recorded statements
from the spreadsheet, applying criteria (1) and (2), without any knowledge of the
initial researcher’s coding. This process resulted in a total of 665 observations. Out
of these observations, 11 were found to use the term “evaluation” without discussing
evaluations, and therefore, they were excluded from the dataset. The final dataset
comprised 654 observations. The coding performed by the three researchers is
depicted in Table 1.
In cases where there was a discrepancy in the coding of statements among the
three researchers, the coding was based on the consensus of two researchers’
perceptions. Overall, the three researchers reached a mutual agreement in 88% of
the cases. In the remaining 12% of cases (113 observations), one researcher’s coding
differed from that of the others.

Results

This section commences with a concise depiction of the empirical context of

innovation policy in Sweden. Subsequently, we delve into a review of pertinent
research that explores the evaluation of government agencies’ endeavors by various
groups of evaluators. Within this review, we also examine research that adopts a
more cautious stance toward the effectiveness of innovation support. Following that,
we present our findings regarding the utilization of evaluations by government
agencies and their self-assessment of their work as documented in their annual
reports.
220 R. Björnemalm et al.

Empirical Background

In Sweden, innovation policy is primarily administered through a few prominent and

independent state agencies, which aligns with the typical structure of Swedish public
administration. Notable agencies in this realm include the Energy Agency, the
Innovation Agency, and the Agency for Regional and Economic Growth, collec-
tively responsible for a significant portion of the allocated resources. The remarkable
growth of the first two of those government agencies over the past decades is evident
in Figs. 1 and 2. Expenditure related to innovation policy has grown rapidly, with
state grants alone (excluding EU, regional, and municipal investments) surpassing
1 billion euros annually (Karlson et al. 2019). The corresponding US figure exceeds
USD 13 billion (Hunt and Kiefer 2017).

Evaluations of Innovation Policies in Sweden

In Sweden, as in many other Western countries, evaluations are conducted exten-

sively across the entire public sector, including within the domain of innovation
policy. Two independent agencies, namely, Tillväxtanalys (the Swedish Agency for
Growth Policy Analysis, henceforth SAGPA) and Riksrevisionen (the Swedish
National Audit Office, NAO), are responsible for performing evaluations in this
field. Additionally, evaluations are carried out by researchers and consultants who
are specifically hired to assess particular tasks or initiatives.

Fig. 1 The budget of the Energy Agency, 2003–2021 (billion SEK)

A Public Choice Perspective on Mission-Oriented Innovation Policies. . . 221

Fig. 2 The budget of the Innovation Agency, 2007–2021 (billion SEK)

Table 2 Share of positive, neutral, and negative evaluations of innovation policy per
evaluator type
Evaluations by evaluator type
Total Auditing agencies Consultants Self-evaluation Academic researcher
Positive 61% 51% 73% 50% 53%
Neutral 33.5% 33% 27% 50% 40%
Negative 5.5% 16% 0% 0% 7%
Source: Collin et al. (2022)

A comprehensive study conducted by Collin et al. (2022) examined two key

aspects of 110 innovation policy evaluations: the entities responsible for conducting
the evaluations, the findings and conclusions derived from these evaluations. Out of
the 110 evaluations analyzed, 67 were categorized as positive, 37 as neutral, and 6 as
negative. About 51% of the evaluations were conducted by consultants, 28% by
auditing agencies, and 13.5% by researchers, while 7.5% were self-evaluations.
Table 2 shows that 61% of the evaluations were positive, 33.5% neutral, and 5.5%
were negative or critical. When looking at different categories of evaluators, it is
clear that consultants and self-evaluations are more positive.

Examples of Critical Policy Evaluations

While the majority of evaluations and research papers tend to overlook failures, there
are a few notable exceptions. Daunfeldt et al. (2016, 2022) conducted a counterfac-
tual study using a matched control group, which showed that several support
schemes had no significant effects on employment, turnover, or profits. In a
222 R. Björnemalm et al.

subsequent study, Gustavsson Tingvall and Videnord (2020) documented a differ-

ence between rural and urban areas. Positive but weak effects were found for cities,
while a statistically significant negative effect was found for rural regions
(Gustavsson Tingvall and Videnord 2020).
Gustafsson et al. (2016) examined the long-term performance of firms after
receiving innovation grants. Contrary to popular belief regarding the substantial
long-term benefits of such grants, the effects were only initially observed. The
primary cause of these effects was an initial boost of investment. However, the
positive effect was not sustained. The authors aptly referred to this phenomenon as a
“sugar rush” effect due to the absence of sustained long-term effects.
Gustafsson et al. (2020) studied “subsidy entrepreneurs,” defined as firms that
received multiple grants and R&D subsidies from government agencies. During the
period 1997–2013, they found that out of 14,205 firms receiving support, 3624 had
obtained more than one grant, with some even receiving more than ten different
grants. Interestingly, these subsidy entrepreneurs, on average, paid higher wages but
exhibited lower productivity compared to non-recipients of support. Apart from this
disparity, no significant effects were identified.
In a subsequent study, SAGPA examined 15 innovation programs that collec-
tively amounted to SEK 1.8 billion disbursed to firms between 2001 and 2010. The
results of this analysis are summarized by SAGPA (2019, p. 28):
No significant connection between receiving support and firm turnover could be found in the
short or long term. The absence of effects on turnover holds regardless of whether we
compare with the firms’ own past development or a control group of similar firms that have
not received support.

The researchers found significant effects only for one category: firms with fewer than
250 employees. However, they were unable to identify any indirect effects in terms
of investments or the number of employees. SAGPA further asserts (p. 28):
Regardless of controlling for city or countryside, manufacturing or services or different
definitions of growth-oriented support, the result is the same. No effect on firm turnover can
be found.

In summary, prior research has demonstrated that a significant portion of evaluations

of innovation policy is conducted by actors who are reliant on government agencies,
and these evaluations often yield positive conclusions, despite limited scientific
evidence supporting such positivity. Furthermore, we note that these actors, includ-
ing consultants and self-evaluations, who depend on government agencies, tend to
exhibit a more positive outlook. In the following section, we will present our
empirical contribution, which examines how government agencies responsible for
innovation policy utilize evaluations and provide commentary on their own
operations.
A Public Choice Perspective on Mission-Oriented Innovation Policies. . . 223

How Government Agencies Use Evaluations

After examining the evaluations of the three innovation agencies and comparing
them to evaluations that emphasize effects and employ a counterfactual approach,
we will now delve into how these government agencies incorporate evaluations into
their annual reports. Figure 3 illustrates the distribution of positive, neutral, and
negative statements made by these agencies in their annual reports. To provide a
clearer understanding, Tables 3, 4, 5 offer illustrative examples of positive, neutral,
and negative statements.
Across all three agencies, a consistent pattern emerges with a prevalence of
positive statements, a limited presence of neutral and negative statements. The
Innovation Agency stands out by having the highest proportion of positive state-
ments (92%) and the lowest proportion of negative statements (1%), while the
Agency for Regional and Economic Growth exhibits the lowest share of positive
statements (78%). In contrast, the Energy Agency records the highest percentage of
negative statements (5%).
Figure 4 presents how the share of positive, negative, and neutral statements has
evolved over time. Here, no significant differences can be identified during the
studied time period.

Fig. 3 Share of positive, neutral, and negative statements regarding evaluations of innovation
policy in the annual reports of the three agencies (2011–2021)
224 R. Björnemalm et al.

Table 3 Illustrative examples of positive statements made by government agencies concerning

evaluations
Annual report Quote
The Energy Agency (2020) “Thereby, the program contributes to energy efficiency
improvement that otherwise would not have occurred
within the Swedish industry.”
The Energy Agency (2015) “An evaluation conducted in 2015 shows that the program
is a pioneering effort, both nationally and internationally.”
The Agency for Regional and “Furthermore, it was revealed that the program strongly
Economic Growth (2016) contributed to saving companies and jobs, and that the
survival rate is high among the companies that have
received counseling via the Business Emergency Line.”
The Agency for Regional and “The impact and the ability to reach customers improved
Economic Growth (2013) and also became greater than if the company had carried out
the initiative on its own.”
The Innovation Agency (2011) “A preliminary study also shows that companies partici-
pating in Produktionslyftet have shown better growth than
companies on average, even during the financial crisis.”
The Innovation Agency (2011) “The evaluators conclude that TSS has performed excep-
tionally well in connecting various actors in Sweden with an
interest in demonstration and testing activities of vehicles.”

Table 4 Illustrative examples of neutral statements made by government agencies concerning

evaluations
Annual report Quote
The Energy Agency (2020) “The evaluation points out that there is a continued need to
work on energy efficiency among SMEs, but that the sup-
port needs to be differentiated and adapted to different
industries.”
The Energy Agency (2019) “However, the program has only partially contributed to
increasing companies’ opportunities to spread their
innovations.”
The Agency for Regional and “Based on these evaluations, The Agency for Regional and
Economic Growth (2019) Economic Growth concludes that the content can generally
be considered relevant. However, it is clear that a certain
target group demands some form of knowledge exchange
that is more specialized and advanced.”
The Agency for Regional and “The evaluation showed that the results and effects of the
Economic Growth (2020) mission are visible primarily in the long term.”
The Innovation Agency (2012) “After conducting an employee survey and a 360-degree
evaluation in 2011, improvement areas were identified and
action plans were established.”
The Innovation Agency (2014) “Evaluations during the year, on the other hand, have given
a mixed picture of the programs’ effect on the companies.”
A Public Choice Perspective on Mission-Oriented Innovation Policies. . . 225

Table 5 Illustrative examples of negative or critical statements made by government agencies

concerning evaluations
Annual report Quote
The Energy Agency (2012) “Regarding the agency’s processing, some criticism was
raised concerning extensive administration and decision-
making processes.”
The Energy Agency (2011) “The Energy Agency’s role and involvement in the course
need to be developed.”
The Agency for Regional and “Kontigo also pointed at a lack of program ownership in the
Economic Growth (2019) form of organizations that take long-term strategic respon-
sibility in the border region, and who can work across
boundaries.”
The Agency for Regional and “The evaluators pointed out that the implementation can be
Economic Growth (2017) improved, for example through clearer prioritization among
policy documents and through clearer description and con-
sensus on how each program is expected to achieve its
goals.”
The Innovation Agency (2014) “The authors of the previous report argued that no signifi-
cant effects on, for example, growth and employment from
the Innovation Agency’s investments could be identified
with the method applied.”
The Innovation Agency (2018) “However, the programs should strengthen their work on
internationalization and enhance communication efforts, as
well as further develop their work on gender equality and
diversity.”

Fig. 4 Share of positive, neutral, and negative statements regarding evaluations of innovation
policy in the annual reports of the three agencies (2011–2021)
226 R. Björnemalm et al.

Discussion

In this section, we delve into a discussion and interpretation of our findings. The data
presented in Tables 2, 3, 4, 5 indicate that both evaluations themselves and the way
government agencies reference these evaluations lean toward a positive perspective.
As a result, government agencies are portrayed in a favorable light.
These outcomes align with the principles of public choice theory, which asserts
that policymaking occurs within a framework of distributed agency, wherein the
involved actors strive to maximize their own interests. According to public choice
theory, government agencies typically prefer to avoid budget cuts and instead aim
for budget expansion. With a growing budget, each manager’s relative importance
expands, enabling the agency to undertake more activities it deems important.
Armed with asymmetric information and motivated to advocate for additional
resources, government agencies are typically capable and willing to take actions
that sustain their revenues and promote organizational growth. We discuss various
aspects of this behavior in the coming sub-sections.

Evaluations Are Positive but Lack Evidence

Starting with Table 2, we see that the vast majority of evaluations of innovation
policy are positive. As reported in Collin et al. (2022), the National Audit Office
made the following statement about these evaluations of innovation policy (NAO
2020, p. 4):
There are considerable weaknesses in the effect evaluations of industrial policy that have
been carried out by government agencies: only 2 out of 37 studied evaluations fulfill all three
elementary criteria set up by the NAO regarding credible evaluations.

When combining this statement with the fact that a collection of publications
utilizing counterfactual evaluations presents a significantly less positive impression
(e.g., Daunfeldt et al. 2016; Gustavsson Tingvall and Deiaco 2015; SAGPA 2019), it
suggests that the positive impressions conveyed in these evaluations might be
exaggerated. However, assessing the extent of this exaggeration falls beyond the
scope of this paper. It can be argued that government agencies have an interest in
receiving positive evaluations of their various innovation support programs.

Dependent Evaluators Are More Positive in Their Evaluations

From Table 2 it is clear that the few negative and critical evaluations are published
by research groups and other government agencies responsible for conducting
evaluations. The data in Collin et al. (2022) do not clarify whether researchers
receive funding from the agencies they evaluate or not. Nevertheless, it is evident
A Public Choice Perspective on Mission-Oriented Innovation Policies. . . 227

that both consultants and self-evaluations are reliant on the government authority
being evaluated. These two categories did not publish any negative reports at all.
Consulting firms that work for an agency assigned to evaluate are dependent on the
government agency for ongoing business, while self-evaluations are conducted by
employees who are reliant on their employer. Hence, these results are also consistent
with the assumption of government agencies acting in their own self-interest.

Evaluations Are Referred to in a Positive Manner

Regarding references to evaluations, our study of 33 annual reports yielded a total of

654 instances where government agencies refer to evaluations. As indicated in
Table 2 and Fig. 3, the overwhelming majority of these evaluations are positive
(84%), with few being neutral (12%) and only a small percentage being negative
(4%). Once again, it is noteworthy that evaluations are utilized to portray the
agencies’ activities as successful and efficient, further reinforcing positive impres-
sions among policymakers and other stakeholders.
One could argue that annual reports of government agencies, much like corporate
annual reports, tend to convey a more positive impression as a means to present a
holistic view of the organization. Government agencies thus utilize annual reports to
explain and legitimize their operations, in a way similar to how this is done by firms.
It should come as no surprise that such reports tend to be more positive than
negative, serving to provide a favorable impression of the organization.
Some of the assertions found in the annual reports are conspicuously strong and
positive to the extent that they appear blatantly unrealistic. Here are three examples
from the Innovation Agency’s (2014) annual report for 2013:
An evaluation of companies with financing from the VINN NU program shows that they
have increased their turnover and employment more than twice as much as companies in a
control group. (p. 40)
To summarize, the evaluation shows that the companies granted funds attract more capital
(14–15 times), increase their turnover (3 times) and the number of employees (2.5 times)
more than a control group, 7 years after they have been granted VINN NU funds. (p. 40)
An evaluation of the companies financed in 2002–2004 under the VINN NU program, which
is aimed at start-up companies, shows that they increased their turnover 19 times on average
between the year of financing and the measurement point in 2012. (p. 11)

Critical Evaluations Receive Little Attention

As previously mentioned, several evaluations indicate that innovation policies and

the various support programs implemented by these three government agencies have
yielded limited positive effects (Daunfeldt et al. 2022; Gustavsson Tingvall and
Videnord 2020; Gustafsson et al. 2016; Gustafsson et al. 2020; Gustavsson Tingvall
228 R. Björnemalm et al.

and Deiaco 2015; SAGPA 2014, 2015, 2019). However, in the examined annual
reports of these government agencies, we find virtually no mention or discussion of
those evaluations. Instead, attention is mostly given to positive evaluations
conducted by hired consultants and self-evaluations.
It becomes clear that evaluations are utilized in the annual reports to defend
government agencies against criticism. In cases where critical evaluations are indi-
rectly or directly referenced, it appears to be done with the aim of safeguarding the
government agency’s reputation. One such instance pertains to the evaluations
indicating that the Innovation Agency’s support programs VINN NU and Forska &
Väx have had no discernible impact on employment, turnover, growth, or innova-
tion. In the Innovation Agency’s 2014 annual report (2015), these evaluations are
briefly mentioned and discussed:
In 2014, two impact evaluations of Forska & Väx were completed. One was conducted by
the research institute Ratio on behalf of Growth Analysis and the other by the Innovation
Agency. (p. 37)
The authors of the former report believed that no significant effects on, for example, growth
and employment of the Innovation Agency’s initiatives could be established with the method
applied. (p. 37)

While these government agencies tend to ignore evaluations that are not positive,
evaluations that have received a lot of attention may necessitate some reaction. In the
same annual report, the Innovation Agency also defends its programs:
The Innovation Agency’s assessment is that the evaluation was carried out too shortly after
the end of the projects and did not take sufficient account of either company dynamics or the
functioning of innovation processes to be able to draw clear-cut conclusions. (pp. 37–38)

Subsequently, the Innovation Agency also asserted that when analyzing other
materials, positive returns could be identified:
At the project level, the evaluation indicated a positive return on the Innovation Agency’s
investments that exceeds the Innovation Agency’s costs for the projects. (p. 38)

A similar discussion can be found in the Agency for Regional and Economic
Growth’s (2016) annual report for 2015:
The study presented in 2015 shows that the companies that were granted regional investment
aid in 2010 have a worse profit development than both a control group and the group of
companies in Sweden. (p. 43)

On the same page, this observation is countered using the following statement:
However, the value added in the supported companies improved more than in the other
groups. (p. 43)

In other annual reports, government agencies argue that their innovation grants
function as a quality stamp. The Energy Agency (2016) made one such assertion
in its annual report for 2015:
The case studies show that the support from the Swedish Energy Agency acts as a quality
stamp and makes other actors dare to participate or co-finance. (p. 75)
A Public Choice Perspective on Mission-Oriented Innovation Policies. . . 229

A similar claim can be found in the Innovation Agency’s (2014) annual report for
2013 concerning its support program VINN NU:
VINN NU gives companies a quality stamp and signal value that makes it easier for them to
attract customers, capital, and talent than for those who have not received it. (p. 40)

A series of initiatives funded by the Energy Agency have resulted in significant

failures. One notable example is the well-documented case of Sekab in Örnsköldsvik
(extensively discussed in Sandström and Alm 2022). This case sparked a major
scandal in Sweden, as a small municipal company engaged in the construction of
factories in Hungary and Poland while establishing sugar plantations in Tanzania for
ethanol production. These endeavors were supported by approximately SEK 1 billion
from the Energy Agency.
In their 2011 annual report, the Energy Agency (2012, p. 42) asserted the
following concerning Sekab:
The evaluators recommend additional support from the owners and from the Swedish
Energy Agency on a level and with a time frame that makes it possible to finish negotiations
with partners and potential investors.

Regarding the scientific evaluation, the Energy Agency asserts (p. 42) that it “was an
excellent program and a continuation at least on the same level as during the past
years is strongly recommended.”
In those instances, the Energy Agency affirms that these conclusions are based on
a scientific evaluation, yet they do not provide any specific source to allow for easy
access to the evaluation. Considering that the Sekab case had already gained
significant notoriety in Sweden by 2011–2012, one could infer that the aforemen-
tioned statements in the annual report were aimed at shielding the government
agency from criticism.

Government Agencies as Special Interests

Our findings are consistent with the predictions that can be derived from a public
choice perspective. The overall impact of these evaluations and the way they are
mentioned in the 33 annual reports we analyzed is that a positive image of the
government agency’s endeavors is conveyed. It is consistent with Muldoon and
Yonai’s study (2023, p. 3) that the mission-oriented innovation policies and the
research conducted by Mazzucato and her colleagues
conjures an image of disinterested and competent technocrats who make decisions based on
knowledge, with their sole motivation being the common good. In addition, because these
technocrats are nonpartisan and not self-interested, their motivation will be in the long-
term good.

Also, the government is depicted as “a dynamic, thoughtful body that makes

decisions based on relevant information” (p. 3).
230 R. Björnemalm et al.

Upon uncovering how government agencies responsible for implementing

mission-oriented innovation policies utilize evaluations and present their own activ-
ities, our findings raise doubts about the assumption of competent and altruistic
government agencies. The behavior we observe aligns with Bednarczuk’s (2022)
findings, which showed that government officials favor increases in the size of
government as long as their own agency receives more funding.
Applying the public choice perspective, we propose that part of this behavior can
be attributed to the fact that the three agencies operate under the Ministry of Climate
and Enterprise and, in a sense, compete for the same budget. If one agency were to
hire evaluators who are significantly more critical and subsequently present these
critical findings in their annual reports, they would appear less capable and signif-
icant compared to the other agencies, consequently facing the risk of receiving fewer
resources.
Our findings have significant implications for the implementation of innovation
policies that place the government at the helm of the economy. As government
agencies overseeing innovation support programs acquire greater funding and
resources, their relative status and influence grow. Consequently, more resources
will be allocated to legitimizing the presence of mission-oriented policies, particu-
larly since these innovation agencies often sponsor academic research. Conversely,
scholarship that critically examines and questions mission-oriented policies is likely
to be met with hostility from both the government agencies benefitting from a
magnified role in the economy and from politicians who put these policies in place.

Conclusions, Implications, and Future Research

In this chapter, we have explored the actions and motivations of three government
agencies responsible for implementing mission-oriented innovation policies. While
prior literature has generally portrayed these actors as competent and altruistic (e.g.,
Mazzucato 2021), few studies have investigated their incentives and behaviors. Our
contribution lies in unveiling the inner workings of innovation agencies and exam-
ining their incentives and actions.
Through our analysis of 654 instances where government agencies refer to
evaluations in their annual reports, we find that the majority of these references are
positive (84%), some are neutral (12%), and very few are negative (4%). The pattern
is stable over time and across the three agencies, except that the tendency is
somewhat stronger for the Innovation Agency.
In line with public choice theory, it appears that government agencies employ
evaluations and references to create a positive image of their activities rather than
conducting an inquiry into the efficiency and effectiveness of resource utilization for
the government and taxpayers. These findings suggest that government agencies
exhibit behavior more in line with self-interested and revenue-maximizing actors
(Niskanen 1994) than with altruistic and competent organizations working for the
collective welfare of society (Mazzucato 2021).
A Public Choice Perspective on Mission-Oriented Innovation Policies. . . 231

Our results highlight the contextual factors and diverging incentives surrounding
the implementation of mission-oriented policies (Muldoon and Yonai 2023). Gov-
ernment agencies entrusted with administering funds for these purposes are also
driven by self-interest. Furthermore, evaluations are referenced in a manner that
justifies the allocation of resources toward these objectives. Critical reports and
evaluations receive less attention, thereby creating an illusion of higher efficiency
and effectiveness in mission-oriented innovation policies than may actually be the
case. As mission-oriented policies place the government and its agencies at the helm
of the economy, it is likely that government agencies will support these policies. In
many countries, including Sweden, government agencies responsible for mission-
oriented innovation policies also finance research on innovation policy and industrial
dynamics.
While our chapter provides an initial exploration of government agencies tasked
with implementing mission-oriented policies, we acknowledge several limitations in
our research and welcome further scholarly endeavors in this field. This study relies
solely on secondary data from annual reports. Future research could benefit from a
combination of interviews, secondary data, and other archival sources. Specifically,
exploring the relationship between government agencies and ministries in the
resource allocation process would be of great interest.

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Rickard Björnemalm holds a BSc in political science and currently pursues a master’s degree in
global political economy with a focus on economic history while working part time as a research
assistant at the Center for Educational Leadership and Excellence at the Stockholm School of
Economics. He has significant experience in research centered on public policy and he has
previously worked as a research assistant at the Institute for Economic and Business History
Research and the Center for Sustainability Research at the Stockholm School of Economics, and
at the Ratio Institute. Rickard Björnemalm’s research interests include state-owned enterprises and
government agencies, and historically oriented organizational research.

Christian Sandström is Senior Associate Professor at Jönköping International Business School

and the Ratio Institute in Sweden. His research concerns innovation policy and the interplay
between technological and institutional change. Sandström is one of the editors behind Questioning
the Entrepreneurial State (Springer). He has published more than 30 papers in peer-reviewed
academic journals such as Technological Forecasting and Social Change, the Journal of Technol-
ogy Transfer and Industry and Innovation.
Sandström wrote his PhD thesis on the topic of disruptive innovation at Chalmers University of
Technology (2010). He has been a visiting scholar at the University of Cambridge and ETH Zürich
in Switzerland. Sandström has received several awards for his pedagogical skills and is a frequently
hired public speaker on the topic of technological change and industrial transformation.

Nelly Åkesson holds a BSc in economics and has worked as a research assistant at the Ratio
Institute. She is currently enrolled in a MSc programme at Lund University. Åkesson’s research
concerns political economy and the role of government agencies and government officials.
234 R. Björnemalm et al.

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Learning from Overrated Mission-Oriented
Innovation Policies: Seven Takeaways

Magnus Henrekson, Christian Sandström, and Mikael Stenkula

Abstract This chapter integrates findings from several different case studies on
mission-oriented innovation policies (MOIPs) and makes use of the existing litera-
ture to briefly describe three other missions: The War on Cancer, homeownership in
the United States, and the Swedish Million Program. Together with the analyses in
the other chapters of this volume, seven takeaways regarding mission-oriented
innovation policies are developed and described: (1) wicked problems cannot be
solved through missions, (2) politicians and government agencies are not exempt
from self-interest, (3) MOIPs are subject to rent seeking and mission capture,
(4) policymakers lack information to design MOIPs efficiently, (5) MOIPs distort
competition, (6) government support programs distort incentives and result in moral
hazard, and (7) MOIPs ignore opportunity costs. These seven takeaways are illus-
trated using the cases described in this chapter and elsewhere in this volume.

Keywords Mission-oriented · Innovation policy · Rent seeking · Failure · Public

choice

JEL Codes H50 · L26 · L52 · O31 · O38 · P16

We are grateful for useful comments and suggestions from Niklas Elert, David Lucas, and Kathy
Saranpa. Financial support from the Jan Wallander and Tom Hedelius Foundation (P2018-0162
and P2023-0186), the Kamprad Family Foundation for Entrepreneurship, Research & Charity
(P20220048), the Marianne and Marcus Wallenberg Foundation (2020.0049), and the
Knowledge Foundation is gratefully acknowledged.

M. Henrekson · M. Stenkula (✉)

Research Institute of Industrial Economics (IFN), Stockholm, Sweden
e-mail: [email protected]; [email protected]
C. Sandström
Jönköping International Business School, Jönköping, Sweden
The Ratio Institute, Stockholm, Sweden
e-mail: [email protected]

© The Author(s) 2024 235

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_13
236 M. Henrekson et al.

Introduction

Large-scale government programs and interventionist industrial policies specifically

tailored to mobilize innovation to address well-defined societal objectives—so-
called mission-oriented innovation policies (MOIPs)—are currently being
implemented in many Western countries with little prior critical inquiry. There is
also a shortage of academic studies devoted to how and why MOIPs may fail.
Part III of this volume contains three detailed accounts of failed MOIPs: The US
efforts to end homelessness (Lucas and Boudreaux 2024), foreign aid and nation
building (Waldron and Coyne 2024), and the Brazilian government’s effort to create
a domestic shipbuilding industry (Alves 2024). It also includes an analysis of the
empirical evidence invoked to justify missions (Yerger 2024a, 2024b), a review of
evaluations of 49 other MOIPs (Batbaatar et al. 2024), and an exploration of
government agencies implementing MOIPs and how they evaluate their effective-
ness (Björnemalm et al. 2024).
In this chapter, we explore what we consider to be the most essential aspects of
three historical cases of failed or overrated MOIPs and combine insights from these
cases with insights from the other chapters in Parts II and III of this volume. This
results in seven takeaways.
The next section contains short descriptions of three MOIPs that did not meet
expectations or for which the consensus interpretation can be questioned. Next, the
takeaways are described in further detail, and for each one, some illustrative exam-
ples are provided. The concluding section summarizes the seven takeaways and
vents our concern for the current trend toward the increased use of MOIPs around the
world.

Learning from Historical Missions

Beyond the examples described in this collective volume, there are other cases of
failed or overrated MOIPs throughout history, which have resulted in economic
downturns or the impeding of important development activities. Three such cases are
covered below, starting with the War on Cancer (WoC), followed by the program to
boost homeownership in the United States, and finally the Swedish program to build
1 million new housing units in 10 years. Tables 1, 2, 3 demonstrate that all three
cases fulfill the criteria for being defined as a mission. The cases were chosen partly
as they fulfill the criteria stipulated by the OECD. Beyond this definition, we would
argue that these cases are of a more general interest for public policy as they concern
important historical events.
The War on Cancer was inspired by the moonshot, and interestingly President
Biden has put in place a “Cancer Moonshot” with the goal of curing cancer through
moonshot policies. Insights into the workings of the War on Cancer may therefore
give valuable insights into the function of MOIPs.
Learning from Overrated Mission-Oriented Innovation Policies: Seven Takeaways 237

Table 1 Criteria for a mission-oriented policy specified by the OECD (2021) applied to the War on
Cancer in the United States
Mission criteria The War on Cancer
Involves actors from different fields and Involved academia, pharmaceutical firms, gov-
sectors ernment departments
Addresses a grand challenge or a wicked Cure cancer
problem
A defined deadline that is medium- or long- Cure cancer by the US bicentennial in 1976
term and clear measurable milestones
Involves an element of risk Involves extensive research and development,
with elements of uncertainty and risk of failure

Table 2 Criteria for a mission-oriented policy specified by the OECD (2021) applied to
homeownership in the United States
Mission criteria Homeownership in the United States
Involves actors from different fields and Fifty-six actors in diverse sectors such as finance,
sectors government, construction, and housing
Addresses a grand challenge or a wicked Increase homeownership especially among
problem minorities in the United States
A defined deadline that is medium- or long- Clinton: Accomplish 67.5% homeownership by
term and clear measurable milestones the year 2000
Bush: Increase the number of minority
homeowners by 5.5 million families by 2010
Involves an element of risk Financial risks related to lending money to the
subprime segment of the market

Table 3 Criteria for a mission-oriented policy specified by the OECD (2021) applied to the Million
Program for housing in Sweden
Mission criteria The Million Program in Sweden
Involves actors from different fields and sectors Involved the state and several large enterprises
such as Riksbyggen and SIAB
Addresses a grand challenge or a wicked Eliminate Sweden’s housing shortage
problem
A defined deadline that is medium- or long- Build 1 million housing units in 1965–1974 by
term and clear measurable milestones completing 100,000 units per year
Involves an element of risk Extensive 10-year plan involving considerable
economic and political uncertainty

Homeownership in the United States is clearly related to the financial crisis in the
United States, which in some regards paved the way for more MOIPs and the
renaissance of interventionist industrial policies. If MOIPs related to
homeownership had a role in fueling the housing bubble and subsequent crash of
2008–2009, such mechanisms are important to document and uncover.
Last, the Million Program in Sweden is interesting as it has been described by
Mazzucato and Sweden’s Innovation Agency, Vinnova, as a success story. This
238 M. Henrekson et al.

interpretation has been questioned by many scholars historically, and therefore this
example deserves to be further scrutinized.
We acknowledge that these three cases are not failures in all regards, and we do
not aim to draw general conclusions based upon only these cases. Rather, our goal is
to explore them to both inform policymakers and make use of these cases along with
the empirical material in this volume to develop a set of takeaways regarding
challenges in implementing MOIPs.

Nixon’s War on Cancer

The War on Cancer (WoC) was launched by President Nixon in the United States
and contains many valuable lessons, particularly bearing in mind that President
Biden used the 60th anniversary of President Kennedy’s historical moon landing
speech to reignite “the Cancer Moonshot.”1 As Table 1 shows, the WoC fulfils the
OECD criteria for a MOIP.
The launch of Nixon’s WoC is full of references to the moonshot. The WoC had
been preceded by extensive campaigns, notably featuring Sidney Farber, former
President of the American Cancer Society, asserting “[w]e are so close to a cure for
cancer. We lack only the will and the kind of money and comprehensive planning
that went into putting a man on the moon” (Coleman 2013, p. 32). Today, it is widely
regarded as a failure (e.g., Faguet 2005).
There are many reasons why high expectations to find a cure for cancer were not
met. At the onset of the WoC, there were already disagreements regarding what
strategies to pursue. Cancer biologists and other scholars were asking for research
that targeted cancer prevention, while the President and policymakers used the term
“cure” instead and continued to frame the efforts as a “war,” i.e., a battle that is either
won or lost.
On the 40th anniversary of the National Cancer Act in 2011, the NCI’s director,
Dr. Harold Varmus, rejected the fundamental philosophy of the WoC by saying
“cancer is a complex group of diseases arising from fundamental aspects of our
biology.” Similar observations were made as early as 1975 by a senior official at the
Department of Health, Education and Welfare, Charles Edwards (MD), who wrote
that the cancer program was based on:
[t]he politically attractive, but scientifically dubious premise that a dread and enigmatic
disease can, like the surface of the moon, be conquered if we will simply spend enough
money to get the job done. (Schmeck 1975, p. 61)

The trend toward combating disease rather than looking for causes has persisted. In
the time period 2000–2010, the National Cancer Institute’s (NCI) budget increased

1
White House (2022).
Learning from Overrated Mission-Oriented Innovation Policies: Seven Takeaways 239

from USD 3.3 billion to USD 5.1 billion, but the share devoted to prevention
declined from 11 to 7% during these years.2
Many scholars were skeptical of this massive political campaign against cancer,
especially as little was known at the time about the microbiology of cancer. Sol
Spiegelman, Director of the Institute of Cancer Research at Columbia, favored more
focus on prevention than on fighting disease: “An all-out effort at this time [to find a
cure for cancer] would be like trying to land a man on the moon without knowing
Newton’s laws of gravity” (Coleman 2013, p. e33). It has also been argued that a
large share of the WoC budget was captured by those researchers and interest groups
who primarily looked for viral causes of cancer (Coleman 2013; Surh 2021).
Epstein (1990) summarizes the failure of Nixon’s War on Cancer. He also
highlights the idea that more focus on prevention and identification of the underlying
causes of cancer would have been a more viable approach. Instead, government,
industry, and a small circle of scientists combined to stymie efforts to introduce
preventive measures, such as strict pollution control standards. In 1992,
68 established scientists gave a press conference, releasing a statement on the
WoC where they noted that it had not managed to stop growth in either cancer
rates or cancer deaths.
The WoC and the National Cancer Act of 1971 were not failures in all regards.
These efforts set the direction for some substantial advances in basic cancer research
and treatment. Knowledge in molecular biology and genetics related to cancer has
grown exponentially over the past decades, but according to many scholars,
improvements for patients have not occurred at a similar pace (Surh 2021).
In hindsight, many scholars still regard the WoC as a failure and attribute this
failure to a disregard for prevention, a belittling of screening, and an over-reliance on
inefficacious, nonspecific cancer drugs (Faguet 2014). Not everything can be solved
simply by spreading more government funds over praiseworthy missions.

Boosting Homeownership in the United States

The financial crisis of 2008–2009 is often interpreted as an example of how untamed

market forces and unregulated speculation may threaten economic and financial
stability. There is certainly some truth to that interpretation, yet several scholars
have also emphasized the role of state involvement and the formulation of socially
desirable goals by policymakers as well as the creation of public-private partnerships
or semi-public entities such as Fannie Mae and Freddie Mac as factors behind the
crisis. Thompson (2012, p. 415) writes:
Analysing the financial crisis primarily in terms of neo-liberalism and free-market funda-
mentalism ignores the part played by the state–finance constellation around Fannie Mae and
Freddie Mac in the crisis.

2
https://www.cancer.gov/about-nci/budget/fact-book/archive.
240 M. Henrekson et al.

In line with numerous other scholars, McDonald (2012, p. xiii) places a large share
of the blame for the financial crisis not only on Fannie Mae and Freddie Mac but also
on efforts by politicians to use the financial sector to accomplish various political and
social goals:
Above all, it was the distortion of the banking sector to achieve political ends that ultimately
caused the crisis. Politicians, with their unthinking political stances, must, perhaps for the
first time, take the lion’s share of the responsibility.

Homeownership and government housing policies had been part of the political
agenda for several decades. Homeownership had been growing for decades, from
43.6% in 1940 to 65.6% in 1980, partly as a function of various subsidized loan
programs funded by agencies such as the Federal Housing Administration and the
Veterans Administration. It declined slightly in the 1980s, and upon taking office,
President Clinton lifted the long tradition among policymakers to support
homeownership to a higher level as he initiated a National Homeownership Strategy.
The approach is consistent with Mazzucato’s (2021, p. 6) recommendations to set
targets that are not only ambitious “but also inspirational, able to catalyse innovation
across multiple sectors and actors in the economy.” As Table 2 shows, the National
Homeownership Strategy also fulfils the OECD criteria for a MOIP.
The Clinton administration formulated a socially desirable goal to increase
homeownership, and 56 actors across all sectors of society signed an agreement to
become “Partners in the American Dream.”3 These included the American Bankers
Association, the Federal National Mortgage Association, Fannie Mae, Freddie Mac,
and the US Department of Housing and Urban Affairs. President Clinton also
formulated a measurable goal for this strategy: by the year 2000, homeownership
would reach a level of 67.5% (McDonald 2012). The goal to increase
homeownership was framed as a mission that resonated with American ideals related
to family, ownership, and the American dream. The Bush administration continued
to support the homeownership agenda, asserting that it “is in our national interest
that more people own their own home. . . . if you own your own home, you have a
vital stake in the future of our country” (White House 2003). Hence, the support for
the homeownership agenda and related activities was strong in both the Republican
and the Democratic parties.
The political objective to increase homeownership implied that the two
government-sponsored entities (GSEs)—Fannie Mae and Freddie Mac—were used
to provide cheaper credits to minorities. Most importantly, this was achieved by
guaranteeing the timely payment of principal and interest on mortgage-backed
securities they issued. This guarantee made such securities more attractive to inves-
tors because it reduced credit risk and helped maintain liquidity in the secondary
mortgage market.4

3
US Department of Housing and Urban Development (1995).
4
For a detailed account of Fannie Mae and Freddie Mac’s undertakings in the process culminating
in the 2008 financial crisis, the reader is referred to McDonald (2012).
Learning from Overrated Mission-Oriented Innovation Policies: Seven Takeaways 241

Wallison and Calomiris (2009) argued that these GSEs had an important role in
the financial crisis as they faced dual objectives that conflicted with each other. On
the one hand, the government had commissioned Fannie and Freddie to increase
homeownership, especially in minority groups, which in turn meant taking on more
risk. On the other hand, simultaneous demands for profitability put the GSEs in a
position where they had to exploit government subsidies to increase profits. In doing
so, while simultaneously expanding loans in the subprime segments of the market,
they were taking on risks so significant that the stability of the entire financial system
was jeopardized.
Thompson (2012, p. 416) summarizes the homeownership mission as follows:
That a state-encouraged subprime boom happened in the U.S. rather than anywhere else is
neither a coincidence nor a simple function of deregulated American financial markets. It
was a historically rooted political phenomenon. Subprime lending, subprime securitisation
and the under-regulation of, and latitude given to, Fannie Mae and Freddie Mac served a
particular set of political purposes.

Homeownership increased in the United States from 64% in 1995 to 69% in 2005. In
the wake of the financial crisis, homeownership reverted to the level of the
mid-1990s (US Census Bureau 2016). In effect, the mission not only failed to
increase homeownership, but it also contributed to one of the deepest recessions in
modern history.
This US homeownership mission clearly underlines the fact that good intentions
are never a sufficient condition for achieving social progress and enhanced social
welfare. On the contrary, it can give rise to unintended and dire negative
consequences.

The Swedish Million Program

In the 1960s, the Swedish government implemented a large program to end the
housing shortage that had plagued the country for decades. As early as 1963,
economist Assar Lindbeck had argued that Sweden’s persistent housing shortage
was a consequence of rent control (Bentzel et al. 1963). As it proved politically
difficult to end rent control, the Million Program was launched. This was an attempt
to address Sweden’s housing shortage through a centrally planned mission to build
1 million housing units in the 10-year period 1965–1974 by completing
100,000 units per year. The enormous size of the mission becomes obvious if one
considers that the Swedish population was a mere 7.5 million when the mission was
announced. As Table 3 shows, the Million Program fulfils the OECD criteria for
a MOIP.
In a publication by Vinnova, Sweden’s Innovation Agency, this “Million Pro-
gram” is described by Dan Hill, Mariana Mazzucato, and co-authors as a success:
Running from 1965, the Million Programme (Miljonprogrammet in Swedish) public hous-
ing programme set a “mission” of building one million affordable new dwellings within a
242 M. Henrekson et al.

decade. The mission was broadly successful, with 1,006,000 dwellings being built by 1974.
“Affordable” was defined in understandable terms, relating to the wage packets of average
workers. Miljonprogrammet produced a rich diversity of dwellings, with the majority being
small houses despite the popular allusion with larger housing blocks typical of the age. (Hill
2022, p. 54)

In the same report, the authors make comparisons between this Million Program and
Project Apollo, and the Million Program is described in a positive way, with parallels
not only to Project Apollo but also to D-Day:
Not every country has “a Vinnova,” however. And Sweden has a very particular history.
Everyday life here is imbued with living memories of the Million Programme and Vision
Zero—missions avant la lettre, perhaps—as well as its many decades of progressive and
equitable societal action. As this book explains, that has directly informed the possible
“plays.” (p. 14, this passage written by Mariana Mazzucato)
Yet Miljonprogrammet’s results arguably deserve to be seen in the same light as Apollo. The
public policy terrain of housing policy is just as complex as that of space travel. (pp. 54–55)
In this, it is already making clear that this mission-oriented innovation is a process to be
performed, or a culture to create. A mission, whether Apollo, D-Day, or Miljonprogram,
implies a journey as much as a destination, and this initial stage is not far past “Base Camp
One” in that journey. (p. 187)

The Million Program was plagued with several difficulties. While some of these
issues such as “poor-quality construction and insufficient focus on community-
building and participation” are acknowledged in Hill (2022, p. 55), there were
several other challenges related to the Million Program. Apartments were mass
produced with little regard for quality and with a functionalist Le Corbusier-inspired
style that many found unattractive. In the early 1970s, about 20,000 apartments were
vacant despite the housing shortage at that time. Later, many apartment buildings
were leveled to the ground again—with the support of public money (Jörnmark
2007). Furthermore, many apartments in the remote countryside were filled up with
immigrants during the refugee crisis in the 2010s. These apartments were completed
only years before the population in those towns began to decline due to dwindling
employment opportunities and acceleration of the movement of people and jobs to
the larger cities and metropolitan areas. Unsurprisingly, the massive influx of
non-European immigrants to these towns has fueled social problems and ethnic
conflicts on an unmanageable scale.
It did not take long before crime and social unrest increased in the Million
Program suburbs. Three years before the completion of the program, economist
Assar Lindbeck (1972, pp. 75–76) had already pointed to this risk:
What has also perhaps not been adequately recognized is that some of the shortcomings of
today’s housing market have effects far into the future. This is, of course, particularly true of
the effects on housing production. If, during periods of rent control, there has been a strong
divergence in the direction of investment from consumer preferences, then the rent-
controlled housing market has in fact made a huge misinvestment. Personally, I believe
that this is the case, in the sense that households would have preferred a much stronger focus
on single-family houses, with land contact for the residents, if household preferences had
been allowed to determine the direction of production in the same way as happens in
Learning from Overrated Mission-Oriented Innovation Policies: Seven Takeaways 243

commodity areas with equilibrium pricing. In that case, our country would have had a living
environment that most people considered far more “human” than the one that exists today.

Sune Lindström, professor of city planning at Chalmers University of Technology,

wrote in 1977 that the Million Program was a “newly built slum, of a never seen
proportion. A slum that by its very existence makes future planning and housing
politics an inaccessible swamp” (Lindström 1977, p. 203). Unfortunately,
Lindbeck’s and Lindström’s prophecies turned out to be accurate, and the outcome
is far from the rosy picture depicted in Hill (2022). In a 2015 report concerning
organized crime in Sweden, the Swedish Police (2015, p. 8) underscored the
connection between crime and the Million Program: “The vast majority of the
audited areas were built between 1965 and 1975 as part of what came to be known
as the Million Program.”

Learning from Mission Failure: Seven Takeaways

While the mission-oriented approach to innovation policy has gained significant

popularity in recent years, particularly among policymakers, some academics have
started to critically examine these ideas (e.g., Wennberg and Sandström 2022),
leading to the identification of several challenges. The chapter contributions in
Part III of this volume together with the additional missions reviewed above shed
a new light on the risks associated with implementing mission-oriented innovation
policies. Below, we synthesize theoretical arguments and empirical observations
into seven takeaways that together call into question the usefulness of MOIPs.

1. Wicked Problems Cannot Be Solved Through Missions

A common trait of many of the MOIPs discussed in this volume is that they in some
way or another try to solve a “wicked” problem, i.e., problems that are complex,
systemic, and span several policy areas (Nelson 1977). This is no coincidence and in
line with the idea behind launching MOIPs. As is well illustrated among all
examples in this volume, it is also inherently difficult to “solve” these often impor-
tant but complex problems in any profound way through grand politically initiated
projects—despite good intentions and, occasionally, abundant public spending.
Lucas and Boudreaux’s (2024, pp. 146–147) chapter about the US efforts to end
homelessness provides a good illustration of how difficult it can be to address
wicked problems:
But despite a clear mission, good intentions, bipartisan political support, evidence-based
innovations, major funding increases, thorough stakeholder engagement, and unequivocal
state leadership, the results during this period were underwhelming at best. A more-than-
doubling of federal expenditures and the widespread diffusion of evidence-based practices
saw a mere 9 percent reduction in total homelessness; in fact, the downward trend stalled
244 M. Henrekson et al.

early, with no single year-over-year decline in homelessness since 2016. Not one of the four
objectives initially outlined in 2010 were met, and each one was eventually delayed, revised,
or dramatically curtailed.

In a similar way, other social problems described in this chapter and throughout this
volume, such as homeownership in minority groups in the United States (this
chapter) or foreign aid (Waldron and Coyne 2024), are complex and wicked by
nature and hard to solve in any meaningful way.
Richard Nelson, the doyen of evolutionary and innovation economics, contends
that grand societal challenges and the wicked problems of today cannot be effec-
tively addressed through a mission-oriented approach because these challenges
(Nelson 2011, p. 1697)
are all very different than the challenges faced and met by Manhattan and Apollo. These
programs were aimed to develop a particular technological capability, and the achievement
of their technological objective signaled the end of the program.

This conclusion is repeated in another piece, written together with two co-authors,
arguing that mission-oriented policies “are not the right models for new programs
aimed at the challenges we now face” (Foray et al. 2012, p. 1697).
Mazzucato (2021, p. 108) refers to Nelson’s conclusion—wicked problems
cannot be solved through MOIPs as they are much more complex and systemic by
nature—and states that “Nelson was right.” Instead, she argues that wicked problems
require another form of missions which are much more systemic and span the entire
economy. To reform and restructure several different, interdependent sectors and
policy areas across society are clearly sizable challenges, and it is difficult to see how
Mazzucato or other advocates of MOIPs can counter Nelson’s stance. Our conclu-
sion stands: Wicked problems cannot be solved through missions.

2. Politicians and Government Agencies Are Not Exempt from

Self-Interest

The findings in this volume—as well as in other case descriptions of failed

missions—show that self-interested behavior among government actors is often a
part of the story and may be one important factor to bear in mind when exploring the
reasons why MOIPs fail to achieve their mission. Lucas and Boudreaux (2024)
suggest, in their chapter about homelessness, that actors may twist and bend the
arguments and evidence for a specific policy in order to safeguard their own private
interest.
Within the field of public choice, self-interested action is an essential idea used to
analyze outcome and behavior of policymakers, and several contributions in this
volume make use of this notion, notably Holcombe (2024) and Björnemalm et al.
(2024). For example, the latter show how government agencies implementing
innovation policy act in their own interest and regularly describe their own opera-
tions in an overly positive way, ignoring less positive evaluations. It has also been
Learning from Overrated Mission-Oriented Innovation Policies: Seven Takeaways 245

shown that these government agencies systematically rely on external evaluations

that tend to be positive without having evidence for such assessments (Collin et al.
2022). Such behavior can be explained by the assumption that both elected politi-
cians and government officials are governed by some degree of self-interest.
Politicians also benefit from MOIPs as inaugurations of large programs, and
projects are likely to result in positive publicity. President Nixon benefited from
positive publicity upon launching the War on Cancer in 1971 and by referring
extensively to the moonshot. Five decades later, President Biden repeated Nixon’s
effort and rhetoric when initiating his Cancer Moonshot. When Biden’s Cancer
Moonshot is implemented, the President appears to be taking decisive action against
something people fear and dread.5 As a politician, Biden is likely to benefit from
such an initiative where a strong negative outcome can ostensibly be avoided, and he
will most likely receive positive publicity and gain in popularity.
Mazzucato (2021, p. 34) explicitly refutes public choice theory and states that:
No empirical evidence was advanced to support this idea. It was just assumed that social,
constitutional and ethical concerns never motivated bureaucrats and politicians. And it was
assumed that the public and private sectors were competitors and one side or the other could
be a loser.

While it is certainly plausible that both politicians and government officials are not
only driven by pure economic motives as actors in the market, it would be naïve to
assume that policymakers are completely exempt from self-interested behavior. On
this issue, Muldoon and Yonai (2023, p. 3) conclude that the literature on MOIPs
[c]onjures an image of disinterested and competent technocrats who make decisions based
on knowledge, with their sole motivation being the common good. In addition, because these
technocrats are nonpartisan and not self-interested, their motivation will be in the long-
term good.

The same authors maintain that research on MOIPs depicts the government as “a
dynamic, thoughtful body that makes decisions based on relevant information”
(p. 3). MOIPs are therefore likely to be appreciated by policymakers as they are
portrayed as visionary, altruistic, and competent actors at the steering wheel of
society. The chapters in this volume have clearly shown that this is a view of the
actors involved in MOIPs that is too naïve and rigid.

5
By using the universal tendency to loss aversion among the population and by strongly empha-
sizing a potentially very bad outcome if no political action is taken, politicians can create what
Schnellenbach (2024) denotes a “loss frame.” This makes the general public more willing to accept
grand political projects and the ensuing spending. Exploiting this kind of bias makes the stated
objectives of missions normatively appealing, and politicians may eschew the need to weigh in the
efficiency of the proposed measures. This method of argumentation has, according to
Schnellenbach (2024), been used to implement numerous other missions, including DARPA and
the original Apollo project.
246 M. Henrekson et al.

3. MOIPs Are Subject to Rent Seeking and Mission Capture

Above, we stressed that many government actors, like other actors in the economy,
are not omniscient altruists but may be less informed and partly driven by self-
interest. Besides politicians and government agencies pursuing their own agendas,
there are other interest groups which exert pressure on the political sector to receive
(financial) benefits—a phenomenon often referred to as rent seeking. Hence, pow-
erful and concentrated interest groups, such as large corporations, labor unions, and
industry associations, may leverage their relational and financial resources—often
combined with asymmetric knowledge—to influence policymaking. As a result,
they may shape regulations, compensation schemes, and tax structures to their
advantage—an idea elaborated by Holcombe (2024) in this volume.
Several of the failed missions covered throughout this volume and in this chapter
can be understood through the lens of rent seeking and regulatory capture. Alves
(2024) shows how attempts to revive Brazil’s shipbuilding industry were influenced
by labor unions in such a way that large supportive measures were directed toward
domestic suppliers, which were not competitive in the global marketplace. Waldron
and Coyne (2024) also stressed that foreign aid made many economic areas highly
politicized in the receiving country, substantially increasing the scope for and extent
of rent seeking. The description of the US financial crisis in 2008–2009 highlights
how powerful interest groups were able to exert influence on policymakers. In
particular, Fannie Mae and Freddie Mac were extremely effective in their lobbying
efforts. In hindsight, the combination of access to government funding, de facto
guarantees, strong political connections, and shareholder demands on growth and
profits made it very difficult to stop Fannie and Freddie from blowing a credit
bubble. The War on Cancer is another case in point illustrating how interest groups
captured the agenda. The quest for a cure, related patents, and monopoly profits
gained the upper hand vis-à-vis an alternative approach focusing more on preven-
tion. Prevention would arguably have resulted in a stronger emphasis on research
concerning the toxicity of various chemical substances and their effects on humans,
something that would have threatened vested interest groups.
The rent-seeking argument has been applied to the study of MOIPs by several
other scholars as well (e.g., Muldoon and Yonai 2023). OECD (2021) uses the term
“mission capture” to highlight the risk that MOIPs become captured by vested
interests. As MOIPs are formulated in interaction with established stakeholders,
they are also likely to exert disproportionate amounts of influence. It has been argued
that missions tend to favor vested interests rather than supporting new entrants or
institutional entrepreneurs (Bergkvist et al. 2022), because it is difficult to bar
incumbent actors and already existing infrastructures from dominating the imple-
mentation of the mission (Begemann and Klerkx 2022). Economists such as Bloom
et al. (2019, p. 179) also emphasize this point, asserting that missions “may be more
likely to favor sectors or firms that engage in lobbying and regulatory capture, rather
than the most socially beneficial.”
Learning from Overrated Mission-Oriented Innovation Policies: Seven Takeaways 247

All these examples are in line with public choice scholars such as James
Buchanan and Gordon Tullock (1965), who assume that actors in the policymaking
process behave as economic agents, aiming to maximize their own utility. But this
conclusion should not be overly surprising—why should the design of MOIPs be an
exception to the pattern described by the public choice scholars?

4. MOIPs Distort Competition

MOIPs emphasize the importance of collaboration, both between businesses and

between the public and private sectors. It has been argued that the state should set “a
direction that can foster and catalyze new collaborations across multiple sectors”
(Mazzucato 2021, p. 53).
Certainly, innovation is in many regards a collective effort. This fact is acknowl-
edged and further developed by the Collaborative Innovation Bloc (CIB) perspective
(e.g., Elert and Henrekson 2022), which is inspired by Schumpeter’s assertion that
the entrepreneurial function “may be and is often filled cooperatively” (1989 [1949],
p. 261). Many key contributions to the literature on innovation and entrepreneurship
explicitly or implicitly acknowledge these collaborative elements (e.g., McCloskey
and Klamer 1995; Garud and Karnøe 2003; Sarasvathy 2008). Innovative entrepre-
neurship is therefore largely about attracting and mobilizing resources in novel
directions.
Still, the fact that innovation is largely a collaborative effort does not imply that
there are no elements of competition. Other scholars have put more emphasis on the
competitive elements of capitalism that result in innovation. Baumol (2005), for
instance, depicts mature capitalism as a form of oligopolistic competition where
fairly few firms try to outsmart each other through innovation, thereby fueling a
process of renewal. Even entrepreneurs who mobilize resources toward collabora-
tion compete with alternative usages of such resources.
When one regards innovation and entrepreneurship in the modern economy as
both a process of competition and collaboration, it becomes clear that MOIPs can
thwart competition and raise barriers to entry. Yerger (2024a) discusses how, for
example, collaboration between the public sector and incumbents may obstruct free
entry and induce “expert failure” (Koppl 2018) through a lack of rivalry.
In other settings, there may also be different alternative paths to accomplish a
certain mission. The War on Cancer described above, for example, illustrates how
preventing cancer would have been one approach but that policymakers instead
prioritized the quest for a cure. The aforementioned Million Program provides
another illustration of how other more welfare-enhancing solutions to a problem
are crowded out by the mission. Policymakers could have tried to end Sweden’s
housing shortage by removing the primary cause—rent control—but instead opted
for a centralized large-scale effort that benefited both government-owned companies
and private construction companies. Similar scenarios can be discussed regarding
the reduction of CO2 emissions, to name one topical example. Would nuclear power,
248 M. Henrekson et al.

wind power, solar cells, or hydroelectric power be the most efficient way forward
and what balance between these alternatives is ideal?
There are certainly many historical examples of how groundbreaking innovations
have been developed in close collaboration between companies and customers.
Consider, for example, Ericsson’s close partnership with Sweden’s telecommunica-
tions monopoly—the government agency Televerket—and the development of both
electronic switches in the 1970s and the first generations of mobile telephony in the
late 1970s and 1980s. However, assuming that innovation only involves collabora-
tion would be an oversimplification. For example, consider once again the historical
case of telecommunications in Sweden. The same collaboration that was described
above as critical for development of new technology became a threat to free and fair
competition in the 1980s. The government monopoly was now barring innovative
competitors from entering the market, partly by building strong connections to
dominant companies such as Ericsson. In such a setting, MOIPs reduce competition
and the innovative activity that it fuels (Eriksson et al. 2019).

5. Policymakers Lack Information to Design MOIPs Efficiently

If MOIPs present an inherent risk of distorting competition between technologies

and companies, it is critical to further investigate how MOIPs are designed. The
examples given in this volume suggest that policymakers often lack the required
information to design MOIPs in an effective and efficient way. In the 1970s, cancer
research was still relatively underdeveloped by today’s standards, making it virtually
impossible to design a mission against the disease in 1971 when President Nixon
signed the National Cancer Act. The chapter by Lucas and Boudreaux (2024) is
another case in point where politicians continued to spend money on a mission to
eradicate homelessness that in the end turned out to be a complete failure,
underlining that “many obstacles to success are only observable ex post” (p. 165).
Even people with “well-meaning” interests have limited knowledge, something that,
once again, underscores the notion that good intentions are not enough to succeed in
solving a grand challenge.
In line with this argument, Waldron and Coyne’s (2024) chapter is a good
illustration of the “knowledge problem” associated with political control in general
and state-guided missions in particular. With Mazzucato’s principles in action, the
authors show how difficult it is to succeed with foreign aid missions without
sufficient information and feedback loops, a condition that is fertile soil for
unintended consequences. At worst, these may even do more harm than good.
André Alves’ (2024) chapter on the Brazilian government’s mission to create a
flourishing domestic shipbuilding industry provides another illustrative example and
concludes that the associated policies were not in harmony with the industrial and
economic landscape of the country (p. 185):
Learning from Overrated Mission-Oriented Innovation Policies: Seven Takeaways 249

The misalignment between policy intent and the real possibilities of market creation that
considers the concrete availability of technological and organizational capabilities at any
given time results in policy ambiguity that hinders the successful implementation of
missions.

These arguments are not new. When Nelson revisited his 1977 book in 2011, he
emphasized that a key argument in his book was still valid, namely, the lack of
knowledge to make sound decisions was “not so much political, as a consequence of
the fact that, given existing knowledge, there were no clear paths to a solution”
(Nelson 1977, p. 685).

6. Government Support Distorts Incentives and Creates Moral

Hazard

Once missions are put in place, they usually contain substantial amounts of resources
that the government makes available, either via inexpensive loans, R&D grants,
various subsidies, or other even more protectionist measures. The availability of
these resources is likely to affect the behavior of businesses in the long run. Many
(large) companies may systematically exploit such government resources and
become less prudent in their investment decisions—a scenario often referred to as
moral hazard. Moral hazard may arise when an actor has incentives to increase its
risk exposure because large part of the cost of that risk is born by someone else.
This volume illustrates the problems with distortions in incentives in several
ways. Waldron and Coyne (2024) show how public funds may distort the incentives
concerning nation building due to foreign aid programs. The authors emphasize how
these programs result in several odd incentives and related behaviors (p. 200):
[C]onsider how influxes of foreign aid can incentivize wealth-destroying behavior, as
individuals recognize profit earning opportunities from lobbying for additional aid and
shift resources into the political realm. Instead of focusing on the productive creation of
economic wealth, individuals and firms choose to compete for political favors, diverting
resources better used elsewhere and rewarding corruption for those in positions of power
over how foreign assistance is spent.

The behavior of the government-sponsored enterprises (GSEs) Fannie Mae and

Freddie Mac in the US financial crisis is, in the same manner, a clear example of
moral hazard. While being directed through policies to increase lending to minority
groups while at the same time delivering profits to shareholders, Fannie and Freddie
delivered on those two objectives by taking on so much risk that the stability of the
entire financial system was threatened. In hindsight, it is clear that they did so
because the risk was born by taxpayers.
If companies can access resources via grant applications instead of by delivering
valuable goods and services to customers on a competitive market, they will devote
progressively more time and effort toward unproductive activities such as applying
for grants and subsidies. In effect, they become “subsidy entrepreneurs” (Gustafsson
250 M. Henrekson et al.

et al. 2020), i.e., businesses that systematically exploit various grants and subsidies
awarded by the government. Using a sample of small- and medium-sized firms,
Gustafsson et al. (2020) show that those that systematically apply for and obtain
grants from the government tend to both pay higher wages and, simultaneously,
experience lower productivity. They spend their time and efforts applying for
money, meaning that productivity is lower, but they are still able to pay high
wages. Firms receiving “free money” for various high-risk technological endeavors
become immune to risks and begin to engage in wasteful projects and “pet” projects,
losing significant amounts of money pursuing technological trajectories with scant
long-term potential.
Other examples of distorted incentives and technological efforts which bore no
fruit, besides those depicted in this volume, include ethanol from corn cobs in the
United States, ethanol from cellulose in Sweden, and methane from tree branches
(Sandström and Alm 2022). Without large grants from government agencies and the
European Union, these efforts would not have been made, and resources could have
been saved.
All the cases depicted above show that incentives matter and may result in
problems in the real world. Ignoring these difficulties turns explicit missions
intended to solve grand challenges into nothing more than pipe dreams.

7. MOIPs Ignore Opportunity Costs

The results reviewed in this chapter show that MOIPs are generally implemented and
evaluated with little concern for opportunity costs. Yerger (2024b) argues that the
Global Positioning System (GPS), e.g., cannot be evaluated without taking the
opportunity costs into account but central planners (often) do not have the ability
to assess these costs. The literature review by Batbaatar et al. (2024) showed that of
the 33% of MOIPs that were assessed by researchers as successful, none of them
reached that conclusion after having looked at actual costs or discussing any
alternative usage of the resources in question.
The Million Program for housing in Sweden serves as an example of this
problem. The goal to build 1 million dwellings was reached. Yet the shortage of
housing was still a problem because of strict rent control and the fact that many of the
Million Program projects were executed without paying much attention to consumer
preferences. Needless to say, the capital and effort that went into the Million
Program could have been better utilized.
Kantor and Whalley’s (2023) study of the moon landing project is one of the first
studies of the actual effects of MOIPs that seeks to compare this initiative with
alternative forms of government spending. As they find that effects of the moonshot
are not greater than for other government expenses, their results call into question a
considerable share of the anecdotal evidence used to justify MOIPs. These findings
are in line with the observations made by Batbaatar et al. (2024) regarding current
implementations of MOIPs. Most MOIPs or assessments of their effects do not take
Learning from Overrated Mission-Oriented Innovation Policies: Seven Takeaways 251

opportunity costs into consideration. As a result, they convey an overly positive

impression of their effects. This is not a coincidence; a disregard of costs and lack of
attention to the resources used seems to be a prevalent approach in the literature on
MOIPs. Mazzucato (2021, p. 122) is crystal clear regarding this aspect:
[The mission] . . . can be evaluated by asking a single question: “Did we achieve it or not?”
This is how to determine the success or failure of a mission and measure progress along
the way.

If policies are assessed merely by looking at the benefits without discussing costs, it
would be strange if those policies would not be considered beneficial. To measure
success only in terms of whether the goal was realized means that the opportunity
cost, including the actual monetary expenses, would be ignored. Given that this is
the approach to costs and expenses, the whole idea of MOIPs must be considered
thoughtless—no matter how urgent and benevolent the missions to be achieved
may be.

Concluding Remarks

In this chapter we have synthesized theoretical arguments and empirical observa-

tions into seven takeaways that question the usefulness of mission-oriented policies
(MOIPs):
1) Wicked problems cannot be solved through missions.
2) Politicians and government agencies are not exempt from self-interest.
3) MOIPs are subject to rent seeking and mission capture.
4) MOIPs distort competition.
5) Policymakers lack information to design MOIPs efficiently.
6) Government support distorts incentives and creates moral hazard.
7) MOIPs ignore opportunity costs.
The seven takeaways summarize our findings explaining why MOIPs may result
in disappointing outcomes. While several of these observations have been made in
each of the chapters and elsewhere in the literature on missions, innovation policy,
and political economy, this chapter provides illuminating illustrations and summa-
rizes these insights in the form of seven takeaways. These takeaways are grounded in
various social science theories and are illustrated with different cases of failed
missions.
A couple of implications emerge from this chapter. First, given the evidence
reviewed in this chapter and throughout this volume, and considering the many
criticisms of MOIPs, it is a matter of grave concern to observe how MOIPs are being
implemented around the world to address environmental challenges and health
issues such as cancer. Bear in mind that some of these areas have already been
subject to failed missions historically.
252 M. Henrekson et al.

Second, our analysis implies that MOIPs should be assessed and evaluated
properly by taking opportunity costs into consideration. Evaluations need to look
at both costs and benefits. So far, such studies are virtually non-existent.
Finally, we see a need for further articulations of alternative approaches to
accomplish development and renewal of our economies. The fourth part of this
collective volume is explicitly concerned with how this can be done.

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Magnus Henrekson is Professor of Economics and Senior Research Fellow at the Research
Institute of Industrial Economics (IFN) in Stockholm, Sweden. He resigned as CEO of IFN in
2020 after 15 years of service. Until 2009, he held the Jacob Wallenberg Research Chair in the
Department of Economics at the Stockholm School of Economics.
He received his PhD in 1990 from Gothenburg University with his dissertation An Economic
Analysis of Swedish Government Expenditure. Throughout the 1990s, he conducted several projects
that aimed to explain cross-country growth differences. Since the turn of the new millennium, his
primary research focus has been entrepreneurship economics and the institutional determinants of
the business climate. In this area, he has published extensively in scientific journals and contributed
several research surveys to Handbooks in the field of entrepreneurship.
In addition to his academic qualifications, Henrekson has extensive experience as an advisor,
board member and lecturer in many different contexts, in both the business and public sectors.
Learning from Overrated Mission-Oriented Innovation Policies: Seven Takeaways 255

Christian Sandström is Senior Associate Professor at Jönköping International Business School

and the Ratio Institute in Sweden. His research concerns innovation policy and the interplay
between technological and institutional change. Sandström is one of the editors behind Questioning
the Entrepreneurial State (Springer). He has published more than 30 papers in peer-reviewed
academic journals such as Technological Forecasting and Social Change, the Journal of Technol-
ogy Transfer and Industry and Innovation.
Sandström wrote his PhD thesis on the topic of disruptive innovation at Chalmers University of
Technology (2010). He has been a visiting scholar at the University of Cambridge and ETH Zürich
in Switzerland. Sandström has received several awards for his pedagogical skills and is a frequently
hired public speaker on the topic of technological change and industrial transformation.

Mikael Stenkula is Associate Professor of Economics and holds a PhD from the School of
Economics and Management at Lund University. He received this degree in 2004 with his
dissertation Essays on Network Effects and Money. After having worked for a year as a lecturer
at Lund University, where he taught microeconomics, he joined the Research Institute of Industrial
Economics (IFN) in the fall of 2005. His main area of research is entrepreneurship economics.
Stenkula is part of IFN’s taxation history project, which has systematically and comprehensively
described and analyzed the Swedish tax system from 1862 to the present day. This study is unique
in scope—no equally comprehensive investigation of a national tax system has been conducted for
any other country. In addition to the meticulous year-to-year documentation of all relevant details of
the tax code, the project aims to examine how changes in the tax system affect the economy by
guiding people’s choices, particularly how the tax system affects entrepreneurial activity and firm
behavior.
He also teaches at the Stockholm School of Economics and serves as the executive secretary of
the award committee for the Global Award for Entrepreneurship Research, the foremost global
award for research on entrepreneurship.

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 Part IV
Alternative Paths
The Entrepreneurial State Cannot Deliver
Without an Entrepreneurial Society

Mark Sanders, Erik Stam, and Roy Thurik

Abstract In The Entrepreneurial State and Mission Economy, Mazzucato argues

that the state should adopt a proactive and entrepreneurial approach, setting ambi-
tious missions that inspire collective action nurtured by emotions of urgency. By
defining clear goals, the state can mobilize resources and talent from both the public
and private sectors. We do not challenge Mazzucato’s facts or discredit her analysis.
We agree that states successfully have and perhaps should continue to play a role in
mobilizing talent and other resources around urgent societal challenges. Healthcare,
climate change, and inequality are not problems that “markets” will solve on their
own, and relevant and competent government organizations are an essential tool in
our toolbox to address them. We would even agree that the state would do well to
formulate clear missions and approach them in an entrepreneurial fashion. That is,
experiment with an open mind and be willing to fail and learn, rather than develop
interventions on the drawing board and then stick to them because of bureaucratic or
political lock-in. But all that effort will only pay off, often in many unexpected ways,
if we do not succumb to the fallacy of hindsight. That is, a well-defined and
entrepreneurially executed state-led mission can only succeed in also generating a

Some parts of our text were drafted with help of ChatGPT. The authors take full responsibility for
the complete text. They thank Magnus Henrekson for helpful comments.

M. Sanders (✉)
Maastricht University School of Business and Economics, Maastricht, the Netherlands
e-mail: [email protected]
E. Stam
Utrecht University School of Economics, Utrecht, the Netherlands
Allan Gray Centre for Africa Entrepreneurship (AGCAE), Stellenbosch University,
Stellenbosch, South Africa
e-mail: [email protected]
R. Thurik
Montpellier Business School, Montpellier, France
Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam, the Netherlands
e-mail: [email protected]

© The Author(s) 2024 259

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_14
260 M. Sanders et al.

stream of valuable but largely unanticipated spin-off innovations, if the conditions

for acting on such opportunities are right.

Keywords Entrepreneurial Society · State-led mission · Grand societal challenges ·

Spin-off innovations

JEL Codes E02 · H11 · L26 · O30

Prologue

Many, if not all, important innovations of the twentieth and twenty-first century can
be traced to their origins in public investments in knowledge and education. Com-
panies in semiconductors, chemicals, logistics, aviation, energy, fertilizers, biotech,
pharma, and steel would not be where they are today if it had not been for
governments investing in universities, basic research, and public education. Clearly,
some innovation projects are too big, too daunting, and too uncertain for the private
sector to engage in. Then government can and has always played an important role.
Mariana Mazzucato carefully and convincingly establishes this in The Entrepre-
neurial State (Mazzucato 2013), and in Mission Economy (Mazzucato 2018, 2021),
she argues that the state should set clear goals on the priority areas of innovative
development to actively push research and business in the right direction. Taking her
inspiration from the “moonshot” space program of the 1960s, Mazzucato calls for
the same level of bold state coordination of private and public sector resources to be
applied to the biggest problems of our time.
There is nothing that prevents a government with a clear purpose or mission, from
mobilizing the talent, resources, and energy to tackle great societal challenges. What
is problematic in this approach, however, is copy-pasting the approach of the “man-
on-the-moon” mission to the twenty-first century’s gigantic problems. Many, if not
all, examples of successful government mission-driven innovation are intricately
connected to (hot or cold) war and natural disasters, involving an urgent battle for
survival. Moreover, the successful missions of the past were complex engineering
problems, not complex societal ones (Nelson 1977). Government-led missions of the
past therefore had a clear focus and obvious urgency. And both were essential to
justify the state engaging, in an entrepreneurial fashion, in uncertainty and experi-
mentation with public resources. The present time is different.
Looking back in history has significant risks and creates important blind spots. In
retrospect, the winding road from initial ideas to successful products, services,
businesses and markets often looks obvious. Every outcome can be traced back to
its antecedents as if a river is followed upstream until one reaches its sources. But
innovation is not like water flowing down a mountain. It is not gravity that deter-
mines the course of history. Rather it is entrepreneurship, which we define here as
the act of challenging the status quo. Indeed, it is such entrepreneurship in the public
The Entrepreneurial State Cannot Deliver Without an Entrepreneurial Society 261

or the private sector that brings innovation and subsequent progress. But this implies
that at every hurdle, turn, and fork in the road it is people that decide how history
unfolds. And their successes and failures are highly contingent on their character, the
resources they can mobilize in the institutional framework they find themselves in,
and their complementarity with the other people in their—often growing—organi-
zations. In fact, success and failure depend on a host of factors that combine into
such a complex, idiosyncratic, and chaotic cluster that we may as well call it “fate” or
“luck.” The road from initial ideas to ultimately successful ventures is littered with
false starts, failures, dead ends, and lucky strikes that often go unrecorded and were
and are impossible to predict and engineer ex ante because entrepreneurs in the
public or private sector engage in what Frank Knight (1921) referred to as uncer-
tainty. Innovation is more like making your way through a dense jungle. Looking
back, one can see the path taken, but going forward, there is no telling what path will
lead to success and what path ends in ruin and disaster.
We may refer to this as the fallacy of hindsight. Hindsight suggests a linear,
teleological evolution to a clear final goal that in reality is an experimental, interac-
tive, holistic, fuzzy process, in which goals and means change over time. Mazzucato,
in her books The Entrepreneurial State and Mission Economy, is clearly aware of
this, but in her conclusions, and even more so in the reception of her work by others,
this point is ignored. Policymakers in Europe and around the world are quick to
formulate ambitious missions to address urgent societal challenges and mobilize
private and public resources on inventing and scaling up the required solutions. But
they forget that any road to successful innovation is necessarily littered with failure
and learning.
It is interesting, and even ironic, that an established evolutionary economist such
as Mazzucato should overlook this most important lesson in the work of the founder
of that field. As Schumpeter (1934, 1942) carefully elaborated, the essence of
innovation and the engine of capitalist system dynamics is not invention, but
innovation (Henrekson et al. 2024). And he defined innovation as taking ideas and
working them into successful products by building the organizations to make them
available to the population at large. The hard work is not in creating new ideas, but in
developing them into viable ventures.
The value of new knowledge to society at large manifests itself only when
innovation is successful and the benefits to society emanate in the form of a
ubiquitous availability of that innovation. Not only to solve a specific problem but
also to help develop further innovations that solve further problems (Holcombe
2003). The social value of smartphones is not the annual profit or stock market
value of Apple, but rather the unmeasured consumer surplus, that (as buying a
smartphone is a voluntary act) must exceed the cost price plus the margin charged
by Apple by a multiple. And that consumer surplus does not include the social value
generated in the multitude of new applications that have been developed because
creative venturers jumped on the new opportunities offered by the ubiquitous
availability of smartphones and networks.
This brings us to an important amendment to Mazzucato’s mission-driven
moonshot guide to industrial policy. The knowledge created while addressing urgent
262 M. Sanders et al.

societal challenges should not be appropriated by the government, and taxing

successful innovators that bring knowledge developed in such government programs
to the market in anticipated and unanticipated forms should not be seen as a source of
finance for more government-funded invention, mission-driven, or otherwise. Tax-
ing successful innovation through retaining IP rights or taxing away the rents that
motivate and finance entrepreneurial venturing is a self-defeating strategy. We argue
that to develop the full potential of new ideas and knowledge, private ownership of
factors of production and free access to that knowledge remain crucial prerequisites
to ensure that creative entrepreneurial people can organize resources to develop
innovations in open competition with those who would use them for alternative
ventures.
Mazzucato’s mission maps are popular in policy circles for understandable
reasons. Politicians can dream up elaborate sets of related missions that address
their constituents’ urgent problems, while the private sector, in close collaboration
with an experimenting and knowledgeable civil service, is there to subsequently
deliver. But the preconditions for delivering such results are usually absent. And
mission-dreaming politicians do not wish to be responsible or held accountable for
creating or maintaining these preconditions.
Moreover, modern missions are very different from the successful ones of the
past. The missions for policymakers today are not life-and-death struggles of the
nation to preserve its way of life, but instead life-and-death struggles of humanity to
convince entrenched national groups to abandon their way of life for the benefit of
anonymous future generations and poor people far away. It is the right thing to do,
but the reasons to engage lack the urgency of an existential struggle and the prestige
of a national victory over formidable adversaries or technological challenges.
Mission-driven industrial policy is simply not a very appealing proposition to the
people that need to make the sacrifices our policymakers dream up.
That is not a plea to accept the status quo. As much as preventing the government
from appropriating or clawing back the returns on innovation, one should also inhibit
private companies appropriating publicly financed knowledge and/or using their
exclusive rights to knowledge to block further innovation and development. We
should not thwart new monopolies from arising, but we should prevent established
ones from becoming uncontestable and permanent. We should combat the natural
tendency of a capitalist system to “close” itself (Audretsch et al. 2001). At the same
time, we should not expect it to ever reach a state where, even a democratically
legitimized, bureaucracy can take the place of private sector entrepreneurs who risk
their wealth, their health, their talent, their resources, and their energy on ventures
that a government does not know society needs or wants.
Therefore, an Entrepreneurial State should complement its own, more active role
in guiding and financing knowledge creation, with policies that promote and main-
tain an open, experimenting Entrepreneurial Society. It is people that need to feel the
freedom to challenge the status quo (which includes the government itself) and have
access to the resources to follow their personal drive to develop innovations that
create new value for themselves and for society at large (Baumol 1990). Work on
what constitutes a hospitable and enabling ecosystem for entrepreneurs to be
The Entrepreneurial State Cannot Deliver Without an Entrepreneurial Society 263

successful has been summarized in Wurth et al. (2022), and concrete proposals on
how to achieve and safeguard such open ecosystems were published in Elert et al.
(2019). We further develop the argumentation above in three steps which we term
“The fallacy of hindsight,” “Mazzucato meets Schumpeter,” and “No Entrepreneur-
ial State without an Entrepreneurial Society.”

The Fallacy of Hindsight

In The Entrepreneurial State and Mission Economy, Mazzucato presents a prima

facie compelling case for redefining the role of the state in driving economic growth
and innovation. Mazzucato argues that the state should adopt a more proactive and
entrepreneurial approach, setting ambitious missions that inspire collective action
nurtured by emotions of urgency. These missions should tackle pressing global
issues such as climate change, healthcare, and inequality. By defining clear goals,
the state can mobilize resources and talent from both the public and private sectors.
One of the key examples discussed in the latter book is the moon landing mission.
Mazzucato emphasizes how the Apollo program of the 1960s brought together
various stakeholders, including government agencies, private companies, and aca-
demic institutes, to achieve the audacious goal of landing a human on the moon and
bringing him safely back to Earth. The Apollo program grew out of the space race, a
contest that began in 1957 between the capitalist United States and the communist
Soviet Union over superiority in space. The mission not only demonstrated the
state’s ability to drive innovation but also generated significant technological
advancements with broad societal benefits.
In her description of the moonshot mission, Mazzucato positions these broad
societal benefits as an almost inevitable and automatic outcome of the mission itself.
The state-led mission undeniably generated the knowledge that was essential to
develop the new products and services that benefitted society at large. But to
exclusively credit the mission with these benefits largely ignores the time and effort
that was spent by private actors to develop the ideas and knowledge into commercial
and viable products and services for large groups in society. Mazzucato then goes on
to call for a paradigm shift, urging policymakers to adopt a mission-oriented
approach that promotes sustainable and inclusive economic growth. By setting
ambitious goals and actively participating in innovation, the state is expected to
drive transformative change and create a more prosperous and equitable society.
We do not want to challenge Mazzucato’s facts or discredit her analysis. We
agree that states successfully have and perhaps should continue to play a role in
mobilizing talent and other resources around urgent societal challenges. Healthcare,
climate change, and inequality are not problems that “markets” will solve on their
own, and relevant and competent government organizations are an essential tool in
our toolbox to address them (cf. Stam and Vogelaar 2023). We would even agree
that the state would do well to formulate clear missions and approach them in an
entrepreneurial fashion. That is, experiment with an open mind and be willing to fail
264 M. Sanders et al.

and learn, rather than develop interventions on the drawing board and then stick to
them because of bureaucratic or political lock-in. The world of venture capital fully
understands that spreading risks by financing many diverse ventures is a better
option than going with the naïve strategy of financing only similar ventures. Such
a portfolio approach can be adopted by a public sector that discriminates between a
clear mission and a diverse and flexible operationalization.
But all that effort will only pay off, also in many unexpected ways, if we do not
succumb to the fallacy of hindsight. That is, a well-defined and entrepreneurially
executed state-led mission can only succeed in also generating a stream of valuable
but largely unanticipated spin-off innovations, if the conditions for acting on such
opportunities are right. That was evidently the situation in the United States in the
1960s, but it was not the case in the Soviet Union at that time. And it is highly
doubtful that the governments that now eagerly adopt Mazzucato’s recipes are more
like the former than the latter.

Mazzucato Meets Schumpeter

We would join Mazzucato (2013) and others who argue for an Entrepreneurial State
(Ebner 2009). Schumpeter’s work on entrepreneurship and innovation indeed places
entrepreneurship at the center stage of capitalist societies. According to Schumpeter,
it is the entrepreneur’s disruptive actions and ability to introduce new combinations
of resources that propel economies forward. The willingness of entrepreneurs to take
risks, experiment with new ideas, and pursue novel opportunities leads to economic
progress and growth. By constantly seeking innovative solutions, entrepreneurs
drive the wheels of creative destruction. In principle, there is nothing that would
prevent the state, as the most important vehicle and instrument to formulate and
address our collective challenges, from also operating in that way. In fighting our
wars, in establishing and maintaining the rule of law, and in protecting our lives,
property, and rights, we turn to the state and expect it to act on our behalf, if need be,
in an entrepreneurial fashion. And our democratic political institutions ensure that
the state remains accountable and that the status quo can always be challenged to act
on new opportunities and respond to changing realities.
Importantly, however, Schumpeter also saw the state as a potential barrier to
entrepreneurial dynamism. Not because the state is somehow inherently less efficient
or less dynamic or more risk averse and conservative than the private sector.
Mazzucato convincingly shredded those myths in The Entrepreneurial State. Rather,
Schumpeter cautions against the entrenchment of power, whether by the state or
private entities, as such entrenchment hampers the openness and contestability
necessary for entrepreneurial people to thrive. Schumpeter argued that excessive
concentration of power stifles competition, promotes rent seeking, discourages
innovation, and ultimately hinders the overall development of the economy. He
was thinking of large incumbent firms, but the same applies to large, incumbent
governments. Hence, an Entrepreneurial State is not theoretically impossible but in
The Entrepreneurial State Cannot Deliver Without an Entrepreneurial Society 265

existing government agencies hard to achieve in practice. This has to do with the
dynamics of democracy. Mistakes will be held against the incumbent politicians,
weighing more heavily than successes. Political opponents will use state-run inno-
vation failures to criticize incumbent politicians, saying that it is a sign of their
incompetence and that they should be replaced. It will rarely suffice for incumbents
to point to successes. Or to say that it is normal that many entrepreneurial projects
fail. So, what is normal in private markets where private firms and individuals risk
their own money is not equally acceptable in a system that is democratically
governed using taxpayers’ money. As a result, it becomes rational for politicians
and government agencies to be risk averse.
In Capitalism, Socialism and Democracy, Schumpeter (1942) goes as far as to
argue that a socialist, centrally planned state can and should replace capitalism and
private business ownership. But only when all innovation activity in the economy
has been fully routinized and is conducted in professionally and bureaucratically
managed R&D labs of large corporations. From all his earlier oeuvre, it is clear that
Schumpeter did not really believe that such a state would ever materialize.
Mazzucato’s modern-day societal challenges are a clear illustration that he was
right. The world will never be predictable and will keep putting new and unexpected
problems and challenges on our path. Therefore, innovation can never be reduced to
routine, and we can never do without entrepreneurs, who challenge the status quo,
even when most of us cherish the current state of affairs.
To maintain a steady pace of economic progress, Schumpeter suggests that
governments organize society in a way that ensures that positions of power, wealth,
and prestige remain contestable, both in the public and the private spheres. Only then
will better ideas continue to replace the good ones of the past. This means
implementing policies that foster competition, reduce barriers to entry, and promote
an environment conducive to public and private entrepreneurship. By encouraging a
level playing field and providing support for experiments, challengers, and entrants,
governments can nurture the entrepreneurial spirit in society and keep innovation
going. They can then also contribute to Mazzucato’s concrete and well-defined
government-led missions and help address urgent societal challenges. But ensuring
a vibrant, open, Entrepreneurial Society is essential to create and act on new
opportunities to realize the many unanticipated and broad societal benefits that
Mazzucato so casually attributes to the state-led missions themself.
The moonshot mission was a success in generating many broad societal benefits
in the United States, where the initially more advanced Soviet space program was
much less successful in that respect. No doubt, the space race innovations in the
Soviet Union benefitted the army and hence the Communist Party. But resources and
incentives to develop civil applications were not available. And while we have no
doubt that the Chinese will put a man on the moon by 2030, it remains to be seen
what the broader societal benefits of that mission will be. These examples illustrate
how ambitious missions in more closed, less entrepreneurial societies can fail to
generate the impressive list of unanticipated but highly valuable private sector
innovations that a clear state-led mission can help launch. The problem is that
bureaucratic governments, even democratic ones, have a hard time to see the value
266 M. Sanders et al.

of unanticipated innovations. This is not inherent to the state, but to bureaucracy.

The statements by IBM that the global market for mainframe computers was about to
be saturated or the failure of Kodak to see the potential of digital photography until it
was too late are famous examples in the private sector, where mission-driven
managers failed to recognize the value of adjacent inventions and entrepreneurs
stepped in to realize their potential.
Taken together, a precise reading of Schumpeter’s work underscores this central
role of entrepreneurship in driving dynamics and innovation in capitalist societies,
where property is privately owned and fortunes can be accumulated. The latter is
essential to incentivize but, even more importantly, to fuel the development and
diffusion of new ideas that develop inventions into innovations that ultimately
benefit society at large. Schumpeter emphasized the disruptive actions of entrepre-
neurs and their role in challenging existing structures. Such challenges are typically
not appreciated in mature, bureaucratic organizations, whether they are big corpo-
rations or governments. As we read Schumpeter, he does not adhere to the
public vs. private sector myths that Mazzucato effectively debunks in her work.
But he does caution against the concentration of power, whether by the state or
incumbent private firms, and argues that governments should foster open, contest-
able environments to encourage entrepreneurship and innovation in society at large.

No Entrepreneurial State Without an Entrepreneurial

Society

Those who read in Mazzucato’s work a justification for more ambitious and directive
government interventions are likely to overlook the important policy implications
that decades of entrepreneurship research entail. We summarize this in the claim that
an Entrepreneurial State without an Entrepreneurial Society will not deliver. An
Entrepreneurial Society can be defined as a society where challengers of the status
quo serve as the critical force driving progress, prosperity, and competitiveness in
global markets and where institutions and policy have a focus on facilitating and
generating such entrepreneurial activity (Audretsch 2007; Elert et al. 2019). In short,
it is a society in which challenging the status quo is both encouraged and facilitated.
Missions will deliver better outcomes if they are contestable and open to challengers
themselves. The risk of too powerful mission-driven Entrepreneurial States is that
they use the power and resources of the state to block, rather than nurture, such
challengers. As many of the benefits that resulted from historical missions were
unintended and provoked by challengers from outside, ensuring that the modern
missions remain open to challengers is an essential ingredient for their success.
It is possible to have a benevolent dictator mobilizing public and private resources
to a worthwhile mission. In fact, in ancient Greece and Rome, dictators were elected
in times of crisis. And we understand the temptation of doing the same, as urgent
global challenges confront us with existential threats. For that reason, we see those
The Entrepreneurial State Cannot Deliver Without an Entrepreneurial Society 267

that are worried most about the future of our planet, continent, and country most
willing to suspend liberal democracy in the political realm and market capitalism in
the economic realm. When the end justifies the means, mission-driven policies
implemented by a strong Entrepreneurial State, may seem like a good idea. But as
the early successes of the Soviet Union in the space race have shown, succeeding on
the goals of the mission itself is not a sufficient condition for successful mission-
driven innovation policy. And even today, there is an interesting debate on whether
an Entrepreneurial Society can thrive under a very powerful Entrepreneurial State
(Audretsch and Fiedler 2023).
Adopting a mission-driven innovation and industrial policy without carefully
considering the environment in which that mission is to be implemented risks losing
many of the potentially life-altering improvements in other domains. More impor-
tantly, it will make mission-driven industrial policy fall short of its promises and may
end up discrediting an approach that has many merits from the start.
The essential amendment we would like to make to the Mazzucato recipe is
therefore that the private sector be allowed to run off with the ideas and to basically
“steal” them for private gain. While government intervention and public investment
can play a crucial role in catalyzing invention, it is important not to stifle market
competition and dynamism in the successive stages of the innovation process.
Excessive control and central planning on mission objectives may discourage
entrepreneurial activity and impede the ability of challengers to (re)allocate
resources efficiently. Especially the suggestion that private sector profits should be
taxed to finance future missions and innovation is short-sighted and potentially
devastating. We do not only fear the often-claimed disincentive effects that such
taxation would reduce entrepreneurship. Many, if not most, of the best and most
talented entrepreneurs are not in their business primarily for the money. But what
siphoning off private revenues from growing ventures would do is to starve suc-
cessful challengers of the resources that are much needed and will be allocated to
disseminate the innovation and fitting new ideas to new, bigger, and more profitable
markets and domains. Ensuring an open system of innovation where ideas can
compete on a level playing field requires careful reconsideration of ownership
structures, intellectual property rights, and the distribution of profits, but not in the
direction that Mazzucato seems to advocate.
This means that a sharp eye needs to be kept on the long run. While government
interventions can provide a short-term boost to innovation and economic growth,
long-term sustainability requires the build-up and nurturing of a broader ecosystem
that encourages private sector, bottom-up entrepreneurship. It is crucial that policies
be focused on fostering a supportive environment for startups, improving access to
finance, enhancing education and skills, promoting research and development col-
laborations, and creating robust institutions and legal frameworks. Most importantly,
however, those institutions should focus on allowing challengers of the status quo,
inside and outside the state, to compete for the resources they need to make their
challenge a success. Ventures should fail because they are based on bad ideas, not
because they are starved of resources by institutions that favor incumbents. Mission-
driven industrial policy in the hands of lobby-sensitive politicians seriously risks
268 M. Sanders et al.

moving us in the latter direction. Policymakers, including those that now embrace
Mazzucato’s ideas, love to tilt the playing field in favor of organizations that
contribute to the missions they have formulated. It is much harder for them and
much more important for creating long-term sustainable progress that they level the
playing field, also for those that challenge their policies.
By considering this amendment, those who advocate ambitious and directed
government interventions, as inspired by Mazzucato’s work, can warrant that the
promised societal benefits are realized in a balanced and sustainable manner. It is
important to strike a careful balance between government intervention and market
forces, between public and private initiatives and between competition and account-
ability. To make the Entrepreneurial State a success, it needs to operate in an
Entrepreneurial Society, nurturing an ecosystem that enables entrepreneurship and
private sector participation.

Epilogue

The essential role of entrepreneurship in “grand societal missions” such as improv-

ing healthcare, containing climate change, and bringing down inequality leaves little
room for the view that the Entrepreneurial Society is over. It is hard to imagine that
the increasing domination of megafirms and large government with fading entrepre-
neurship in a world where the lowest caste consists of self-employed persons and
freelancers (Schumpeter’s socialism) will help overcome the challenges of the day.
Market capitalism and liberal democracy have not yet become sclerotic (Thurik et al.
2023); our best chance is to revitalize these engines of progress that have proven
their worth in the past.
There is certainly no “end of history” (Fukuyama 1992), but despite many
challenges from both the right and the left, liberal democracy and capitalism remain
the systems that best ensure an open society (Popper 1945). An Entrepreneurial
Society built on inclusive institutions that channel resources to challengers
experimenting and scaling new ideas to increase prosperity ensures a capitalism
that works best and benefits people the most (cf. Acemoglu and Robinson 2012).
Together, democracy and entrepreneurship ensure the effective launch of state-led
missions that are both legitimized and realize their economic potential.

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London: Anthem Press.
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trial and Corporate Change, 27(5), 803–815.
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quo, Pitfalls, and the Need for Credible Innovation Policy. International Small Business
Journal, 41(5), 563–566.
Thurik, A. R., Audretsch, D. B., Block, J. H., Burke, A., Carree, M. A., Dejardin, M., Rietveld,
C. A., Sanders, M., Stephan, U., & Wiklund, J. (2023). The impact of entrepreneurship research
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Entrepreneurship Theory and Practice, 46(3), 729–778.

Mark Sanders is Professor of International Economics at Maastricht University, School of

Business and Economics, the Netherlands. He previously held positions at the Max Planck Institute
of Economics (Jena, Germany) and Utrecht University School of Economics. His research interests
include innovation economics, entrepreneurship, and economic development, with a special focus
on the role of entrepreneurial activity and finance in the transition to a sustainable and resilient
economy. He has published on a wide variety of topics applying a broad range of methods in Small
Business Economics, Macroeconomic Dynamics, Journal of Economic Behavior and Organization,
Journal of Conflict Resolution, Journal of Greenhouse Gas Control, Energy Economics, Climatic
Change, World Economy, Environmental Research Letters, Review of Environmental Economics
and Policy and serves as editor and consulting editor for Small Business Economics and Interna-
tional Small Business Journal, respectively.
270 M. Sanders et al.

Mark has coordinated the Horizon2020 Project Financial and Institutional Reforms for the
Entrepreneurial Society (FIRES), leads the strategic spearhead Maastricht Observatory on Respon-
sible, Resilient and Sustainable Societies, Economies and Enterprises (MORSE), is a founding
member of Sustainable Finance Lab (SFL) and Sustainable Industry Lab (SIL), and actively
engages in the public debate in the Netherlands and Europe.

Erik Stam is Professor of Strategy, Organization & Entrepreneurship, board member of Strategic
Research Theme Institutions for Open Societies, Faculty Director of the Center for Entrepreneur-
ship at Utrecht University, and Extraordinary Professor at Stellenbosch University (South Africa).
He was Dean of the Utrecht University School of Economics, and held positions at Erasmus
University Rotterdam, the University of Cambridge, the University of Oxford, the Max Planck
Institute of Economics (Jena, Germany), IMT School for Advanced Studies (Lucca, Italy), and the
Netherlands Scientific Council for Government Policy (WRR). He is editor of the journals Entre-
preneurship Theory and Practice and Small Business Economics. He is a leading scholar of
entrepreneurial ecosystems, engaged in the science and practice of entrepreneurship-led develop-
ment, both locally and globally. Next to his scientific work he is often consulted by governments, at
the local, regional, national, and international level (European Commission, OECD, G20, World
Bank), and by start-ups, investors and corporates on innovation and entrepreneurship.

Roy Thurik is Professor at the Montpellier Business School in France. He is emeritus professor at
the Erasmus School of Economics (Erasmus University Rotterdam) and at the Free University of
Amsterdam. He is a Research Fellow at the Tinbergen Institute for Economic Sciences and the
Erasmus Research Institute for Management. He is also member of Labex Entreprendre of the
University of Montpellier. Moreover, he is Research Fellow at the Institute for Development
Strategies (School for Public and Environmental Affairs, Indiana University) and Institute for the
Study of Labor (Bonn, Germany).
Roy’s research focuses on the role of small firms in markets, the role of business owners in firms,
entrepreneurship and well-being, industrial organization and policy, the consequences and causes of
entrepreneurship in economies and anything related to biology, psychiatry, and behavior.
He has published some 300 articles in leading academic journals. He is (co)-editor of many
books, editor of Small Business Economics, and on the editorial board of numerous international
scientific journals.
He has done consultancy work for many firms and (international) institutions.

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Overcoming the Siren Song of Central
Planning

David C. Rose

Abstract The concepts of state entrepreneurship and mission economy are the
latest attempts to justify greater central planning despite the explosion of human
flourishing in free market societies over the last few centuries. This is a puzzle. Why
do we keep falling for this old wine in new bottles? I argue that our genes predispose
us to be too skeptical about having faith in complex and evolving systems involving
large numbers of people. This is because we fail to recognize that there are two
different ways to control evolution. I then briefly discuss how moral beliefs might
overcome this predisposition.

Keywords Moonshot economics · Market failure · Central planning · Evolution ·

Group maladaptation

JEL Codes A13 · B52 · L26 · L50 · O21 · O32 · P11 · Z10

Introduction

Like wines that improve with age, there are ideas that never stop being relevant for
cultivating human flourishing. Like wines that worsen with age, there are ideas that
may have once been helpful but no longer are. When all humans lived in small
groups, for example, robust central planning was necessary, just as it continues to be
within families and firms for the reasons laid out almost a century ago by Ronald
Coase (1937). But when applied across the large societies we now live in, the more
centrally planned economic activity is, the worse the outcome.

I thank Melvin Schut for helpful discussions about the basic argument.

D. C. Rose (✉)
Department of Economics, University of Missouri-St. Louis, St. Louis, MO, USA
Common Sense Society, Alexandria, VA, USA
e-mail: [email protected]

© The Author(s) 2024 271

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_15
272 D. C. Rose

Our distant ancestors were excellent central planners because in the small groups
within which they lived it improved group fitness. It is therefore now a part of the
genetic recipe we all share. But recently in our evolutionary history, groups began to
compete on the margin of size because, in addition to the obvious martial advan-
tages, Adam Smith (1981 [1776]) was right about the economic power of scale.
Market pricing came to effectuate socially efficient decision-making in contexts for
which central planning could not for the reasons laid out by Friedrich Hayek (1945,
2002 [1968]). Unfortunately, our small group genes do not equip us to readily
appreciate the social benefits of market pricing.
Few economists have enjoyed the level of public policy influence that Marianna
Mazzucato has enjoyed in the last decade, but her work is unconcerned with this
harsh reality. She came to prominence by arguing that innovation is often driven by
government involvement. But despite providing numerous examples, she does not
provide an explanation for why such efforts were necessary. Saying they were too
risky to have happened otherwise is an assertion, not a fact, since no one can know
the counterfactual outcome.
She doesn’t call for destroying the price system, but she and her co-authors do
seek to reshape it significantly.1 To what ends and why? Her calls for using
government power to better achieve social objectives provide no economic rationale
for why such objectives (e.g., development of green technologies) are in the right
proportion relative to other social objectives.
I submit that she and her growing number of followers are mostly responding to
genetic predispositions we all share, predispositions that make us favor controlling
how the economy evolves. More to the point, I shall argue that her calls for having an
entrepreneurial state or a mission-based (moonshot) economy (Mazzucato 2015,
2021) amount to little more than new justifications for greater central planning, a
case of old wine in new bottles.
Mazzucato and those who share her views would not agree, perhaps because they
think of central planning as the polar opposite of market pricing, and they are clear
about not being against market pricing. But Hayek’s demonstration of how value is
created by markets in contradistinction to central planning does not imply that if
markets exist then central planning does not exist, either. Few would quibble with
the observation that perfectly centralized and perfectly decentralized planning are on
opposite ends of a broad continuous spectrum. Mazzucato’s calls for “market
shaping” obviously don’t call for the end of market pricing, but they also don’t
imply that her views are closer to comporting with decentralized planning than
central planning.2

1
In their own words:
The role of the state is key here since it is the only institution with the power to shape
markets and direct economic activity in socially desirable directions—or “missions”—to
achieve publicly accepted outcomes. (Kattel et al. 2021, p. 19) [emphasis added]
2
Moreover, her calls for increased government intervention clearly involve greater central planning.
She and her co-authors state, for example:
Overcoming the Siren Song of Central Planning 273

There is already ample criticism of central planning in general and these new
versions of it in particular. I will neither add to, review, nor synthesize this important
work. Instead, I will attempt to address the following puzzle: Why is the pull of
central planning so powerful? The short answer is that the genes that served us so
well for so long make us desire control. This gene-based conception of control,
however, is not the kind of control that best supports flourishing in the kinds of
societies we have built for ourselves.
In what follows, I offer an explanation for why our desire for control and our
failure to appreciate that how it is effectuated makes all the difference has led to a
greater fear in market evolution than is warranted. I then argue that certain kinds of
moral beliefs shape thinking in a way that makes us more likely to overcome this
bias, allowing us to have more faith in the free market system than otherwise. In the
West, the evolution of such moral beliefs helped inoculate democracy from provid-
ing political support for central planning to produce specific moral outcomes. The
waning of these beliefs opens the door for a resurgence of support for central
planning in the very societies that have already benefitted greatly from decentralized
planning.

The Siren Song of Control

Until very recently in the story of humans, a matriarch, patriarch, or small group of
elders was in charge of making decisions that affected the welfare of the group.
Examples of such decisions would be where to move the tribe if area resources had
become depleted or whether to make friends with a neighboring tribe or destroy it. In
the small groups within which we lived, such top-down control was very efficient.3
The spontaneous order of the market didn’t even rise to the level of a foolish fantasy
because it was as unfathomable as it was impertinent.
Rising intelligence led humans to become increasingly forward looking over time
rather than merely reactive to immediate circumstances. So they increasingly went
beyond adapting to the local environment to proactively trying to shape it, both
physically and socially. Human genes therefore now produce feelings of anxiety
when things seem out of control to induce us to bring them under control. Just letting
things happen seems foolish and irresponsible.
In most circumstances humans therefore favor someone or something being in
control. This control bias makes us suspicious of letting anything run on autopilot,

. . .governments. . .need to set medium-term targets with time horizons of 10–30 years. . .and
develop detailed policy pathways for achieving these targets. [emphasis added] (Sachs et al.
2019, p. 811)
3
My father fondly remembered how his grandmother “ran the family.” He was referring to the
extended family and her power to direct decisions in ways that would be out of bounds today, like
telling a grandchild to lend money to another family member (see also Brooks 2020).
274 D. C. Rose

let alone letting things evolve over time without attempting to exert some measure of
control over the path of change. The problem is that some of the mechanisms that
produce efficient control in small group settings fall apart outside of the milieu
within which they evolved.
A small group’s central planning leader can directly control who does what under
varying circumstances, but to do this efficiently, he or she must account for all of the
costs and benefits involved. This requires an acute sense of empathy. It would be
inefficient, for example, to put someone who is afraid of heights in charge of
climbing trees to gather coconuts for the group. At the same time, our capacity for
empathy helps keep opportunism in check. Even if we know we can get away with it,
if we are opportunistic at the expense of a small group, we know we will empathize
with the harm done to individuals in the group, so we will expect to feel guilty. This
internalizes the cost of such actions and thereby discourages them.
But in a large society, the harm caused by opportunism is often spread over so
many people that there is no actual person with whom to empathize. This removes
the trigger that normally actuates guilt that thwarts opportunism. This hardwired
capacity for harm-based restraint therefore doesn’t scale up. So opportunism was not
nearly as big a problem for our distant ancestors as, say, cheating the IRS is in
America today (Rose 2011).
A better-known problem is the effect of group size on the localization of
knowledge (Hayek 1945). Larger groups are far more productive because they
enable greater specialization that increases productivity (Smith 1981 [1776]). The
more specialized economic activity is, the truer it is that most people will know a
great deal about what they do and the ever-changing details of time and place that
affect how they do it, while knowing nothing about what everyone else does. In very
small groups, this is never a problem, so our small group genes are ill-equipped to
deal with this problem.
In his Nobel acceptance lecture, Hayek explained why, in large societies espe-
cially, we should not infer from improved scientific and theoretical understanding of
the broad causal relationships in economies that we therefore know enough to
engage in efficient central planning.4 Every bit as important is localized knowledge
about the details of time and place. This distributed knowledge requires a mecha-
nism, such as is provided by the price system, if it is to be fully put to socially
beneficial use.
In large groups the localization of knowledge makes efficient direct management
of what people do impossible. By explaining how this problem grows exponentially
with group size, Hayek (1945) was able to explain how the price system creates
value for society. With market pricing, no one needs to know what others are doing,
how they do it, or how relevant conditions have changed because market prices force

4
“The pretense of knowledge” was the title of Hayek’s Nobel Prize lecture, but parts of this general
argument are themselves distributed over a number of his writings. Consider this well-known quote
from his book The Fatal Conceit (1988): “The curious task of economics is to demonstrate to men
how little they really know about what they imagine they can design.”
Overcoming the Siren Song of Central Planning 275

everyone to bear the social opportunity cost of using any resource they might use.
This implicitly assumes that any market failure problem that might drive a wedge
between the market price of a resource and the true social opportunity cost of using it
has been addressed.
This means that as individual persons or firms do their best with the local
knowledge they possess, society doesn’t suffer from resources failing to be used
where they will create the greatest social value. If there is another more highly valued
use, that would drive up demand, which would drive up price, which would induce
those using the resource who valued it less than this new, higher price to look for
alternatives. This is exactly what a central planner who was trying to best promote
the common good would do if he could do it.
Hayek’s insight is one of the most important ideas in economics. But it does not
comport with our hardwired intuitions. It suggests that society works best when we
don’t try to control the flow of economic activity, when we instead let those with
local knowledge act on it as they see fit as long as they pay market prices for the
resources they use and play by the rules of civil society. Unfortunately, most people
simply cannot believe that it is possible for society to do well if no one is in direct
control of all but the least consequential of economic activities.
Because we evolved in very small groups, faith in the free market system working
us to better outcomes is not something that our innate scientific intuitions prepare us
to believe. Quite the opposite is true since for most people the proposition that we
don’t try to centrally plan economic activity seems ridiculous on its face. So just as
gravity never stops pulling on Newton’s apple, we never stop hearing the siren song
of our small group genes calling for someone or something to be in control to avoid
disaster.
I suspect that so many economists today have so little faith in the free market
system because of their own control bias about which they are unaware. To my
knowledge this problem has never been carefully studied. But it seems unlikely that
this bias does not exist, and it seems rather likely that it explains why most people –
especially very responsible people – are instinctively incredulous about the desir-
ability of decentralized planning.

The Power of Evolution

Before the neoclassical revolution economists had a more organic view of the
economy and economic behavior than they do today (Rose 2019b; Smith and Wilson
2017). With the rise of neoclassical economics near the end of the nineteenth century
came an increasing preoccupation with precise mathematical modeling of nearly all
economic phenomena. This naturally led to a more mechanistic way of thinking of
the economy and economic behavior (Mirowski 1988).
This ushered in the rise of Keynesianism, which envisioned a more activist role
for government based on the presumption that economists now had a sufficiently
clear understanding of how the economy worked to make such intervention fruitful.
276 D. C. Rose

Before long an unwillingness to intervene came to be viewed as foolish, even

immoral. Interventionism began with discretionary fiscal and monetary policy
aimed at smoothing business cycles. It became fashionable to believe that through
scientific reductionism the economy could be effectively disassembled, reverse
engineered, and improved upon through policy. This led to broader regulation of
economic activity to effectuate various forms of social engineering. We now live in
the age of the economic policy wonk.
Unfortunately, market economies are much more like constantly evolving biomes
than toasters. Just as biological evolution has produced an incredible variety of life,
the evolution of market societies has produced an incredible variety of goods,
services, technologies, and institutions. Until very recently, little of this was centrally
planned. The pace of change often led to great disruptions (e.g., the migration of
labor from the agricultural economy to the industrial economy), but the rate of
economic growth was so great that the word “progress” was viewed by most as
inherently positive.
Near the end of the nineteenth century, there were growing concerns about the
social cost of industrialization, which undermined the presumption that progress is
inherently good. Then came spectacular successes of central planning to achieve
victory in two world wars and a series of successes in the space program. Far too
many economists failed to recognize that central planning in exceptional circum-
stances atop economies that are already well developed because of decentralized
planning is hardly evidence of the general efficaciousness of central planning.
An increasing proportion of economists began wondering if unbridled capitalism
was such a good idea after all. Marx had little influence initially, but his work began
to find purchase with the intelligentsia and in the academy. The idea that some form
of central planning would be wiser than pure capitalism gained momentum in part
because our innate control bias made our minds receptive to such arguments.
None of this was news to economists who understood the theory of market
failure.5 There are circumstances for which flourishing will almost certainly fall
short of what is possible without government intervention. No one who understands
the theory of market failure believes that unfettered capitalism is a good idea. Over
the second half of the twentieth century, central planning advocates increasingly
invoked the theory of market failure to justify intervention.
Recently, however, a growing number of central planning advocates believe that
rectifying market failures but otherwise having faith in the evolution of society is
foolish. The presumption is that with more proactive planning to guide the course of
economic change, governments could do much more good. Increasingly, rectifying
market failures came to be viewed as necessary but far from sufficient for sustainably

5
This body of knowledge goes back at least as far as Pigou’s (1920) analysis of how externalities
can be addressed indirectly through the price system with excise subsides or taxes rather
than through direct regulation of behavior by government. The theory of public goods, broadly
construed, is another area of major focus in the theory of market failure. The economic polymath
Paul Samuelson (1954) provided the first rigorous analysis.
Overcoming the Siren Song of Central Planning 277

maximizing social welfare over time. For an extended counterargument to this

position, see Rose (2024).
If there are compelling theoretical reasons for this shift, members of this post-
market failure movement have not spelled them out. Simply arguing that active
intervention in the past produced success and asserting that we can do better by
putting more effort into overt central planning are not compelling arguments for
supplanting market evolution with central planning. They simply express incredulity
about putting faith in the free market system. Neither demonstrates how we can
know central planning will do better than the counterfactual outcomes that would
have otherwise arisen from evolution amidst appropriately addressed market failure
problems. This is remarkable given ample evidence of social progress that came on
the heels of market evolution arising through decentralized planning in the private
sector over the previous three centuries in the West.

Guided Versus Girded Control and Evolution

Control is normally thought of as the direct regulation of something like setting the
water temperature for a shower or driving a car in a precise path down a road. But
control can also be effectuated indirectly. It can take the form girding, for example,
like having an anti-scald valve on the shower’s water supply or having guardrails to
keep the car on the road.
Whereas guided control charts a specific path forward through time, girded
control simply puts constraints on where that path can go. Unless it is so suffocating
that it creates de facto guiding, girding is a lower level of control.6 But that does not
mean it is less important. Girding allows for the elimination of actions that cause
problems for society while not otherwise removing discretion from private actors. It
therefore leaves the lion’s share of control in the hands of individual persons or
organizations which, in turn, gives behavior room to evolve in a multitude of ways.
When government power is used to effectuate precise control to directly guide the
path of change, this has the effect of forbidding all other ways forward. It therefore
forecloses a great deal of potential future directions of progress that might have been
taken if evolution had been allowed to proceed within the limits of girded control.
There are profound benefits to having systems in place that allow evolution to
produce a variety of possible avenues of change that can allow those who possess
local knowledge to use it to adapt and create. Such efforts often lead to the
serendipitous discovery of new knowledge. Thinking of competition as a discovery
procedure through the price system (Hayek 2002 [1968]) helps prepare the mind to

6
Suppose there are three possible actions. Having behavior guided in the sense of having only the
first action allowed is no different from having behavior girded in the sense of prohibiting the
second and third actions.
278 D. C. Rose

be receptive to the idea of thinking of girded evolution as fostering its own kind of
knowledge discovery procedure.
When evolution is girded but not guided, only specific actions are redacted from
what individual persons or firms can choose (Rose 2011, 2019a). It is natural to view
the complement of this redacted set as an equally well-defined and bounded set. But
in reality, this set cannot be fully known and is constantly changing, so it is
effectively unbounded. Most importantly, when evolution is only girded, this ever-
changing and growing complementary set of actions automatically falls under the
discretion of private actors.
In contrast, the truer it is that evolution is precisely guided by government, the
smaller is the set of actions that fall under the discretion of private actors. This
forecloses the use of the distributed local knowledge possessed by individual
persons and firms for adapting and creating. By the very definition of local knowl-
edge, using this knowledge cannot be replicated by the central planner. This pro-
duces many fewer lines of evolution that reach into the future, thereby reducing a
society’s ability to benefit from evolving knowledge.
Girded market evolution is not evolution that is solely driven by random muta-
tions as it is in biology because those who possess local knowledge are not merely
making random guesses about how to use it. They are positing educated conjectures
in light of what they already know, much of which central planners cannot possibly
know. So the problem isn’t just fewer experiments going forward through time; it is
also that the presumed best approach chosen by central planners could not have been
conceived through consideration of all the possible ways forward arising from the
variety of perspectives that localized knowledge affords.
Guided evolution is not much of a problem in a very small group. But the larger a
society is and therefore the more dispersed and varied local knowledge is, the greater
is the cost of guiding change to take one particular course forward. As our society
gets larger and more specialized, it produces more lines of evolution at any point in
time which causes cross-fertilization of knowledge to expand exponentially
through time.
Those who possess local knowledge do not know which way forward is best,
either. But unlike the central planner, they don’t have to. With girded evolution
decision-makers simply adapt and create the best they can with the local knowledge
they possess, knowing that foolish efforts might produce bankruptcy, while brilliant
ones might produce spectacular riches.
We do not know that this process will result in discovering specific knowledge.
This fact about the nature of evolution produces angst among some people, and I
suspect this helps explain the allure of meticulous central planning over evolution.
But it is fallacious to look to the past and point to discoveries that were made under
central planning that might not have been made without it and then to worry what the
world would look like without such control. This is because such discoveries, no
matter how remarkable, cannot be compared to counterfactual outcomes that could
never see the light of day from having resources driven to the efforts determined by
the central planner.
Overcoming the Siren Song of Central Planning 279

All parents know this feeling. They cannot imagine a world with different
children than the ones they have. But most are able to understand that this feeling
arises from temporal confusion as is evidenced when they urge their children not to
have children until after turning 30, even though their first two children were born to
them when they were in their 20s.
Employing knowledge fuels the discovery and creation of new knowledge. The
greater the scale and scope of knowledge, the greater the rate of creation.
Knowledge – specifically durable scientific ideas – is a perfect form of social capital.
The essence of this type of capital is that it is used but not used up in the process.
Whereas all other inputs are either used up (like flour when making cakes) or
disappears (like the baker’s time) or wears out (like the batter mixer), knowledge
has the peculiar property of not being subject to any of these effects. If anything, it
gets stronger with use. But the adjective social is also meaningful since knowledge
tends to produce spillovers.
Paul Romer (1986, 1990) was awarded the Nobel Prize in economics for intro-
ducing endogenous growth theory to economics. His work stresses that knowledge
tends to build on itself, to compound over time, to grow exponentially. From existing
knowledge, with effort we can create new knowledge and that new knowledge can
create yet more new knowledge. Political economic systems that recognize the
power of knowledge are therefore systems that can produce an astonishing rate of
intensive economic growth that is the only path to improving the quality of life over
time for everyone.
One reason why not guiding evolution is so important is that evolution serves as a
mechanism for discovering knowledge we might not otherwise acquire, at least not
as quickly. It therefore helps increase not just the volume of knowledge, but its
diversity. The more diverse the set of ideas over which competition is unleashed, the
better the best we end up with will be. But greater diversity also increases the rate of
compounding by providing new starting points for subsequent knowledge creation.
The compounding nature of economic growth ensures that static efficiency gains
from not having multiple efforts, most of which will fail, will be more than offset by
the gains resulting from the largest possible set of competing approaches rolling
forward through time with compounding returns.
Even when new things are tried that fail, often something is still learned that
produces benefits to others. But such knowledge would not have been discovered
without having tried the failed approach. Genuine entrepreneurs who understand the
value of quick and creative action have every incentive to pounce on such knowl-
edge. But the more that government guides evolution through central planning, the
fewer experiments there will be and therefore the fewer serendipitous knowledge
discoveries there will be that no one could have ever imagined ex ante.
With girded evolution decision-making by individual persons and firms is guided
primarily by economic forces. But the more government attempts to guide evolution
through central planning, the more the course of change will be determined by
political forces. This means that political agendas will sometimes dictate the direc-
tion of change over value creation. This is how we can end up with giant white
280 D. C. Rose

elephants from managed industrial development schemes for which failure produces
a doubling down, rather than a termination, of the flow of resources.7
Although it is foolish to demand guided evolution – in the extreme, an
oxymoron – it is not foolish to be skeptical of ungirded evolution. As freer societies
became the norm in the West, private sector-driven evolution produced a roller
coaster ride of change. Part of the thrill of riding a roller coaster is not knowing
what’s coming next, and so it is with social, political, and economic progress. But
even the staunchest thrill seeker wants to be assured that any given roller coaster is
reasonably safe.
Imagine a world in which this assurance was derived by a particular “best” design
for all roller coasters rather than by boundary conditions that constrain how roller
coasters can be built and operated. There would be very few roller coasters indeed,
for who wants to ride the same roller coaster over and over? The way to have lots of
different roller coasters while knowing they are all reasonably safe is to understand
the need to gird the evolution of roller coaster design, construction, and operation.
Only a fool advocates for completely ungirded evolution of society. But girded how?
What should and should not be on the list of things that should gird social,
political, and economic evolution is too large of a question to be addressed here. The
point here is not to debate the appropriate set of constraints to effectuate girding; it is
to draw attention to the need to distinguish between girded control and guided
control so it is easier to see that when central planning moves us increasingly into
the realm of precisely guiding how the economy evolves over time, it is destroying
benefits that only the girded market evolution process can provide.

Utopianism

What can explain this preoccupation with controlling the flow of resources into the
future? I submit it is, most likely, that there is a primal fear of heading into the
unknown. Unless one has already learned a great deal about how evolution and free
market societies work, having “faith in the system” to produce “progress” that is
presumed to best promote the common good is impossible. All of this messiness can
be avoided by defining a destination ex ante and then working to ensure that social,
political, and economic change heads inexorably toward it.
Shades of utopianism can be found in all human societies. The ubiquity of
utopianism is hardly surprising when we recognize how closely related it is to
control bias arising from genes that we all share. For the most part, humans try to

7
Consider innovations to teaching in public education. Success means you need fewer resources
going forward. Failure normally means you can argue that the new approach wasn’t tried fully
enough, so failure increases the flow of resources. This is precisely the opposite of what happens in
the private market.
Overcoming the Siren Song of Central Planning 281

make sure things head in the direction they want most, the direction required by their
definition of utopia. But there are at least two problems with this.
As Robert Nozick (1974) explained many years ago, if you want a society that
maximizes liberty you can have that, but you’ll have to give up on utopia. This is
because millions of cats going off in their own directions will not support the
execution of any particular plan. And if you want a utopia you can have that, too,
but then you’ll have to give up on liberty. This is because all action will have to be
subordinated to making progress toward the plan. Those who are preoccupied with
utopianism need to understand that the price tag of any utopia is the loss of liberty
unless one’s definition of utopia is the free society.
The second problem is that utopianism is antithetical to evolution. This is
devastating when one tries to imagine an alternative mechanism through which to
produce the array of life we now have on our planet. We live the good life now in
large part because systems evolved that allowed us to have our cake and eat it, too.
They did this by girding evolution to limit the downside risk, but by not guiding it,
they left evolution’s substantial upside. Utopianism is based on the naïve and
arrogant presumption that we already know what is best given our known resource
constraints, so knowledge discovery processes are both superfluous and wasteful.
With the knowledge discovery process made possible by girded but not guided
evolution, the more diverse knowledge is, the more rapidly the stock of total
knowledge grows and, with it, a society’s ability to support mass flourishing. Such
knowledge can be subject to a kind of infinitely repeating feedback loop that, unlike
anything else, has no particular reason to be subject to diminishing returns. It never
stops compounding. In most cases this new knowledge produces spillover benefits
since knowledge is famously hard to make fully excludable.
This process creates unimaginable treasures along the way. But we don’t know
what exactly will be in each new treasure chest we discover. We only know from
experience that in the past those societies that let the knowledge genie of girded but
not guided evolution out of the bottle enjoyed rapid progress toward mass
flourishing. But this story never gets off the ground if the path going forward is
forced back to a predetermined plan to achieve a particular view of utopia.

Market Failure

When government addresses market failure problems as narrowly and unobtrusively

as possible, the problem is normally rectified while not impeding the efficient
function and subsequent evolution of society. This is most obvious with subsidizing
basic research.
It is well-known that basic scientific research has the potential to produce
tremendous positive spillovers. Since no one can know what all of those spillovers
might be, and therefore the extent to which they might be adequately captured to
assure a socially optimal level of investment, the expected benefit to society can be
high, while the expected gain to any individual person or firm is only modest. This is
282 D. C. Rose

because social benefits sum all distributed benefits no matter where they land.
Private incentives for funding basic research are therefore too weak for the private
sector to invest as much as would best promote the common good.
Members of the post-market failure movement view policies designed to address
market failures as necessary but not sufficient for best promoting the common good.
They attempt to demonstrate this by showing that economies like the United States
have already done well with de facto state entrepreneurship efforts in the past. What
is required is more of both, which begins with not letting the private sector take all of
the credit for what the government has already made possible.
But their examples of these prior successes are, in fact, rather poor examples of
state entrepreneurship. These examples include but are not limited to the discoveries
that made possible new drugs, the Internet, smart phones, ancillary smart phone
technologies like SIRI and GPS devices, and so forth (Mazzucato 2015, 2021).
These are poor examples of the earlier success of state entrepreneurship because the
entrepreneurial part of the exercise had nothing to do with the state part (Yerger
2024).
The state’s role was to fund basic research. The entrepreneurial part of the story
was individual persons and firms later taking these findings, whatever they might
end up being, and applying them in practical ways to create value. In other words,
the truer it is that what we are considering is genuine basic research, the less likely
that such work was undertaken by entrepreneurs or even promoted by entrepreneurs.
Contrary to the suggestion of those who favor state entrepreneurship, evidence of
technological advance driven by basic research paid for by government is not
evidence of the virtues of state entrepreneurship (Holcombe 2024).
These are actually good examples of the social benefits of enlightened American
application of the theory of market failure through its funding of basic research that
would have otherwise been underfunded in the private sector. They are also good
examples of how well creative entrepreneurs have put new knowledge to work in
ways no one could have imagined possible, in ways that had nothing to do with
achieving a particular plan for society in the future. Basic research has been
frequently justified by the theory of market failure precisely because the ultimate
ends to which such research might be put are known to be unknown.
So what can possibly explain all of this effort to garner support for state
entrepreneurship given the success of truly private entrepreneurship fueled by state
subsidized basic research that was justified through the theory of market failure?
Perhaps their real concern is not the failure of the theory of market failure, but it is
success through the unguided evolution of economic activity. Such an explanation
makes sense if what is really driving the movement is having control over the
direction in which the economy evolves.
Overcoming the Siren Song of Central Planning 283

How Moral Beliefs Can Defeat the Siren Song of Control

My purpose has not been to argue that members of the post-market failure movement
are advocating central planning in a deceptive way. But the practical effect of doing
what they recommend nevertheless pushes our society in the direction of greater
central planning. They can resist that label, but there is no denying that if we do as
they suggest, much more control will be exerted over how future economic activity
unfolds.
My purpose has been, instead, to offer an explanation for why we are so willing to
accept policies that result in greater central planning. In short, our genes lead us to
think that someone or something needs to be in control of society, not just in terms of
day-to-day operation but also in terms of how it evolves. Our genes are right about
this for societies that are not much larger than the groups within which they
evolved.8 But now that we live in very large societies, using central planning to
efficiently control society is a pipe dream. Understanding why this is true should be a
lesson taught to all future voters.
I will now argue that when moral beliefs have a certain kind of logical structure,
they frame moral thinking in a way that makes it more likely citizens will be willing
to accept the unpredictability of change that goes with evolution and therefore not be
so susceptible to policies that promise to alleviate such fears by more directly
managing the economy. This may have helped some societies evolve in directions
that led to an increasing level of decentralized planning and therefore rising general
prosperity.9
I submit that this new logical structure took the form of a wall in the mind with the
moral don’ts on one side and the moral dos on the other. Not doing the don’ts
became increasingly treated as an absolute moral duty. Doing the dos became
increasingly treated as merely being something to be valued but not compelled
(Rose 2011).
This duty-based moral restraint arises from moral beliefs that attach guilt directly
to negative moral actions rather than their effects on others. This allowed us to
overcome the problem of waning harm-based moral restraint with increasing group
size. The stronger the expectation of guilt from taking any negative moral action, the
more that moral restraint takes on the quality of a moral duty and vice versa. Finally,
since duty-based moral restraint calls for inaction, it does not run up against resource
constraints so all can be expected to obey it.

8
“Dunbar’s Number” (150 persons) was propelled into the lexicon in Malcom Gladwell’s The
Tipping Point (2002). Robin Dunbar (1992, 2016) demonstrated the existence of a strong correla-
tion across species between the neocortex, adjusted for body mass, and the size of groups they
normally live in. Applying his estimated model to humans produced 150. In other work he has
shown how this multiple arises again and again in the organization of human activity.
9
Although there is no question that some specific moral values and beliefs helped drive the rise of
market societies (McCloskey 2006), moral beliefs were also coevolving with increasing decentral-
ization in a way that was also producing a new logical structure that changed how moral values
related to one another (Rose 2016, 2019b).
284 D. C. Rose

But duty-based moral restraint alone is not enough. Doing the moral dos must
also not be viewed as a duty. Positive moral actions normally require resources. So if
duty-based moral advocacy exists, it might very well involve having to do a set of
dos that cannot be done without violating duty-based moral restraint. This will
produce conflicting duties. If, for example, you believe it is your moral duty to
give at least USD 10 to all homeless persons you see, then unless you are very rich
you will need to steal some money, which would violate duty-based moral restraint,
or else fail to fulfill your positive moral duty. The only way to avoid the erosion of
duty-based moral restraint is to not have duty-based moral advocacy.
This means that moral restraint, without which a large high trust and therefore low
transaction cost society is impossible, must take precedence over moral advocacy,
lest being required to do the moral dos undermine the duty-based moral restraint.
This does not mean we should reject moral advocacy. It only means that positive
moral acts must ultimately be left to the judgment of the individual who can weigh
the relevant costs and benefits.10
This was increasingly echoed in and reinforced by other ideas that were shaped by
this new way of thinking about morality. These other ideas induced us to construct
new frameworks for government such as the US constitution.11 In America this
moral foundation took hold most fully, so institutions began to echo it in a vision of
the rule of law that was not undermined by the legacy of monarchical discretion, but
was instead reinforced by a constitutionally limited government and a Tocquevillian
preference for cultural regulation of behavior over government power.
But what does all this have to do with evolution?
Utopian plans share a deep problem with duty-based moral advocacy. Unless
explicitly built in, utopian plans also have no particular reason to be feasible within
existing resource, legal, and moral constraints. Because of this, they often create
pressure to rationalize the violation of these constraints. In contrast, economic
evolution that is only girded can commence and continue to abide constraints.
A utopian plan – the very antithesis of evolution – is like a young adult who first
says to himself that not having a new sports car is unacceptable, so he buys one he
can’t really afford. It is easy to see how this leads to ruin. In contrast, girded
evolution is like a person thinking about buying a house by first saying to himself
that, given his financial circumstances, he cannot spend more than USD 1500 a
month on a mortgage. He does not begin with “I will not settle for anything less than
a 2500-square-foot home in Malibu.” He begins with what he can afford. Because of
that, he chooses among alternatives that won’t require that he spend more than he
can afford.

10
The Judeo-Christian ethic frequently stresses not doing the don’ts over doing the dos. As Hillel
the Elder famously stated: “That which is hateful to you, do not do to your fellow [man]. That is the
whole Torah; the rest is the explanation; go and learn.”
11
Note how the way was paved for the US constitution by the Declaration, which was an extended
argument to the effect that the colonies had the moral authority to leave the empire because of the
abuse of power by the crown.
Overcoming the Siren Song of Central Planning 285

No one can possibly know which house he will ultimately choose. It’s unlikely, of
course, that a single 2500-square-foot home in Malibu will exist within the constraint
of USD 1500 a month, so such a dream never sees the light of day. So while the
“utopia first” approach will start with a clear vision of the final outcome that may
very well be impossible or unsustainable, the “constraint first” approach seeks to
discover that which is best within the set of what is possible and sustainable.
In societies we live with others, and if those others also start with constraints, as
all genuine adults should do, none of them will be able to predict what their final
decision will be, and no one will be able to predict the final outcome for society that
will arise from the combination of these unknown choices. But we can predict that
they will not be on an unsustainable path.
Central planning driven by any kind of idealized plan in the context of the large
societies we live in today therefore virtually guarantees disaster even if we set aside
Hayek’s argument that we need a price system for the efficient use of local knowl-
edge. When citizens don’t understand the dangers of utopia-driven central planning,
political competition inevitably unleashes a utopian arms race whereby votes are
garnered with ever more grandiose conceptions of utopia.
It is instructive to consider how these arguments might be interpreted over an
individual’s life cycle. Children have genes that predispose them to expect to be
taken care of by their parents while also being willing to accept a high level of
control. All human children expect to be taken care of and not through a vague faith
in the system. They expect that very specific things will happen, every day, like
having milk with cereal, heated air in the winter, and protection from dangerous
people. This will happen because it is driven by the power of love that their genes
have also prepared them to believe that their parents and other close kin have
for them.
Such love carries the same force as inviolate duty. So parents provide, no matter
what. But love evolved alongside the practical realities of the day-to-day life of our
species in the small group milieu within which we lived. This means love for
children closely related to us asks for no more than we can usually provide.
Just because our genes prepare us as children to expect to be taken care of does
not mean we always are. A staggering proportion of children died over the last
million years, sometimes from insufficient resources and sometimes from inadequate
parenting, but none of those children were able to reproduce. There is no reason for
the genes we possess to prepare us for an outcome that is only relevant if our genes
become irrelevant. So we, as children, expected to be taken care of as will all of our
descendants.
Political competition in a democracy can induce the state to make unilateral
commitments to undertake positive moral actions that will result in our being
taken care of as adults as part of a promised utopia. All of us “childhood survivors”
are inclined to see the benefit of that. This is effectively living in a world in which
prevailing moral beliefs include duty-based moral advocacy made possible by the
exercise of power by the state. The ordinal nature of political competition suggests
that this will often result in the state eventually needing to undertake negative moral
acts as a means to that end.
286 D. C. Rose

Moreover, Robert Nozick has not stopped being right about utopia necessarily
coming at the cost of liberty. But we are enchanted by utopia and therefore accept the
central planning needed to effectuate it, because we don’t understand how costly it
is. I have argued above that one cost that too few economists recognize is the
throttling of the process of knowledge discovery through evolution that is only
girded to stay within the guardrails of civil society (e.g., no genocide, ever).
Even within free societies today, echoes of Nozick’s thesis can be seen over the
life cycle of individuals. Children expect and indeed are provided for in very specific
ways, and they presume this will happen in their little utopia they take for granted
without question so much so that if this ends up not being true, they are scarred for
life. But these children are most definitely not free.
As adults they become free, but this is only a sustainable condition in societies
where they understand that the unilateral commitments that their parents made to
them do not transmute into an equal level of assurance from the state. If they cannot
accept this or they have been convinced by moral narratives that infantilize them
enough to reject this, then they will expect to be taken care of by the state. The result
is a state through which adults are increasingly infantilized to be willing to be less
free, little by little, over successive generations.
When we don’t understand these harsh realities, and the role played by modern,
Western, moral beliefs in framing adult expectations about what can and cannot be
expected of the state under the condition of liberty, democracy will inevitably
produce policies that are not time consistent. Democracy is as dependent upon
culture, through moral beliefs, as it is dependent on institutions.
So what seems to be a purely economic issue about development is also a moral
one both in terms of cause and effect. Moral beliefs that produce an ethic of duty-
based moral restraint without duty-based moral advocacy make the high trust society
possible and, by managing expectations, make the unpredictability of evolution
tolerable. As for effect, such moral beliefs avoid impoverishing future generations
through profligatory actions in the present by putting constraints first. This moral
outcome is a good trade for those who understand Nozick’s tradeoff and the ever-
growing power of ever-growing knowledge made possible by girded evolution.
Minds that are already accustomed to viewing moral constraints as duties while
treating positive moral action as only legitimately undertaken within those con-
straints are minds that are better prepared to accept the roller coaster ride of girded
but not guided evolution as simply a part of the inevitable drama of living in
a flourishing society. Such minds are also less likely to endorse the level of
management of economic development envisioned by Mazzucato and others in the
post-market failure movement. Such minds are, therefore, less likely to fall for old
wine in new bottles that will inevitably make them less prosperous and less free.
Overcoming the Siren Song of Central Planning 287

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David C. Rose is Professor of Economics at the University of Missouri-St. Louis and a senior
fellow at Common Sense Society. Since 2014 he has been a member of the Missouri advisory board
of the U.S. Civil Rights Commission. He received his PhD in Economics in 1987 from the
University of Virginia.
His book, The Moral Foundation of Economic Behavior, was selected one of CHOICE’s
outstanding titles of 2012. His newest book, Why Culture Matters Most, is also from Oxford
University Press. His most recent work employs ideas from anthropology and psychology to
sharpen our understanding of the connections between moral beliefs and the creation, functioning,
and decline of political economic systems.
He frequently contributes to policy debates through radio and television interviews as well as in
op-eds on topics ranging from social security, monetary policy, fiscal policy, judicial philosophy,
education reform, healthcare reform, and freedom of speech. He also speaks frequently on the roles
that culture in general and moral beliefs in particular play in fostering economic development and
freedom.

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R&D Tax Incentives as an Alternative
to Targeted R&D Subsidies

Roger Svensson

Abstract Governments can provide targeted R&D subsidies and/or tax incentives
to spur innovation and growth in the business sector. This chapter analyzes the
theoretical pros and cons of these policy instruments and their practical implications
according to the empirical literature. Tax incentives have low administrative costs,
enable market agents to choose R&D projects, and can be provided to many firms.
However, they entail the risk that governments might finance R&D that would have
been undertaken anyway (deadweight loss) and that firms may relabel other costs as
R&D costs. Targeted subsidies are preferable for projects with high uncertainty and
those that require a long time to achieve a finished product and for contexts in which
the government wishes to allocate resources to specific sectors. However, such
subsidies have high bureaucratic costs, distort competition, and favor grant applica-
tion experts. The greatest disadvantages of targeted R&D subsidies are that they are
mainly allocated to large firms and are often used as covert industrial subsidies.

Keywords Targeted R&D subsidies · Tax incentives · Spillovers · Imperfect

appropriability · Financial restrictions · Small business · Innovation · Government
policy

JEL Codes O31 · O32 · O33 · O34 · O38

The author is grateful to the Jan Wallander and Tom Hedelius Foundation (Grant No. P23-0186) for
financial support.

R. Svensson (✉)
Research Institute of Industrial Economics (IFN), Stockholm, Sweden
e-mail: [email protected]

© The Author(s) 2024 289

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_16
290 R. Svensson

Introduction

Several literature reviews have concluded that new knowledge and technology,
created through research and development (R&D), are regarded as the main factors
of growth and productivity in the economy (Wieser 2005; Hall et al. 2010). How-
ever, there is a consensus in the literature that in a free market, companies invest in
R&D to a degree that is less than socially optimal. Due to imperfect appropriability,
companies carrying out R&D cannot reap the full benefits of their efforts (Jaffe
1998). Since companies consider solely their own returns and ignore spillover
effects to others when determining how much to invest in R&D, the socially optimal
level is not reached (Arrow 1962). Underinvestment in R&D also occurs due to
asymmetric information about the commercial prospects of projects, which leads to
high transaction costs and imperfect capital markets. This can cause a financial gap,
especially for small, early-stage, and risky R&D projects (Kaplan and Strömberg
2001; Carpenter and Petersen 2002). Thus, there is a crucial difference between these
two reasons for market failure with respect to firm size. While imperfect
appropriability applies for R&D-performing firms of any size, financial restrictions
are a problem faced primarily by new ventures and small firms working in early
phases of high-tech projects (Lerner 2009).
To address these market failures, governments have developed a toolkit of
instruments for intervening in the market (Bloom et al. 2019).1 Examples include
exclusive intellectual property rights in the form of patents and copyright, innovation
support in the form of government loans and venture capital, education of trained
scientists, and improved market conditions for entrepreneurial firms.
While scholars are largely in agreement concerning the general importance of
R&D to handle market failures as described above, the policy measures used to
handle this issue have varied over time. Mission-oriented policies, such as those
advocated by, e.g., Mazzucato (2021, 2022), have underscored the importance of a
proactive government making targeted and bold efforts in certain sectors of the
economy. Mazzucato (2022, p. 93) asserts that:
Governments play a critical role in catalysing and coordinating both public and private
investment around common goals, not least transitioning to a green economy. [...]
Key here is to use the full range of levers available to governments—from supply-side
interventions, with the state acting as an investor of first resort (rather than lender of last
resort) and as a funder and regulator with clear direction, to demand-side interventions, with
the use of dynamic procurement policy to incentivize innovative solutions in domains
ranging from public transport to housing.

These statements and related innovation policy research point to the importance of
directionality, i.e., that governments should set directions for technology

1
These methods are designed to promote the dissemination of technology and create new and
improved products that will benefit consumers. Thus, welfare is expected to increase, given that
overall, the cost is lower than the positive effects.
R&D Tax Incentives as an Alternative to Targeted R&D Subsidies 291

development (e.g., Schot and Steinmueller 2016) rather than backing away from
interventions in the economy.
Recent discussions concerning the effects of such mission-oriented policies
would benefit from a thorough review of the various advantages and disadvantages
of different policy measures. As policymakers throughout the Western world are
implementing large-scale industrial policies aimed at leapfrogging the entire sectors
into a more “sustainable” state through “green deals,” there is a need for structured
analysis of the effects that are associated with direct subsidies and tax subsidies.
In this chapter, one of the main policy instruments will be analyzed: government
subsidies for business R&D.2 Such subsidies can take the form of targeted R&D
subsidies or R&D tax subsidies.3 Targeted subsidies imply that the government
subsidizes the R&D that is conducted by companies. R&D tax subsidies indicate that
the government subsidizes the R&D performed by companies by lowering their
taxes. The idea is that this incentivizes companies to increase their R&D
investments.
Most OECD countries allocate 10–20% of their annual public R&D budget to the
business sector (OECD 2022). Government support for business R&D increased
from 0.14 to 0.22% of the total GDP between 2000 and 2020 in the OECD area
(OECD 2023b). However, statistics show that the distribution of this R&D support
through targeted subsidies and tax incentives varies substantially across countries
(see Fig. 1). In 2020, approximately 55% of the total R&D support given to the
business sector in OECD consisted of R&D tax subsidies (see Fig. 1).4 Furthermore,
there has been a clear shift from targeted subsidies toward tax subsidies in OECD
countries in recent decades (Güceri et al. 2020; OECD 2023b). In 2022, 33 out of the
38 OECD countries provided R&D tax incentives for business R&D expenditures
compared to only 19 OECD countries having done so in 2000 (OECD 2023b).
The current trend toward provisioning more R&D tax subsidies might depend not
only on the economic factors that are analyzed in this chapter but also on political
factors. Carvalho (2012) argues that the Lisbon Agenda and the Action Plan to fulfill
the Barcelona objective have stimulated a growing interest in R&D tax incentives
among politicians. The political goals of increasing the level of innovation and
business R&D enhance the international competition for scarce R&D resources
and can only be achieved when more companies are incentivized to undertake
R&D and subsequently perform it. Therefore, the best instrument that governments
have at hands is the provisioning of R&D tax subsidies.
The main purpose of this chapter is to examine the economic pros and cons of
targeted R&D subsidies and tax incentives based on the theoretical and empirical

2
Government R&D financing is also provided to universities and government laboratories.
Archibugi and Filippetti (2018) have analyzed how public-funded R&D should be carried out
among different recipients (universities, government laboratories, and firms in the business sector).
3
The expression “targeted R&D subsidies” is used here because the government usually specifies in
which sector the R&D project is to be carried out and specifies numerous other conditions for
funding to be granted.
4
In the OECD area, R&D tax subsidies surpassed targeted R&D subsidies in 2016.
292 R. Svensson

Fig. 1 Direct subsidies and tax subsidies for business R&D among high- and middle-income
countries in 2020 as a percentage of GDP. Source: Countries selected from OECD (2023a)

scientific literature. Are these policy instruments substitutes or complements? How

should they be designed to work efficiently?
The analysis shows that there are several pros and cons of both targeted R&D
subsidies and tax incentives. Targeted subsidies are preferable for projects with high
uncertainty, when it takes a long time to deliver a finished product and when the
government wishes to allocate resources to specific sectors with high spillovers (e.g.,
the environment and energy sectors). However, targeted subsidies have high bureau-
cratic costs, distort competition, and favor organizations that are application experts.
The greatest disadvantages of targeted R&D projects are that they are allocated
mainly to large firms and that they are often used as covert industrial subsidies.
Tax incentives are mostly competition neutral, have low administrative costs, let
market agents choose R&D projects, and provide continuous support. However,
there is a risk of governments financing R&D that would have been undertaken
anyway (generating dead-weight losses) and of firms relabeling other costs as R&D
costs.
R&D Tax Incentives as an Alternative to Targeted R&D Subsidies 293

Furthermore, my analysis reveals that targeted R&D projects and tax subsidies
are complementary in several senses: Targeted subsidies are often allocated to
projects that require a lengthy period to reach a finished product, while firms choose
short-term R&D projects when they are financed through R&D tax subsidies.
Targeted subsidies should be used when the government aims to increase R&D
efforts in specific sectors, while R&D tax subsidies are preferable when the aim is to
increase total business R&D investments. However, increased efficiency can be
achieved if the government uses a specific form of tax subsidies called “R&D payroll
tax subsidies” that have a cap per firm. The subsidies can then be directed where they
are most efficient—to small businesses and entrepreneurs. The reason for the
increased efficiency is that market failures related to both imperfect appropriability
and imperfect capital markets can then be considered.
The chapter is structured as follows. Section “Public Support of Private R&D”
analyzes the theoretical pros and cons of direct R&D subsidies and R&D tax
incentives in the business sector. The empirical literature is reviewed in Sect.
”Empirical Research on the Efficiency of the Instruments”. Section “Conclusions
and Implications for Mission-Oriented Policy” spells out the main conclusions.

Public Support of Private R&D

Jaffe (1998) argued that government R&D financing in the business sector should be
focused on projects with large spillover effects and a low risk of displacing private
R&D. However, government financing of business R&D for the purpose of creating
spillovers is problematic since profit-maximizing firms actively attempt to avoid
disseminating R&D results to competitors. Companies therefore try to protect the
results of their R&D through secrecy, lead times, or IPRs. However, in the case of
patents, the basic knowledge about R&D results is disseminated, as patent author-
ities publish basic information about the inventions in patent documents. When there
is a commercial potential with a fairly high private return but still significant
spillover effects, the government can subsidize R&D in the business sector—either
directly or indirectly.5 The government may then set up appropriate dissemination
criteria, such as requiring the company to cooperate with universities or other
companies. Other requirements may be that the company hires a certain number of
people or that the R&D results be partially published (patent requirements).

5
There are other reasons than imperfect appropriability and financial restrictions why governments
finance R&D in the business sector instead of at universities or government research laboratories.
The business sector may have better R&D equipment than the public sector. The government may
be interested in increasing the competitiveness of its own country’s companies. There may also be
expectations that an injection of government funding will stimulate companies to increase their own
R&D.
294 R. Svensson

Targeted R&D Subsidies

Direct R&D subsidies are usually allocated through a call for proposals by govern-
ment agencies or research councils. Targeted calls are used almost exclusively for
direct R&D subsidies to the business sector, while open calls are rare. Thus, the
government authorities determine in which sectors R&D projects should be under-
taken and also specify other conditions that must be fulfilled. Companies then
compete for grants. As a rule, the grant applications are reviewed and evaluated by
an audit committee consisting of internal and external experts from industry and
academia. The government can try to estimate the quality and objectives of R&D
projects in advance and select projects that promise a social return that significantly
exceeds the private return. Examples include projects that promote the government’s
own public goals (defense, the environment, and health care) or early-stage projects
in technology-intensive industries with no access to capital markets due to informa-
tion asymmetries. Furthermore, targeted R&D subsidies can be tied to fulfilling
certain obligations. Companies might, for example, be forced to patent their inven-
tions, publish parts of their R&D results, create a certain number of new jobs, or
collaborate with universities or other private companies.

R&D Tax Incentives

Most OECD countries allow R&D costs (including R&D capital expenditures) to be
written off as current expenditures in the same year in which they are implemented.
Thus, R&D expenditures are treated more generously than investments in plants and
equipment, which must be written off over a longer period.
The most common R&D tax subsidies are tax allowances and tax credits, which
are normally available for all firms performing R&D. Governments can allow an
accelerated deduction (of more than 100%) of R&D costs from taxable income (tax
allowance) or from payable income tax (tax credits). Tax deductions reduce com-
panies’ marginal cost of R&D and thus should stimulate more R&D (Hall and Van
Reenen 2000).
Tax allowances imply that firms may deduct more R&D costs from their taxable
income than they actually spend on R&D, while tax credits are a percentage of R&D
expenditures that can be deducted from payable income tax (OECD 2023b). A
difference between tax allowances and tax credits is that the value of a tax allowance
depends on the corporate income tax rate, while a tax credit does not. Another
difference is that unused tax allowances (for unprofitable firms) may be postponed,
offsetting future taxes under normal loss carryforward provisions. However, the
carryforward of unused tax credits requires a special pool to track unused credits;
otherwise, unprofitable firms cannot use credits.6 Since many unprofitable

6
Many OECD countries allow tax credits to be claimed against future income tax (OECD 2023b).
R&D Tax Incentives as an Alternative to Targeted R&D Subsidies 295

companies are small firms or new ventures, a carryforward of unused tax credits
increases the value of tax credits for such firms.
Most tax subsidies for R&D in OECD countries are volume-based, which means
that all R&D carried out by companies is covered by subsidies. This generous system
is easy to administer but means that the government subsidizes a large amount of
R&D that companies would have undertaken without the subsidies. Some countries
have incremental schedules of their tax incentives, i.e., companies receive more tax
subsidies if they increase their R&D expenditures relative to those in a base year.
This process avoids financing R&D that companies would have performed without
the subsidies, but it is administratively demanding (OECD 2010a; SOU 2012). Many
OECD countries have thresholds or upper ceilings for the eligible R&D volumes that
qualify for R&D tax subsidies (OECD 2023b). This means that SMEs often are
favored over large firms. For R&D tax credits/allowances, SMEs receive a 20%
subsidy on eligible R&D expenses on average, as compared to 16% for large firms
(OECD 2023b).
The third kind of tax incentive system is reduced wage or payroll taxes for R&D
staff. Such a system (the WBSO system) has been applied in the Netherlands since
1994 and benefits labor-intensive R&D.7 Furthermore, unlike under traditional tax
allowance and tax credit systems, unprofitable firms can benefit from payroll tax
subsidies directly. Three countries that had not previously had R&D tax subsidies—
Sweden, Germany, and Finland—also introduced such payroll tax subsidies in 2014,
2020, and 2022, respectively.

The Pros and Cons of the Policy Instruments

There are several advantages and disadvantages associated with R&D tax incentives
and targeted R&D subsidies (see Table 1).
One obvious advantage of tax subsidies is that they are mostly competition
neutral and often available to all companies conducting R&D. Support is given
irrespective of firm size, sector, type of R&D, and the objective of the innovation
activity (van Pottelsberghe et al. 2003; CREST 2006). However, there might be
thresholds or ceilings, as mentioned in the previous section, which favor SMEs.
Furthermore, the design of the R&D subsidies might favor profitable firms (tax
allowances and tax credits) since non-profitable firms must carry their subsidies
forward until they become profitable (OECD 2023b). Targeted R&D subsidies
obviously distort competition, as the government decides to which companies the
support should be directed. Only projects and companies that receive support can
benefit from it.
Furthermore, tax subsidies have lower administrative costs than targeted R&D
subsidies (van Pottelsberghe et al. 2003; CREST 2004, 2006). Politicians and

7
The WBSO has been changed several times since its introduction in 1994.
296 R. Svensson

Table 1 Pros and cons of targeted R&D subsidies and tax incentives
Targeted R&D subsidies R&D tax incentives
Pros • Suitable under considerable uncertainty • Suitable for applied R&D that is close
and a lengthy time requirement for realizing to realizing a finished product
a finished product • Suitable for financing projects that are
• Suitable if spillovers can be identified on the margin of being commercially
• Suitable for R&D in specific public profitable
good sectors • Often competitively neutral since com-
• Good budget control for the government panies in all sectors can receive support
• The government can stimulate spillovers • Low administrative costs
by enforcing patenting and cooperation • Suitable for stimulating business R&D
among other companies and universities in general
• Both the market and companies are
efficient at selecting appropriate R&D
projects
• Continuity that is good for long-term
R&D efforts
• Does not benefit application experts
Cons • Distorts competition and assists only • Poor budget control for the government
selected companies • Entails the risk of financing R&D that
• High administrative costs would have been performed even without
• Impractical for stimulating business the support (volume-based subsidies)
R&D in general • Companies are incentivized to relabel
• Difficult for the government to identify other costs as R&D costs to benefit from
suitable projects tax reduction
• Non-continuous project-based support • Companies choose R&D projects with
• Benefits application experts high private returns rather than a high
social return
• Patent boxes are available only for
profitable companies

bureaucrats do not need to select firms, sectors, or regions. In the case of targeted
subsidies, one must identify interesting sectors, announce projects, evaluate appli-
cations, and try to pick winners. This means that targeted R&D subsidies are
impractical and costly to use when the government is aiming to increase business
R&D investment in general (CREST 2006). In that context, R&D tax subsidies are
the least costly option (Veltri et al. 2009; Carvalho 2012).
Another advantage of tax incentives is that they are continuous and support
companies’ long-term R&D investments. Targeted R&D subsidies are usually
linked to individual projects and can be used for a project only until it has been
completed (Carvalho 2012). Finally, tax incentives prevent the emergence of
so-called application experts who specialize in winning most of the grants. Targeted
subsidies not only favor such application experts (Freeman and Soete 1997; Hall and
Van Reenen 2000; Lerner 2009) but can also be influenced by political pressure,
bureaucratic structures, and lobbying from companies (Czarnitzki et al. 2011).
R&D Tax Incentives as an Alternative to Targeted R&D Subsidies 297

In general, targeted R&D support is considered appropriate if there is great

uncertainty about R&D investment and if there is a long waiting time until a
product’s development is completed (CREST 2006; Veltri et al. 2009). Targeted
R&D support is also appropriate when large spillovers are expected (van
Pottelsberghe et al. 2003) and when R&D is to be directed at specific public sectors,
e.g., the environment and defense (CREST 2006; Veltri et al. 2009). Tax subsidies
are considered more suitable for applied R&D and for products that can be com-
pleted quickly (OECD 2010b) because tax subsidies stimulate R&D projects that are
on the margin of being profitable for the private sector. Government authorities have
problems selecting winners (van Pottelsberghe et al. 2003), while companies are
more efficient in selecting appropriate and profitable R&D projects (Hall and Van
Reenen 2000; CREST 2004, 2006; Atkinson 2007). In fact, one risk in regard to
R&D tax subsidies is that companies might choose projects with a high private
return rather than those with a social return (Hall and Van Reenen 2000; van
Pottelsberghe et al. 2003).
There are some disadvantages of tax incentives. The subsidies may go to R&D
that the companies would have carried out even without the subsidy (i.e., the
subsidies are characterized by non-additionality) (CREST 2004). This is especially
the case if the tax subsidies are volume based (R&D is subsidized from the first cent
that is spent) (David et al. 2000). Furthermore, as all types of tax incentives in some
ways are linked to the expenditure side, it may be problematic to classify which costs
are actually related to R&D. There is a risk that companies will try to relabel other
costs as R&D costs to benefit from the support (CREST 2004; Veltri et al. 2009).
Finally, government budget control is reduced when direct R&D support is pro-
vided, which is not the case with R&D tax subsidies (van Pottelsberghe et al. 2003).
Because profit-maximizing companies do not want to disseminate their R&D
results, the government may set up appropriate dissemination criteria, such as
requiring the company to cooperate with universities or other companies (Veltri
et al. 2009). Other requirements may be that the company hires a certain number of
people or that the R&D results be partially published (patent requirements). How-
ever, such requirements can usually be met only under a targeted R&D subsidy
system and seldom under an R&D tax incentive policy.

Empirical Research on the Efficiency of the Instruments

Several review studies have concluded that the social returns on private R&D are
significantly higher than the private returns, i.e., the spillover effects are significant
(Wieser 2005; Hall et al. 2010). Spillover effects can occur both within and between
industries and between countries, which is particularly important from an economic-
political perspective, as spillover effects primarily motivate public actors to finance
R&D.
The research literature shows that publicly funded R&D carried out by companies
has a positive effect on productivity and growth, but the effect is weaker than when
298 R. Svensson

companies finance their own R&D (Wieser 2005). This may occur because public
authorities are not as skilled as market agents in terms of identifying promising R&D
projects to finance, and the authorities do not invest their own money. Defense-
related R&D that is implemented in the business sector and funded by the govern-
ment has a negative effect on productivity and growth (Poole and Bernard 1992;
Guellec and van Pottelsberghe 2004). There are two explanations for this negative
effect. First, this type of R&D is sometimes accomplished through contracts where
the financier (government) owns the result. Therefore, the company has a weaker
incentive to carry out R&D efficiently. Second, the defense industry is hampered by
export restrictions, which means that R&D has a smaller effect on productivity and
growth. However, defense R&D can have desirable positive effects; for example, the
well-being of society may improve because it has a stronger defense system in place.
Several studies have analyzed whether public subsidies have a positive effect on
companies’ self-financed R&D and create so-called additive effects (David et al.
2000). In this case, there is a risk that public R&D funding will create problems.
First, publicly funded R&D can displace privately funded R&D by raising the cost of
R&D—mainly the cost for scarce R&D staff. Second, publicly funded R&D can
simply replace privately funded R&D. Companies may replace their own financing
with public financing and maintain their current level of R&D. The third problem is
that the government often does not allocate resources as efficiently as market
participants, thereby creating distortions in the market.

Targeted R&D Subsidies

Early studies show that direct R&D subsidies have both positive effects and
crowding-out effects on companies’ R&D (see reviews by David et al. 2000 and
Garcia-Quevedo 2004). However, David et al. (2000) criticized early studies due to
biased sample selection; firms with no R&D were excluded from the samples. As
R&D-intensive companies are more likely to apply for R&D support, it is probable
that these companies would have made some of the R&D investments even without
support. Therefore, these studies tend to find displacement effects.
More recent studies use econometric methods that account for this biased sample
selection problem and have therefore found more positive effects on business R&D
supported by direct R&D subsidies. This result is confirmed by studies that analyze
R&D subsidies in numerous European countries (Aerts and Schmidt 2008;
Czarnitzki and Hussinger 2004; Duguet 2004; Hussinger 2008; Özcelik and Taymaz
2008; Carboni 2011; Cerulli and Poti 2012; Bloch and Graversen 2012).
R&D Tax Incentives as an Alternative to Targeted R&D Subsidies 299

R&D Tax Incentives

There are two main groups of studies that analyze the effect of R&D tax subsidies on
R&D investments at the firm level: studies using the structural approach and studies
using the direct approach (Blandinières and Steinbrenner 2021):
Structural approach. In the studies using a structural method, the impact of the
tax incentives is captured via an R&D user cost, which accounts for the reduction in
R&D costs, and the dependent variable is the firm’s R&D expenditures in a log-log
specification. Thus, these studies estimate an elasticity, namely, how a percentage
decrease in the R&D user cost affects the percentage change in R&D investments.
According to a literature review by Becker (2015), recent studies have established
that tax incentives have relatively stable effects on companies’ R&D. The elasticity
is approximately -1 (i.e., if the tax decreases by 1%, companies’ R&D increases by
1%), but there is some variation across countries and periods (Bloom et al. 2002;
Parisi and Sembenelli 2003; Koga 2003; Bernstein and Mamuneas 2005; Baghana
and Mohnen 2009; Harris et al. 2009; Lokshin and Mohnen 2012; Mulkay and
Mairesse 2013).
Direct approach. In studies using a direct approach, the tax subsidy is measured
either as a dummy or in absolute terms, i.e., the amount of R&D subsidy received,
and compared with firms’ R&D expenditure. The dummy can be interpreted either as
a treatment effect on the firm or as a reflection of whether the firm is eligible for the
subsidy. Some recent studies using a direct approach rely on difference-in-difference
or matching methods to correct for selection bias and to compare the effect across
treatment and control groups. Most studies conclude that tax credits increase R&D
spending or R&D intensity (Paff 2005; Yang et al. 2012; Kobayashi 2014; Crespi
et al. 2016; Güceri and Liu 2019; Agrawal et al. 2020; Stavlöt and Svensson 2022).
Notably, many of the studies taking the direct approach have found that small firms
or firms with liquidity constraints respond more strongly to tax incentives
(Kobayashi 2014; Güceri and Liu 2019; Agrawal et al. 2020).
Other approaches. Some studies use dependent variables other than firms’ own
R&D investment. This choice might arise from the fact that data on firm-level R&D
expenditures are not available or that the authors wish to estimate the effects on other
goal variables. One study in this vein worth emphasizing is that of Czarnitzki et al.
(2011), who use a matching method to estimate the effects of Canadian tax credits on
a series of innovation indicators (number of new products, sales of new products,
originality of innovations, etc.). The authors conclude that recipients of subsidies
score better on most indicators than a control group. Furthermore, they find that the
tax credit has a positive impact on firms’ decision to conduct any R&D at all.
Using data on Belgian R&D tax subsidies for R&D wages, Neicu et al. (2016)
find that increasing the subsidies cause behavioral additionality effects among R&D
conducting firms. Companies do not undertake similar R&D projects as they did
before (scale), nor do they conduct projects with a higher speed, but they rather place
greater focus on research than development and initiate new R&D projects. Since
“research” is more intricately linked than “development” to market failures, the
300 R. Svensson

provisioning of additional volume-based R&D tax subsidies is therefore supported

from a policy-perspective.

Targeted Subsidies vs. Tax Incentives

Few studies have empirically compared tax incentives with direct subsidies. How-
ever, Neicu et al. (2016) find that companies that also receive direct R&D subsidies
are more strongly affected by the above-mentioned behavioral additionality effects
that arise from R&D tax subsidies. Becker (2015) reviews the literature assessing
how direct support and tax incentives affect private R&D in the short and long terms.
In the short run, tax incentives have significant effects, which then diminish. Direct
support, on the other hand, has small effects in the short run but greater long-term
effects (see Table 1). These observations depend on the fact that companies are more
likely to choose profitable projects that are relatively close to being finished and
marketed. Furthermore, in the case of direct support, public authorities choose which
R&D projects to carry out. These projects are often in the early R&D phases and
focus on specific sectors (e.g., public needs). Such R&D projects can therefore create
new opportunities and induce companies to start R&D projects in later phases. These
results suggest that tax incentives and direct support should be coordinated.
Görg and Strobl (2007) conduct a firm-level investigation on how the amount of
public R&D support to domestic and multinational manufacturing companies in
Ireland affects firms’ self-financed R&D. For domestic companies, low levels of
R&D support for firms have positive effects on private R&D, but high levels of
support crowd-out companies’ own R&D. For multinational companies, government
support has neither positive nor negative effects, regardless of the size of the support.
Hsu and Hsueh (2009) examine the effectiveness of public R&D assistance provided
to Taiwanese companies. They find that providing a high level of government R&D
support for companies’ R&D is ineffective. Similar to Guellec and van Pottelsberghe
(2003) with respect to the macro-level, both Görg and Strobl (2007) and Hsu and
Hsueh (2009) conclude that at the micro-level, the effects of public R&D support on
companies’ R&D correspond to an inverted U-shaped curve. Becker (2015) inter-
prets this result to imply that a high level of R&D support increases the probability of
the government financing R&D activities that companies would have performed
even without government support. In such cases, it is better for the government to
provide lower amounts of R&D support to many companies rather than large
amounts to a few companies.
An increasing number of empirical studies show that public R&D support can
increase private R&D more effectively in small firms than in large companies. The
theoretical argument is that small and young companies are more financially
constrained. Public R&D support acts as a signal to other financiers that the project
is worth investing in and should thereby attract more external financing. Lach
(2002), González et al. (2005), Hyytinen and Toivanen (2005), and Hall et al.
(2009) find that R&D subsidies have a greater effect on R&D performed in small
R&D Tax Incentives as an Alternative to Targeted R&D Subsidies 301

companies than on that performed in large companies, especially if the companies

have not performed any R&D before receiving support. Howell (2017) finds that
one-time direct subsidies provided to small firms have a significant impact on firm
R&D/innovation since they fund prototype technologies and reduce uncertainty.
However, multiple grants awarded to the same firms are not as efficient. Studies
show that in practice, most public direct R&D subsidies go to larger companies
(Czarnitzki and Ebersberger 2010). For example, it has been estimated that 85% of
the public targeted R&D subsidies (SEK 5.3 billion) provided to the Swedish
business sector are allocated to large companies (Vinnova 2019). The picking-the-
winner and application expert theories (see the next section) can partly explain this
phenomenon.

Theories about the Skewed Distribution of Direct R&D

Subsidies

There are two theories used to explain why the allocation of targeted R&D subsidies
is often skewed. The first theory is the “picking-the-winner” theory (Stiglitz and
Wallsten 2000), which implies that public R&D financiers prefer to finance R&D
projects that have a high probability of success and a lower expected return rather
than projects with a low probability of success and a high expected return. There are
several explanations for this phenomenon (Cantner and Kösters 2012; Antonelli and
Crespi 2013). First, R&D projects are risky and have a high probability of failure.
The public choice literature argues that strong political commitments are needed to
justify the provision of subsidies for many failed projects. Second, direct support
distorts competition. Subsidized companies have an advantage over nonsubsidized
companies. By subsidizing good/efficient companies rather than bad/inefficient
ones, the distortion is minimized (Shane 2009).
The second theory concerns application experts. Companies that have experience
with previous support or applications seem to have an advantage over inexperienced
companies (Lerner 2009). For each application submitted, companies gain insight
into how the authority’s selection of subsidized companies works. Experienced
applicants should therefore be more likely to receive direct subsidies. The risk is
that—in the end—some companies specialize in obtaining support from many
different authorities. The “Matthew effect” can also explain why there is continuity
in how direct R&D subsidies are allocated (Merton 1968; Antonelli and Crespi
2013). According to this principle, successful researchers receive a disproportionate
amount of attention for their research and thus obtain more funding.
302 R. Svensson

Conclusions and Implications for Mission-Oriented Policy

This chapter addresses the pros and cons of tax incentives and targeted subsidies, as
the government finances R&D in the business sector. Targeted subsidies have certain
advantages: the government can allocate support to specifically selected sectors, and
this action works well under high risk, and it takes a long time to achieve a finished
product. However, there are significant disadvantages in the form of distorted
competition, and bureaucrats have difficulty knowing which R&D projects will be
commercially viable in the long term. Targeted subsidies also favor application
experts. In addition, bureaucrats do not distribute their own money but that of
taxpayers and may therefore be less careful when choosing appropriate R&D pro-
jects. Above all, targeted subsidies are costly, as projects must be identified and
announced, and applications must be evaluated. However, the largest disadvantages
of targeted R&D projects are that they are allocated mainly to large firms and are
often used as covert industrial subsidies.
Tax deductions also have disadvantages. There is a risk that the government
finances R&D that companies would carry out even without support, and companies
reclassify other costs as R&D costs to benefit from tax deductions. On the plus side,
tax incentives are mostly competition neutral, and more companies can benefit from
this type of support, especially innovative small companies and entrepreneurs. Tax
deductions reduce the administrative cost for the government, and opportunists who
specialize in applying for support do not overly benefit. Finally, companies are
allowed, to a greater extent, to decide which R&D investments to carry out, as
market participants are considered more efficient than bureaucrats in allocating the
support where it is most useful, and companies must co-finance the R&D projects
they choose.
The analysis shows that targeted R&D projects and tax subsidies are comple-
mentary: targeted subsidies are often allocated to projects where there is a long time
to a finished product, while firms choose short-term R&D projects when financed
through tax subsidies. Furthermore, targeted subsidies should be used when the
government aims to increase R&D efforts in specific sectors, while R&D tax
subsidies are preferable when the aim is to increase the total level of business
R&D investments. However, increased efficiency can be achieved if the government
uses a specific form of tax subsidies called “R&D payroll tax subsidies” that has a
cap per firm. The subsidies can then be directed where they are the most efficient—to
small businesses and entrepreneurs. The reason for the increased efficiency is that
market failures related to both imperfect appropriability and imperfect capital mar-
kets can then be considered.
The findings in this literature review have implications concerning the efficiency
and effectiveness of mission-oriented innovation policies. While the mission-
oriented approach can be implemented in different ways, in many cases, it becomes
a large-scale program aimed at a specific transformation of an entire sector of the
economy, e.g., transitioning industries such as steel or cement into making use of
hydrogen gas instead of previously dominant production methods (Sandström and
R&D Tax Incentives as an Alternative to Targeted R&D Subsidies 303

Alm 2022). These missions usually involve large sums of R&D subsidies that firms
can apply for.
This literature review highlights a set of challenges that are related to mission-
oriented innovation policies. First, large targeted R&D subsidies face an inherent
risk of resulting in distorted competition, as only a few selected companies end up
receiving support, an argument that has been previously applied to mission-oriented
innovation policies (Bergkvist et al. 2022).
There is also an apparent risk that government officials end up supporting the
wrong technology. Allocation of support does not happen in a vacuum; in contrast,
such processes take place under the influence of various stakeholders. In Sweden, an
attempt to transition cars into using ethanol instead of gasoline as fuel resulted in a
spectacular failure. Ethanol was not a competitive fuel, neither for the environment
nor for the economy, but nevertheless gained political support because a farmers’
lobby association was historically a strong supporter of ethanol (Sandström and
Björnemalm 2022).
The presence of large pools of public R&D support earmarked for specific
technologies also results in considerable administrative costs. An industry for
application experts emerges and results in a form of unproductive entrepreneurship
aimed at writing and obtaining grants. Previous research has shown that firms that
receive more R&D support tend to be less productive and pay higher wages,
effectively becoming subsidy entrepreneurs (Gustafsson et al. 2020).
The review in this chapter suggests that targeted R&D subsidies may be
warranted if large and long-term investments are required, if there is high uncer-
tainty, and if the positive externalities are deemed to be substantial. However, there
is an inherent risk that such subsidies could lead to misallocation of resources due to
lobbying by interest groups and the pursuit of narrow self-interest among political
decision-makers.

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R&D Tax Incentives as an Alternative to Targeted R&D Subsidies 307

Roger Svensson is Associate Professor of Economics and Senior Research Fellow at the Research
Institute of Industrial Economics (IFN) in Stockholm, Sweden. He received his PhD in 1996 from
Uppsala University with his dissertation Foreign Activities of Swedish Multinational Corporations.
His research focuses on issues related to innovation, entrepreneurship, technology transfer and
intellectual property rights. Special focus is on government interventions or subsidies to stimulate
R&D and innovations. He has also a great interest in applying economic theory to historical events
and contexts, especially monetary policy.
He has published several articles about government policies and monetary systems in leading
journals, such as Research Policy, Journal of Business Venturing, the International Economic
Review and Economic History Review.

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Bottom-Up Policies Trump Top-Down
Missions

Magnus Henrekson and Mikael Stenkula

Abstract Mission-oriented innovation policies are becoming increasingly popular

among policymakers and scholars. We maintain that these policies are based on an
overly mechanistic view of innovation and economic growth, suggesting that a more
bottom-up approach is called for. By invoking an entrepreneurial ecosystem per-
spective, we point out that innovative entrepreneurship requires many other actors—
besides the entrepreneur—whose skills and abilities are necessary to realize an
entrepreneurial project. When mission-oriented policies play a large role in the
economy, connections between actors in the ecosystem risk becoming distorted.
An efficient and well-balanced entrepreneurial ecosystem requires instead an insti-
tutional framework that levels the playing field for potential entrepreneurs and
encourages productive entrepreneurship. To promote this kind of system, we discuss
in more detail eight key areas where appropriate horizontal or bottom-up policy
measures can foster innovation and, in the end, the welfare-enhancing productive
entrepreneurship policymakers and scholars strive for.

Keywords Collaborative innovation bloc · Entrepreneurial ecosystem ·

Entrepreneurship policy · Institutions · Public choice

JEL Codes H50 · L26 · O31 · P16

We are grateful for useful comments and suggestions from Niclas Berggren, Niklas Elert, and
Christian Sandström. Financial support from the Jan Wallander and Tom Hedelius Foundation
(P2018-0162 and P2023-0186), the Kamprad Family Foundation for Entrepreneurship,
Research & Charity (P20220048), and the Marianne and Marcus Wallenberg Foundation (2020-
0049) is gratefully acknowledged.
An earlier version of this chapter has appeared as IFN Working Paper No. 1474. Used with
permisson.

M. Henrekson (✉) · M. Stenkula

Research Institute of Industrial Economics (IFN), Stockholm, Sweden
e-mail: [email protected]; [email protected]

© The Author(s) 2024 309

M. Henrekson et al. (eds.), Moonshots and the New Industrial Policy, International
Studies in Entrepreneurship 56, https://doi.org/10.1007/978-3-031-49196-2_17
310 M. Henrekson and M. Stenkula

Introduction

As the European Union, national governments and regional policymakers have been
elevated to the forefront of the innovation process, a growing body of policies are
being put in place with larger budgets and higher expectations on their net contri-
bution to innovation and renewal. This development has been inspired by what at
times is referred to as the third generation of innovation policy.
Over time, the literature on innovation systems has become increasingly
concerned with directionality, i.e., the idea that governments need not only create
conditions for innovation and entrepreneurship but also set the overall direction for
effort and resource mobilization. Several scholars have paved the way for the
emergence of this approach. Schot and Steinmueller (2016) used the term “transfor-
mative change,” Borrás and Edler (2014) wrote about “socio-technical systems,” and
Geels (2004) introduced the notion of “system innovation.”
These ideas were synthesized and popularized by Mariana Mazzucato (2018,
2021), who forcefully disseminated the vision of a so-called mission-based economy
guided by a proactive state, a message that has received worldwide attention and
gained influence among policymakers and economic researchers alike. Her main
argument is based on the notion that a sustainable, inclusive, and well-functioning
economy requires a potent and committed state that fosters innovations by shaping
markets and guiding the economy in ways that aim to achieve bold common goals at
the societal level—an entrepreneurial state. By using the term missions, she manages
to imbue her message with an almost spiritual sense of urgency—government-
initiated endeavors are the only way forward for solving the Grand Challenges
faced by nations and, indeed, the world.
According to Mazzucato, this is not only the way forward for progressive states in
the present day but also the way many Western states through history have acted
successfully (before cynical ideologies and theories with questionable agendas cast
doubt on the legitimacy and efficaciousness of the political sector). This claim is
supported by empirical cases, ostensibly showing the key role the state has played in
implementing new successful technologies and extraordinary innovations,
debunking the myth of the inefficient and bureaucratic state. Mazzucato’s reasoning
paves the way for a more proactive and interventionist state, which steers economic
development by means of top-down or vertical industrial policies. Based on
Mazzucato’s influence as a worldwide expert, this perspective is now also high on
both research and policy agendas.
Until recently, Mazzucato’s ideas remained largely unquestioned. This is no
longer the case. Her reasoning and the ensuing policy conclusions are beginning
to face serious critique from both a theoretical and empirical point of view
(Wennberg and Sandström 2022). Critics have, for example, pointed out that her
historical examples are either exaggerated (Yerger 2023) or grossly misleading
(McCloskey and Mingardi 2020) or that her underlying vision ignores or greatly
underestimates fundamental challenges faced by the political sector, including
Bottom-Up Policies Trump Top-Down Missions 311

knowledge and incentive problems (Muldoon and Yonai 2023; Karlson et al. 2021;
Bergkvist et al. 2022; Schnellenbach 2024).
An innovative idea or creative vision that is flawed should of course be duly
criticized, but unless a more viable alternative is presented, the flawed idea is
unlikely to be phased out. Presenting such an alternative is the prime purpose of
this chapter. It thus takes a positive approach, complementary to the critical dissec-
tions of Mazzucato’s body of work presented in other chapters of this volume and
elsewhere.
A flourishing economy requires, and in fact stems from, a well-balanced entre-
preneurial ecosystem. Hence, in this chapter we discuss what we consider to be the
most important points for supporting a well-functioning ecosystem and identify the
key institutions and policy measures that facilitate the emergence of an entrepre-
neurial economy without relying on an interventionist top-down or even dirigiste
approach. The pertinent policy measures cover a wide array of issues. More specif-
ically, we will, in more detail, discuss eight important institutional areas and how
their design affects the driving forces for productive entrepreneurship. This will be
contrasted with Mazzucato’s notion of a top-down, mission-oriented approach.
Except in extreme cases such as war and other acute existential threats, our conclu-
sion is unequivocal: bottom-up policies trump top-down missions.

Top-Down Missions

Numerous scholars have already reviewed and critically evaluated Mazzucato’s

views regarding optimally efficient management of the economy.1 In short, she
asserts that society is held back by a flawed ideology (“conventional wisdom”)
restricting the economic role of the government. Instead, a prosperous future
requires the government to assume a more active role in guiding the economy in
the “right” direction through a top-down, mission-oriented approach.
Using the traditional political tools—adjusting the total level of taxes, govern-
ment expenditures, or money supply through fiscal and monetary policy—is said to
be “rudderless” and too passive as it has no explicit direction. How the resources in
the end will “trickle-down” through the system will, in this case, rely on the
spontaneous market process, implying that the end result may be unsustainable
and inappropriate.
What is needed is a political sector controlling the direction of the economy in
combination with civil servants actively working together with economic agents,
shaping new markets, and co-creating value in existing markets. In this way, a more
political and planned agenda can, according to Mazzucato, be driven by public-
interest consideration rather than profit where growth is better balanced and resilient
and where risks and rewards are more equally shared.

1
See, e.g., the contributions in this volume and in Wennberg and Sandström (2022).
312 M. Henrekson and M. Stenkula

The government and public sector must thus be more active, transforming itself
into an “innovation organization”—an entrepreneurial state energizing the economy
and working as a catalyst for investment, innovation, and collaboration, making it
possible to achieve bold objectives and deliver on ambitious outcomes. The state
must reclaim its capabilities and privilege to shape markets and guide the economy
in ways that target necessary and urgent common goals, i.e., missions. According to
Mazzucato, the government can always increase public expenditure to the extent
required to achieve the alleged missions—an idea she denotes as the government
functioning as an “investor of first resort” in a travesty of the more widely accepted
economic idea of “lender of last resort.”2
Thus, Mazzucato can be said to advocate the increased use of vertical—what we
call top-down—innovation and entrepreneurship policies targeted toward specific
industries, sectors, or even certain companies to encourage innovation in particular
fields or areas. By contrast, horizontal—what we call bottom-up—policies apply
broadly across all sectors of the economy, focusing on improving the overall
conditions for innovation, rather than targeting specific sectors.
Our view of how innovations come about and the role of the state differ in
fundamental ways from that of Mazzucato. To expound our view, we will begin
by discussing the functioning of the entrepreneurial ecosystem, which enables a
better understanding of how the economy creates and explores valuable knowledge.
In the subsequent section, we will discuss in some detail a number of key areas
where appropriate horizontal or bottom-up policy measures can foster innovation
and welfare-enhancing, productive entrepreneurship.

The Entrepreneurial Ecosystem

Developing socially beneficial innovations requires entrepreneurship. But entrepre-

neurs do not act in a vacuum. The development of entrepreneurship requires an
entrepreneurial ecosystem, i.e., a system or environment in which entrepreneurs,
startups, and growth-oriented businesses can flourish and grow. This system com-
prises a variety of interconnected elements, both formal and informal, that collec-
tively support and shape the entrepreneurial journey. Several of those elements are
either (wholly or partly) financed by the government or a result of government

2
This idea is based on the heterodox theory, denoted modern money theory (MMT)—also explicitly
referred to by Mazzucato (2021, pp. 183f)—claiming that the government does not have any budget
restrictions as it is backed up by a central bank that can “create” any amount of money for the
mission at hand. This idea has already been debunked several times by the (mainstream) economics
profession. See, e.g., Drumetz and Pfister (2021, p. 355), who conclude that “the meaning of MMT
is more that of a political manifesto than of a genuine economic theory.”
Bottom-Up Policies Trump Top-Down Missions 313

Fig. 1 The collaborative innovation bloc. Source: Elert and Henrekson (2021)

decision-making, notably institutions for education, training, and basic research,

support organizations, the regulatory framework, and the physical infrastructure.3
The transformation of new knowledge and innovations into real value in new and
growing businesses requires private sector agents with complementary skills and
resources, what Elert et al. (2017) and Elert and Henrekson (2021) denote a
collaborative innovation bloc. In addition to the entrepreneur, at least five additional
actors with complementary competencies have been identified: inventors, key per-
sonnel (managers, R&D specialists, etc.), early-stage financiers (business angels and
VC firms), later-stage financiers (buyout firms, institutional investors, etc.), and
demanding customers.4
If any of the actors or their competencies are missing or are in insufficient supply
for some reason, there is a significant risk that innovations cannot be developed to
their full potential or perhaps not be realized at all. Figure 1 illustrates schematically
what the collaborative innovation bloc looks like—from idea to full-scale industrial
production—and how the different actors in the system contribute to the develop-
ment through the different phases. Although all actors and the functions they
perform are needed, the same person may perform more than one function: for
example, an entrepreneur may also be an inventor or act as a manager. In order for
policymakers and civil servants to design adequate policy measures, they must
consider the entrepreneurial ecosystem in its entirety—with all its parts and actors—
and try to understand the logic of the system.

3
Wurth et al. (2022) provide an in-depth discussion of the various components of the entrepre-
neurial ecosystem.
4
Lucas (2019) suggests that the model could be extended with another layer also including those
who advocate, write, and enforce the rules that competencies are guided by (such as politicians,
regulators, and experts).
314 M. Henrekson and M. Stenkula

It is important to note that no single person “owns” or controls the ecosystem. On

the contrary, it is the rule rather than the exception that it emerges spontaneously
from below as stakeholders interact on a voluntary basis. No one understands more
than a fraction of how the ecosystem works, and no one necessarily feels responsible
for ascertaining the efficient functioning of the system. Instead, the development of
the ecosystem is highly experimental, and serendipity often plays a role in innova-
tion and subsequent business success.
The opposite approach is to try to resolve Grand Challenges through bold public
missions launched by the government where vertical measures tied to the mission are
supposed to guide the economy and the various actors toward the desired solution.
However, this is not congruent with how an entrepreneurial ecosystem works. In
reality, actors search for suitable solutions and forms of cooperation in a trial-and-
error process that cannot be efficiently directed from above. It is therefore not
possible to ensure a more successful development of innovations by means of
top-down command and control measures. The ignorance and uncertainty inherent
in all innovation activities are the main reasons why caution and humility are
called for.
Hence, the state is rarely better placed than private actors to address failure in the
innovation process.5 A well-functioning ecosystem simultaneously reduces two
related forms of failure (Eliasson 2000). The first type of failure involves rejecting
(prospective) winners, often because the entrepreneur or other actors in the ecosys-
tem become too pessimistic. We would argue that the mission-oriented argument
draws much of its strength from the fear of this type of mistake—the economy needs
a visible hand pushing the economy in the “right” direction that would not take place
“spontaneously.” The second type of failure is more subtle and involves allowing
failing ventures to survive for too long because of misjudgments regarding compet-
itive conditions and the viability of the innovation. Market forces in the ecosystem
tend to systematically eliminate such mistakes because “market experience reveals
the unfeasibility of some (hitherto sought after) courses of action and the (hitherto
unnoticed) profitability of other courses of action” (Kirzner 1997, p. 71). Collabo-
ration among the actors in the ecosystem is of fundamental importance in identifying
and correcting such mistakes early and at the lowest possible cost.
As it is difficult, if not impossible, for politicians and government employees to
determine in advance who will be a successful entrepreneur (or what will be a
successful business idea), it is misguided to try to support a particular group or a
particular type of entrepreneurship. A system based on special benefits and regula-
tions for selected categories also tends to become extremely complicated, with
extensive rules, exemptions and exemptions to the exemptions. In turn, significant
administration and information costs result, which may make things worse for the
very type of company that the measures were intended to benefit. In addition,

5
Autio (2016, p. 22) echoes this idea claiming that top-down approaches “build on the assumption
that it is possible to identify clear-cut ‘failures’ in the functioning of a given market or an innovation
system” and that such failures “can be fixed through top-down intervention.”
Bottom-Up Policies Trump Top-Down Missions 315

cumbersome administrative systems encourage unproductive and destructive entre-

preneurship by encouraging extensive lobbying efforts (Baumol 1990). Once poli-
ticians begin to grant favors to a particular group, good arguments for increasing the
number of beneficiaries will abound.
Hence, it is doubtful whether government early-stage investments can be a recipe
for success, as there is no sure method for selecting winners. The evaluation process
developed in the private venture capital (VC) industry is complex and relies heavily
on tacit knowledge and experience-based judgmental decisions. By contrast, a
government agency, which is accountable to its constituents, is not and can never
be mandated to act based on tacit knowledge and experience-based judgments.
Moreover, VCs have an important screening function and provides management
and market expertise (Croce et al. 2013; Landström and Mason 2016). While it is
true that, at best, VC actors cannot be said to be more than moderately successful in
finding the future winners among all high-risk projects (Svensson 2008; Gompers
et al. 2009; Lerner 2020), the VC strategy typically includes investing in many
projects to manage this problem.
While it is possible for governments to pool risks as well, the whole purpose of
the VC business model is to shift extremely risky projects to a more acceptable level
of risk in a diversified portfolio of investments. This harmonizes the incentives for
investors, VC partners, and entrepreneurs. If the government is better at pooling risk,
it is presumably because it can spread the costs of its failed investments across the
entire taxpayer community. While it is unproblematic for private actors to bear high
risk, it is difficult to justify, in a democratic setting, that politicians and civil servants
take risks with taxpayers’ money in the same way. The lack of “skin in the game”
also means that the incentives to learn from mistakes are greatly weakened, and a
risk that results in “failing to fail” (Lucas 2019).
A far better strategy to tackle Grand Challenges such as climate change is
government creation of frameworks that incentivize economic agents to search for
efficient solutions. A case in point is a cap-and-trade system for greenhouse gases.
Such a system sparks innovation activities across the board to find efficient ways to
reduce and eventually stop emissions altogether. In such a system, the crucial
selection mechanism remains operative, and a large number of experiments will be
made within the framework. Over time, it will become clear which solutions turn out
to be most efficient, and none of the original experiments will have been so large that
a failure will have disastrous effects (Harford 2011).
At the end of the day, policymakers should, as far as possible, avoid tampering
with the market’s search process where new ideas are identified, commercialized,
and screened. What they can and should do is to design an institutional framework
that rewards productive entrepreneurship where a well-functioning entrepreneurial
ecosystem is most likely to emerge spontaneously. Next, we will discuss what areas
and what policy measures are most likely to be of substantive importance in this
respect.
316 M. Henrekson and M. Stenkula

A Bottom-Up Approach

There is no simple and obvious top-down quick fix that stimulates and generates
more successful entrepreneurial activity regardless of the quality of the ecosystem or
the institutional and cultural background. The nature of politics, with its election
cycles, tends to encourage campaigns with far-reaching visions based on a
proclaimed top-down approach. But the political sector is not guided by an altruistic,
omniscient, omnipotent, and enlightened ethos which resolutely aligns its economic
policy with the most up-to-date knowledge in relevant areas. Political consider-
ations, knowledge problems, self-interest, and rent seeking imply that society will
never attain (or perhaps never even strive for) an ideal world with optimal ways of
reaching commendable goals. Moreover, major changes in the regulatory framework
will invariably give rise to unintended consequences that are impossible to predict.6
Economic reality consists of billions of heterogeneous individuals and firms but
lacks an altruistic and omniscient government sector equipped with superior knowl-
edge and forecasting abilities. Therefore, a more bottom-up approach is called for.
As it is impossible for private and government actors alike to identify how, where,
and when the next successful disruptive innovation will emerge, profoundly altering
the development of the economy, the primary objective for policy should be to level
the playing field, to ensure that no potential paths forward are unnecessarily blocked,
leaving the final selection to the entrepreneurial society rather than the entrepreneur-
ial state (e.g., Elert and Henrekson 2022; Sanders et al. 2024).
The starting point for this approach is the entrepreneurial ecosystem. Long-term
economic development will largely depend on the quality of new entrepreneurial
firms and on how well the market selection process works. Entrepreneurship cannot
be planned or mandated, but an environment can be created where successful
entrepreneurs are more likely to be identified and chosen through a market-like
selection process. If politicians and bureaucrats want to increase innovation and
entrepreneurial activity, the best way to do so is to create institutional framework
conditions that take this into account. Such policies will in general reward
• education,
• knowledge transfer,
• competition, and
• successful productive entrepreneurship,
while penalizing methods of acquiring wealth without contributing to its creation
such as corruption and rent seeking, e.g., in the form of lobbying for special benefits
and obstructive litigation.

6
Cf. Lucas (2019), who argues that a discussion about the role of government in the innovation
process should include a public choice perspective taking into account the problems and limitations
inherent in the political sector.
Bottom-Up Policies Trump Top-Down Missions 317

Below, we will in more detail present a smorgasbord of measures and identify

eight policy areas that we consider important for all parts of the ecosystem to
promote innovation and entrepreneurial activity.

Rule of Law and Property Rights

Our first policy area involves the legal system itself. An essential condition for the
proper functioning of the entrepreneurial ecosystem is the rule of law and protection
of property rights. If the rule of law is respected and the judicial system is disinter-
ested and efficient, entrepreneurs will be more willing to invest time and resources
on long-term projects, as they can be confident that their assets and potential future
profits will not be unduly seized in the future (North 1990; Rodrik et al. 2004).
Strong protection of property rights means that potential entrepreneurs and other
actors in the ecosystem can expect to keep the lion’s share of the surplus they create.
Similarly, entering into agreements and carrying out transactions with other parties
are less risky. A well-functioning society characterized by the rule of law enables
greater specialization and division of labor. Therefore, entrepreneurs can more easily
exploit their ideas without having to internalize the entire value chain—in other
words, they do not have to do everything themselves. Access to external equity
financing and complementary skills can also be gained based on contractual agree-
ments (de Soto 2000).
Without secure property rights, unproductive entrepreneurship develops in the
form of crime syndicates and mafia-like organizations that fill the void left by the
absence of the rule of law. In such cases there is a significant difference between
formal laws and their enforcement in practice.

Taxation

The second aspect involved in a healthy bottom-up approach is the design of the tax
system. The taxation of entrepreneurs’ income has a major impact on their net worth,
but the overall design of the tax system is also important. With all its details,
exceptions, and exceptions to the exceptions, the tax system affects the entrepre-
neur’s return in relation to how other actors are taxed and of course also the existence
and incentives of the other actors in the entrepreneurial ecosystem.
Tax rates should generally be low or moderate and predictably so. A simple,
stable system with few exceptions is preferable to a tax system using targeted
exceptions and special rules. For the ecosystem to flourish and for the path from
idea to industrialization to work well, the tax system should be as neutral as possible
between different ownership categories, sources of finance, firm sizes, and
industries.
318 M. Henrekson and M. Stenkula

Taxes should not prevent key employees and entrepreneurs from obtaining a fair
stake in the substantial capital value that materializes when a successful business is
developed, even if they lack financial resources of their own. This can be achieved
through adequate tax rules pertaining to stock options that allow state-contingent
contracting and vesting and where capital gains are taxed at a low rate and not until
the stock options or the shares received are eventually sold (Braunerhjelm and
Henrekson 2024, Chap. 6).
Unless skilled specialists who need to be recruited can receive some of the capital
value they are instrumental in creating, they are likely to prefer a career in incumbent
firms where salaries are higher and the risk of unemployment is lower. Favorable
stock option taxation is also important for the professional VC sector since it pro-
vides a much-needed instrument to incentivize both founders and key personnel.

Savings and Capital Formation

The policy debate often highlights the importance of promoting savings and wealth
accumulation. However, the type of savings is probably more important than the
level itself. Even if there is a high level of savings in the economy, a large part of
what is saved in various fund systems is often not available to finance investments in
risky entrepreneurial ventures. Many new businesses find it difficult to obtain capital
from large institutions and have to rely on other sources (family, friends, personal
wealth). Studies often show that the difficulty in accessing capital hampers the
entrepreneurial ecosystem (Parker 2018, Chap. 12).
A long-term solution to this problem is to ensure that not all savings are
channeled into funds that are barred from investing in unlisted high-risk firms and
to allow pension funds (to which a growing share of all savings is channeled) to
invest part of their assets in entrepreneurial projects and not only in listed securities
and real estate.
As new entrepreneurial firms cannot use debt financing to any significant degree,
the regulatory framework should be as neutral as possible between debt and equity
financing. Overall, the regulatory framework should encourage private wealth cre-
ation and the creation of a dynamic VC sector, especially for early-stage financing.
The public sector may, directly or indirectly, support the VC sector to mitigate the
above problems. The state can, e.g., use some of its tax revenues to directly provide
the market with venture capital, either through its institutions or together with private
actors. However, this type of support presents some cause for concern, as already
discussed.
Neither theory nor practice suggests that government agencies will be better able
than venture capitalists or business angels to evaluate the future success of a
particular firm or a specific project. Existing evidence suggests that public venture
capital appears to be less effective at stimulating innovation than private capital or a
mix of private and public capital (Bertoni and Tykvova 2015; Cumming et al. 2017).
Bottom-Up Policies Trump Top-Down Missions 319

According to Bloom et al. (2019, p. 178), “removing constraints on the develop-

ment of an active early-stage finance market (like angel finance or venture capital)
might be a reasonable policy focus” to stimulate innovation. These sectors have
historically faced high barriers in many countries. This was also the case in the
United States until a number of reforms around 1980 paved the way for the
emergence of today’s VC sector. Without these reforms, the emergence of Silicon
Valley would hardly have been possible (Fenn et al. 1995). The reforms that made a
difference was, on the one hand, the reduction of both capital gains taxes and
taxation of capital gains for stock options in young entrepreneurial firms and, on
the other hand, the right of pension funds to invest in high-risk securities including
VC funds (Gilson and Schizer 2003).7
An appropriately designed tax policy is not the only way the government can
support early-stage financing of entrepreneurial firms. For example, public agencies
can provide soft loans (loans that do not require collateral or personal guarantees and
that, under some circumstances, can be waived) to improve the supply of risk capital
in the market. However, the effects of such soft loans are generally disappointing,
partly because politicians, for political reasons, may be tempted to establish a
number of agencies that are authorized to offer loans that target specific regions
and/or industries. A complex maze of terms and conditions, often lacking consis-
tency and encouraging strategic and short-term behavior, thus results.
Based on the reasoning above, it is doubtful whether channeling more govern-
ment funds into venture capital markets is a successful strategy. VC financing is
more likely to be stimulated if the expected returns of innovative projects are higher
because of, for instance, reduced corporate or capital gains taxes. The existence of
exit opportunities also energizes the VC industry (Da Rin et al. 2006).

Labor Market Regulations and Social Security

The fourth policy area we would like to highlight involves the labor market and
financial security for times when workers are not employed. Research shows that
labor market mobility is associated with higher rates of innovation (Kaiser et al.
2015; Braunerhjelm et al. 2020). The regulatory framework related to the labor
market should be designed to facilitate the recruitment of a suitable workforce with
the right skills and not make it unnecessarily difficult to adjust the composition and
size of the workforce. High levels of job security, such as strict regulation governing
the order of dismissal, make it difficult to recruit key personnel who have secure,
salaried jobs in other sectors. Stringent job security mandates also increase the

7
This view of capital gains taxation can be contrasted with Mazzucato (2021, p. 22), who claims
that lower capital gains taxation drives away investments from the real economy, rewarding short-
term investment in financial assets.
320 M. Henrekson and M. Stenkula

opportunity cost of switching employers and joining entrepreneurial projects

(Ho and Wong 2007; van Stel et al. 2007).
Exempting small businesses from certain employment protection rules may
sound like a reasonable measure but will in practice act as a tax on business growth
and reduce the willingness of small businesses with potential to grow. Allowing a
dual labor market to emerge where temporary workers have no (or greatly reduced)
protection while permanent workers have extensive protection is also not a sustain-
able strategy. Temporary workers with low protection will have weak incentives to
acquire firm-specific knowledge and to be loyal to the firm, while those with
permanent contracts will be reluctant to change jobs even if it would be socially
beneficial. Such dichotomized labor markets tend to be less innovative.
A relatively generous unemployment insurance scheme with extensive retraining
opportunities would reduce the need for extensive and strict employment protection
(Kreiner and Svarer 2022). Such a “flexicurity” system would facilitate entrepre-
neurial activity and prevent key individuals or potential entrepreneurs from being
“stuck” in a permanent position in an established large firm. In general, social
benefits should not be linked to a specific job; instead, benefits should, as far as
possible, follow the individual, for example, if he or she leaves a permanent job and
becomes an entrepreneur. This would make the labor market more flexible and
increase people’s willingness to move between jobs and firms (Audretsch et al.
2002).

Product Market Regulations

Product market regulations and their various forms comprise the fifth policy area
which we will address. An extreme form of product market regulation involves
granting a monopoly in a market to a specific firm—something that used to be
common in the telecom industry and in radio and TV. Other examples include
requirements for state licensing, detailed requirements regarding product design,
and rules that stipulate which production methods to use. To encourage entrepre-
neurship, the markets for goods and services must be subject to a regulatory
framework that facilitates the search for information and knowledge to discover
and create new entrepreneurial opportunities.
Established and dominant market players should not be able to abuse their
position, and all markets should, as far as possible, be subject to competitive
pressure. This requires that the regulatory framework does not hamper the ability
to start new businesses and that protected sectors are opened up to outside compe-
tition. Weak competitive pressure reduces the incentives for ecosystem actors to
adopt innovations and new technologies. Many rules may create unnecessary bar-
riers to free enterprise, to the detriment of economic efficiency and development
(European Commission 2015).
Regulations that reduce the competitive pressure also implicitly blunt incentives
to reallocate capital and labor from low-productivity firms to firms with higher
Bottom-Up Policies Trump Top-Down Missions 321

productivity. For instance, such lock-in effects may result from public procurement
rules that lock in government institutions and agencies to a specific supplier for
extended periods. Because considerable productivity differences exist between firms
in a particular industry at a given point in time, high-productivity growth cannot be
achieved unless resources can be transferred across firms relatively smoothly.
Depending on the industry’s composition and the workforce’s skills, these effects
may vary (Arnold et al. 2011). Nevertheless, growth emanates mainly from churning
(firm and job turnover) and restructuring—primarily shifts in production from less to
more successful firms within narrowly defined industries, rather than from declining
to growing sectors (Caballero 2007).

Insolvency Law

While well-functioning ecosystems minimize the occurrence of mistakes, failures

are still both common and inevitable. All entrepreneurial activity is inherently
experimental, and it is the rule rather than the exception that some businesses and
entrepreneurs end up in financial distress or insolvency. However, entrepreneurial
failures need not be seen as a waste of resources; they are a natural part of an
entrepreneurial ecosystem built on experimentation, screening, and selection. In fact,
they provide important information to the rest of the market about what does not
work, i.e., the competitiveness of an innovation or business model. This “process of
learning by trial and error [. . .] must involve a constant disappointment of some
expectations” (Hayek 1976, p. 124). Failed businesses must be liquidated as
smoothly and quickly as possible so that resources can be transferred to new and
better projects (Armour and Cumming 2008). Empirical research shows that faster
firm turnover makes the economy more competitive (Brown et al. 2008; Heyman
et al. 2019). It also appears that “lowering barriers to failure via lenient bankruptcy
laws encourages more capable—and not just more—entrepreneurs to start firms”
(Eberhart et al. 2017, p. 93).
There is a difficult balance to strike in the legislation. On the one hand, the
regulatory framework must be generous enough to give failed entrepreneurs a
“second chance.” Many successful entrepreneurs have experience with unsuccessful
projects, giving them valuable knowledge and experience that increases the chances
of success with future projects (Ucbasaran et al. 2008). On the other hand, the
regulatory framework should not be overly generous, encouraging destructive entre-
preneurship, where the entrepreneur uses dubious business restructurings and serial
bankruptcies to avoid fulfilling his or her obligations to suppliers and creditors.
322 M. Henrekson and M. Stenkula

R&D and Knowledge Spillovers

Not only Mazzucato but most politicians, regardless of ideology, have often pointed
to R&D spending as a route to more innovation and growth. However, R&D
expenditure is an input in the production process, not a valuable output. For such
spending to result in a welfare-enhancing outcome, it requires a well-functioning
entrepreneurial ecosystem that can transform knowledge or inventions into some-
thing that is demanded, such as goods and services or more efficient production or
distribution methods (Bhidé 2008). This does not happen automatically.
From an entrepreneurial ecosystem perspective, the notion of increased R&D
investment to stimulate innovation and sustainable growth appears to be an overly
mechanistic view of the functioning of the economic system. Such a notion also
neglects other routes to innovation such as learning by doing, networking, and
combinatorial insights (Braunerhjelm and Henrekson 2024, Chap. 2).8
Significant R&D investments may be necessary in a thriving economy but are far
from sufficient, and there is no guarantee that policy measures stimulating increased
R&D spending will result in more economically valuable knowledge (Da Rin et al.
2006). Spillover effects may also be negative as public R&D can crowd out private
R&D. Countries where the share of business R&D expenditure directly or indirectly
financed by the government is high have lower R&D expenditure in private firms
(Elert et al. 2017). Moreover, public R&D spending comes with a general opportu-
nity cost, since the resources could be used for alternative measures, such as
lowering the capital gains tax or investing in other public goods.
Since it is almost impossible for a public agency to “pick the winners,” a
spontaneous demand-driven, bottom-up increase in R&D is always better than any
top-down designed alternative. Actors receiving public support are also, as already
noted, likely to become a politically relevant interest group, using their newfound
power to garner resources that could be better used elsewhere.
Instead of focusing on quantitative R&D spending targets or targeting R&D
support to individual firms or groups of firms, politicians should create a regulatory
framework that makes it easier to start and develop businesses. Much of the societal
benefit of R&D arises through imitation and knowledge spillovers, i.e., when ideas
and know-how from earlier successful innovations find new areas of application or
spread to companies in other parts of the economy (Acs et al. 2009; Klepper 2016).
Almost without exception, successful business clusters have emerged spontaneously
and cannot be commanded to emerge by means of a centrally issued directive.

8
Bhidé (2008) even suggests that the process of transforming a prominent idea into a commercially
competitive product rarely requires significant R&D.
Bottom-Up Policies Trump Top-Down Missions 323

Incentives for Human Capital Investment

The final policy area involved in our bottom-up approach concerns human capital.
Successful entrepreneurs are often highly educated, which underlines the importance
of education in facilitating entrepreneurial activity. A well-educated population is
also of great importance for the proper functioning of the entrepreneurial ecosystem,
as it increases the availability of skilled workers and potential key employees. For
companies in high-tech industries, there is a great need for a well-educated work-
force, especially in STEM areas (Shavinina 2013).
For the entrepreneurial ecosystem to function as well as possible, learning and
acquiring new knowledge must be profitable, whether through formal education or in
the workplace. The wage structure and associated tax system therefore play an
essential role: it should not be designed to discourage human capital investment at
the individual level. The education and training premium varies considerably across
nations. Europe’s university systems have the advantage of generally low tuition
fees, which means that talented individuals are rarely excluded from higher educa-
tion for personal financial reasons. On the other hand, Europe has few top-class
universities (with the United Kingdom being the only real exception).
This educational system should provide incentives for universities and
researchers to aim for academic excellence while at the same time, without
compromising their integrity, collaborating with industry and adapting their educa-
tional offerings to fields for which there is a strong demand in labor markets.

In Sum

An innovation’s successful commercialization, production, and industrial distribu-

tion require a gamut of complementary competencies. The process is both complex
and long-lasting. Obstacles regarding financing and recruitment must be overcome.
The entrepreneur plays the key role in this process. Many new firms which initially
experience rapid growth fail. However, those that succeed make major contributions
to growth, development, and job creation.
Linking the specific skill sets of various agents requires well-designed institutions
and policies. Combined with an efficient judicial system, the regulatory framework
should efficiently prevent destructive entrepreneurship and fraudulent business
practices, preferably without incurring unnecessary costs for firms—costs that
become entry barriers for new ones. The legal system must be characterized by
transparency, consistency, equal treatment, and swiftness regarding handling of legal
disputes between private parties and between the government and individual firms.
Thus far we have, in line with this view, highlighted eight policy areas where
appropriate policy can pave the way for entrepreneurial firms by stimulating an
entrepreneurial ecosystem that fosters innovation and entrepreneurial venturing—as
well as the social welfare it entails. According to our reasoning, this bottom-up
324 M. Henrekson and M. Stenkula

approach is a better and more realistic view than the top-down mission-oriented
approach envisaged by Mazzucato.
The framework for economic and industrial policy should promote competition
and business activity across the board. It should not be designed to favor certain
kinds of firms, industries, or a particular size of enterprise, nor should it legitimize
entrenchment and weak competition. The University of Chicago professor Luigi
Zingales aptly opines that business policies should be pro-market, not pro-business.
Pro-business proponents maintain that the government should encourage and sup-
port specific firms and industries through subsidies, tax incentives, or other favorable
actions.9 Pro-market proponents oppose this view, instead asserting that the govern-
ment should create a level playing field on which every economic agent can compete
on equal terms. When the buyer/consumer no longer decides whether a business
succeeds or fails, firms will devote more effort and resources to ensure that they
receive benefits from the public sector and less effort in creating value for their
customers. Such behavior not only decreases the productivity of a business but also
creates fertile ground for corruption and clientelism (Zingales 2012).
Those who doubt that this is a significant problem can consider the Swedish
experience with direct public support to stimulate innovation and growth.
Gustafsson et al. (2020, p. 439) show that “highly productive entrepreneurs abstain
from seeking grants, moderately productive firms allocate a share of their effort to
grant seeking, and low-productivity firms allocate most resources to seeking grants.”
By contrast, receiving support once had a negative effect on firm productivity, and
the negative effect increased for businesses that received support more than once.10
Unless a significant market failure exists that may be identified and corrected
(or mitigated) by economic policy, skepticism toward targeted support is warranted.
A policy that aims to promote entrepreneurship should use a broader approach,
facilitating the evolution of an economic system that encourages individuals to
pursue productive entrepreneurship and business growth. The economic and busi-
ness policies should, as much as possible, not seek to influence the “natural”
development of firm size, growth, or type through targeted subsidies or tax
deductions.
It is true that wise public interventions may have spillover effects (or other
positive externalities) that benefit all agents in the ecosystem—but there are
undoubtedly more ways for this support to fail than to succeed. The failure of
most business ideas is, after all, the reason why venture capitalists spread funding
across many different initiatives and attempts. The ideas that survive usually do so
not because they were perfect from the start or part of a grand mission but because
their creators and developers adjusted and customized the project until it became

9
A similar argument is developed by Hayek (1948).
10
A similar result was found by Bergström (2000) in a study of the effects on total factor
productivity of public capital subsidies to firms in Sweden between 1987 and 1993. After the first
year following the subsidy, the more subsidies a firm had been granted, the worse its TFP growth
developed.
Bottom-Up Policies Trump Top-Down Missions 325

competitive in the market and beneficial for society. Providing more (private or
public) funding does not change this fact. Without a well-functioning ecosystem,
spreading (more) money over the economy will not automatically make missions
successful—no matter how noble the missions are.

Mazzucato on the Bottom-Up Approach

Mazzucato is aware of the alternative bottom-up approach and the importance of

experimentation and trial and error.11 According to her, this approach is, however,
too “narrow” and will not suffice.
One important implication of the bottom-up approach is that policymakers strive
to “level the playing field” and avoid distorting the economy in any direction
through, for example, favoring specific actors or industries. But the very essence
of the mission approach is to tilt the playing field by directing investments to specific
areas aimed at fulfilling certain politically determined objectives.
Mazzucato argues that the private VC industry often has too short a time horizon
in their investment strategy, thus calling for an active state to compensate for this
alleged shortcoming. From an entrepreneurial ecosystem perspective, the “short-
termism” of a VC firm is not to be regretted. It is a consequence of specialization and
the fact that early (business angels and VCs) and later-stage financiers (buyout firms,
etc.) bring different skills and resources adapted to different stages of an innovation-
based firm’s development.
One shortcoming of the mission-oriented approach, as discussed extensively
above, is the difficulty in picking winners.12 One likely reason is that government
agents base their decisions on political rather than business criteria. Here, Mazzucato
maintains that going beyond pure business concerns and profit opportunities is part
of the point of mission-driven projects: other considerations should be taken into
account. However, the risk of funds frivolously spent on political “pet projects”
looms large with this approach.
The fact that the textbook ideal—an economy characterized by perfect competi-
tion devoid of externalities—does not exist in reality is invoked by Mazzucato to
assert that it is always possible for government policy to improve economic out-
comes compared to outcomes resulting from a decentralized bottom-up process.
Surely, the business sector may be incomplete and imperfect—but, as we have

11
See, e.g., Mazzucato (2021, p. 178): “[A] theory of innovation needs to be nested in a theory of
learning, experimentation and adaption to uncertainty.”
12
There is some confusion about Mazzucato’s position here. On the one hand, Mazzucato explicitly
says that her idea is not about supporting specific technologies, firms, or sectors but (only?) about
identifying problems and catalyzing and facilitating collaboration across sectors (Mazzucato 2021,
pp. 125, 159). On the other hand, she explicitly states that the government and its agencies should
“pick winners” (or “pick the willing”) and that the conventional view is too negative to this
approach (e.g., Mazzucato 2021, pp. 49ff).
326 M. Henrekson and M. Stenkula

already noted, the same is true for the political sector. Uncertainty and
unpredictability are inherent traits of the economy and will not disappear if the
economy is subjected to increased political guidance. One might also ask whether
citizens in their role as consumers are not better placed than the government to
determine what they value.
Mazzucato is, of course, also aware of the public choice literature and its less
optimistic view of the political sector. If bureaucrats and elected politicians are
assumed to be self-interested utility maximizers, public choice theory predicts,
inter alia, that bureaucrats may be budget maximizers and that policymakers may
be unduly influenced by interest groups and fall into nepotism, cronyism, or corrup-
tion. Mazzucato (2021, pp. 32ff) asserts that these notions lack empirical support;
they are merely assumed. “Real people” do not optimally react to (price) incentives
and are not maximizers of profit or utility. This opens up “a sizeable scope for clever,
well-informed regulations” (ibid., p. 142) instituted and directed by the public sector
striving for a better world.
Clearly, one can disparage the public choice view as overly negative and lop-
sided. But in that case one can claim that the opposite “public interest” view, where
“policymakers altruistically provide optimal quantities of public goods and create
laws solely in the interest of the governed” (Lucas 2019), is just as assumed and
unrealistic. In reality, the incentives of government agents and the public-interest
seldom coincide, making the entire approach less attractive.
Moreover, as pointed out by Sanders et al. (2024, p. 265), although an entrepre-
neurial state is not theoretically impossible, it is hard to achieve in practice because
of the dynamics of democracy:
Mistakes will be held against the incumbent politicians, weighing more heavily than
successes. Political opponents will use state-run innovation failures to criticize incumbent
politicians, saying that it is a sign of their incompetence and that they should be replaced. It
will rarely suffice for incumbents to point to successes. Or to say that it is normal that many
entrepreneurial projects fail. So, what is normal in private markets where private firms and
individuals risk their own money, is not equally acceptable in a system that is democratically
governed using taxpayers’ money. As a result, it becomes rational for politicians and
government agencies to be risk averse.

Of course, this does not entirely inhibit politicians from taking risks (with other
people’s money). “However, while they are usually ready to take credit for risky
projects when they succeed, they are also ready to blame a scapegoat, usually a
bureaucrat, an agency, or ‘the market,’ when projects fail” (Elert and Henrekson
2022, p. 357). This effect adds to our skepticism toward the idea that government
agencies can substitute for private agents with “skin in the game” when it comes to
entrepreneurial risk-taking and experimentation.
Bottom-Up Policies Trump Top-Down Missions 327

Conclusion

In a diverse and uncertain world with billions of heterogeneous agents possessing

complementary capabilities and competencies, lacking an altruistic and omniscient
political sector, a system guided by political top-down missions will be problematic.
A more bottom-up approach is called for. At the end of the day, fostering innovation
and sustainable development of society requires an institutional framework that
promotes productive entrepreneurship. When entrepreneurs are seeking to create
value, they are greatly influenced by the reward structure they encounter. This
structure is primarily determined by the economic system’s institutional setup. In
this chapter we have discussed the basis for a decentralized bottom-up approach and
considered eight key institutional areas and how their design affects the driving
forces for innovation and productive entrepreneurship.
We believe that this bottom-up approach, which is about leveling the playing field
for potential entrepreneurs and encouraging productive entrepreneurship, is a better
and more realistic view of how to organize a society that promotes economic
wellbeing. We are keenly aware that our view lacks the grandeur that makes
Mazzucato’s top-down missions so emotionally appealing as solutions to our most
pressing problems. Most likely, our species is genetically predisposed to desire
control (Rose 2024). However, the complex market-based economic system that
has evolved, which is crucial for our material wellbeing, is totally dependent on a
process of decentralized experimentation, selection, and screening to continue to
fulfill our needs.

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Magnus Henrekson is Professor of Economics and Senior Research Fellow at the Research
Institute of Industrial Economics (IFN) in Stockholm, Sweden. He resigned as CEO of IFN in
2020 after 15 years of service. Until 2009, he held the Jacob Wallenberg Research Chair in the
Department of Economics at the Stockholm School of Economics.
He received his PhD in 1990 from Gothenburg University with his dissertation An Economic
Analysis of Swedish Government Expenditure. Throughout the 1990s, he conducted several projects
that aimed to explain cross-country growth differences. Since the turn of the new millennium, his
primary research focus has been entrepreneurship economics and the institutional determinants of
the business climate. In this area, he has published extensively in scientific journals and contributed
several research surveys to Handbooks in the field of entrepreneurship.
In addition to his academic qualifications, Henrekson has extensive experience as an advisor,
board member and lecturer in many different contexts, in both the business and public sectors.

Mikael Stenkula is Associate Professor of Economics and holds a PhD from the School of
Economics and Management at Lund University. He received this degree in 2004 with his
dissertation Essays on Network Effects and Money. After having worked for a year as a lecturer
at Lund University, where he taught microeconomics, he joined the Research Institute of Industrial
Economics (IFN) in the fall of 2005. His main area of research is entrepreneurship economics.
Stenkula is part of IFN’s taxation history project, which has systematically and comprehensively
described and analyzed the Swedish tax system from 1862 to the present day. This study is unique
in scope—no equally comprehensive investigation of a national tax system has been conducted for
any other country. In addition to the meticulous year-to-year documentation of all relevant details of
the tax code, the project aims to examine how changes in the tax system affect the economy by
guiding people’s choices, particularly how the tax system affects entrepreneurial activity and firm
behavior.
Bottom-Up Policies Trump Top-Down Missions 331

He also teaches at the Stockholm School of Economics and serves as the executive secretary of
the award committee for the Global Award for Entrepreneurship Research, the foremost global
award for research on entrepreneurship.

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