Analyzing the Effectiveness of State-guided Innovation

Rodney H. Yerger

Advisor: Peter J Boettke, PhD, Department of Economics

Committee Members: Peter T. Leeson, Rosolino Candela

Online Location, Online
April 12, 2023, 12:00 PM to 02:00 PM


A crucial debate exists over the effectiveness of government-guided innovation efforts, which recently through economist, Mariana Mazzucato’s arguments for an entrepreneurial state that encourages the public sector’s active role in technological change and value creation, is considerably shaping global policy. This dissertation addresses three main arguments promoted by advocates of the entrepreneurial state. First, the claim that government is the boldest innovator accountable for the greatest value to society. Second, the assertion that public sector agents can provide mission-oriented directionality to harness creative destruction through entrepreneurial action. Finally, the contention that government bureaucracy can be transformed through a strategic structuring that would improve upon the dynamic capabilities necessary to pursue and direct innovation.

The first chapter consists of a review essay of Deirdre McCloskey and Alberto Mingardi’s book, The Myth of the Entrepreneurial State (2020), wherein I conduct a comparative institutional analysis on the effectiveness of state-guided versus private sector innovation. I argue that many of Mazzucato’s assertions of the state providing mission-oriented directionality that drives technology development do not survive the scrutiny of McCloskey’s Supply-Chain Fallacy, the belief that every item in a line of production or chain of events is necessary and causal. However, through separate use case analyses, 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.

The second chapter assesses the viability of the public sector entrepreneur in accomplishing state-guided innovation. Leveraging elements of political economy and public choice theory, I argue that while the public sector agent can suitably perform an entrepreneurial function, the checks and balances provided by political institutions severely constrain innovativeness while information and incentive problems can channel alertness to political profit towards unproductive or destructive outcomes. I support my assertions by examining key findings from empirical research studies of the Small Business Innovation Research program as well as by conducting an empirical analysis on the crowding out effects from direct government subsidies of business-performed research and development.

The final chapter executes a case study analysis on the Defense Advanced Research Projects Agency (DARPA), which is touted as a model organization for inducing public sector innovation of emerging technologies. Applying economic theory and employing empirical analysis, I objectively examine key factors that are attributed to DARPA’s success, such as the organization’s autonomy, small size, and limited tenure of its program managers, in order to assess the worthiness of the agency’s exemplar status for strategic organizational structuring that empowers a mission-oriented approach to innovation.