Photo: James Duncan Davidson

Governments’ role in spurring innovation is a controversial one. In rough terms, political debates about public spending usually go something like this: One side argues governments should only spend on the most basic public goods and do whatever they can to keep out of the way of the private sector that grows the economy and funds innovation. The other side says that government spending itself, along with the stability that comes from offering public goods, grows the economy and is essential for creating the conditions that allows innovators to do their work. In both narratives, though, government’s role is thought of as passive to the process of innovation. At most, as economist Marianna Mazzucato outlined at TEDGlobal today, it’s seen as a “market fixer” — something that can patch holes and plug leaks when economic problems naturally occur.

But, Mazzucato asks, “who really funded the cool, revolutionary things in your iPhone?” The answer: GPS and the Internet were the direct results of investments made by the US military’s DARPA and NAVSTAR; multitouch, which TEDsters originally saw at TED2006 when Jeff Han took the stage, was crafted with the help of grants from the CIA and National Science Foundation. And public venture-capital schemes like the Small Business Innovation Research Initiative helped finance companies like Apple, Compaq and Intel in their early stages of development.

In this light, and when you step back from the ideological rhetoric, the state has been far more than a condition-setter and market fixer — it’s been a “a market shaper” and an essential risk-taker. Mazzucato argued today that, regardless of the role you think governments should play, it has played, and very successfully, the role of lead investor in innovation.

What’s more, states, time and again, dedicate resources toward technologies that can only appeal to most investors once they reach a level of development that inspires confidence. In the drug industry, for example, 75% of the “radically innovative drugs” in the United States are researched in nationally funded laboratories. Whereas drug companies focus their efforts on “me-too” drugs — varieties of proven, profitable drugs — governments will take on potentially game-changing “new molecular priorities,” despite the risks involved. In this sense, state governments are uniquely situated not just to “de-risk” the playing field, leaving a wake of market confidence for private interests to take advantage of, but to think outside the box and set crucial strategic goals for the future.

Photo: James Duncan Davidson

But risks incur failure. As Mazzucato pointedly observed today, “You will fail when you innovate. Only one out of ten experiments will find success.” It’s a natural part of an essential process. But if governments should continue to take on these high-risk investments, then — and this, she pointed out, may be the most important question in her talk — “where’s the reward for the state for taking on these massive risks?”

The tax system, Mazzucato is quick to say, does offer some return, but indirectly, and “companies that benefit from the state … legally pay very little tax back.” So, she urges us to ask, “should there be a return-generating mechanism more direct than taxes?” Consider direct schemes, things like income-contingent loans and equity stakes. Through equity stakes, for example, Norway was able to use returns from the successes of Nokia to support new startups that are now fueling that economy. Widespread adaptation of similar mechanisms could have a huge impact, feeding directly into the public programs that get innovators off the ground. “You can bet that if even just .5% of the profits from the Internet came back to the state, that there would be so much more to spend on green technology now.”

Ultimately, Mazzucato leaves us with a challenge to recast how we talk about governments’ role in the economy. “I think we’ve stunted these public-private partnerships [with our rhetoric]… But if we have a broader theory what the state is actually doing, value creation, the next period of growth will be not only smart, not only green, but also inclusive.”

Mariana Mazzucato’s talk is now available for viewing. Watch it on TED.com »