In the world of knowledge economy

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VIAM Ziauddin
SOURCEBusiness Recorder
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We are almost in the midst of the age of knowledge economy. All around us, especially in our immediate east and up north, it is the knowledge economy that is driving progress and development. In Europe, North America and East Asia knowledge economy is leading what is called the fourth industrial revolution.

The world had entered the age of knowledge economy not on the back of private sector but driven by the public sector as it was the latter that had the capacity for expending billions to undertake research activities, a number of which lasting for decades and generating multiple spinoffs.

The private sector since it is driven essentially by the profit motive alone and by nature not known to be a high risk taker has benefited by simply commercializing the safest bets resulting from these research activities.

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Even in Europe there was this misunderstanding for decades that it could not develop such economy of knowledge driven giants as Googles and Facebooks because it didn’t subscribe to the Silicon Valley’s free market approach.

“It was just ideology: there was no free market in Silicon Valley,” insists Mariana Mazzucato who has demonstrated that the real driver of innovation isn’t lone geniuses but state investment. She’s working with the UK government, the EU and UN to apply her moonshot approach to the world’s biggest challenges.

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Discussing about her idea in greater detail, Joao Medeiros in his article (This economist has a plan to fix capitalism. It’s time we all listened – published in Wired on 8 October, 2019) informs that development of Google’s search algorithm, for instance, had been supported by a grant from the National Science Foundation, a US public grant-awarding body.

Electric car company Tesla initially struggled to secure investment until it received a $465 million loan from the US Department of Energy. In fact, three companies founded by Elon Musk — Tesla, Solar City and SpaceX — had jointly benefited from nearly $4.9 billion in public support of various kinds. Many other well-known US startups had been funded by the Small Business Innovation Research programme, a public venture capital fund. It wasn’t just early research, it was also applied research, early stage finance, strategic procurement. The more one looked, the more one realised: state investment is everywhere.”

Mazzucato traced the provenance of every technology that made the iPhone. The HTTP protocol, of course, had been developed by British scientist Tim Berners-Lee and implemented on the computers at CERN, in Geneva. The internet began as a network of computers called Arpanet, funded by the US Department of Defense (DoD) in the 60s to solve the problem of satellite communication. The DoD was also behind the development of GPS during the 1970s, initially to determine the location of military equipment. The hard disk drive, microprocessors, memory chips and LCD display had also been funded by the DoD. Siri was the outcome of a Stanford Research Institute project to develop a virtual assistant for military staff, commissioned by the Defense Advanced Research Projects Agency (DARPA). The touchscreen was the result of graduate research at the University of Delaware, funded by the National Science Foundation and the CIA.

According to Mazzucato without the massive amount of public investment behind the computer and internet revolutions, such attributes might have led only to the invention of a new toy.

“History tells us that innovation is an outcome of a massive collective effort – not just from a narrow group of young white men in California,” Mazzucato says. “And if we want to solve the world’s biggest problems, we better understand that.”

“Silicon Valley entrepreneurs rarely acknowledged that they were standing on the shoulders of giants. It was a call to arms to innovators to sort of step up and acknowledge that,” says Saul Klein, co-founder of venture capital firm Local Globe. “There has been a very concerted effort, over the past 40 years, to build this intellectual construct that was sold to government and sold to society about the free market, supported by businessmen who were trying to tell a story that was advantageous to them,” says tech mogul Tim O’Reilly. “It’s now very clear that there’s something wrong with the story. We need a new theory to replace this, and Mariana is one of the economists trying to build a rival narrative.”

DARPA, the research agency founded by President Eisenhower in 1958 following the Soviet Union’s launch of Sputnik is said to be the prime example of what is called mission oriented organisations. The agency pumped billions of dollars into the development of prototypes that preceded commercial technology such as Microsoft Windows, videoconferencing, Google Maps, Linux and the cloud. In Israel, Yozma, a government-backed venture capital fund that ran between 1993 and 1998, supported more than 40 companies. In the UK, the Government Digital Service, launched in 2010, was behind the award-winning.gov.uk domain, saving the government £1.7bn in IT procurement.

“When I use the word ‘state’ I am talking about a decentralised network of different state agencies,” Mazzucato says, “When such agencies are mission-oriented to solve problems and structured to take risks, they can be an engine of innovation.”

To Mazzucato, the epitome of the mission-oriented concept was the Apollo programme, the space programme designed to land Americans on the Moon and return them safely to Earth. Between 1960 and 1972, the US government spent $26bn to achieve precisely that. More than 300 different projects contributed, not only in aeronautics but in areas such as nutrition, textiles, electronics and medicine, resulting in 1,800 spinoff products, from freeze-dried food to cooling suits, spring tyres and digital fly-by-wire flight control systems used in commercial airplanes. The programme was also instrumental in kick-starting an industry for the integrated circuit, an unproven technology at the time, and other space projects such as the Space Shuttle and the International Space Station.

The modus operandi of these mission-oriented institutions provided Mazzucato with an alternative vocabulary that told a different story about the role of the state. “Economics is full of stories,” she says. “Words like ‘enabling’, ‘facilitating’, ‘spending’, ‘regulating’ – they create a story of the state as boring and inertial. It becomes a self-fulfilling prophecy. We need a new narrative to guide better policies.”

These mission-oriented institutions were actively creating and shaping markets, rather than merely fixing them. They were ambitiously seeking high-risk directions for research and investment, rather than outsourcing and avoiding uncertainty.

Cost-benefit analysis is not suitable to evaluate mission-oriented policies, which are inherently risky and uncertain, and aimed at creating new markets rather than fixing existing ones. As Mazzucato likes to point out, we would never have walked on the Moon if the Apollo Program had been evaluated via cost-benefit analysis.

So, what is the lesson for Pakistan in the revelations that it was neither free market nor the private sector which actually helped the developed world enter the age knowledge economy?

To start with our policy planners should first get rid of their obsession with free market economy and their unflinching faith in our private sector, which, if one were to look back on its past performance, has consistently failed the nation but successfully made enormous wealth for itself by thriving on fiscal and monetary concessions, evading taxes, pilfering utilities like water, power and gas and obtaining bank loans on low interest rates and then getting most of it written off. On the side, it has also massively indulged in hoarding, black marketing, money laundering and stashing its loot in offshore safe havens.

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Next, our official policymakers could take a close look at the way in the 1960s Pakistan Industrial Development Corporation (PIDC) used to set up textile and chemical units in the public sector and after having run them to test their operational viability and their profitability divest them to the willing entrepreneurs. This was being done because in the first place there was a dearth of well- heeled investors with entrepreneur skills in the private sector capable of taking risks with innovative ideas for promoting industrialization.

Therefore, it is time once again for the government to go back to the basics and innovate the way we did through PIDC. Of course not repeating the PIDC path but by setting up in the public sector organisations which would facilitate drawing from knowledge economy freely available world-wide, fuse it with our comparative advantages and; continually deepening and widening this knowledge under public sector management while providing the private sector opportunities to be commercially innovative and competitive in the world markets.

(This news/article originally appeared in Business Recorder on December 4th, 2019)

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