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The Creative State

The conventional view in mainstream economics is that governments have little capacity to spark innovation.The truth is that in some of the world's most famous technological hubs, including Silicon Valley and Israel, the state has played a critical role in creating and shaping markets for new products.

LONDON – The conventional view in mainstream economics today is that governments have little capacity to spark innovation. The state should play as limited a role in the economy as possible, the thinking goes, intervening only in cases of “market failure.” This is far from the truth.

In fact, governments can and do play a critical role in spurring innovation – actively creating new markets, instead of just fixing them. To be sure, advocates of a limited economic role for government believe that market failure justifies some funding of infrastructure and basic science. But such limited intervention can hardly explain the billions of public-sector dollars that have flowed toward downstream applied research, even providing early-stage financing for companies. Indeed, in some of the world’s most famous innovation hubs, the state has played a key “entrepreneurial” role, envisioning and financing the creation of entire new fields, from information technology to biotech, nanotech, and green tech.

In Silicon Valley, for example, the government has acted as a strategic investor through a decentralized network of public institutions: The Defense Advanced Research Projects Agency, NASA, the Small Business Innovation Research program (SBIR), and the National Science Foundation.

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