innovations did not exist before the State envisaged and developed them,
consequently, markets for these new products or services had also to be created
and shaped by the ‘visible hand’ of the State.
Yet most economists talk simply of fixing ‘market failures’. Standard economic
theory justifies State intervention when markets fail to efficiently allocate resources
and reach a ‘Pareto equilibrium’,
2 as when the social return on investment is higher
than the private return, making it unlikely that a private business will invest. Classic
cases include cleaning up pollution (a negative ‘externality’ not reflected in
prices) and funding basic research (a ‘public good’ difficult to appropriate privately).
However, State investment must be more than this. Visionary investments are
exemplified today by confident State investment banks that are directing lending to new uncertain areas that private banks and venture capitalists (VCs) fear.
The State can act as a force for innovation and change, not only ‘derisking’ the
economic landscape for risk-averse private actors, but also boldly leading the way,
with a clear and courageous vision – exactly the opposite image of the State that
is usually sold.
In economics, the ‘crowding-out’ hypothesis is used to analyse the possibility
that increased State spending reduces private business investment, since both
compete for the same pool of savings (through borrowing). This in turn might
result in higher interest rates which reduce the willingness of private firms to borrow,
and hence invest. While Keynesian analysis has argued against this possibility during
periods of underutilized capacity, the point is that even in the boom (when in
theory there is full capacity utilization), there are in practice many parts of the risk
landscape where private business fears treading and the State must lead the way.
Therefore, if government is ‘transforming’ – creating and shaping markets, not only
fixing them – then the crowding-out hypothesis would not apply here either.
Thus, to dismantle that false image, a proper defence of the State should argue
that it not only ‘crowds in’ private investment (by increasing gross domestic product
(GDP) through the multiplier effect) – a correct but limited point made by
Keynesians – it does something more. It is necessary to build a theory of the State’s
role in shaping and creating markets, more in line with the work of Karl Polanyi
(1980 [1944]) who emphasized how the capitalist ‘market’ has from the start been
heavily shaped by State actions. In innovation, the State not only ‘crowds in’ business
investment but also ‘dynamizes it in’, creating the vision, the mission and the plan.
This chapter explains the process by which this happens as a central feature of green
transformations.
The chapter in particular focuses on the role of the ‘entrepreneurial’ risk-taking
State in launching specific ‘green’ technologies, in this case wind turbines and solar
photovoltaic (PV) panels. It was State funding and the work of particular State
agencies that provided the initial push, early stage high-risk funding and institutional
environment that could establish these important technologies. Currently, it is
also State funding, particularly through development banks, that is promoting the
diffusion of those green energy technologies, which highlights that States have a
role to play throughout the entire innovation chain and not just in public good
The green entrepreneurial state 135
consequently, markets for these new products or services had also to be created
and shaped by the ‘visible hand’ of the State.
Yet most economists talk simply of fixing ‘market failures’. Standard economic
theory justifies State intervention when markets fail to efficiently allocate resources
and reach a ‘Pareto equilibrium’,
2 as when the social return on investment is higher
than the private return, making it unlikely that a private business will invest. Classic
cases include cleaning up pollution (a negative ‘externality’ not reflected in
prices) and funding basic research (a ‘public good’ difficult to appropriate privately).
However, State investment must be more than this. Visionary investments are
exemplified today by confident State investment banks that are directing lending to new uncertain areas that private banks and venture capitalists (VCs) fear.
The State can act as a force for innovation and change, not only ‘derisking’ the
economic landscape for risk-averse private actors, but also boldly leading the way,
with a clear and courageous vision – exactly the opposite image of the State that
is usually sold.
In economics, the ‘crowding-out’ hypothesis is used to analyse the possibility
that increased State spending reduces private business investment, since both
compete for the same pool of savings (through borrowing). This in turn might
result in higher interest rates which reduce the willingness of private firms to borrow,
and hence invest. While Keynesian analysis has argued against this possibility during
periods of underutilized capacity, the point is that even in the boom (when in
theory there is full capacity utilization), there are in practice many parts of the risk
landscape where private business fears treading and the State must lead the way.
Therefore, if government is ‘transforming’ – creating and shaping markets, not only
fixing them – then the crowding-out hypothesis would not apply here either.
Thus, to dismantle that false image, a proper defence of the State should argue
that it not only ‘crowds in’ private investment (by increasing gross domestic product
(GDP) through the multiplier effect) – a correct but limited point made by
Keynesians – it does something more. It is necessary to build a theory of the State’s
role in shaping and creating markets, more in line with the work of Karl Polanyi
(1980 [1944]) who emphasized how the capitalist ‘market’ has from the start been
heavily shaped by State actions. In innovation, the State not only ‘crowds in’ business
investment but also ‘dynamizes it in’, creating the vision, the mission and the plan.
This chapter explains the process by which this happens as a central feature of green
transformations.
The chapter in particular focuses on the role of the ‘entrepreneurial’ risk-taking
State in launching specific ‘green’ technologies, in this case wind turbines and solar
photovoltaic (PV) panels. It was State funding and the work of particular State
agencies that provided the initial push, early stage high-risk funding and institutional
environment that could establish these important technologies. Currently, it is
also State funding, particularly through development banks, that is promoting the
diffusion of those green energy technologies, which highlights that States have a
role to play throughout the entire innovation chain and not just in public good
The green entrepreneurial state 135