Across the globe we are hearing that the state has to be cut back in order to foster a post-crisis recovery, unleashing the power of entrepreneurship and innovation in the private sector. This feeds a perceived contrast that is repeatedly drawn by the media, business and libertarian politicians of a dynamic, innovative, competitive private sector versus a sluggish, bureaucratic, inertial, 'meddling' public sector. So much so that it is virtually accepted by the public as a 'common sense' truth.
For example, in his budget speech of June 2010, a month after taking office, the Chancellor, George Osborne, stated that the public sector was 'crowding out' the private sector, providing an additional justification, beyond the need to reduce the deficit, for a relative contraction of the state (Osborne, 2011). Both in the documentation that supported that emergency budget, and subsequently, the Coalition Government has repeatedly called for a more 'balanced' economy, with private activity taking up a greater share of the total so that the economy can be more 'competitive and innovative'.
The Prime Minister, David Cameron, adopted a more polemical tone in a speech given to the Cardiff Conservative Spring Forum in March 2011 when he promised to take on the 'enemies of enterprise' working in government, which he defined as the 'bureaucrats in government departments' (Wheeler, 2011). This is a rhetoric that fits with the government's broader theme of the 'Big Society', where responsibility for the delivery of public services is shifted away from the state to individuals operating either on their own or by coming together through the third sector. The Big Society is in fact based on the idea that the state should recede not only to reduce the deficit but because the state impedes innovation and dynamism. By allowing local communities to have more control of their resources and decisions, free from the heavy hand of big government, initiatives under the Big Society programme - including 'free schools' which are run by local parents and self-help groups - will lead to higher quality, more dynamism and more choice. Without this assumption, the Big Society is only about cuts, something the government has insisted it is not.
And it is not a view that is unique to the UK government. The Economist, which often refers to government as a Hobbesian Leviathan (The Economist, 2011a), recently argued that government should take the back seat and focus on creating freer markets and creating the right conditions for new ideas to prosper, rather than taking a more activist approach (The Economist, 2010). The established business lobby groups have long argued for freedom from the long arm of the state, which they see as stifling their ability to succeed through the imposition of employee rights, tax and regulation. The right-wing Adam Smith Institute argues that the number of regulators in the UK should be reduced to enable the British economy to 'experience a burst of innovation and growth' (Ambler and Boyfield, 2010). In the USA, supporters of the Tea Party movement are united by a desire to limit state budgets and promote free markets.
While business as a whole may not see the virtues of anything that does not have a clear and positive impact on its bottom line, and nor arguably should it, there is a danger when a general desire to reduce the size of the state translates into weak and non-ambitious economic policy. When that happens, we are all losers: policy is not as effective as it could be and the potential to create greater prosperity is not fulfilled. There is now a real danger of that happening in the field of innovation policy, greatly limiting its impact on economic growth.
A secret history
The view of the current government - shared by its predecessor - is that the role of the state in spurring innovation is simply to provide the 'conditions for innovation to flourish' (BIS and HM Treasury, 2011). …