Entrepreneurs should not shun the state... far from it

The state machinery is often essential, the more so if you are trying to do something truly novel

Dear readers, 

I write this newsletter once every month or so. It features my reflections on the deployment of creativity to making the world’s economic systems (and by extension social and to some extent political systems) more inclusive and, therefore, fairer.  That sounds like a tall order – and it is! 

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Last week, I wrote an invited opinion piece, Entrepreneurship and a State of Mind. It’s about an attitude to entrepreneurship, not (just) the act of creating a successful company. An entrepreneur could concoct a creative policy intervention, or create an NGO or non-profit that addresses a pressing problem.

Over the weekend, I came across a couple of examples that made me want to amplify the cautionary point I made towards the end of the op-ed – that would-be entrepreneurs are often overly suspicious of the government, to their own detriment.

Famously, Ronald Reagan epitomized this mistrust. His 1986 speech said that “the nine most terrifying words in the English language are .... I’m from the Government, and I’m here to help.” Of course, in India we had decades of the so-called License Raj – thankfully since mostly dismantled - where government simply shackled private entrepreneurship.

Yet, the state machinery is often essential, the more so if you are trying to do something truly novel, when the policy framework to allow it to happen has to be birthed in tandem. That happens all the time (I wrote about this in the HBR in 2018).

Here are a couple of contemporary examples, one in the US and one global, both mind-opening.

California farmers, worried about long-run drought, are using a temporary windfall of excess rain this season to flood farmland to replenish groundwater. They can then tap into those replenished reservoirs during dry years. The land that’s flooded generally grows plants that can withstand flooding – eg pistachio fields. So, the reservoir replenishment is a way of banking water for the future. But there’s still likely net loss of available farmland this year. Here’s where government can come in by providing state grants of water credits in recognition of the fact that groundwater replenishment likely has some public goods aspects to it. That is, it has benefits for the environment more than just the benefits for a particular farmer. The policy intervention is key to making the farmers’ reservoir replenishment economically viable.

In a TED talk I happened to hear, I came across an even cooler global example that I’d title ‘it’s all in the poop.’ It turns out that whales eat krill which eat phytoplankton, and phyto suck in a lot of carbon (and release oxygen). So much so that a single whale contains as much carbon as 1500 trees, and phyto in the aggregate remove as much carbon as four Amazon forests! The insight in the TED talk was to quantify the value of the whales’ carbon sequestration, by using carbon prices to impute a monetary value to the carbon removal services provided by a whale, and by the whale’s progeny, and their progeny, and so on. This is a standard valuation exercise for a financial economist, and the magic number comes to $3 million/whale (the exact number is not as relevant as realizing that it’s big!). That means a whale is worth more alive than dead (the ‘value’ of a dead whale, I suppose, is the price that people are willing to pay, legally or illegally for its whale meat – no matter what numbers you use, it’ll be far less than even a million dollars, I reckon). Suddenly, there’s an economically viable reason, at least in theory, to protect whales, in addition to appeals to biodiversity and aversion from cruelty. 

Where’s the state then, or other rule making body that businesses often consider pesky or a nuisance? Some legal or regulatory framework would be needed to allow this. One example is provided by UN-REDD (United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries) which has, among other things, mobilized capital to help member countries’ preserve forests. Similar framework agreements can protect the public good aspects of whales’ ‘services’ to the cause of carbon mitigation. But it does require rule-making bodies – states or multilaterals – to innovate, along with the scientists who discovered whales’ carbon sequestration and the gentleman who had the insight to translate that service into its monetary equivalent.

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