Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

In an era in which profits are being hoarded at record levels, it’s important to understand what led to the agreements whereby business reinvested profits instead of hoarding them. And the answer is confident and capable government, which has built up its own capacity to invest in technological opportunities and, just as important, to negotiate the landscape that they create. Monopolies like patents are contracts which must be negotiated. One party (business) receives protection of its profits, the other party (government) receives benefits for the public, whether through lower costs and prices (by economies of scale), diffusion of innovation (by the way patents disclose information), or through reinvestment of the profits in specific areas considered beneficial for growth – in this case, innovation.

Developing countries are used to such deals over foreign investment: you come and make use of our resources as long as you reinvest profits locally to benefit us. But negotiation of this sort is largely absent from modern Western capitalism. Just as governments have allowed companies to use patents for unproductive rather than productive entrepreneurship, they have also allowed companies to stop reinvesting profits. That would be fine (perhaps) if those profits were generated from their own activity, independent of public funds. But, as I have argued throughout this chapter, the technology and the underlying networks have been produced collectively. They should therefore be negotiated collectively.

A key issue behind all these considerations is government’s contribution to economic growth – public value. Why, historically, have no economists referred to it? And, more importantly, why have governments now lost their confidence in fighting for public value, while previously they limited the scope of patents or put pressure on monopolies to reinvest profits? We will turn to these matters in the next chapter.

8

Undervaluing the Public Sector

The important thing for Government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.

John M. Keynes, The End of Laissez-Faire , 1926 1

The January 2010 edition of The Economist was devoted to the dangers of big government. A large picture of a monster adorned the magazine’s cover. The editorial opined: ‘The rich world has a clear choice: learn from the mistakes of the past, or else watch Leviathan grow into a true monster.’ In a more recent issue, dedicated to future technological revolutions, the magazine was explicit that government should stick to setting the rules of the game: invest in basic goods like education and infrastructure, but then get out of the way so that revolutionary businesses can do their thing. 2

This, of course, is hardly a novel view. Throughout the history of economic thought, government has long been seen as necessary but unproductive, a spender and regulator, rather than a value creator.

Previous chapters revealed how actors in both the financial sector and Silicon Valley have been particularly vociferous in their self-aggrandized claims about wealth creation, using these claims to lobby for favourable treatment that has in turn enabled them to reap rewards disproportionate to the value they actually created. By the same token, others have widely but mistakenly been regarded as ‘unproductive’.

As we have seen, finance has, ultimately, been less productive than it claims to be. In this chapter I want to look at government, an actor that has done more than it has been given credit for, and whose ability to produce value has been seriously underestimated – and this has in effect enabled others to have a stronger claim on their wealth creation role. But it is hard to make the pitch for government when the term ‘public value’ doesn’t even currently exist in economics. It is assumed that value is created in the private sector; at best, the public sector ‘enables’ value.

The concept of ‘public value’ has existed for millennia, debated in philosophy and society at least from the time of Aristotle’s Nicomachean Ethics . It is, however, a Cinderella subject as far as the study of economics is concerned. There is of course the important concept of ‘public goods’ in economics – goods whose production benefits everyone, and which hence require public provision since they are under-produced by the private sector – but, as we shall see, the concept has also been used to hinder government activity (restricting specific areas in which it is OK for the public sector to tread) rather than help government think creatively about how it produces value in the economy.

The narrative that government is inefficient and its optimum role should be ‘limited’ to avoid disrupting the market is extremely powerful. At best, the story goes, government should simply focus on creating the conditions that allow businesses to invest and on maintaining the fundamentals for a prosperous economy: the protection of private property, investment in infrastructure, the rule of law, an efficient patenting system. After that, it must get out of the way. Know its place. Not interfere too much. Not regulate too much. Importantly, we are told, government does not ‘create value’; it simply ‘facilitates’ its creation and – if allowed – redistributes value through taxation. Such ideas are carefully crafted, eloquently expressed and persuasive. They have resulted in the view that pervades society today: government is a drain on the energy of the market, an ever-present threat to the dynamism of the private sector.

But there is one area of mainstream economic theory which recognizes – indeed, emphasizes – where governments can play a positive role: fixing ‘market failures’. As discussed, market failures arise when the private sector does not invest enough in an area considered good for the public benefit (e.g. basic research, as it’s so hard to make profits from this output) or invests too much in areas considered bad for public benefit (e.g. polluting industries, creating a negative externality not embodied in company costs). A government subsidy may be placed on the good and a tax on the bad. But the current message to government is: intervene only if there is a problem, otherwise sit back, focus on getting the ‘conditions’ right for business and let the business sector do its thing, which is to create value.

But while this is the accepted view of government’s role, a brief glance at the history of capitalism reveals some other powerful, if less simplistic, stories about government’s place in the economy. In the middle of the Second World War Karl Polanyi, a radical Austro-Hungarian thinker who combined the reasoning of political economy with a deep understanding of anthropology, history and philosophy, wrote a very important book: The Great Transformation . In it, he argued that markets were far from ‘natural’ or inevitable – rather, they resulted from purposeful policymaking: ‘The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism … Administrators had to be constantly on the watch to ensure the free working of the system.’ 3

Polanyi traced the long history of local and international markets. In the process, he showed that the national capitalist market – the one studied in economics classes with supply and demand curves – was actually forced into existence by the state. Government, Polanyi asserted, does not ‘distort’ the market. Rather, it creates the market. Put bluntly: no state, no market. This is not a normative point – the government can of course invest in areas that are considered problematic, from wartime technologies to fracking technology, which some have argued strongly against. And it is precisely this potentially powerful role that should alert us all to better understand what taxpayers’ money (or printed money) is being invested in.