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

In Chapter 7 we saw the importance of government in developing the key infrastructure and technology upon which twentieth-century capitalism was built, even though it has received inadequate recognition for doing so. Of course, the story is not always positive. The Concorde aircraft did not result in a commercialized plane. Most R&D in new drugs leads to nothing. And guaranteed loans are made to companies which fail, a recent example, as we have seen, being the $528 million provided by the US Department of Energy to the company Solyndra in 2005 for the production of solar cells. When the price of silicon chips fell dramatically soon after, Solyndra went bankrupt, leaving the taxpayer to pick up the bill. 68

Yet any venture capitalist will say that innovation involves exploring new and difficult paths, and that occasional failure is part of that journey. The guaranteed loan ($465 million) provided to Tesla for the development of the Model S electric car was, as we saw in Chapter 7, a success. This trial-and-error process is accepted in the private sector – but when governments experience failure they are regarded as incompetent and are accused of being unable to ‘pick winners’. As a result, public organizations are frequently told to stick to the straight and narrow, to promote competition without ‘distorting’ the market by choosing specific technologies, sectors or companies in which to invest. 69

To limit government in this way is to completely ignore its track record, from the development of touchscreen technology to innovation in the renewables sector. Government has often been at its best when mission-oriented – precisely because, as President Kennedy said, it is hard.

Doing ‘hard’ things means being willing to explore, experiment, make mistakes and to learn from those mistakes. But this is almost impossible in a context in which government ‘failure’ is deemed the worst of all sins, and in which the guns are loaded, waiting for government to make the slightest mistake.

This does not of course mean that mistakes should be welcome under any conditions. Mistakes that arise from rent-seeking behaviour can lead to vested interests influencing government. As we know, rent occurs when value is extracted through special privileges, for example a subsidy or tax break, and when a company or individual grabs a large share of wealth without having created it. Profit-maximizing firms can try to increase their profits by soliciting special policy-related favours, and are often successful because politicians and policymakers are open to influence and even corruption. The possibility of this sort of capture (of government by vested interests) is a problem, but it becomes even more acute when there is no clear appreciation of government value. If the state is seen as irrelevant, it will over time also become less confident and more easily corrupted by the so-called ‘wealth creators’ – who can then convince policymakers to hand out favours which increase their wealth and power.

Lazy assumptions about the role of public investment are misleading. Business investment is mainly driven by perceptions of future opportunities, whether these be in a new sector (the emergence of nanotechnology), or in a region that is perceived as an exciting place for new ideas. As we have seen, such opportunities have historically been funded directly by governments, whether by DARPA-type investments in what later became the Internet, or the Danish government’s investment in renewable energy. All of which means that policies constructed on the assumption that business always wants to invest, and simply needs a tax incentive to do so, are simplistic, not to say naïve. The incentives (indirect spending through a tax cut), unless complemented by strategic direct investment by government, will rarely make things happen that would not have happened anyway (in economics speak, there is no ‘additionality’) . As a result, a company or individual will often experience an increase in profits (through a tax cut) without increasing investment and without generating any new value. And the primary objective of the policymaker should be to increase business investment, not profits. Indeed, as seen earlier the relationship between profits and wages is at record levels. There is no profits problem, but an investment problem. 70

PUBLIC AND PRIVATE JUST DESERTS

Once we recognize that the state is not just a spender but an investor and risk taker, it becomes only sensible to ensure that policy leads to the socialization not only of risks but also of rewards. A better realignment between risks and rewards, across public and private actors, can turn smart, innovation-led growth into inclusive growth.

As we have seen, neoclassical value theory for the most part disregards the value created by government, such as an educated workforce, human capital and the technology which ends up in our smart products. Government is ignored in microeconomics – the study of production – except in regulating the prices of inputs and outputs. It plays a bigger part in macroeconomics, which deals with the economy as a whole, but at best as a redistributor of the wealth created by companies and an investor in the ‘enabling’ conditions companies need – infrastructure, education, skills and so on.

The marginal theory has fostered the idea that collectively produced value derives from individual contributions. Yet, as the American economist George Akerlof, who shared the Nobel Prize in Economics in 2001, said: ‘Our marginal products are not ours alone’ 71– they are the fruits of a cumulative process of learning and investment. Collective value creation entails a risk-taking public sector – and yet the usual relationship between risks and rewards, as taught in economics classes, does not seem to apply. So the crucial question is not just about accounting for government value but also rewarding it: how should rewards from investment be divided between the public and private sectors?

As Robert Solow showed, most of the gains in productivity of the first half of the twentieth century can be attributed not to labour and capital but to the collective effort behind technical change. And this is due not only to improved education and infrastructure, but also, as discussed in the previous chapter, to the collective efforts behind some of the most radical technical changes where the public sector has historically taken a lead role – ‘the entrepreneurial state’. 72But the socialization of risks has not been accompanied by socialization of rewards.

The issue, then, is how the state can reap some return from its successful investments (the ‘upside’) to cover the inevitable losses (the ‘downside’) – not least, to finance the next round of investments. This can be done in various ways, as discussed in Chapter 7, whether through equity-holding, conditions on reinvestment, caps on prices, or the need to keep patents as narrow as possible.

FROM PUBLIC GOODS TO PUBLIC VALUE

In this chapter we have considered the biased way in which government activity in the economy is viewed. The role of government is often limited to ‘fixing problems’; it must not over-reach itself, government failures being regarded as worse than market failures. It should have a light touch on the economic tiller and fix the basics by investing in areas like skills, education and research, but not go as far as to produce anything. And should government be productive, as state-owned enterprises are, our way of accounting for GDP does not recognize it as public production.

Indeed, almost nothing that government does is considered to fall within the production boundary. Government spending is seen purely as expenditure and not as productive investment. While that spending might be regarded by some as socially necessary and by others as unnecessary and better done by the private sector, neither side has made a robust case for government activity as productive and essential to creating a dynamic capitalist economy. Too often ideology has won over experience.