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

Keynes was critical in showing the dynamic role of public expenditure in creating a multiplier effect that can lead to higher growth. Yet there is still debate as to whether the multiplier exists at all, and advocates of government economic stimulus are often on the defensive. Part of the problem is that the argument for fiscal spending continues to be tied mainly to taming the business cycle (through counter-cyclical measures), with too little creative thinking about how to direct the economy in the longer term.

It is especially important to rethink the terminology with which we describe government. Portraying government as a more active value creator – investing, not just spending, and entitled to earn a rate of return – can eventually modify how it is regarded and how it behaves. All too often governments see themselves only as ‘facilitators’ of a market system, as opposed to co-creators of wealth and markets. And, ironically, this produces exactly the type of government that the critics like to bash: weak and apparently ‘business-friendly’, but open to capture and corruption, privatizing parts of the economy that should be creating public and collective goods.

A new discourse on value, then, should not simply reverse the preference for the private sector over the public. What is required is a new and deeper understanding of public value, an expression found in philosophy but almost lost in today’s economics. This value is not created exclusively inside or outside a private-sector market, but rather by a whole society; it is also a goal which can be used to shape markets. Once the notion of public value is understood and accepted, reappraisals are urgently required – of the idea of public and private and of the nature of value itself. ‘Public values are those providing normative consensus about (1) the rights, benefits, and prerogatives to which citizens should (and should not) be entitled; (2) the obligations of citizens to society, the state, and one another; (3) and the principles on which governments and policies should be based.’ 73

The idea of public value is broader than the currently more popular term ‘public good’. The latter phrase tends to be used in a negative way, to limit the conception of what governments are allowed to do, rather than to stimulate the imagination to find the best ways to confront the challenges of the future. So the state-owned BBC is thought to serve the public good when it makes documentaries about giraffes in Africa, but is questioned if it makes soap operas or talk shows. State agencies can often fund basic science due to the ‘positive externalities’, but not downstream applications. Public banks can provide counter-cyclical lending, but they cannot direct their lending to socially valuable areas like the green economy. These arbitrary distinctions reflect a narrow view of the economy which often results in a public actor being accused of ‘crowding out’ a private one – or, worse still, delving into the dangerous waters of ‘picking winners’: the state is only supposed to do what the private sector does not want to do, rather than have its own vision of a desirable and achievable future.

Public institutions can reclaim their rightful role as servants of the common good. They must think big and play a full part in the great transformations to come, squaring up to the issues of climate change, ageing populations and the need for twenty-first-century infrastructure and innovation. They must get over the self-fulfilling fear of failure, and realize that experimentation and trial and error (and error and error) are part of the learning process. With confidence and responsibility, they can expect success, and in so doing will recruit and retain top-quality employees. They can change the discourse. Instead of de-risking projects, there will be risk-sharing – and reward-sharing.

It might also make sense for private enterprises – which benefit from different types of public investments and subsidies – in return to engage in a fair share of activities which are not immediately profitable. There is much to be learned from the history of Bell Labs, which was born out of the US government’s demand that the monopolist AT&T invest its profits rather than hoard cash, as is so common today. Bell Labs invested in areas that its managers and its government contractors thought could create the greatest possible public value. Its remit went well beyond any narrow definition of telecommunications. The partnership of purely government-funded research and work co-financed by Bell Labs and agencies like DARPA led to phenomenal tangible results – many found in our handbags and pockets today. 74

A bold view of the role of public policy also requires a change in the metrics used for evaluation of those policies. Today’s typical static cost-benefit analysis is inadequate for decisions which will inevitably have many indirect consequences. A much more dynamic analysis, one which can capture more of the market-shaping process, is urgently required. For example, any measure of the success of a government project to organize a charging infrastructure for electric cars must try to take into account the opportunities offered for further technical development, the reduction of pollution and the political and ecological gains of lessening reliance on non-renewable oil from countries with objectionable governments.

It is crucial to find metrics which favour long-run investments and innovation. In the 1980s, it was not cost-benefit analysis that encouraged the BBC to establish a dynamic ‘learning programme’ to get kids to code. The activity led to the development of the BBC Microcomputer, which found its way into all British classrooms. While the Micro did not itself become a commercial success, procurement for its parts supported Acorn Computers and eventually led to the creation of ARM Holdings, one of the most successful UK technology companies of recent decades. Similarly, there would almost certainly be more European high-tech successes if there existed greater interaction between innovation systems and public procurement policies. However, to recognize that the public sector creates value we must find ways to assess that value, including the spillovers from this sort of ambitious public funding. The BBC initiative helped kids learn to code and increased their interest in socially and economically beneficial new technologies. It also had direct and indirect effects in different sectors, helping new companies to scale up and bringing new investors into the UK tech landscape. Similarly, there would almost certainly be more European high-tech successes if there existed greater interaction between innovation systems and public procurement policies. However, to recognize that the public sector creates value we must first find ways to assess that value, including the spillovers from this sort of ambitions public funding.

Governing Public Value

The work of Elinor Ostrom (1933–2012), an economist from Indiana University who received the Nobel Prize in 2009, helps clarify the richness of the way in which new metrics can affect behaviour and vice versa, in defusing the conflict between government and market. Ostrom shows how the crude state–private divide that dominates current thinking fails to encapsulate the complexity of institutional structures and relationships – from non-partisan government regulators to state-funded universities and state-run research projects – that span this divide. Rather, she emphasizes common pooled resources, and the shaping of systems that take into account collective behaviour.

Ostrom’s work supports Polanyi’s historical conclusion in The Great Transformation : governments, along with the many institutions and traditions of a society, are the womb in which markets are nourished, and later the parent which helps them serve the common good. One vital government responsibility in the modern economy – which Ostrom also finds in successful pre-industrial economies – is to limit the amount of rent that emerges from any non-collective approach to wealth creation. This brings us back to Adam Smith’s definition of the ‘free market’ as being free from rent.