I have written a piece for the Financial Times Alphaville blog to kick off a new series they are running about the Mission-Oriented Finance for Innovation Conference I am organising next week. Keep an eye on Alphaville for more blogs from our speakers and the Alphaville team throughout the week. You can also watch a livestream of Day 2 of the conference on the conference website and follow the action on twitter using #MOFI2014 or follow @MazzucatoM & @SPRU for updates.
“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. …I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”
Keynes – The General Theory of Employment Interest and Money, 1936 (p. 383)
Modern capitalism faces a number of societal challenges, including climate change, youth unemployment, obesity, ageing, and rising inequality. To meet them requires a new agenda for innovation and growth policy. We need policymakers to ‘think big’ about what kind of technologies and socio-economic policies can fulfil visionary ambitions to make growth more smart, inclusive and sustainable.
But how can Governments think big about the challenges ahead when they are slaves of defunct economic theory?
Although such challenges are not strictly technological (as they also require behavioural and systemic changes), they are different from those ‘mission-oriented’ feats that led to putting a man on the moon, or to those that led to the emergence of new general-purpose technologies, ranging from the Internet to biotechnology and nanotechnology.
Success in the past required companies that were willing and able to invest in long-run areas, and a confident ‘entrepreneurial state’ willing and able to take on the early, capital intensive high risk areas which the private sector tends to fear. Indeed, today this is becoming even more necessary with record hoarding rates in the private sector, and many companies choosing to spend more on share buybacks than on R&D.
The iPhone is a good example. This chart shows how every technology that makes it so smart, traces its funding back to a mission-oriented public agency in the US government which likes to pretend it believes in the free market when actually it has been one of the most interventionist in history.
Source: The Entrepreneurial State: debunking private vs. public sector myths (p. 109)
Similarly, it is public development banks that are lead funders of the next big thing after the internet: the green revolution.
Yet today it is increasingly difficult for states to think big.
We live in an era when the role of government is being limited to simply ‘facilitating’ and ‘de-risking’ the private sector, fixing market failures, rather than taking a direct role in creating and shaping markets. Indeed, when government agencies step out of this ‘facilitating’ role, they immediately get accused of ‘crowding out’ or ‘picking winners’.
And when we hype some actors (e.g. venture capital), while dismissing others (the state), we allow successful lobbying by those agents that call themselves the ‘value creators’. This is most evident in the way capital gains tax has evolved in the US and the UK, with the National Venture Capital association being the lead force in negotiating a fall of 50% in capital gains between 1976 and 1981.
The emphasis since the Global Financial Crisis on cutting public debt (even though it was private debt that caused the crisis) has inevitably affected the budgets of the very state agencies that have been responsible for creating both the direct and indirect types of investments needed to catalyse the technological revolutions of the past.
In the US, ‘sequestration’ has put close to one-third of the US public R&D budget ($130bn per year) at risk. In Europe, the ‘fiscal compact’ (which requires member states to have fiscal deficits that are only 3 per cent of their GDP) is putting pressure on countries to cut spending on areas like education and R&D. Spain—a critical case—has cut publicly funded R&D by 40 per cent since 2009. In the UK, while the government has ‘ring-fenced’ the science budget, in real (inflation-adjusted) terms, this has meant a 15 per cent cut.
Meanwhile, the opposite trend is occurring in countries that continue to grow. Germany has increased its education, research and science budget by the same amount (€10 billion per year) since 2009, raising it to almost 10 percent of its GDP; while China has made increases in this area of 170 percent over the last five years.
Nevertheless, finding a way for government to ‘think big’ is not just about throwing public money at different activities. It requires a new economic framework that can justify the role of the public sector in ‘directing’ change, forming the right institutional structures . It needs to justify the catalytic role of government — its ability to transform landscapes and create and shape markets, not just fix them. It requires new indicators through which to evaluate public investments, which captures the ‘transformational’ catalytic impact that Keynes suggested should be the objective (‘those things which at present are not done at all’). And finally, it requires different insights on the organisation of government, and on the distribution of risks and rewards that emerge from ‘smart’ innovation led growth.
Next week the conference will bring together public agencies from across the world that are facing up to this mission oriented role of the public sector. It will provide a forum to hear about the challenges they face today and to think big in a world that asks governments to think small.
They will meet with academics working to transform economic theory in such a way that it not only can describe what has actually happened in the past (rather than the ideological position of assuming it was all market directed), but also how to evaluate such investments in the future.
This is the conversation we need to have if we are to avoid the self-fulfilling prophecy that Keynes warned us against: the ‘gradual encroachment of ideas’ that leaves practitioners as the slaves of defunct economists. Let’s throw off the shackles.
© Mariana Mazzucato
Building the Entrepreneurial State – My policy brief for the conference
Visit the conference website for more background papers
Serious innovation requires serious state support – My article from last year in the FT