This is the English translation of an article that first appeared on the front page of La Repubblica on January 2, 2016.
The debate about the relative roles of the state and the market in capitalist economies tends to swing from side to side in the hearts and minds of public opinion: periods when the state is defended for its role in economic development are always superseded by an attack on its intervention into ‘well functioning’ markets. It has been like this throughout the twentieth century. And it is what has happened since the most recent global financial crisis and economic recession: a brief period right after its outbreak, when there was consensus that the state had a key role to play in both saving the banks and using fiscal policy to promote growth, was quickly apprehended by those who feared rising levels of public debt. Indeed, this debt was mistakenly seen as the cause rather than the result of the crisis—due to lower tax receipts, rising bailouts, etc. So austerity became again the flavour of the day, while any sort of serious economic and industrial policy became anathema.
What is missing from the public perception is how through the history of modern capitalism, the state has done, and continues to do, what markets simply won’t. This is not about its role in simply fixing ‘market failures’, but its role in directly shaping and creating markets. Take the financial sector. A well-functioning financial system must in theory fund the capital development of the economy, promoting economic growth and rising living standards. One of the biggest banks in the US is called Chemical Bank because it had its origin in funding the chemical sector—unthinkable today that a bank would be so focussed on the real economy!. Yet in recent years finance has not been funding investment or innovation in the real economy but financing… itself. Since the 1970s, financial innovations coupled with deregulation have made it easier to earn profits from speculative investments in financial assets.
Yet capital development of the economy requires ‘patient, long-term committed finance’. Indeed the IT revolution in the US, was financed initially by patient public finance provided by a network of strategic and mission-oriented agencies: like DARPA in the Department of Defense, NIH in the Department of Health, NSF, NASA, and the Small Business Innovation Research program (which has given more early stage high risk finance to companies than the entire venture capital sector).
And more recently the green revolution (what many hope will be the next big thing after the Internet) is being funded by similar agencies like ARPA-E in the Department of Energy, or guaranteed loans such as that provided to Tesla (for close to $500 million by the tax payer). In some countries, like Germany and China, such patient finance comes from the public banking sector, KfW in Germany and the China Development Bank in China. Both are leading the way in their country’s green economy transformations—something which Bill Gates himself has realised, recently asking governments to lead in green as they did in IT.
Even in a country that in the public imagination represents liberalism par excellence – Great Britain – it was state support in the 70s that saved Rolls-Royce by putting it back on its feet and, more recently, it was the state funded automotive Catapult Centre that allowed the UK automotive industry to get back on its feet, producing more cars now than in Italy.
Italy today continues to lack such strategic organizations. Economic problems are framed, whether by Berlusconi in the past or Renzi today, only in terms of removing ‘impediments’ (taxes, bureaucratic red tape, etc). There is no consideration of how to create the necessary set of institutions that can invest, creating the new markets of the future. Take the Cassa Depositi e Prestiti (CDP). It has not functioned as a proper public bank, at best seeing its role as investing in infrastructure and facilitating private companies, rather than in making strategic investments in innovation that could create new markets, which would (as in the rest of the world) be followed by private investments. This is what KfW does in Germany and the China Development Bank does in China. It is still not clear how the current reshaping of CDP today will pan out, whether this is just the n’th change of leadership, or a really new change in direction. What is sure is that it is crucial to Italy’s future. While recapitalising is important, and the latest investments in broadband are positive, it is simply not enough for the 21st century. What’s needed is a change in direction.
But what direction? Key to Italy’s future is to get rid of the static public versus private sector debate. Both sectors are crucial. The question is how to promote synergetic partnerships which allow the public sector, in its engagement with the private sector, to remain courageous, strategic and set the direction of change, rather than only de-risking, facilitating, administering, subsidizing and incentivising. Whether we are looking at education, health, transport, culture, renewable energy or the future of micro-electronics, the problem should not be ‘opening up to the market’ (lots of good that did to Telecom Italia) but how to structure and shape the market, through public and private investments, in such a way that allows a sector to become more dynamic, innovative and investment driven. Instead, because we pretend that investment is for the private sector, and the public sector is there to only regulate, subsidize or save the day when things go wrong (bringing into the public sector the ‘bad’ toxic side of the equation, allowing the ‘good’ to be absorbed privately), this leads to a self-fulfilling prophecy where precisely because we don’t see a real ‘public role’ beyond, it becomes under financed, but also under “imagined”. When a sector lacks imagination, it dies. It becomes irrelevant, and of course easier to attack. This vicious cycle is happening in Italy’s public sector and it is contributing to its demise. Only when the vision becomes one of co-creating a new future, rather than allowing one side to pick up the pieces, while the other continues to make short-term profits, will we get out of the usual ‘tutto deve cambiare perche, tutti resti come prima’ (‘everything needs to change, so everything can stay the same’).
The original article in in La Repubblica, January 2, 2016.
My book, Lo Stato Innovatore (2014)
Review in Sole 24 Ore, August 10, 2014
My recent interview on Otto e Mezzo, December 12, 2015
My latest interview on CNN on the role of public funding in Silicon Valley, January 3, 2016