October 10th, 2013
in Op Ed
by Dan Kervick, New Economic Perspectives
I take time out from our latest national celebration of curmudgeonly misery and political decadence, which features an intense bipartisan struggle over whether to cling to liberal or conservative forms of long-term economic stagnation, in order call the reader’s attention to an economist whose innovative ideas are so insightful, so well-informed and so right that they stand in terrifying contrast to almost everything that most Americans in 2013 hold dear.
Mariana Mazzucato lecturing at the London School of Economics.
The economist is Mariana Mazzucato of the University of Sussex, who recently presented several of the leading ideas from her new book, The Entrepreneurial State, to an audience at the London School of Economics. Mazzucato ties a vast number of themes together in a sparkling, rapid-fire talk followed by a stimulating round of Q&A.
Among the economists who come in for discussion along the way are Polanyi, Keynes, Schumpeter, Stiglitz and Krugman. Mazzucato pulls no punches on the inadequacies of bastard Keynesianism with its limited emphasis on economic pump-priming, and on the dead-enders of neoliberal thought represented, for example, by the editorial staff of The Economist magazine. Here is the link to the presentation:
Mazzucato’s central message is that standard accounts of the economic role of the state are incomplete. These accounts focus on the provision of public goods and the state’s role in compensating for negative externalities and other market failures.
But Mazzucato believes economists and the public need a better understanding of the role of states in driving economic innovation. She argues that government spending has been most effective when that spending is directed towards large missions, and that missions such as putting a man on the moon or tackling climate change require strong government intervention. Mazzucato builds on her account of mission-oriented investment to explain how to develop public-private partnerships that are symbiotic rather than parasitic.
Mazzucato also discusses the problems of predation and value extraction, but resists the idea that the problem consists entirely in a contrast between a bloated and extractive financial sector, on the one hand, and a productive real economy on the other. Private sector firms in the real economy can be just as extractive as financial sector firms, if the former use earnings to overpay management and send large profits to shareholders instead of investing them in long-term, research driven projects.
Mazzucato argues that if we don’t have a good story about value creation, we can’t understand the processes of rent extraction and predatory behavior, and that the full story of value creation in the modern world requires more attention to the high-risk, long-term investment missions that have been carried out by governments.
Among other things, Mazzacato tells us that:
- Banks have no clue about how to differentiate between risks that derive from long-term, research driven innovation and risks that come from financial mismanagement.
- Innovation economists have overemphasized the role of private venture capital.
- Private sector entrepreneurs like Steve Jobs surfed on the massive technological wave created by state-driven, mission-oriented investment.
- In successful modern economies, states have been responsible for taking the largest and most important risks.
- The mission-oriented investments that have driven innovation are not just military, but are seen sector-by-sector, department-by-department.
- States currently receive a grossly inadequate reward for their investments, with far too high a proportion of the rewards going to the firms, executives and shareholders who have benefited from the heavy-lifting and risk-taking carried out by states.
My only reservation on this last point is that I think Mazzucato slightly over-emphasizes the need for rewards to go to states in the form of tax revenues. I would propose that the focus should be on rewards going to the publics which are the democratic foundation of these states. Governments do not necessarily need to recoup rewards in the form of tax revenues, so long as fiscal mechanisms of some kind exist for the provision of public services and the broad distribution of the rewards of state investment throughout the economy.
The necessary mechanisms can include persistent public sector deficits, as is emphasized by MMT, especially if the deficits are coupled with monetary reforms that eschew debt-issuance to extractive holders of large financial surpluses. People can then keep more of their incomes and pay less in taxes, and governments can judiciously exploit their inherent monetary powers to inject monetary assets directly into the economy in amounts that exceed the amounts accumulated by taxes or borrowing.
However, I agree wholeheartedly that progressive taxation in the pursuit of greater socioeconomic equality is called for so long as the fiscal starting point is a grossly unequal society.
I have touched on some of the same themes Mazzucato is developing in several of my earlier pieces on public enterprise. In these doleful and pessimistic times in the United States, where fear and loathing of government is endemic across so much of the political spectrum, and where various anti-state ideas favoring localism, privatization, voluntarism, self-reliance, deregulation and desupervision remain so popular on the right and the left, it might seem impossible for Mazzucato’s call for an economically activist, mission-oriented government to get a foothold. But I am convinced the ideas Mazzucato is advancing are indeed the Next Big Thing.
Americans will ultimately reject failure and stagnation, as they always have in the past; and as awareness grows that our current failures are due to insufficient ambition for mission-oriented state investment, and unequal distribution of the fruits of that investment, the tide will turn back toward public enterprise and ambitious government.