The state should lead market innovations to address humanity's biggest problems, a renowned economist says.
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Mariana Mazzucato argues that governments ought to be active co-creators and co-shapers of markets alongside the private sector.
In her latest book, Mission Economy: A Moonshot Guide to Changing Capitalism, Professor Mazzucato argues that capitalism is failing to solve a host of problems including disease, inequality, the digital divide and the environmental crisis.
The professor in the economics of innovation and public value at University College London (UCL), tells Kathryn Ryan we need to stop pretending the state doesn't already shape markets and then use its potential to solve immediate challenges like climate breakdown.
She points to many of the world's greatest achievements, such as the moon landing or the invention of the internet, which she says stemmed from government investment, not the private sector.
This must involve strategic investments by specialised government units shorn of the box-ticking that has characterised a risk-adverse public sector, she says.
The history of innovation started by government
Mazzucato makes a distinction between the false history and real history of innovation. The idea that all innovation occurs inside business and that government at best can fix 'market failure' and simply enable and invest in education and basic research, is a false narrative that needs to be challenged.
She points out this widely-accepted myth completely ignores the huge risks government took when it came up with things like the internet and GPS, which were publicly financed.
In her previous book The Entrepreneurial State she points out countries that unsuccessfully tried to copy Silicon Valley big tech successes had failed to understand there was a decentralised network of state agencies that worked alongside the private sector to create it.
“Countries that think that they can... bring in venture capital and somehow great science in New Zealand or elsewhere is going to go commercial have failed miserably, because they don’t get that public sector side,” she says.
Muzzucato says such public investment was strategic and in many cases came about through necessary problem-solving.
The Defense Advanced Research Projects Agency (DARPA), a research and development agency of the United States Department of Defense responsible for the development of emerging technologies for use by the military is a good example, she says.
“We really need to better understand what it means to create, drive and nurture public institutions that are purpose-oriented, like DARPA, which came up with the internet... because they had a problem, a purpose, which was at the time, getting satellites to communicate and the internet was the answer.
“With GPS the Navy needed to know where the ships where – and GPS was the answer. So, purpose orientation, when it’s the military orientated, has been successful in that way.
"So the question I’ve been asking is what if we actually built purpose-orientated organisations in the public sector, like DARPA, but around our big societal challenges, whether it’s climate change, health issues or around different types of inequalities, and so on."
To do so would involve re-framing what the public sector is for - not just to fix market failure, but to direct markets into achieving big goals, the public realm would also need re-skilling, she says.
“It has become stupid because of this massive outsourcing trend," she says. "So, the purpose orientation also requires investment within the public sector of its own capabilities and when you get that, what we’ve seen in many countries, including New Zealand, which is a loss in that public sector capacity because of that outsourcing of dynamic knowledge and capabilities within the state.”
Whether it comes to aviation, nuclear power, nano-technology, bio-technology or computing, early government innovation and investment acted to stimulate those industries, she says.
This requires a cultural shift within government institutions, rewarding civil servants for how much risks they take within their work. DARPA already does this, she says.
NASA’s moon landing mission is a prime example of this culture of aiming for something hard to achieve, she says.
“This involves creating budgets, just like when we go to war… no one ever says, ‘there’s no money’. Money literally comes out of the woodwork when it’s time to go to war. Or, on the back of the health pandemic… with many countries’ recovery funds, just a year after we were told there was no money."
Creating money for strategic funds that will increase productivity, sectoral transformations and advance economic goals will offset any inflationary pressures that this may cause. Inflation however isn't necessary the result of such government spending, she says.
“There’s this myth that as soon as government starts to get active and puts money into the economy, whether it’s through a stimulus programme, or going after the kind of missions that I talked about, that inflation is necessarily going to follow. It’s completely false. Inflation occurs if you create a lot of money without expanding the productive capacity of the economy."
By designing the conditions of investment you can influence the strategic direction of companies and the broader economy, she says.
“The kind of investments I’m talking about is not helicopter money, it’s about investing in new opportunities, which increase the expectations in the business sector… instead of just giving tax incentives, which increase profits but not investment."
Many people are still concerned about levels of debt associated with big projects like tackling climate breakdown, she says.
However, she argues so long as this money helps productivity it doesn't matter.
She also argues that when government debt reduces private sector assets reduce because much government debt is held in the form of bonds.
Public investment for her is about forging a better partnership with industry and not 'crowding out' the private sector. The investment should be made in a way that galvanises and inspires others to invest as well. Focusing on big inspirational challenges creates new markets, instead of just fixing and tinkering with existing markets.
"That’s why it’s really important to design those public programmes in such a way," she says. Building up government capacity to do so is vital.
The concept of public value is one used by public sector institutions, she says, including the BBC in the UK, which has created new markets through defining products like soap operas. It's one she believes should be widely used across the public sector when shaping markets.
Mazzucato says the first step in creating these market spaces is acknowledging the state has a part to play in investment and shaping the market, instead of pretending that it doesn’t when it already does.
That means there can be open democratic debate on the merits of investment projects and that these can be voted on at election time, and then advanced by specialised public sector institutions.
Incentivising a risk-adverse public sector to lead creative innovation is another challenge.
But she says this can be achieved by doing away with the bureaucracy of output metrics – ticking boxes on what civil servants are doing to hit goals and targets.
The output metrics system itself is based on a fallacy that public sector isn’t as efficient as the private sector. It just leads the sector to be inefficient and self-limiting versions of corporate entities, which can themselves, be very inefficient, she adds.
“The problem is that has crept in through 'public choice theory', new public management, which is this idea that the public sector is by definition inefficient and almost needs to emulate the private sector and have those kinds of output metrics, otherwise it’s just going to fall into inertia and fall asleep on its feet.
“That’s based on these really false assumptions. This idea that the best way to run a capitalist economy is just through turning government into its own type of business, having the same type of KPIs and outputs that many businesses have, that reduces everything that I’m talking about, which actually has to do about a debate in civil society about what goals we want to go after in order to get there you’re going to be able to accept failure, trail and error, learning by going.”
Mazzucato will be appearing at the New Zealand Festival.
