Can We Fix Capitalism in the Age of Trump and Brexit?

Fixing markets isn’t enough. We have to actively shape and create them.

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By Lynn Parramore

Mariana Mazzucato, Professor of the Economics of Innovation at the Science Policy Research Unit of the University of Sussex and author of The Entrepreneurial State: debunking public vs. private sector myths, has made a passionate case for the government’s active role in the economy  —sending the old laissez faire notion that markets can run themselves into the dustbin where it belongs. In a new book co-edited with Michael Jacobs, Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth, she offers a bold new vision for contemporary capitalism that works for the people and the planet. What chance does this vision have in the age of Trump and Brexit? Mazzucato shares her view.

Lynn Parramore: The new book is called “Rethinking Capitalism.” What aspects of capitalism do you think were most responsible for recent political shifts, like Brexit and the election of Donald Trump?

Mariana Mazzucato: In the book, we set out various failures in the model of capitalism that has dominated the last three decades — from instability of growth to increasing inequality to the threats of climate change. We argue that these failures are connected to failures of economic thinking.

Effects of these failures on the electorates of the U.S. and the U.K. are fairly well documented, and some – such as the inability to deliver growth that includes everyone – have now become electorally significant. Growth in productivity has diverged from growth in the share that working people can expect right across advanced economies, but this trend started earlier and has been more pronounced in the U.S.

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To give you some stats, real median household incomes in the U.S. were basically the same in 1989 as in 2014. But we are also seeing similar challenges in the U.K. in the stagnation of real wages. Recent analysis from the U.K. Institute for Fiscal Studies suggests that wages will still be below 2008 levels in 2021. People work hard and companies make big profits, but employees don’t see that they share in the wealth they help to create.

For too long, these problems have been ignored. And the results of the U.S. election and the EU referendum showed that people were no longer willing to vote for the status quo.

Where there is less agreement is on the reasons why. It would be a mistake to overstate the similarities between the Brexit vote and Trump’s win – but there are common themes, not least in the rallying cries that the winning campaigns used. They focused on a supposed economic threat posed by outsiders – as immigrants or as trade partners. This fuelling of anxieties underpinned a narrative centered on the need to “regain control,” whether of borders or of economic forces. Unfortunately, simplistic framing of the problems leads to simplistic answers.

Another similarity of Brexit and Trump’s campaigns was an attack on so-called ‘elites.’ This is not so much a failure of capitalism as of its high priests in the economic profession – for which we must all take some responsibility.

LP: So what’s the real story of what’s not working for so many?

MM: If we look at the complexity of the challenges facing western societies today, we see that the problems are not really about outsiders, but have their roots much closer to home.

Our current model of capitalism and the dominant ideas in policy making have led to a failure of investment by both the public and the private sector in the things that drive productivity, and which affect its distribution. Shareholder value theory — the destructive idea that companies should be run solely for the benefit of shareholders — has led to financialized businesses that do not invest in the areas that will lead to future growth or the invention of useful new products. Companies prefer to put money in the pockets of shareholders or to hoard cash rather than to raise wages or invest.

But it is not just how these ideas have affected the private sector.  They have also had a detrimental impact on our understanding of the role government can play in raising both the rate of growth and shaping its direction. Mainstream economic theories popular in the last several decades have tended to downplay the government’s role in markets and to increase skepticism about even that more limited role. Austerity, particularly in Europe, has added to the problem. It has not worked, even on its own terms.

LP: In your earlier book, The Entrepreneurial State, you describe a model of capitalism that would address many of these problems. How does it work?

MM: My work has shown how a different understanding of the role of the state in growth can unlock private investment. Markets are not static entities that are ‘intervened’ in (for good or bad) but are outcomes of public and private interactions. In my view, the state should be active and work in cooperation with private businesses to spur growth that’s sustainable and inclusive. The policy process is about co-creating and co-shaping of markets, creating new opportunities for business investment —and negotiating a better deal for the public too.

Historically, it has been an entrepreneurial state that stimulates and gives direction to new technological opportunities. It is those opportunities that  stir the animal spirits of business to invest—and we can do that again. The examples I give in my book show that public investments are not only important for affecting the rate of growth but also its direction. And that these investments were most successful when mission driven, rather than aimed at single sectors. The venture capital industry entered biotechnology only decades after the National Institutes of Health led the way. Similarly, Apple’s i-products were only made possible due to the hefty public financing of all the technologies that make those products smart and not stupid: internet, GPS, touchscreen and SIRI. Today there are opportunities in green: indeed Germany is using its Energiewende policy as a way of envisioning a green transformation and innovation across many sectors.

If we want growth today to be more innovation-driven, more inclusive and more sustainable, then we need a more active state — not a less active one. Yet we still hear the dogma that we should just fix market failure by focusing on science and infrastructure, and to ‘level the playing field.’

Fixing markets isn’t enough. We have to actively shape and create them and ‘tilt’ the playing field in the direction of the growth we want.

LP: What’s your impression of the possibilities to get things moving in a better direction in the wake of recent political shifts?

MM: Brexit and Trump have brought the problems of capitalism into sharp relief, but both are only making things worse. Take the investment challenge – businesses invest where there they see technological or market opportunity.  Brexit has shrunk the market opportunities.  Exiting trade deals will do the same for the U.S.  Those deals must be actively shaped and governed to make growth more inclusive.

But – to look on the bright side – because the problems are now in greater focus and can no longer be pushed aside, maybe policy makers will be more creative in trying to address them.

I see signs of that, for example, in Theresa May’s explicit embrace of industrial strategy, with a seeming interest in focusing this on missions that help make a better society, which I’ve discussed recently with various people in the government. There is a lot of flesh to be put on the bones – but there is at least an opening for a more pragmatic, less ideological debate about how to build economies that work for people, within the limits of our planet.

With a Trump administration we don’t know enough yet to make predictions, but if past behavior is any indication, I am not encouraged.  As I wrote in an article for the Guardian, as a businessman, Trump has been associated with some of the worst excesses of a particular style of value-extracting and asset stripping capitalism: set up businesses, let them fail, avoid paying suppliers, use bankruptcy laws to avoid taxes for decades, then set up another business somewhere else. It is this model that is the cause of many problems we see today.

LP: Trump seems to be rethinking fiscal policy with his proposal for an infrastructure program, which is interestingly a focus he shares with former candidate Bernie Sanders. What is your opinion of that focus?

MM: Too many politicians seem to reach for ‘infrastructure’ as the default answer to investment, as if roads and bridges were the answer to everything. Even the IMF and the World Bank seem to mainly offer infrastructure spending as an alternative to austerity, although they are right to focus on the need for investment.

While infrastructure is of course important, it must be part of a bigger vision. The point is not to simply dig ditches but to steer those investments towards transformational growth. We should be investing where the public returns are greatest – that is in innovation. If we look at Germany’s infrastructure policy, it has been driven by its mission-oriented focus on green infrastructure.  This affects both innovation and infrastructure, old industries and new. The German steel industry, for example, has adapted to the policy by lowering its material content through a ‘repurpose, reuse and recycle’ strategy.

Added to this, my specific concerns with Trump’s plans are that they are likely to investments in infrastructure where the private returns are highest (for example toll roads and bridges) rather than where the public gains are greatest.

LP: Speaking of green, how have the stakes of rethinking the economics of climate change shifted with Brexit and Trump?

MM: Green is not just about renewable energy. It’s also about creating a new direction for the whole economy. This requires government to step up, not step back, creating the kinds of mission-oriented public organizations that will enable us to tackle climate change — as ambitious as those that got us to the moon. It also requires the financial sector to be less short-term since we know that short-term finance has distorted incentives and directions in areas like biotechnology.

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A new study we are doing with data produced by Bloomberg New Energy Finance looks at the role of public banks and other public entities in providing the strategic, patient finance for the green revolution. An interesting attribute of public banks is that they don’t only de-risk the downside, but also get a share of the upside. This brings us to John Maynard Keynes’ idea of the ‘socialization of investment,’ which could provide new thinking on the types of public and private deals that the 21st century requires.

Brexit and Trump’s election are forcing countries to come up with new radical ideas. In this context, rethinking capitalism means rethinking the role of the public sector, the role of the private sector, the role of finance, and the relationship between them all. What is needed is both a New Deal in terms of mission-oriented investments but also a new deal in terms of a modern social compact—one that allows the state to socialize not only risks but also rewards. Maybe then innovation-led growth will also become growth that includes all of us. 

Originally published here at the Institute for New Economic Thinking.

2016 December 10

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  • ICFubar

    Yes indeed, how can we fix capitalism when there are no markets with true price discovery? All is now centrally planned, including any governmental input to the economy. Those who control unlimited amounts of liquidity can move the NYSE to 30,000 if they wish with the a few clicks of a mouse, or conversely drop the exchange to 5,000. When entire stock issuance of companies are traded with a couple of weeks with HFT we have to know that stock ownership itself is largely imaginary.

  • GaryReber

    The author talks about the need for investment to grow the economy, but fails to address the issue of ownership. As it is structured now our monetary system requires past savings in order to invest in future economic opportunities and technological invention and innovation. But past savings are limited to the present wealthy capital asset ownership class, who have been able to save due to high earnings as a worker or due to inheritance. The vast majority of Americans are unable to save or if they are the savings are insignificant, and those who do have minimal savings are fearful of the risk of losing the savings they do have.

    The author fails to discuss the issue of concentrated capital ownership and the fact that the vast majority of Americans are losing their ability to be good “customers with money” to sustain demand for products and services the need and want. This is because tectonic shifts in the technologies of production are exponentially eliminating the necessity for work. But the problem is a job is now the ONLY means for the vast majority of Americans, who own no significant capital, to earning an income and support demand for consuming products and services. This impacts investment because without “customers with money” there will be no return or self-liquidation of the investment. This violates the logic of corporate finance which is capital acquisition takes place on the logic of self-financing and asset-backed credit for productive uses. People invest in capital ownership on the basis that the investment will pay for itself. The basis for the commitment of loan guarantees (past savings/equity) is the fact that nobody who knows what he or she is doing buys a physical capital asset or an interest in one unless he or she is first assured, on the basis of the best advice one can get, that the asset in operation will pay for itself within a reasonable period of time––5 to 7 or, in a worst case scenario, 10 years (given the current depressive state of the economy). And after it pays for itself within a reasonable capital cost recovery period, it is expected to go on producing income indefinitely with proper maintenance and with restoration in the technical sense through research and development.

    The solution has to be to empower EVERY citizen (starting as a child and throughout the life cycle) to acquire significant ownership shares in the formation of future wealth-creating, income-producing capital assets, on the basis that the investments are sound investments. This can be accomplished using insured, interest-free (not cost free) capital credit, repayable out of the future earnings of the investments, and without the requirement of past savings. The highly selective use of the Federal Reserve’s discount powers and control over credit costs are policies that are necessary. Ideally, the Federal Reserve, in controlling and channeling monetary growth, would differentiate sharply between interest rates on already accumulated savings (i.e., “other people’s money”) and credit costs on newly created central bank credit for stimulating private sector investment growth among new owners (“pure credit”).

    What is missing is a refinement in the present irrigation system — a two-tiered credit policy that would permit increases in the money supply to be channeled more selectively into new private sector plants, equipment, and advanced technology, but through routes that gradually and systematically create new capital owners, thus reducing the pressures for forceful redistribution.

    • Dick Burkhart

      Right on in regard to ownership. Check out “With Liberty and Dividends for All” by Peter Barnes.

      • Duncan Cairncross

        I have ordered a copy –

        • Duncan Cairncross

          Excellent book – I would well recommend it

    • Duncan Cairncross

      Hi Gary
      I would prefer a modification of that
      90+% of our wealth is due to innovations/improvements made before us
      This is a major asset that should be equally owned by everybody

      I would suggest that we get everybody to pay a “rental” on their use of this existing universal asset – a “Wealth Tax” would be the fairest way of imposing this “rent”

      Then the money from this should be distributed as a “Universal Basic Income”

      Income from the “wealth” – not the wealth itself – this can also be a universal safety net

      Rather than “empowering every citizen to acquire” – simply giving every citizen the income from their share of the collective wealth

      • GaryReber

        The State under your scenario becomes extremely powerful with citizens more dependent rather and concentrated ownership is never abated. Political power follows property ownership.

        Under the economic democracy approach, the end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.

        • Duncan Cairncross

          Hi Gary
          I accept that point
          My issue is that if the citizen’s share is theirs then they can sell it and we will be back to having people with zero resources
          Giving everybody their “share” at birth with a basic minimum that cannot be sold would work the same way
          Effectively we should split the citizen share into
          (1) – a piece that is effectively just an income – which means that the government controls it
          (2) – another piece that actually becomes owned by the citizen

          But that is only possible when the UBI is noticeably bigger than is required for a reasonable life

          • GaryReber

            Duncan, yes, as with everything in life from the time we are infants we are constantly learning. We need to teach personal responsibility how the program works to each person’s long term financial benefit – the aim being to provide a new source of long-term income..

  • geonomist

    Please get over equating markets, an organic system, with capitalism, a parasite, and instead equate markets with the ecosystem. Subset and supra-set follow the same laws/patterns. Despite however much our species harms the nest, we’re still part of it.

    • chris goodwin

      You are nearly right (but still too far to the left !) Yes, markets are an “organic system” – a congeries of uncountably many men trying to make the best decisions, each for their own goals, by doing deals with others, a very complex human system. And this complex and very sensitive system is real, and not to be equated with “capitalism” – not because capitalism is parasitic, but because it is mythical: it is not a “bad system” that “feeds” in some way off the primary “organic” markets, but a (very bad) model of these same markets. “Capitalism” is a straw economic system, set up by the left, to be shot at and denounced as harsh, cruel and unfair. This is not to deny that the world can be harsh, cruel and unfair, but the left want to transfer the despair engendered by the normal failures of the bright springtime of our lives to persist from the normal cycles of life’s chances to an aggressive, malignant, greedy powerful evildoer – let’s just call him a “Capitalist* ! He is a fiction. The only thing on which “he ” has control is your mental picture of the world. Just forget “him” – you know you can ! It takes an effort, but you will feel much better.

      Don’t take my word for it. Just try reading anything by Thomas SOWELL – he is a black American scholar who seems to have been able to rise above the “Black Lives Matter” idiots – in fact even before the BLM rubbish was invented. If he, and a (small) number of other blacks in America, can throw off the burden of racial degradation, then surely you can throw off the burden of a hundred years of Marxist intolerance and misunderstanding ? Human beings have an infinite capacity for making mistakes: but when these have been pointed out, it should not be so hard to “see the light”.

      • geonomist

        Actually, Chris, your left/right does not exhaust reality. There’s still organic or “Green” whose founding slogan (I was a co-founder) was “neither right nor left but ahead” (too self-aggrandizing, I know). We even had a Nixon speech writer with us before your left took over. Since you have plenty of time to read what others suggest, see the Nanny State.

        • chris goodwin

          ‘Tis not MY left: I despise the lot. (Where did he get that idea ?) And what is this exhaustive coverage of “reality” ? I though we were dicussing the Age of Trump and Brexit, a pure journalistic myth ?

  • I’m happy to see this analytic thinking and we need to delve deeper. There are many different kinds of ‘capital’ that interact. Financial capital is important, even more basic is natural capital (think ecosystem (thanks @geonomist:disqus) and human capital (knowledgeable labor). There are also many different levels of ‘government’ operating simultaneously: intra-family, neighborhood and local communities are more likely to control their behavior based on cultural norms and gifting than to rely on money economies. And what constitutes ‘wealth’ varies tremendously across both time and geography. Finally, we need to grapple with the possibility that we humans are at the point of such increased productive capacity (driven by both advanced technologies and infrastructure) that the very foundation of all our economic theory – scarcity – is threatened. IMHO, any economic pontification that fails to take these factors into its arguments is just a tempest in a teapot — or more dramatically, fiddling while Rome burns.

  • Dick Burkhart

    Sure, we need to grow the “green economy”, and dramatically so. But to do this we must de-grow wasteful parts of the old economy (military, luxuries for the rich, drug companies, Wall Street, etc.) because the world is hitting its overall limits to growth. Otherwise we’ll just be pushing “ecological overshoot” into “collapse” more rapidly.

  • chris goodwin

    “CAN WE FIX CAPITALISM in the AGE of Trump and Brexit.” (NB; I am not shouting.) I have capitalised the dodgy words in the title.

    Well, CAN we ? And if so, how ? And if we have a means, why has it not worked before ? And why should it be expected to work better now ?

    Then, “Can WE …” Just who is this mysterious “we” ? It certainly does not include me: I have no say – neither politically: (I have a one bit choice every four or five years. This is drowned in the parallel one bit choices of however oinx millions of other voters decide to vote: and it all comes down to a choice between the idiot Tweedledum and his insane brother Tweedledee -so that my one bit “control” in the democratic process is in fact just an oinxmillionth of one bit: not really worth getting out of bed for. If you cannot follow this argument, just go away:) nor economically: I am down to my last million, and it hurts. So, some ill specified powerful group are going to “fix capitalism, are they ? Fat chance.

    And what does “fix” mean ? Right its wrongs, perhaps. That’s what Tweedledum has proved so good at, these last hundred or so years ? Or was that Tweedledee – sometimes I cannot tell them apart, for some strange reason.

    And then we have this old chestnut “capitalism” – so much in need of being “fixed” – I don’t think. Capitalism is not a “thing” that can be fixed, it is an analytical myth, a theoretical model of the 19th century British economy, and a very bad model at that. Economists just love playing with models, probably because they are rarely allowed to “play with” actual economies – not really a surprise, because when they do get their hands on the “Levers of Power” (a truly 19th century image, of the railwayman, Supreme Master of the technological wonder of the age, standing in his box, swinging the levers that control the signals and switch the points to direct the mighty steam engines along their allotted tracks: well said, Harold Wilson, keep your mind firmly a hundred years behind reality !) – when, that is, economists rule, then disaster follows. Many examples. Contra examples, few and far between, and contentious; more the exceptions that prove the rule.

    Perjhaps we are meant to listen in the echo chamber of the political left, where the word “capitalism” is bandied freely about, but refers to more or less free market economies. These markets are routinely but inaccurately described as “failing” – whenever some unwanted result occurs, to spoil some Tweedledodderish politico’s Grand Plan – but this is nearly never a failure of the market, but a failure in the market. Even if the market was a perfect market, (and it never is,) it would still not guarantee success to every market participant trying every imaginable stunt: the market is supposed to punish the Tweedles of this world with the failure of their ill conceived schemes – but failure in the market is not the same as failure of the market. Markets are not there to be fixed. The greatest trouble with existing markets is that the political economists, through their control of central banks, have distorted the value of money, by deliberate, sustained inflation of the money supply: not too much on any one day, week or month (except when they screw up !) but maintained over years decades and generation – certainly long enough to destroy the basis of the calculations needed for effective long term invesment. So, not surprisingly, the only operators left active are the ultra short termists, who can see a chance for a very rapid bang for a buck. Investment froth. True investment has been strangled by the State’s intervention in the market.

    And, finally, the “age of Trump and Brexit.” That might just be a good chapter heading a lifetime hence, when some brave scholar attempts an account of “The Millenial Economic Shift” or some such – but such an “Age” would have to have turned out to be significant in some lasting fashion: right now we cannot see what the long term upshot of either of these events will be, we only have fears, alarms, and uncertainties. These fears alarms and uncertainties have been vigourously stoked by the governments, Central Banks, Universities, and the commentariat – whio have thus shown themselves to be “out of touch.” These theorists (a lot of them being economists,) are presumably the “we” of the title, who cannot “fix” anything while continuing to inhabit their ivory towers. They certainly cannot frighten us by alarming reference to an “Age of Trump and Brexit,” which is a profoundly unprofessional attempt to claim for their ignorant fears the status of informed Historical scholarship. Perhaps they learned this trick from Karl Marx: if you cannot show historial examples, imagine them, and project them into the future. Gutter press journalism. Freud the fraud would have understood.

  • Dick Burns

    “We should be investing where the public returns are greatest – that is in innovation.” –Where investments should be made is in creating self-sustaining autonomous communities which is the opposite of “innovation”. In other words, people need to go backwards while taking with them modern technologies thus far created. More tech or “growth” beyond computers, robots and good medicine/biology is not the answer. If you want a sustainable planet, look to cultures like the Amish or traditional Basques. It’s a kiss it simple strategy. Reinventing the wheel is futile. Humans have already perfected societal living that is scalable, it just needs to be invested in -That IS Innovation!