You Can’t Have a Prosperous Economy Without an Entrepreneurial Government

Ending the state vs market myth

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By Mariana Mazzucato

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hearts and minds of public opinion: periods when the state is defended for its role in economic development are always superseded by an attack on its intervention into ‘well functioning’ markets.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.

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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’).

Originally published here.

2016 February 25

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  • chris goodwin

    Well, here we have yet another well meaning but ill founded tirade – against capitalism, of course. I hate to have to tell you, but Capitalism does not exist: never did, and never will. It is a purely fictive construct of the warped minds of Marx and his followers, lacking any evidential basis. Very useful as a term of abuse, to be levelled at people doing more or less constructive jobs, by philosophers in Ivory towers, paid good money to speculate about processes they cannot even begin to understand.

    The state does what markets won’t. What a trite claim. Markets do not DO anything: they allow others, viz market participants, to make deals. I will buy a pound of your most excellent apples, thank you very much. Or a million tons of coal. Or whatever. Different markets, of course, but the doings are not done by the markets – the market is merely the environment within which such sales/purchases take place. Eight year olds understand this, but professors of Economics seem to have lost it!

    Market failure (!) RUBBISH. Markets do not do anything, and they certainly never fail. It is again the participants within the markets who do the doins, and they may be said to “succeed” or “fail”, all dependent on what contracts they enter into. Anyone can make a mistake, and sadly, some do, but “the market” is not such a one. Even if you call “him” Mr Market, and try to personify him (Him?) or anthropomorphologise (?) him, “he” remains a passive space, a context, within which men do deals.

    And then it gets even worse (or better ? iff you are looking for entertainment value !) In §2 we get the example of the financial sector. “A well-functioning financial system must in theory fund the capital development of the economy, promoting -…” well, something or other. Sounds plausible, indeed it seems to be true by definition. But the “well-functioning” rubric does not guarantee that every desire of every insane politician to pretend to provide both bread and circusses to his greedy and lethargic voting rabble is necessarily going to be fulfilled. A well funtioning system will just stop, saying, (in it’s impersonal way,) “I cannot go on: you ask too much of me.” Rather like a wastrel being brought up short when he has abused his credit just once too often. We see the individual Rake being slung into Debtors’ Prison, and say, “Silly fool, he had it coming to him,” – but when it comes to the State, oh dear, “This cannot be true – my pension ! My government contract ! Say it is not threatened ! Whatever will I do now ?” A case of “Woe, Woe and thrice Woe!” I think – but only an ILL-functioning financial system will prop up a government, a State, that ignored reality, pledges a quart from a pint pot, and useszombie economix and spoof statistix to pretent all is well. The financial system, just like the “market” is just a set of rules, an environment, a framework, within which, and in accordance with the rules of which, actors can DO stuff – buying and selling, launching projects and curtailing them, striving to achieve valuable and important goals: but neither their high value nor their great importance gives any guarantee that the clever clogs entrusted with the job will in fact bring it to a successful conclusion.

    I think the wisdom here being ignored is that “the good workman does not blame his tools.” If you wish to operate in the market, do so: and Caveat Emptor. If you wish to operate in the financial system, then take the responsibility for your own actions. There is no active, hostile “system” for you to blame.