The Value of Everything (UK)

by Mariana Mazzucato

Policymakers should have a clear understanding of who the different actors in the process are in order to prevent free-riding on publicly funded innovation and a ‘winner-takes-all’ outcome. Rather than creating myths about actors in the innovation economy such as venture capitalists, it is important to recognize the stages at which each of these actors is important. Tax policy could be changed to encourage truly dynamic links between the different participants in innovation, for example by bringing the rewards and tax breaks that venture capitalists enjoy more into line with the risks they actually take compared with other stakeholders. Understanding that the state’s role is to do what the business sector is not willing to do – engage in high-risk early-stage development and fundamental research – also means that particular policies such as R&D tax credits must be devised so that the subsidy encourages investment in needed innovations over and above random potentially profitable ones.

  Treatment of employees is also very important here. When, typically in the name of maximizing shareholder value, a successful company fires experienced employees, it is quite probable that the unlucky victims committed their time to the enterprise in the expectation of sharing in the returns if and when it succeeded. They are now cut off from the rewards that they deserve, while others such as venture capitalists who came in at a later stage receive a disproportionately large share of the rewards. Employees’ contribution to the enterprise deserves to be better protected.

  Deals are being developed in European capitals, such as Berlin and Paris, to place limits or conditions on the operations of companies like Airbnb, Uber and Netflix.79 Patent pools can be set up that guarantee the use of patents for common goals. Government can earn equity stakes or royalties when investing in high-risk areas, whether in products or technologies. Prices of products that have received public support can be negotiated to reflect the public contribution. Big data can be governed so that it reflects the public data and publicly funded infrastructure upon which it rests. This means that we must not hype up technological advances, but recognize the collective contribution that created them, and govern them so that they produce a public good.

  CONCLUSION

  Economic growth without innovation is hard to imagine. But innovation must be properly governed to make sure that what is produced and how it is produced leads to value creation and not gimmicks for value appropriation. This means paying attention both to the rate and direction of innovation (what is produced), and to the deals that are struck between the different creators of that new value.

  First, it is crucial to understand that innovation is not a neutral concept. It can be used for different purposes – in the same way a hammer can be used to build a house or as a weapon. The big data revolution itself can go either way. It can become a way for public data (on health, on energy use, on shopping preferences) to serve private profits, or it can be used to improve the services that consumers and citizens receive. Citizenship should in the process not be confused with being a client. As citizens, we have rights to enjoy the opportunities that innovation presents us with, to make use of public space, to be able to contest authority, and to share experiences and tastes without our stories and preferences ending up on a website or a database. In this sense movements for ‘inclusive’ innovation are important in how they focus on who is involved in envisioning change and benefiting from it.

  Second, innovation has both a rate and a direction. A democratic debate about the direction is just as important as those that occur about the rate of growth – and key to understanding the multiple pathways that innovation may take, and how policy affects this. The assumption is that policy should be about ‘levelling the playing field’. But achieving innovation-led growth and innovation of a particular type (e.g. green innovation) will require not levelling but tilting the playing field. And furthermore, this requires not only a different policy mindset but also a different organizational structure: the ability to explore, experiment and strategically deliberate inside the public sector. It was this capacity that was central to the organizations that fostered some of the most radical innovations of our age, from the Internet to GPS to fracking. More discussion is needed on how to use mission-oriented innovation to battle societal and technological grand challenges – like climate change or social care.80 Just as the IT revolution was chosen and directed, we can choose and direct green and care as the new paths for innovation. This does not mean top-down dictation of what should be produced, and which actors are ‘productive’ and how each must behave. Rather, it requires new types of contracts between public and private actors (as well as the third sector and civil society) in order to foster symbiotic relationships, sharing the kinds of investments that will be needed to redirect economies away from high material content and energy based on fossil fuels. There are lessons from ‘mission-oriented’ investments such as going to the moon. Making sure our earth remains habitable demands the same ambition, organization, planning, bottom-up experimentation, public-private risk-sharing and sense of purpose and urgency as the Apollo project.81 But it is also true that because these investments are transformational, more debate should also be had on why it is that some technologies are pursued, and what is done with them. It is curious, for example, that there was so little debate about fracking – which was government-financed – until after its arrival.

  Third, as argued in the previous section, innovation is produced collectively, and hence the benefits should be shared collectively. The deeply flawed reasoning behind pharma prices, patents and the dynamics of big data is a good example of how a confused and misleading approach to the concept of value can be costly, allowing large monopolies to get away with huge rents at the expense of society. But it need not be this way if we think radically.

  Patents themselves should not be seen as ‘rights’ (IPR), but rather as a tool with which to incentivize innovation in the sectors where they are relevant – but in such a way that the public sector also gets its return; drug prices could become ‘fairer’, reflecting the collective contribution of different actors and making a healthcare system sustainable. The sharing economy would not be based on the ability of a few companies to use public infrastructure for free and the dynamics of network economies to monopolize a market. A true sharing economy must by definition respect the hard-won gains of all workers, irrespective of race, gender or ability. The eight-hour day, the weekend and holiday and sick pay fought for by workers’ movements and trade unions were no less important economic innovations than antibiotics, the microchip and the Internet.

  In an era in which profits are being hoarded at record levels, it’s important to understand what led to the agreements whereby business reinvested profits instead of hoarding them. And the answer is confident and capable government, which has built up its own capacity to invest in technological opportunities and, just as important, to negotiate the landscape that they create. Monopolies like patents are contracts which must be negotiated. One party (business) receives protection of its profits, the other party (government) receives benefits for the public, whether through lower costs and prices (by economies of scale), diffusion of innovation (by the way patents disclose information), or through reinvestment of the profits in specific areas considered beneficial for growth – in this case, innovation.

  Developing countries are used to such deals over foreign investment: you come and make use of our resources as long as you reinvest profits locally to benefit us. But negotiation of this sort is largely absent from modern Western capitalism. Just as governments have allowed companies to use patents for unproductive rather than productive entrepreneurship, they have also allowed companies to stop reinvesting profits. That would be fine (perhaps) if those profits were generated from their own activity, independent of public funds. But, as I have argued throughout this chapter, the technology and the underlying networks have been produced collectively. They should therefore be negotiated collectively.

  A key issue behind all these considerations is government’s contributi
on to economic growth – public value. Why, historically, have no economists referred to it? And, more importantly, why have governments now lost their confidence in fighting for public value, while previously they limited the scope of patents or put pressure on monopolies to reinvest profits? We will turn to these matters in the next chapter.

  8

  Undervaluing the Public Sector

  The important thing for Government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.

  John M. Keynes, The End of Laissez-Faire, 19261

  The January 2010 edition of The Economist was devoted to the dangers of big government. A large picture of a monster adorned the magazine’s cover. The editorial opined: ‘The rich world has a clear choice: learn from the mistakes of the past, or else watch Leviathan grow into a true monster.’ In a more recent issue, dedicated to future technological revolutions, the magazine was explicit that government should stick to setting the rules of the game: invest in basic goods like education and infrastructure, but then get out of the way so that revolutionary businesses can do their thing.2

  This, of course, is hardly a novel view. Throughout the history of economic thought, government has long been seen as necessary but unproductive, a spender and regulator, rather than a value creator.

  Previous chapters revealed how actors in both the financial sector and Silicon Valley have been particularly vociferous in their self-aggrandized claims about wealth creation, using these claims to lobby for favourable treatment that has in turn enabled them to reap rewards disproportionate to the value they actually created. By the same token, others have widely but mistakenly been regarded as ‘unproductive’.

  As we have seen, finance has, ultimately, been less productive than it claims to be. In this chapter I want to look at government, an actor that has done more than it has been given credit for, and whose ability to produce value has been seriously underestimated – and this has in effect enabled others to have a stronger claim on their wealth creation role. But it is hard to make the pitch for government when the term ‘public value’ doesn’t even currently exist in economics. It is assumed that value is created in the private sector; at best, the public sector ‘enables’ value.

  The concept of ‘public value’ has existed for millennia, debated in philosophy and society at least from the time of Aristotle’s Nicomachean Ethics. It is, however, a Cinderella subject as far as the study of economics is concerned. There is of course the important concept of ‘public goods’ in economics – goods whose production benefits everyone, and which hence require public provision since they are under-produced by the private sector – but, as we shall see, the concept has also been used to hinder government activity (restricting specific areas in which it is OK for the public sector to tread) rather than help government think creatively about how it produces value in the economy.

  The narrative that government is inefficient and its optimum role should be ‘limited’ to avoid disrupting the market is extremely powerful. At best, the story goes, government should simply focus on creating the conditions that allow businesses to invest and on maintaining the fundamentals for a prosperous economy: the protection of private property, investment in infrastructure, the rule of law, an efficient patenting system. After that, it must get out of the way. Know its place. Not interfere too much. Not regulate too much. Importantly, we are told, government does not ‘create value’; it simply ‘facilitates’ its creation and – if allowed – redistributes value through taxation. Such ideas are carefully crafted, eloquently expressed and persuasive. They have resulted in the view that pervades society today: government is a drain on the energy of the market, an ever-present threat to the dynamism of the private sector.

  But there is one area of mainstream economic theory which recognizes – indeed, emphasizes – where governments can play a positive role: fixing ‘market failures’. As discussed, market failures arise when the private sector does not invest enough in an area considered good for the public benefit (e.g. basic research, as it’s so hard to make profits from this output) or invests too much in areas considered bad for public benefit (e.g. polluting industries, creating a negative externality not embodied in company costs). A government subsidy may be placed on the good and a tax on the bad. But the current message to government is: intervene only if there is a problem, otherwise sit back, focus on getting the ‘conditions’ right for business and let the business sector do its thing, which is to create value.

  But while this is the accepted view of government’s role, a brief glance at the history of capitalism reveals some other powerful, if less simplistic, stories about government’s place in the economy. In the middle of the Second World War Karl Polanyi, a radical Austro-Hungarian thinker who combined the reasoning of political economy with a deep understanding of anthropology, history and philosophy, wrote a very important book: The Great Transformation. In it, he argued that markets were far from ‘natural’ or inevitable – rather, they resulted from purposeful policymaking: ‘The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism … Administrators had to be constantly on the watch to ensure the free working of the system.’3

  Polanyi traced the long history of local and international markets. In the process, he showed that the national capitalist market – the one studied in economics classes with supply and demand curves – was actually forced into existence by the state. Government, Polanyi asserted, does not ‘distort’ the market. Rather, it creates the market. Put bluntly: no state, no market. This is not a normative point – the government can of course invest in areas that are considered problematic, from wartime technologies to fracking technology, which some have argued strongly against. And it is precisely this potentially powerful role that should alert us all to better understand what taxpayers’ money (or printed money) is being invested in.

  As discussed in the previous chapter, government policy has been crucial to envisioning and funding key technologies such as the Internet, critical to Silicon Valley’s success. In the process, government has given life to new markets that have sprung from these technologies (the dot.com economy).

  This historical and institutional view of markets’ relationship with government contrasts sharply with the current prevailing orthodoxy and is not to be found in mainstream economics. Here – to get technical for a moment – you only find government as a player in the macroeconomic models that look at the effect of regulation or the effect of a stimulus programme on GDP (through the multiplier which we discuss later in the chapter). But government is totally missing from what in microeconomics is known as the ‘production function’: the relationship between the quantity of outputs of a good and the quantity of inputs needed to make it, or, to put it simply, the analysis of how firms behave. And thus it is assumed that it is only in firms that value is created. Government is left outside the production boundary.

  Some theories go further. Government, they argue, is innately corrupt and liable to ‘capture’ by vested interests. Because government is inherently unproductive, if we can restrict what it does we can reduce unproductive activities, thereby improving conditions for productive ones, steering economies towards growth. The logical conclusion is that government should be curbed, stripped back: perhaps by budget cuts, privatization of public assets, or outsourcing. In contemporary parlance, ‘austerity’.

  This chapter will argue that the prevailing view of government is wrong, that it is more the product of ideological bias than anything else. The stories told about government have undermined its confidence, limited the part it can play in shaping the economy, undervalued its contribution to national output, wrongly led to excessive privatization and outsourcing, ignored the case for the taxpayer sharing in the rewards of a collective – public – process of value creation, and enabled more value extraction. Yet these st
ories have become accepted as ‘common sense’ – always a term to be treated circumspectly. We have become accustomed to much talk about the pros and cons of austerity. The debate about government, though, should not be about its size or its budget. The real question is what value government creates – because to ask about the role of government in the economy is inevitably to question its intrinsic value. Is it productive or unproductive? How do we measure the value of government activities?

  THE MYTHS OF AUSTERITY

  After the 2008 financial crash – a crisis chiefly brought about by private, not public, debt – governments saved the capitalist system from breakdown. Not only did they pump money into the financial system: they took over private assets. A few months after Lehman Brothers collapsed, the US government was in charge of General Motors and Chrysler, the British government was running high street banks and, across the OECD, governments had committed the equivalent of 2.5 per cent of GDP to rescuing the system.

  And yet, even though the crisis was caused by a combination of high private debt and reckless financial-sector behaviour, the extraordinary policy conclusion was that governments were to blame – despite the fact that, through bailouts and counter-cyclical stimulus, they had saved the financial system from crumbling. Instead of being seen as the heroes that stepped in to fix the mess created by private finance, they became the villains. Of course there had been failings on all sides – abnormal interest rates had contributed to the rise in debt – but the narrative became twisted out of all recognition. This distortion was enabled by a view held since the 1970s that somehow the public sector is less able to engineer growth than the private sector. What followed was a drive towards austerity across Europe. And tragically, instead of being allowed to invest their way back to pre-recessionary levels of output and employment, weaker European countries were repeatedly told by the ‘troika’ (the IMF, European Central Bank and European Commission) to cut public spending to the bone. Any country whose budget deficits rose beyond the level stipulated in the Maastricht Treaty were penalized severely, with conditions placed on bailouts that even the pro-austerity IMF later admitted were self-defeating.