The use of the words good versus bad in the above examples could not be more stark: private is good, public is bad. If you are constantly told that you are an impediment to dynamism and competition, you might begin to believe it.
REGAINING CONFIDENCE AND SETTING MISSIONS
Public Choice theory’s interpretation of government failures as worse than market failures, and the drive towards making government ‘efficient’, has had the effect of eroding the ethos and purpose of public services. It has also reduced government capacity and confidence (gaslighting), and eroded civil servants’ ability to ‘think big’.
The epigraph opening this chapter, in which Keynes argues the need for governments to think big – to do what is not being done – shows that he believed that government needs to be bold, with a sense of mission, not merely to replicate the private sector but to achieve something fundamentally different from it. It is wrong to interpret him as believing that what is needed from policy is to simply fix what the private sector does not do, or does badly, or at best invest ‘counter-cyclically’ (i.e. increase investments during the downside of the business cycle). After the Great Depression, he claimed that even paying men simply to dig ditches and fill them up again could revive the economy – but his work inspired Roosevelt to be more ambitious than just advocating what today would be called ‘shovel-ready projects’ (easy infrastructure). The New Deal included creative activities under the Works Progress Administration, the Civilian Conservation Corps and the National Youth Administration. Equally, it is not enough to create money in the economy through quantitative easing; what is needed is the creation of new opportunities for investment and growth – infrastructure and finance must be embedded within the greater systemic plans for change.
President John F. Kennedy, who hoped to send the first US astronaut to the moon, used bold language when talking about the need for government to be mission-oriented. In a 1962 speech to Rice University he said:
We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.67
In other words, it is a government’s duty to think big and confront difficulties – exactly the opposite of the facilitating role predicated by Public Choice theory, the inevitable result of which is timid and lacklustre public agencies which will be easier to privatize later.
Replacing these bold ambitions with financial cost-benefit analysis has dismissed the public value that governments can create. Civil servants are told to step back, minimize costs, think like the private sector and be fearful of making mistakes. Government departments are ordered to cut costs, inevitably also diminishing the skills and capacity of the public structures in questions (departments, agencies, etc.). When government stops investing in its own capacity, it becomes more unsure of itself, less able, and the probability of failure increases. It becomes harder to justify the existence of a particular government function, leading to further cuts or eventually to privatization. This lack of belief in government thereby becomes a self-fulfilling prophecy: when we don’t believe in government’s ability to create value, it eventually cannot do so. And, when it does create value, such value is treated as a private-sector success or goes unnoticed.
In Chapter 7 we saw the importance of government in developing the key infrastructure and technology upon which twentieth-century capitalism was built, even though it has received inadequate recognition for doing so. Of course, the story is not always positive. The Concorde aircraft did not result in a commercialized plane. Most R&D in new drugs leads to nothing. And guaranteed loans are made to companies which fail, a recent example, as we have seen, being the $528 million provided by the US Department of Energy to the company Solyndra in 2005 for the production of solar cells. When the price of silicon chips fell dramatically soon after, Solyndra went bankrupt, leaving the taxpayer to pick up the bill.68
Yet any venture capitalist will say that innovation involves exploring new and difficult paths, and that occasional failure is part of that journey. The guaranteed loan ($465 million) provided to Tesla for the development of the Model S electric car was, as we saw in Chapter 7, a success. This trial-and-error process is accepted in the private sector – but when governments experience failure they are regarded as incompetent and are accused of being unable to ‘pick winners’. As a result, public organizations are frequently told to stick to the straight and narrow, to promote competition without ‘distorting’ the market by choosing specific technologies, sectors or companies in which to invest.69
To limit government in this way is to completely ignore its track record, from the development of touchscreen technology to innovation in the renewables sector. Government has often been at its best when mission-oriented – precisely because, as President Kennedy said, it is hard.
Doing ‘hard’ things means being willing to explore, experiment, make mistakes and to learn from those mistakes. But this is almost impossible in a context in which government ‘failure’ is deemed the worst of all sins, and in which the guns are loaded, waiting for government to make the slightest mistake.
This does not of course mean that mistakes should be welcome under any conditions. Mistakes that arise from rent-seeking behaviour can lead to vested interests influencing government. As we know, rent occurs when value is extracted through special privileges, for example a subsidy or tax break, and when a company or individual grabs a large share of wealth without having created it. Profit-maximizing firms can try to increase their profits by soliciting special policy-related favours, and are often successful because politicians and policymakers are open to influence and even corruption. The possibility of this sort of capture (of government by vested interests) is a problem, but it becomes even more acute when there is no clear appreciation of government value. If the state is seen as irrelevant, it will over time also become less confident and more easily corrupted by the so-called ‘wealth creators’ – who can then convince policymakers to hand out favours which increase their wealth and power.
Lazy assumptions about the role of public investment are misleading. Business investment is mainly driven by perceptions of future opportunities, whether these be in a new sector (the emergence of nanotechnology), or in a region that is perceived as an exciting place for new ideas. As we have seen, such opportunities have historically been funded directly by governments, whether by DARPA-type investments in what later became the Internet, or the Danish government’s investment in renewable energy. All of which means that policies constructed on the assumption that business always wants to invest, and simply needs a tax incentive to do so, are simplistic, not to say naïve. The incentives (indirect spending through a tax cut), unless complemented by strategic direct investment by government, will rarely make things happen that would not have happened anyway (in economics speak, there is no ‘additionality’). As a result, a company or individual will often experience an increase in profits (through a tax cut) without increasing investment and without generating any new value. And the primary objective of the policymaker should be to increase business investment, not profits. Indeed, as seen earlier the relationship between profits and wages is at record levels. There is no profits problem, but an investment problem.70
PUBLIC AND PRIVATE JUST DESERTS
Once we recognize that the state is not just a spender but an investor and risk taker, it becomes only sensible to ensure that policy leads to the socialization not only of risks but also of rewards. A better realignment between risks and rewards, across public and private actors, can turn smart, innovation-led growth into inclusive growth.
As we have seen, neoclassical value theory for the most part disregards the value created by government, such as an educated workforce, human capital and the technology which ends up in our smart produ
cts. Government is ignored in microeconomics – the study of production – except in regulating the prices of inputs and outputs. It plays a bigger part in macroeconomics, which deals with the economy as a whole, but at best as a redistributor of the wealth created by companies and an investor in the ‘enabling’ conditions companies need – infrastructure, education, skills and so on.
The marginal theory has fostered the idea that collectively produced value derives from individual contributions. Yet, as the American economist George Akerlof, who shared the Nobel Prize in Economics in 2001, said: ‘Our marginal products are not ours alone’71 – they are the fruits of a cumulative process of learning and investment. Collective value creation entails a risk-taking public sector – and yet the usual relationship between risks and rewards, as taught in economics classes, does not seem to apply. So the crucial question is not just about accounting for government value but also rewarding it: how should rewards from investment be divided between the public and private sectors?
As Robert Solow showed, most of the gains in productivity of the first half of the twentieth century can be attributed not to labour and capital but to the collective effort behind technical change. And this is due not only to improved education and infrastructure, but also, as discussed in the previous chapter, to the collective efforts behind some of the most radical technical changes where the public sector has historically taken a lead role – ‘the entrepreneurial state’.72 But the socialization of risks has not been accompanied by socialization of rewards.
The issue, then, is how the state can reap some return from its successful investments (the ‘upside’) to cover the inevitable losses (the ‘downside’) – not least, to finance the next round of investments. This can be done in various ways, as discussed in Chapter 7, whether through equity-holding, conditions on reinvestment, caps on prices, or the need to keep patents as narrow as possible.
FROM PUBLIC GOODS TO PUBLIC VALUE
In this chapter we have considered the biased way in which government activity in the economy is viewed. The role of government is often limited to ‘fixing problems’; it must not over-reach itself, government failures being regarded as worse than market failures. It should have a light touch on the economic tiller and fix the basics by investing in areas like skills, education and research, but not go as far as to produce anything. And should government be productive, as state-owned enterprises are, our way of accounting for GDP does not recognize it as public production.
Indeed, almost nothing that government does is considered to fall within the production boundary. Government spending is seen purely as expenditure and not as productive investment. While that spending might be regarded by some as socially necessary and by others as unnecessary and better done by the private sector, neither side has made a robust case for government activity as productive and essential to creating a dynamic capitalist economy. Too often ideology has won over experience.
Keynes was critical in showing the dynamic role of public expenditure in creating a multiplier effect that can lead to higher growth. Yet there is still debate as to whether the multiplier exists at all, and advocates of government economic stimulus are often on the defensive. Part of the problem is that the argument for fiscal spending continues to be tied mainly to taming the business cycle (through counter-cyclical measures), with too little creative thinking about how to direct the economy in the longer term.
It is especially important to rethink the terminology with which we describe government. Portraying government as a more active value creator – investing, not just spending, and entitled to earn a rate of return – can eventually modify how it is regarded and how it behaves. All too often governments see themselves only as ‘facilitators’ of a market system, as opposed to co-creators of wealth and markets. And, ironically, this produces exactly the type of government that the critics like to bash: weak and apparently ‘business-friendly’, but open to capture and corruption, privatizing parts of the economy that should be creating public and collective goods.
A new discourse on value, then, should not simply reverse the preference for the private sector over the public. What is required is a new and deeper understanding of public value, an expression found in philosophy but almost lost in today’s economics. This value is not created exclusively inside or outside a private-sector market, but rather by a whole society; it is also a goal which can be used to shape markets. Once the notion of public value is understood and accepted, reappraisals are urgently required – of the idea of public and private and of the nature of value itself. ‘Public values are those providing normative consensus about (1) the rights, benefits, and prerogatives to which citizens should (and should not) be entitled; (2) the obligations of citizens to society, the state, and one another; (3) and the principles on which governments and policies should be based.’73
The idea of public value is broader than the currently more popular term ‘public good’. The latter phrase tends to be used in a negative way, to limit the conception of what governments are allowed to do, rather than to stimulate the imagination to find the best ways to confront the challenges of the future. So the state-owned BBC is thought to serve the public good when it makes documentaries about giraffes in Africa, but is questioned if it makes soap operas or talk shows. State agencies can often fund basic science due to the ‘positive externalities’, but not downstream applications. Public banks can provide counter-cyclical lending, but they cannot direct their lending to socially valuable areas like the green economy. These arbitrary distinctions reflect a narrow view of the economy which often results in a public actor being accused of ‘crowding out’ a private one – or, worse still, delving into the dangerous waters of ‘picking winners’: the state is only supposed to do what the private sector does not want to do, rather than have its own vision of a desirable and achievable future.
Public institutions can reclaim their rightful role as servants of the common good. They must think big and play a full part in the great transformations to come, squaring up to the issues of climate change, ageing populations and the need for twenty-first-century infrastructure and innovation. They must get over the self-fulfilling fear of failure, and realize that experimentation and trial and error (and error and error) are part of the learning process. With confidence and responsibility, they can expect success, and in so doing will recruit and retain top-quality employees. They can change the discourse. Instead of de-risking projects, there will be risk-sharing – and reward-sharing.
It might also make sense for private enterprises – which benefit from different types of public investments and subsidies – in return to engage in a fair share of activities which are not immediately profitable. There is much to be learned from the history of Bell Labs, which was born out of the US government’s demand that the monopolist AT&T invest its profits rather than hoard cash, as is so common today. Bell Labs invested in areas that its managers and its government contractors thought could create the greatest possible public value. Its remit went well beyond any narrow definition of telecommunications. The partnership of purely government-funded research and work co-financed by Bell Labs and agencies like DARPA led to phenomenal tangible results – many found in our handbags and pockets today.74
A bold view of the role of public policy also requires a change in the metrics used for evaluation of those policies. Today’s typical static cost-benefit analysis is inadequate for decisions which will inevitably have many indirect consequences. A much more dynamic analysis, one which can capture more of the market-shaping process, is urgently required. For example, any measure of the success of a government project to organize a charging infrastructure for electric cars must try to take into account the opportunities offered for further technical development, the reduction of pollution and the political and ecological gains of lessening reliance on non-renewable oil from countries with objectionable governments.
It is crucial to find metrics which favour long-run investments and innovation. In the
1980s, it was not cost-benefit analysis that encouraged the BBC to establish a dynamic ‘learning programme’ to get kids to code. The activity led to the development of the BBC Microcomputer, which found its way into all British classrooms. While the Micro did not itself become a commercial success, procurement for its parts supported Acorn Computers and eventually led to the creation of ARM Holdings, one of the most successful UK technology companies of recent decades. Similarly, there would almost certainly be more European high-tech successes if there existed greater interaction between innovation systems and public procurement policies. However, to recognize that the public sector creates value we must find ways to assess that value, including the spillovers from this sort of ambitious public funding. The BBC initiative helped kids learn to code and increased their interest in socially and economically beneficial new technologies. It also had direct and indirect effects in different sectors, helping new companies to scale up and bringing new investors into the UK tech landscape. Similarly, there would almost certainly be more European high-tech successes if there existed greater interaction between innovation systems and public procurement policies. However, to recognize that the public sector creates value we must first find ways to assess that value, including the spillovers from this sort of ambitions public funding.
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