Building the entrepreneurial state

How the state can create markets as well as fix them.

Industrial policy is back on the agenda, not least due to the leaked letter this week by Vince Cable to the Prime Minister asking for a growth policy with a more "compelling vision" of the future. This is good news so long as the discussion moves beyond the fear about "picking winners". There is no point in talking about innovation, if economic policies focused on austerity prevent key investments which can increase productivity and human capital.

There are five strategies that could drive a visionary industrial growth policy for the UK.

1. Do something different

As Keynes wrote in 1926 in The End of Laissez Faire, "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."

His key insight was that private business investment is volatile and pro-cyclical: too much during booms and too little during busts. To avoid recessions turning into depressions, government needs to focus on counter-cyclical policies -- the opposite of what is happening today. But the focus on "doing something different" is not just about counter-cyclical measures. It is also about the need for government to focus on policies that cause types of economic activity that would not have happened otherwise. Industrial policy is about making this happen in the areas of productivity enhancing investments that lead to growth and innovation.

2. Transform animal spirits into investment

Since investment is driven by "animal spirits" (the gut expectations that investors have on the future state of the economy), a key role of government is to get that investment moving. Large reductions in corporate tax rates did not increase investment in the 80s nor will they today (they simply change income distribution). Government-led investments that open up new technological and market opportunities will. This includes not only properly funding education and research infrastructures but also providing early financing for innovative firms, and new key technologies, which private venture capital has proven too risk averse to fund. Without the state there would have been no internet revolution, biotech revolution or nanotech revolution. Without the state, the green-tech revolution is still-born.

One of the failures of current UK policy is the assumption that firms want to grow, and all they need is a "nudge" in the right direction. While the Green Investment Bank is surely a positive development, it assumes that the willingness to invest is there and all that is needed is some co-financing. But "green" investment is currently confined to incremental areas, and the government is not stepping in to fill the gap. The UK's investment of £12.6 billion in this area in 2009/10 is, according to PIRC, "under 1 per cent of UK Gross Domestic Product; half of what South Korea currently invests in green technologies annually; and less than what the UK presently spend on furniture in a year".

3. Market making not market fixing

What I have called the "entrepreneurial state" is not about fixing markets but creating them. The state has acted in the past as catalyst, lead investor and creator (not just facilitator) of the knowledge economy. This requires far-sighted investments in technologies that are too risky for the private sector, such as offshore wind and carbon capture and storage. It also involves the creation of clear policy signals that increase business confidence in areas that are otherwise seen to be too high risk, such as feed-in tariffs for solar energy (recently cancelled in the UK causing even more uncertainty and less investment).

A more entrepreneurial role for government extends beyond procuring innovative products to making them directly in public labs when the private sector is reluctant to step in. Indeed, 75 per cent of the New Molecular Entities with priority rating in the pharmaceutical industry have originated in public sector labs, because private pharma is more interested in the low risk "me too" drugs. It is the large amounts of US public funds for life-sciences research (via the National Institutes of Health) that has enticed Pfizer and GSK to leave the UK for the US. From 1978 through 2004, NIH spending on life sciences research totalled $365 billion.

4. Rebalancing indicators of performance

Creating markets is also about shaping the indicators that are used to measure economic performance so they reward rather than penalise the most innovative companies. In this sense, "rebalancing" is not necessarily about sectors. It is more about redirecting "indicators of performance" away from short run financial towards long run "real economy" measures. Firms investing in expensive R&D and human capital will have a higher risk profile, since innovation is so costly and uncertain. The most innovative companies have suffered the largest increases in the cost of credit. . Furthermore, the focus on boosting stock prices through share buybacks (Fortune 500 companies have spent $3 trillion on buybacks over the last decade) has been shown to be directly related to lower investments of these companies in human capital and R&D. These are tradeoffs which industrial policy must combat.

Battling against these problems includes devising policies that nurture "patient capital" that can protect the flow of credit to the most innovative companies. In Germany this occurs through the state-backed investment bank - KfW, which works alongside the regional Landesbanken as well as the large network of savings banks. Innovation in Brazil, which has surpassed the UK as the world's fifth largest economy, has been directly funded by the Brazilian Development Bank. In the UK, a National Investment Bank could today be formed relatively quickly out of the nationalised RBS (an idea included in Cable's leaked letter). Selling it off would be a wasted opportunity.

5. Being first matters

China recently announced that it is spending $1.5 trillion over the next five years in seven new key industries (including environmentally friendly technologies and new generation IT). Its industrial policy is its growth policy -- its economic strategy. Similarly, after the crisis hit in 2008, Germany increased its government funded R&D spending by 10 per cent, while the UK has since cut it by the same amount, signalling very different visions of what will drive post-crisis recovery.

In the UK, outside of the eurozone, such investments should be even easier. The money can be created through quantitative easing(already happening), but instead of ending up hoarded in bank coffers it can be directed through a National Investment Bank into productive investment in key new sectors. The time is now not only because it is the right way out of the crisis (fiscal stimulus has been shown to be stronger when directed to new technologies rather than "shovel ready" projects), but also because the history of innovation tells us that being first matters. The US is still the leader today in IT as Germany is still the leader in machine tools. Leaders in green technology today include China, South Korea, Germany and Finland. Not making a mark today in what promises to be the "next internet" - green technology will mean the UK stays behind for years to come.

Mariana Mazzucato is Professor of Economics and RM Phillips Chair in Science and Technology Policy at the University of Sussex. She is the author of The Entrepreneurial State.

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"We repealed, then forgot": the long shadow of Section 28 homophobia

Why are deeply conservative views about the "promotion" of homosexuality still being reiterated to Scottish school pupils? 

Grim stories of LGBTI children being bullied in school are all too common. But one which emerged over the weekend garnered particular attention - because of the echoes of the infamous Section 28, nearly two decades after it was scrapped.

A 16-year-old pupil of a West Lothian school, who does not wish to be named, told Pink News that staff asked him to remove his small rainbow pride badge because, though they had "no problem" with his sexuality, it was not appropriate to "promote it" in school. It's a blast from the past - the rules against "promoting" homosexuality were repealed in 2000 in Scotland, but the long legacy of Section 28 seems hard to shake off. 

The local authority responsible said in a statement that non-school related badges are not permitted on uniforms, and says it is "committed to equal rights for LGBT people". 

The small badge depicted a rainbow-striped heart, which the pupil said he had brought back from the Edinburgh Pride march the previous weekend. He reportedly "no longer feels comfortable going to school", and said homophobia from staff members felt "much more scar[y] than when I encountered the same from other pupils". 

At a time when four Scottish party leaders are gay, and the new Westminster parliament included a record number of LGBTQ MPs, the political world is making progress in promoting equality. But education, it seems, has not kept up. According to research from LGBT rights campaigners Stonewall, 40 per cent of LGBT pupils across the UK reported being taught nothing about LGBT issues at school. Among trans students, 44 per cent said school staff didn’t know what "trans" even means.

The need for teacher training and curriculum reform is at the top of campaigners' agendas. "We're disappointed but not surprised by this example," says Jordan Daly, the co-founder of Time for Inclusive Education [TIE]. His grassroots campaign focuses on making politicians and wider society aware of the reality LGBTI school students in Scotland face. "We're in schools on a monthly basis, so we know this is by no means an isolated incident." 

Studies have repeatedly shown a startling level of self-harm and mental illness reported by LGBTI school students. Trans students are particularly at risk. In 2015, Daly and colleagues began a tour of schools. Shocking stories included one in which a teacher singled out a trans pupils for ridicule in front of the class. More commonly, though, staff told them the same story: we just don't know what we're allowed to say about gay relationships. 

This is the point, according to Daly - retraining, or rather the lack of it. For some of those teachers trained during the 1980s and 1990s, when Section 28 prevented local authorities from "promoting homosexuality", confusion still reigns about what they can and cannot teach - or even mention in front of their pupils. 

The infamous clause was specific in its homophobia: the "acceptability of homosexuality as a pretended family relationship" could not be mentioned in schools. But it's been 17 years since the clause was repealed in Scotland - indeed, it was one of the very first acts of the new Scottish Parliament (the rest of the UK followed suit three years later). Why are we still hearing this archaic language? 

"We repealed, we clapped and cheered, and then we just forgot," Daly says. After the bitter campaign in Scotland, in which an alliance of churches led by millionaire businessman Brian Souter poured money into "Keeping the Clause", the government was pleased with its victory, which seemed to establish Holyrood as a progressive political space early on in the life of the parliament. But without updating the curriculum or retraining teaching staff, Daly argues, it left a "massive vacuum" of uncertainty. 

The Stonewall research suggests a similar confusion is likely across the UK. Daly doesn't believe the situation in Scotland is notably worse than in England, and disputes the oft-cited allegation that the issue is somehow worse in Scotland's denominational schools. Homophobia may be "wrapped up in the language of religious belief" in certain schools, he says, but it's "just as much of a problem elsewhere. The TIE campaign doesn't have different strategies for different schools." 

After initial disappointments - their thousands-strong petition to change the curriculum was thrown out by parliament in 2016 - the campaign has won the support of leaders such as Nicola Sturgeon and Kezia Dugdale, and recently, the backing of a majority of MSPs. The Scottish government has set up a working group, and promised a national strategy. 

But for Daly, who himself struggled at a young age with his sexuality and society's failure to accept it, the matter remains an urgent one.  At just 21, he can reel off countless painful stories of young LGBTI students - some of which end in tragedy. One of the saddest elements of the story from St Kentigern's is that the pupil claimed his school was the safest place he had to express his identity, because he was not out at home. Perhaps for a gay pupil in ten years time, that will be a guarantee. 

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