Mariana Mazzucato, professor in the economics of innovation at Sussex University.
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Public risks, private rewards: how an innovative state can tackle inequality

The winner of the inaugural New Statesman/Speri Prize in political economy on how an innovative state can tackle inequality.

This autumn, the inaugural NS/­Speri Prize was awarded to Mariana Mazzucato of the Science Policy Research Unit at the University of Sussex. It rewards “the scholar who has succeeded most effectively over the preceding two or three years in disseminating original and critical ideas in political economy to a wider public audience” and includes the invitation to deliver a lecture. This is an edited extract from that speech.

What makes the iPhone so smart? Was it only the genius of Steve Jobs and his team and the visionary finance supplied from risk-loving venture capitalists? No. In my book The Entrepreneurial State: Debunking Public v Private Sector Myths, I tell the missing part of that story by analysing the public funds that allowed the smartphone to be created. The research programmes that made the internet, touch-screen displays, GPS and the Siri voice control possible all had government backing.

The point is not to belittle the work of Jobs and his team, which was both essential and transformational. But we must be more balanced in the historiography of Apple and its founders, where not a word is mentioned of the collective effort behind Silicon Valley. The question is this: who benefits from such a narrow description of the wealth-creation process in the hi-tech sector today?

Over the past year, inequality has risen up the political agenda, with the Organisation for Economic Co-operation and Development documenting just how bad inequality is for growth. But the current debate is often focused only on redistribution. If policymakers want to get serious about tackling inequality, they need to rethink not only areas such as the wealth tax that Thomas Piketty is calling for but the received wisdom on how to generate value and wealth creation in the first place. When we have a narrow theory of who creates value and wealth, we allow a greater share of that value to be captured by a small group of actors who call themselves wealth creators. This is our current predicament and the reason why progressive parties on both sides of the Atlantic are struggling to provide a clear story of what has gone wrong in recent decades and what to do about it.

Let’s start with some definitions. First, the market. The path-breaking work of the historian Karl Polanyi teaches us that talk of “state intervention” in “free markets” is a historical fallacy. In his 1944 book The Great Transformation, Polanyi argued: “The road to the free market was opened and kept open by an enormous increase in continuous, centrally organised and controlled interventionism . . . Administrators had to be constantly on the watch to ensure the free working of the system.”

The public sector’s active role in shaping and creating markets is even more relevant in today’s “knowledge economy”. Traditional economic theory, which guides policymaking worldwide, justifies state intervention only to solve market failures. But what the state has done in the few countries that have succeeded in producing innovation-led growth has been to create new markets. Sectors such as the internet, biotechnology, nanotechnology and the emerging green economy have depended on direct, “mission-oriented” public investments, creating a new technological landscape – not only facilitating existing ones – with business following only after returns were clearly in sight. So why have we accepted such a biased story of the state’s role when, as the story of Apple shows, it has done so much more than “fix” market failures? What is the relationship between this false narrative of who the real risk-takers are and increasing inequality? Here are three areas we need to look at.

 

Socialising risks and rewards

The pretence that government only spends, regulates, administers and, at best, “de-risks” or “fixes” market failures prevents us from seeing that it has been a lead risk-taker and investor. As a result, government has socialised the risks but not the rewards. Some economists argue that the reward for the state comes through taxation. This, in theory, is right. Innovation-led growth should lead to an increase in tax revenue – but not if the companies that benefit the most from innovations don’t pay much tax compared to the income they generate, not only as a result of loopholes but also because of their continual lobbying for tax incentives and tax cuts that they say they need to foster innovation. It’s not a coincidence that groups such as the National Venture Capital Association helped convince the US government to reduce capital gains tax by 50 per cent in only five years in the late 1970s – an “innovation policy” later copied by Tony Blair’s government. (A policy that even Warren Buffett has admitted has had no effect on investment but lots on inequality.)

Similarly, in the name of promoting innovation, different types of tax “incentives” are constantly introduced – such as the “patent box” system, which allows companies to pay virtually no tax on profits generated from patented goods and services. By targeting the income generated from patents (which are, in effect, state-granted monopolies for 20 years), rather than the research that leads to them, such measures have little to no effect on innovation.

 

More symbiotic innovation ecosystems

Sharing risks and rewards also requires making sure that private-sector commitment on innovation increases. Of course businesses invest in research and development (R&D) but the emphasis is increasingly on the D, building on earlier public-sector investment in R.

As Bill Lazonick and I have argued in our recent work, in areas as different as pharma, IT and energy, large companies are spending an increasing proportion of profits on share buy-backs, to boost stock options and executive pay. Fortune 500 companies have spent a record $3trn in the past decade on share buy-backs – greatly outpacing R&D. Thus, a serious “life-sciences” strategy should not only be about government increasing its financing of pharma’s knowledge base but should involve government being confident enough to ask Big Pharma to invest more of its profits in research and human resources to address skills shortages.

When countries ask Google, Apple and Amazon to pay more tax, this should not only be because they use public roads and infrastructure but also because a significant part of the technologies that drive their record profits was publicly funded.

We hear a lot about how new technology hurts those without the skills required by the modern economy and that this is the key link between innovation and inequality. But where do skills come from? They are the result of investment – and today we have a massive crisis of investment.

 

A New Deal . . . and a more serious deal

What we need to kick-start investment is not only a new Keynesian deal, investing in areas such as infrastructure, but also more serious “deals” between business and government that benefit both sides. For example, how could the patent system better reflect the collective public-private contribution to innovations? In the US in 1980, the Bayh-Dole Act aimed to increase the commercialisation of science by allowing publicly funded research to be patented. Lawmakers were rightly wary that this could lead to taxpayers stumping up twice: first for the research (the US National Institutes of Health spends $32bn a year) and then for high prices of drugs. So they suggested that government put a cap on the prices of drugs that were publicly funded. Yet the US government has never exercised this right.

We should also reform the tax system to reward long-run value creation over value extraction, opening up the debate about risks and rewards: are there other tools that might offer a better deal for publicly funded investments and innovations? This might come in the form of keeping a “golden share” of the patents, or retaining some equity in companies that receive early-stage financing from government, or giving businesses loans with income-contingent repayments just as we do to students.

My point is not to argue for or against any one of these mechanisms but to start a broader discussion that begins with the view of the state as a market-maker, not only a fixer. There should be a recognition of the huge risks that this involves: for every successful government investment in areas such as the internet, there are failures in areas such as Concorde.

Some, including the think tank Nesta in the UK, have argued that any direct non-tax-based mechanisms for the state to reap back rewards for its risk-taking are “problematic” and suggest that corporate taxes are sufficient. This defence of the status quo, particularly in these times of austerity, seems unsustainable when what is at stake is the ability of business to capture a disproportionate share of value that was created collectively. In a world of big data – so celebrated by the innovation enthusiasts – surely we can create better “contracts” and deals between the public and private sectors, even if this means putting a dent in the profit-wage ratio that is rising at record levels (no, profits are not related to managerial performance).

So how can we change the narrative of the left from one of “redistribution” to one that champions value creation, in which both risks and rewards are shared more equally? Let’s first agree that the market is not a bogeyman forcing short-termism but a result of interactions and choices made by different types of public and private actors. We need to stop talking about the public sector “de-risking” and facilitating “partnerships” and talk more about the kind of public risk-taking that led to all the general-purpose technologies and great transformations of the past, a change of language from general “partnerships” to more detailed commitment about the kinds of partnerships that will lead to greater, not lower, private investment in long-run areas such as research and development and human capital formation.

Changing our understanding of how wealth is created, not only distributed, is the first step in building a more confident mission-oriented government – one that both fuels innovation, and builds the right kind of “deal” with business that gives the word “partnership” real meaning again. 

Mariana Mazzucato is RM Phillips Professor in the Economics of Innovation at SPRU, The University of Sussex, and author of The Entrepreneurial State: debunking public vs. private sector myths. You can watch the full 2014 New Statesman SPERI Prize Lecture here.

This article first appeared in the 19 December 2014 issue of the New Statesman, Christmas Issue 2014

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The French millennials marching behind Marine Le Pen

A Front National rally attracts former socialists with manicured beards, and a lesbian couple. 

“In 85 days, Marine will be President of the French Republic!” The 150-strong crowd cheered at the sound of the words. On stage, the speaker, the vice-president of the far-right Front National (FN), Florian Philippot, continued: “We will be told that it’s the apocalypse, by the same banks, media, politicians, who were telling the British that Brexit would be an immediate catastrophe.

"Well, they voted, and it’s not! The British are much better off than we are!” The applause grew louder and louder. 

I was in the medieval city of Metz, in a municipal hall near the banks of the Moselle River, a tributary of the Rhine from which the region takes its name. The German border lies 49km east; Luxembourg City is less than an hour’s drive away. This is the "Country of the Three Borders", equidistant from Strasbourg and Frankfurt, and French, German and French again after various wars. Yet for all that local history is deeply rooted in the wider European history, votes for the Front National rank among the highest nationally, and continue to rise at every poll. 

In rural Moselle, “Marine”, as the Front National leader Marine Le Pen is known, has an envoy. In 2014, the well-spoken, elite-educated Philippot, 35, ran for mayor in Forbach, a former miner’s town near the border. He lost to the Socialist candidate but has visited regularly since. Enough for the locals to call him “Florian".

I grew up in a small town, Saint-Avold, halfway between Metz and Forbach. When my grandfather was working in the then-prosperous coal mines, the Moselle region attracted many foreign workers. Many of my fellow schoolmates bore Italian and Polish surnames. But the last mine closed in 2004, and now, some of the immigrants’ grandchildren are voting for the National Front.

Returning, I can't help but wonder: How did my generation, born with the Maastricht treaty, end up turning to the Eurosceptic, hard right FN?

“We’ve seen what the other political parties do – it’s always the same. We must try something else," said Candice Bertrand, 23, She might not be part of the group asking Philippot for selfies, but she had voted FN at every election, and her family agreed. “My mum was a Communist, then voted for [Nicolas] Sarkozy, and now she votes FN. She’s come a long way.”  The way, it seemed, was political distrust.

Minutes earlier, Philippot had pleaded with the audience to talk to their relatives and neighbours. Bertrand had brought her girlfriend, Lola, whom she was trying to convince to vote FN.  Lola wouldn’t give her surname – her strongly left-wing family would “certainly not” like to know she was there. She herself had never voted.

This infuriated Bertrand. “Women have fought for the right to vote!” she declared. Daily chats with Bertrand and her family had warmed up Lola to voting Le Pen in the first round, although not yet in the second. “I’m scared of a major change,” she confided, looking lost. “It’s a bit too extreme.” Both were too young to remember 2002, when a presidential victory for the then-Front National leader Jean-Marie Le Pen, was only a few percentage points away.

Since then, under the leadership of his daughter, Marine, the FN has broken every record. But in this region, the FN’s success isn’t new. In 2002, when liberal France was shocked to see Le Pen reach the second round of the presidential election, the FN was already sailing in Moselle. Le Pen grabbed 23.7 per cent of the Moselle vote in the first round and 21.9 per cent in the second, compared to 16.9 per cent and 17.8 per cent nationally. 

The far-right vote in Moselle remained higher than the national average before skyrocketing in 2012. By then, the younger, softer-looking Marine had taken over the party. In that year, the FN won an astonishing 24.7 per cent of the Moselle vote, and 17.8 per cent nationwide.

For some people of my generation, the FN has already provided opportunities. With his manicured beard and chic suit, Emilien Noé still looks like the Young Socialist he was between 16 and 18 years old. But looks can be deceiving. “I have been disgusted by the internal politics at the Socialist Party, the lack of respect for the low-ranked campaigners," he told me. So instead, he stood as the FN’s youngest national candidate to become mayor in his village, Gosselming, in 2014. “I entered directly into action," he said. (He lost). Now, at just 21, Noé is the FN’s youth coordinator for Eastern France.

Metz, Creative Commons licence credit Morgaine

Next to him stood Kevin Pfeiffer, 27. He told me he used to believe in the Socialist ideal, too - in 2007, as a 17-year-old, he backed Ségolène Royal against Sarkozy. But he is now a FN local councillor and acts as the party's general co-ordinator in the region. Both Noé and Pfeiffer radiated a quiet self-confidence, the sort that such swift rises induces. They shared a deep respect for the young-achiever-in-chief: Philippot. “We’re young and we know we can have perspectives in this party without being a graduate of l’ENA,” said another activist, Olivier Musci, 24. (The elite school Ecole Nationale d’Administration, or ENA, is considered something of a mandatory finishing school for politicians. It counts Francois Hollande and Jacques Chirac among its alumni. Ironically, Philippot is one, too.)

“Florian” likes to say that the FN scores the highest among the young. “Today’s youth have not grown up in a left-right divide”, he told me when I asked why. “The big topics, for them, were Maastricht, 9/11, the Chinese competition, and now Brexit. They have grown up in a political world structured around two poles: globalism versus patriotism.” Notably, half his speech was dedicated to ridiculing the FN's most probably rival, the maverick centrist Emmanuel Macron. “It is a time of the nations. Macron is the opposite of that," Philippot declared. 

At the rally, the blue, red and white flame, the FN’s historic logo, was nowhere to be seen. Even the words “Front National” had deserted the posters, which were instead plastered with “in the name of the people” slogans beneath Marine’s name and large smile. But everyone wears a blue rose at the buttonhole. “It’s the synthesis between the left’s rose and the right’s blue colour”, Pfeiffer said. “The symbol of the impossible becoming possible.” So, neither left nor right? I ask, echoing Macron’s campaign appeal. “Or both left and right”, Pfeiffer answered with a grin.

This nationwide rebranding follows years of efforts to polish the party’s jackass image, forged by decades of xenophobic, racist and anti-Semitic declarations by Le Pen Sr. His daughter evicted him from the party in 2015.

Still, Le Pen’s main pledges revolve around the same issue her father obsessed over - immigration. The resources spent on "dealing with migrants" will, Le Pen promises, be redirected to address the concerns of "the French people". Unemployment, which has been hovering at 10 per cent for years, is very much one of them. Moselle's damaged job market is a booster for the FN - between 10 and 12 per cent of young people are unemployed.

Yet the two phenomena cannot always rationally be linked. The female FN supporters I met candidly admitted they drove from France to Luxembourg every day for work and, like many locals, often went shopping in Germany. Yet they hoped to see the candidate of “Frexit” enter the Elysee palace in May. “We've never had problems to work in Luxembourg. Why would that change?” asked Bertrand. (Le Pen's “144 campaign pledges” promise frontier workers “special measures” to cross the border once out of the Schengen area, which sounds very much like the concept of the Schengen area itself.)

Grégoire Laloux, 21, studied history at the University of Metz. He didn't believe in the European Union. “Countries have their own interests. There are people, but no European people,” he said. “Marine is different because she defends patriotism, sovereignty, French greatness and French history.” He compared Le Pen to Richelieu, the cardinal who made Louis XIV's absolute monarchy possible:  “She, too, wants to build a modern state.”

French populists are quick to link the country's current problems to immigration, and these FN supporters were no exception. “With 7m poor and unemployed, we can't accept all the world's misery,” Olivier Musci, 24, a grandchild of Polish and Italian immigrants, told me. “Those we welcome must serve the country and be proud to be here.”

Lola echoed this call for more assimilation. “At our shopping centre, everyone speaks Arabic now," she said. "People have spat on us, thrown pebbles at us because we're lesbians. But I'm in my country and I have the right to do what I want.” When I asked if the people who attacked them were migrants, she was not so sure. “Let's say, they weren't white.”

Trump promised to “Make America Great Again”. To where would Le Pen's France return? Would it be sovereign again? White again? French again? Ruled by absolutism again? She has blurred enough lines to seduce voters her father never could – the young, the gay, the left-wingers. At the end of his speech, under the rebranded banners, Philippot invited the audience to sing La Marseillaise with him. And in one voice they did: “To arms citizens! Form your battalions! March, march, let impure blood, water our furrows...” The song is the same as the one I knew growing up. But it seemed to me, this time, a more sinister tune.