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

Picture: Bridgeman Images
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The people is sublime: the long history of populism, from Robespierre to Trump

If liberal democracy is to survive, the tide of populism will have to be turned back. The question is: how?

A spectre of populism is haunting the world’s liberal democracies. Donald Trump’s victory in the US presidential election, the narrow Leave majority in the EU referendum, Theresa May’s decision to call a snap election – breaking the spirit of the Fixed-Term Parliaments Act passed by the government of which she was a member – and Recep Tayyip Erdogan’s victory in the recent Turkish referendum all testify to the strength of the populist tide that is sweeping through the North Atlantic world. The consequences have been calamitous: a shrunken public realm, a demeaned civic culture, threatened minorities, contempt for the rule of law and an increasingly ugly public mood. If liberal democracy is to survive, the tide will have to be turned back. The question is: how?

The first essential is to understand the nature of the beast. This is more difficult than it sounds. Most democratic politicians seek popularity, but populism and popularity are not the same. Today’s populism is the descendant of a long line of ancestors. The first unmistakably populist movement in history appeared well over two centuries ago during the later stages of the French Revolution. It was led by Robespierre (Thomas Carlyle’s “sea-green incorruptible”) and the Jacobins who promised a reign of “virtue”. They were inspired by the cloudy prose of Jean-Jacques Rousseau, who believed that mere individuals should be subject to the general will of the social whole and – if necessary – “forced to be free”. As the revolution gathered pace and foreign armies mustered on France’s frontiers, the Jacobins launched the first organised, state-led and ideologically legitimised Terror in history. Chillingly, Robespierre declared, “The people is sublime, but individuals are weak.” That is the cry of populists through the ages. Appropriately, the Terror ended with Robespierre lying on a plank, screaming with pain before he was executed by guillotine.

The French Revolution – which began with the storming of the Bastille and ended with Napoleon’s ascent to an ersatz imperial throne – has an epic quality about it missing from later chapters in the populist story. Ironically, the second chapter, which opened half a century later, was the work of Louis Bonaparte, nephew of the great Napoleon. In 1848 came a second revolution and a second Republic; Louis Bonaparte was elected president by a huge majority. He tried and failed to amend the constitution to make it possible for him to have a second term; and then seized power in a coup d’état. Soon afterwards he became emperor as Napoleon III. (“Napoleon le petit”, in Victor Hugo’s savage phrase.) The whole story provoked one of Karl Marx’s best aphorisms: “History repeats itself; the first time as tragedy and the second as farce.”

There have been plenty of tragedies since – and plenty of farces, too. Trump’s victory was a tragedy, but farcical elements are already in evidence. Erdogan’s victory was even more tragic than Trump’s, but farce is conspicuously absent. The Leave victory in the referendum was tragic: arguably, the greatest tragedy in the three-century history of Britain’s union state. As with Trump, farce is already in evidence – the agitated comings and goings that have followed Theresa May’s loss of her Commons majority; the inane debate over the nature of the Brexit that Britain should seek; and the preposterous suggestion that, freed of the “Brussels” incubus, Britain will be able to conclude costless trade deals with the state-capitalist dictatorship of China and the “America First” neo-isolationists in Washington, DC. Unlike the French farce of Napoleon III’s Second Empire, however, the British farce now in progress is more likely to provoke tears than laughter.


Picture: André Carrilho

Populism is not a doctrine or a governing philosophy, still less an ideology. It is a disposition, perhaps a mood, a set of attitudes and above all a style. The People’s Party, which played a significant part in American politics in the late 19th century, is a case in point. The farmers whose grievances inspired the People’s Party wanted cheaper credit and transport to carry their products to markets in the eastern states. Hence the party’s two main proposals. One was the nationalisation of the railways, to cheapen transport costs; the other was “free silver” – the use of silver as well as gold as currency, supposedly to cheapen credit. Even then, this was not a particularly radical programme. It was designed to reform capitalism, not to replace it, as the largely Marxist social-democratic parties of Europe were seeking to do.

Rhetoric was a different matter. Mary Elizabeth Lease, a prominent member of the People’s Party, declared that America’s was no longer a government of the people by the people and for the people, but “a government of Wall Street, by Wall Street and for Wall Street”. The common people of America, she added, “are slaves and monopoly is the master”.

The Georgian populist Tom Watson once asked if Thomas Jefferson had dreamed that the party he founded would be “prostituted to the vilest purposes of monopoly” or that it would be led by “red-eyed Jewish millionaires”. The People’s Party’s constitutive Omaha Platform accused the two main parties of proposing “to sacrifice our homes, lives and children on the altar of Mammon; to destroy the multitude in order to secure corruption funds from the millionaires”. The party’s aim was “to restore the government of the Republic to the hands of ‘the plain people’ with which class it originated”. Theodore Roosevelt promised “to walk softly and carry a big stick”. The People’s Party walked noisily and carried a small stick. Jeremy Corbyn would have been at home in it.

Almost without exception, populists promise national regeneration in place of decline, decay and the vacillations and tergiversations of a corrupt establishment and the enervated elites that belong to it. Trump’s call to “make America great again” is an obvious recent case. His attacks on “crooked Hillary”, on the courts that have impeded his proposed ban on Muslim immigrants from capriciously chosen Middle Eastern and African countries, on the “fake news” of journalists seeking to hold his administration to account, and, most of all, his attack on the constitutional checks and balances that have been fundamental to US governance for more than 200 years, are the most alarming examples of populist practice, not just in American history but in the history of most of the North Atlantic world.

There are intriguing parallels between Trump’s regime and Erdogan’s. Indeed, Trump went out of his way to congratulate Erdogan on Turkey’s referendum result in April – which gives him the right to lengthen his term of office to ten years, to strengthen his control over the judiciary and to decide when to impose a state of emergency. Even before the referendum, he had dismissed more than 100,000 public servants, including teachers, prosecutors, judges and army officers; 4,000 were imprisoned. The Kurdish minority was – and is – repressed. True, none of this applies to Trump. But the rhetoric of the thin-skinned, paranoid US president and his equally thin-skinned and paranoid Turkish counterpart comes from the same repertoire. In the Turkish referendum Erdogan declared: “My nation stood upright and undivided.” It might have been Trump clamorously insisting that the crowd at his inauguration was bigger than it was.

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The best-known modern British populists – Margaret Thatcher, Nigel Farage and David Owen – form a kind of counterpoint. In some ways, all three have harked back to the themes of the 19th-century American populists. Thatcher insisted that she was “a plain, straightforward provincial”, adding that her “Bloomsbury” was Grantham – “Methodism, the grocer’s shop, Rotary and all the serious, sober virtues, cultivated and esteemed in that environment”. Farage declared that the EU referendum was “a victory for ‘the real people’ of Britain” – implying, none too subtly, that the 48 per cent who voted Remain were somehow unreal or, indeed, un-British.

On a holiday job on a building site during the Suez War, Owen experienced a kind of epiphany. Hugh Gaitskell was criticising Anthony Eden, the prime minister, on television and in the House of Commons, but Owen’s workmates were solidly in favour of Eden. That experience, he said, made him suspicious of “the kind of attitude which splits the difference on everything. The rather defeatist, even traitorous attitude reflected in the pre-war Apostles at Cambridge.” (Owen voted for Brexit in 2016.)

Did he really believe that Bertrand Russell, John Maynard Keynes and George Moore were traitorous? Did he not know that they were Apostles? Or was he simply lashing out, Trump-like, at an elite that disdained him – and to which he yearned to belong?

Thatcher’s Grantham, Farage’s real people and David Owen’s workmates came from the same rhetorical stable as the American populists’ Omaha Platform. But the American populists really were plain, in their sense of the word, whereas Thatcher, Farage and Owen could hardly have been less so. Thatcher (at that stage Roberts) left Grantham as soon as she could and never looked back. She went to Somerville College, Oxford, where she was a pupil of the Nobel laureate Dorothy Hodgkin. She married the dashing and wealthy Denis Thatcher and abandoned science to qualify as a barrister before being elected to parliament and eventually becoming prime minister. Farage worked as a metals trader in the City before becoming leader of the UK Independence Party. Owen went to the private Bradfield College before going up to Cambridge to read medicine. Despite his Welsh antecedents, he looks and sounds like a well-brought-up English public school boy. He was elected to parliament in 1966 at the age of 28 and was appointed under-secretary for the navy at 30. He then served briefly as foreign secretary in James Callaghan’s miserable Labour government in the 1970s.

Much the same is true of Marine Le Pen in France. She is a hereditary populist – something that seems self-contradictory. The Front National (FN) she heads was founded by her father, Jean-Marie Le Pen – Holocaust denier, anti-Semite, former street brawler and sometime Poujadist. In the jargon of public relations, she has worked hard to “de-toxify” the FN brand. But the Front is still the Front; it appeals most strongly to the ageing and insecure in the de-industrialised areas of the north-east. Marine Le Pen applauded the Leave victory in Britain’s referendum – she seeks to limit immigration, just as Ukip did in the referendum and as the May government does now.

Above all, the Front National appeals to a mythologised past, symbolised by the figure of Joan of Arc. Joan was a simple, illiterate peasant from an obscure village in north-eastern France, who led the French king’s forces to a decisive victory over the English in the later stages of the Hundred Years War. She was captured by England’s Burgundian allies, and the English burned her at the stake at the age of 19. She was beatified in 1909 and canonised in 1920. For well over a century, she has been a heroine for the Catholic French right, for whom the revolutionary triad of liberté, egalité, fraternité is either vacuous or menacing.

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The past to which the FN appeals is uniquely French. It is also contentious. A struggle over the ownership of the French past has been a theme of French politics ever since the French Revolution. But other mythologised pasts have figured again and again in populist rhetoric and still do. Mussolini talked of returning to the time of the Roman empire when the Mediterranean was Mare Nostrum. Trump’s “Make America great again” presupposes a past when America was great, and from which present-day Americans have strayed, thanks to Clintonesque crooks and the pedlars of fake news. “Take back control” – the mantra of the Brexiteers in the referendum – presupposes a past in which the British had control; Owen’s bizarre pre-referendum claim that, if Britain left the EU, she would be free to “rediscover the skills of blue water diplomacy” presupposed a time when she practised those skills. Vladimir Putin, another populist of sorts, is patently trying to harness memories of tsarist glory to his chariot wheels. Margaret Thatcher, the “plain, straightforward provincial” woman, sought to revive the “vigorous virtues” of her Grantham childhood and the “Victorian values” that underpinned them.

As well as mythologising the past, populists mythologise the people. Those for whom they claim to speak are undifferentiated, homogeneous and inert. Populists have nothing but contempt for de Tocqueville’s insight that the ever-present threat of majority tyranny can be kept at bay only by a rich array of intermediate institutions, including townships, law courts and a free press, underpinned by the separation of powers.

For populists, the threat of majority tyranny is a phantom, invented by out-of-touch and craven elitists. Law courts that stand in the way of the unmediated popular will are “enemies of the people”, as the Daily Mail put it. There is no need to protect minorities against the tyranny of the majority: minorities are either part of the whole, in which case they don’t need protection, or self-excluded from it, in which case they don’t deserve to be protected.

Apparent differences of interest or value that cut across the body of the people, that divide the collective sovereign against itself, are products of elite manipulation or, in Thatcher’s notorious phrase, of “the enemy within”. For there is a strong paranoid streak in the populist mentality. Against the pure, virtuous people stand corrupt, privileged elites and sinister, conspiratorial subversives. The latter are forever plotting to do down the former.

Like pigs searching for truffles, populists search for subversives. Inevitably, they find what they are looking for. Joe McCarthy was one of the most squalid examples of the populist breed: for years, McCarthyism was a baneful presence in Hollywood, in American universities, newspaper offices and in the public service, ruining lives, restricting free expression and making it harder for the United States to win the trust of its European allies. The barrage of hatred and contempt that the tabloid press unleashed on opponents of Theresa May’s pursuit of a “hard” Brexit is another example. Her astounding claim that a mysterious entity known as “Brussels” was seeking to interfere in the British general election is a third.

As the Princeton political scientist Jan-Werner Müller argues, all of this strikes at the heart of democratic governance. Democracy depends on open debate, on dialogue between the bearers of different values, in which the protagonists learn from each other and from which they emerge as different people. For the Nobel laureate, philosopher and economist Amartya Sen, democracy is, above all, “public reasoning”; and that is impossible without social spaces in which reasoning can take place. Populism is singular; democracy is plural. The great question for non-populists is how to respond to the populist threat.

Two answers are in contention. The first is Theresa May’s. It amounts to appeasement. May’s purported reason for calling a snap general election was that the politicians were divided, whereas the people were united. It is hard to think of a better – or more frightening – summary of the spirit of populism. The second answer is Emmanuel Macron’s. For the moment, at least, he is astonishingly popular in France. More important, his victory over Le Pen has shown that, given intelligence, courage and generosity of spirit, the noxious populist tide can be resisted and, perhaps, turned back. 

David Marquand’s most recent book is “Mammon’s Kingdom”: an Essay on Britain Now” (Allen Lane)

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