Mike Haynes looks at the work of prominent left-leaning economist Mariana Mazzucato, whose work challenges the idea that private capital deserves the credit – and financial rewards – for the innovations of our era.
Mariana Mazzucato is currently one of the most influential economists on the left. She has just won the first ‘Not The Nobel Prize in Economics’ – an attempt to expose the hollowness and conventionality of the Nobel Prize in Economics.
Many scientists think that Nobel prizes are a bit silly. Science is a team effort. And the official Nobel Prize for economics is not even a real Nobel prize – it was invented in the late 1960s, and has largely rewarded more right-wing economists. But we are where we are, and perhaps an alternative Nobel prize is not a bad idea. So why has Mazzucato got it?
Mazzucato’s big argument is that successful forms of capitalism depend on state support for their most advanced technologies. The UK has fallen behind because its governments, believing in the market, have invested too little and in the wrong ways in research and development. She makes a case for the state being driving force of radical technical change in the twenty-first century.
Mazzucato has not been the only person making these arguments, but she is now their public face. She broke into the wider public debate in a 2011 extended pamphlet, The Entrepreneurial State published by Demos. This was then turned into a major 2013 book with the same name and more recently, in 2018, she extended the argument in The Value of Everything: Making and Taking in the Global Economy.
Her arguments are not about transcending capitalism. A Times reviewer described her as ‘the sort of critical friend capitalism needs’. What she wants is a shift away from failed research and development incentives and subsidies for the private sector to an open endorsement and support for the idea of the state leading technological change.
We can recognise the case she makes for change is limited and still see interesting things in her arguments. I want to point to three.
The advanced capitalist ‘Development State’
The first is her understanding of how capitalism actually works. She argues that the state has always been central to the development of capitalism, following Karl Polanyi, who argued that in the beginning ‘the road to the free market was opened and kept open by an enormous increase in continuous, centrally organised and controlled interventionism’.
Today the crudest measure of the importance of the state are the calculations which show state expenditure as a percentage of output. This chart shows that for the 36 countries that are members of the Organisation for Economic Co-operation and Development (OECD) the share runs at some 30-50% or more.
Over time there has not been much, if any, decline. What has declined, albeit unevenly, is the amount of nationalised industry, as a result of privatisation policies but even this decline is uneven across countries.
Too often in trying to get our heads around what the state does we focus on its role in structuring markets though creating law and order, its role in education, health and welfare, etc. Beyond this, in the UK, when we think of state control of production we have tended to imagine it involving strategic industries like defence and the nationalisation of industries in crisis. More positive attempts to pick or create ‘winners’ or ‘national champions’ may have worked for countries like Japan and South Korea when they were trying to catch up. They have not worked as a model for capitalism at the technological frontier. The internet revolution, the mobile phone, companies like Apple and Google are private sector triumphs that only the market could have created.
Mazzucato argues that this is all false. Apple, Google and almost all the ‘digital’ companies have relied very heavily on state-supported development. She turns the conventional view of the USA as the bastion of the free market on is head by arguing that it has had, and continues to have, a hidden ‘development state’ that is the most successful in the advanced world. It has been state research that has delivered the key elements of the computer, the internet, the smart phone and even Siri and Alexa.
This is because private capital cannot deal with the level of uncertainty that really big advances involve. Financialization has increased the short termism of business, but even business perspectives at their most ‘long term’ are never adequate to deal with really radical change. The bigger and more dramatic the technological challenge and advance, the more it has depended on the state.
The problem is that this is done under the radar, allowing the private sector to privatise both the glory and the rewards of publicly supported technical progress. ‘The state often gives away the outputs at rock bottom prices’ she wrote in her 2011 pamphlet. All the talk about markets is as much about disguising what really happens in capitalism as a guide about to how to run it.
British capitalism – the Dragon’s Den Model?
Governments in the UK have taken the view that when it comes to research and development (R&D), invention and innovation the job of the state is to increase supply rather than demand. This has led to policies encourage us to be entrepreneurial. It has meant subsidies to small business, the creation of an ‘entrepreneurial culture’, rebranding industrial zones as science parks and enterprise zones. Beyond this, if you have an idea or a business proposal that will work, then private capital will help you.
This is what we can call the Dragons’ Den model. The key problem is to bring good ideas to the notice of business angels and venture capitalists. These are the dragons of the Dragons Den. They are always on the lookout for good products and they will provide the capital and additional knowledge you need.
If the TV programme The Apprentice gives one view of business in capitalism, then Dragons’ Den offers another. If you watch it carefully it is less misleading than The Apprentice, and it illustrates Mazzucato’s arguments about what is wrong with British policy.
Most of those looking for help in the Dragons’ Den fail because they offer variations of old ideas. Others fail because the Dragons cannot see a quick way to make money. The Dragons want the main development work to have already been paid for. They even like you to have already got the product onto the market. They want anything original to be protected by patents. They want a big share of the profits for what is often a modest investment and they want to get out pretty quick. They like to take their profits and move on.
State policy in Britain has failed in the same way. It has missed the opportunity to fund really new ideas. Resources, she argues, should be transferred from unproductively-used general R&D subsidies and given to contracts for research into change – including dealing with the climate crisis. Many of these new projects, like those in the private sector, will fail, but that is par for the course. Only the state can take sort of risks that will lead to the changes that will really reshape the future.
Policy in the UK has to break out of a vicious circle of failure. Modest state support does not lead to much. This undercuts the possibility of better policy. Where progress is made, others seize the advantage. The economy remains sluggish and stuck in a low productivity trap.
Whatever we think about this as a programme for change, this issue of the role of the state and pushing forward the most advanced forms of capitalism raises is an important question.
OECD high-technology State Capitalism?
Mazzucato’s most recent book The Value of Everything is about how we think of value in the economy. She shows how economists over the centuries have struggled to determine what value is and how it should be measured. But instead of the arguments about value becoming clearer they have become more muddied. We now have a perverse situation where things that create real value are seen to be useless and things that create fake value are praised and endorsed by ‘economics’ and economists.
Some of this will be familiar to those with a little knowledge of the history of economic thought. This includes the absurdities of the idea that the price of anything is a measure of its value. It is even being reported that prayer now has an economic value for some economists.
But she turns the argument in two interesting ways. One is to argue that the finance sector is not about creating new value but transferring it – some for legitimate reasons but most as a simple form of ‘rent extraction’. The financial sector takes value produced elsewhere in the system and grabs it for itself. Seeing all of finance as productive is not only theoretically false but it leads to the mismeasurement of the real importance of the ‘financial’ sector.
This issue of mismeasurement is important. There has been both a degree of financialization of the real economy and financialization of our measures of the economy. Sorting out how important finance really is becomes a problem. We cannot say financialization is the key to everything if the statistics are distorted by that very phenomenon. Mazzucato’s discussion here is not as clear as that of Jacob Assa, whose account The Financialization of GDP: Implications for Economic Theory and Policy (2018) was published more or less at the same time. But she is pointing to something which is important for an understanding of modem capitalism.
She also takes the argument in another direction. The current way of thinking and measuring understates the role of the state sector. This is not new. Marx too, she says, ‘had no real theory of the way in which the state can contribute to value’. (p. xi) Conventional economists and many on the left still refuse to see the state sector as one in which new value is created. The assumption is ‘that value is created in the private sector, the public sector “enables” value’. (p. 230) Some accounts have gone even further and pictured the state as a value subtractor – destroying rather than creating. This type of thinking has been central to the politics of austerity, but I am interested more in the way it leads us not only to the wrong politics but the wrong understanding of the state in capitalism.
If value is only enabled in the state sector then this seems to suggest that although the state might be part of the capitalist system, it is not a direct capitalist itself. But if value can be created in the state sector then the state functions not simply as a supporter of capitalism but a form of capital itself. Mazzucato does not use these terms but her argument is essentially about the need to build a more extensive role for a progressive state capitalism.
Anyone who reads earlier social democratic defences of the mixed economy will see that politically there is little new here. What Mazzucato does is to rediscover that tradition and feed it into the current political debate in an updated form. Give the slide to the right in the UK it is no less valuable for this and certainly worth reading, but it is important to be clear about the limits of her argument.
Mazzucato’s account is doubly modest. It is modest at the level of theory. In The Value of Everything she says that ‘this book does not want to argue for one correct theory of value’ (p.18, p.279). If we are to take this view seriously then her arguments seem to amount to little more than spinning the role of the state as a good news story. This seems a little bizarre: if the story is worth telling it is worth telling because it is the right story. And if the other stories are wrong then it is not a question simply of preferring the progressive state capitalism story, but of ceasing to tell the old ones. It is hard not to see this fence-sitting as an attempt to avoid the implications of her argument – that a huge amount of economic theory, whatever its scientific pretensions, has no basis in which to be taken seriously. But it also allows her to avoid something else. She never tells us whether Marx’s arguments about value and surplus value are correct. She praises Marx for posing the problem. Part of her explanation of the rise of modern value theory is then that it needed to find a way of avoiding Marx’s conclusions both at the level of theory and politics. But in a world of value stories Marx’s value story is, it seems, just another one.
Her account is no less modest politically. ‘Once the story telling about value is corrected,’ she says, ‘changes can embolden private institutions as well as their public partners’. (p. 268) It is not difficult to imagine this phrase in the manifesto of any UK political party. Private institutions are to become stakeholder institutions. Yet the realism of this idea has long been criticised. One issue is the extent to which stakeholding is compatible with the company as a legal entity and as ‘capital’. Another is the inability to explain who stakeholders really are, how their interests can be weighted and represented and how they can control the direction of a company.
The problem here (and it applies to others’ analyses too) is that the more damning your critique of the present, the more it requires you to think about the scale of changes you need to argue for in the here and now. Can the ‘unproductive’ (her term) elements of the system simply be repurposed with a bit of regulation and aspirations to a different story, or do they need to be cut out?
Some of the most ‘successful’ bits of UK capitalism, for example, are now its most dysfunctional parts. Indeed we could say that much of the UK economy now has a comparative advantage in doing bad things. Mazzucato follows Adair Turner (the former head of the UK Financial Services Authority) in arguing that much of the financial sector is ‘socially useless’. If so, why do we need it all? She spends a lot of time telling us how Big Pharma exploits us. So is better regulation enough? In 2013 Peter Gotzcshe published his Deadly Medicines and Organised Crime, How Big Pharma has corrupted healthcare. He argued that with Big Pharma a ‘morally repugnant disregard for human lives is the norm’. Sounds extreme? His book won an award from the British Medical Association. It was published with a foreword by the former editor of the British Medical Journal and another from the deputy editor of the Journal of the American Medical Association, and it won praise from the medical community. If Big Pharma is such a problem how are we really going to control it?
Mazzucato’s practical suggestions feed into a relatively small part of an ‘industrial policy’ for the future. But her wider analysis raises much bigger issues about the urgency, scale and manner of the change we really need.