Mariana Mazzucato: Greece shouldn´t do what Germany says it does but what it actually does

Monday, May 23rd, 2016
Last Update: 12:35

Mariana Mazzucato (@MazzucatoM) is a Professor in the Economics of Innovation at the Science Policy Research Unit of the Sussex University. Her book "The Entrepreneurial State", which was in the Financial Times list in 2013, attempts to debunk the myth of state "inertia" when it comes to investment for growth and innovation, and to tackle the stereotype where governments are only meant to play the regulatory role and intervene when the markets fail. She does so through very concrete examples of technologies and services that we use every day. The Enterpreneurial State (by Kritiki Publishing House) was recently published in greek and Capital.gr grasped the chance to speak to Professor Mazzucato about public investments, trade agreements, startups and privatizations, among other things.

Interview to Dimitris Bounias

The concept of your book is moving in the opposite direction from the trend in the western world - at least at this point in history. Do you foresee the economic model changing in the mid-term, more in alignment with "The Entrepreneurial State"?The current trend of downsizing the state is both ideological as well as misinformed. The ideological part is not very new as it has been happening since the 1980s, with policies initiated by Reagan and Thatcher, and theoretically in economics through New Public Management (and Public Choice) theory. The latter treated governments as inevitably corrupt and prone to failure. Hence damage could be minimized by minimizing… government.

But let΄s focus for a minute on the misinformed part. After the recent financial crisis, there was an obsession with cutting deficits and debt/GDP ratios as though it had been public debt that caused the crisis, when the culprit had actually been private debt. Little has been done to solve the latter problem, with personal debt/disposable income levels rising to record levels again. Indeed, as real wages have not been growing, debt levels have had to increase just to maintain living standards.  Pretending that the problem was solely one of public debt (which increased mainly as a consequence of the crisis), solutions then focused on privatization, reduction of the size and ambition of the state, and of course through “austerity”: cutting public budgets. The latter has proved futile because unless we allow public (and private) actors to spend on those areas that increase competitiveness, you can cut all you want but growth will not happen. And hence tax receipts fall. So debt gets even worse. Many southern European countries for example have had relatively modest deficits but precisely because they have not spending strategically in the areas that increase productivity, which is the key determinant of the denominator in the debt/GDP ratio, then the ratio rises. This is simple mathematics. Why? If the numerator (debt) is growing at an annual modest level of 2-4% while the denominator is not growing at all, the ratio can even go to infinity.

But of course the solution is not just spend, spend, spend. It΄s about spending in smart strategic ways. My book, The Entrepreneurial State, focuses on  lessons of how public spending, done strategically and in a decentralized way, was indeed part of the secret of Silicon Valley. A decentralized network of private actors, such as NSF, National Institutes of Health, DARPA in the Department of Defense and the SBIR program (that provides patient finance to small innovative companies through procurement), were crucial across the entire innovation chain, both supply push and the demand pull. That is what got us all the technology behind the iPhone (from the internet, to GPS, touchscreen display and SIRI) and is what is getting us today the green revolution we are witnessing in some countries like China, Germany and Denmark.  Indeed, some countries have learned this lesson, and are trying to build such public sector capacity. We see this in countries like Israel, Denmark, Germany, Singapore and China. So it’s not true that there is a ‘trend’ in the entire Western world. But, yes, that part of the world that thinks that the business alone will create growth is in for a long period of stagnation. Business tends to follow those opportunities that are directly created by public institutions. And in the end, it must be public and private together, working hand in hand, with the public side just as strategic and entrepreneurial as the public side.

Do you see the mounting national debt of many countries as a challenge towards the application of your concept? Can the issue be tackled under today΄s circumstances?



As I mentioned above, debt/GDP is rising due to the lack of spending to drive competitiveness –which affects the denominator. Many countries pretend that competitiveness is just about reducing ‘impediments’ like tax and red tape, and liberalizing labor markets.  But competitiveness requires active spending on human capital, research and development, training and innovation policy that directs an economy into new areas (not just high tech). Its wrong to view debt as a static and exogenous constraint. It is, rather, a dynamic and endogenous outcome of the investment decisions in public and private institutions. The real crisis today in much of the western world is due to (1) an overly financialized private sector, that is hoarding cash at record levels and choosing to spend profits on areas like share buybacks (to boost stock options and executive pay), and (2) an overly austere public sector, not spending enough on education, training, Research and Development, and not having the courage to direct economies towards new directions. Secular stagnation is a result of this lack of investment.

What are some fundamental prerequisites in state structure and hierarchy for the government to be in a position to push innovation? What are some of its advantages over private businesses regarding innovation?

Public institutions have in theory a greater likelihood to think long-term than the private sector, because their objective is not profit but social value. But even areas that eventually create private value, often take a very long time—indeed most of the technologies in the iPhone that I discuss n my book took decades to build. We would never have gotten the Internet with a 3-year time horizon which drives venture capitalists. Indeed, its not a coincidence that it was public institutions that made the most high risk capital intensive investments in areas like biotech, nanotech and today are playing a lead role in green-tech. In each of these cases the private sector only came later. And policies were required both on the supply side and the demand side.   So the lower risk-averseness of the public sector is indeed an advantage. But this is not always true, and it is also fundamental to build public sector capacity and competence. Realistically the capacity is not always there to make high-risk intelligent investments. Building dynamic public institutions and public capacity requires effort—which austerity does not solve!

History teaches us that it is useful to structure public organizations in a way that keeps them arm΄s length away from the political process, so learning can occur over a longer period of time and objectives can be structured around 10-20 years not just the usual 4 year election cycle, which tends to make policy makers fear failure rather than welcome exploration. Indeed innovative organizations, in any policy field (health, education, industrial policy) must be able to learn from trial and error (and error and error). The secret of Darpa was very much related to its organizational dynamic of enabling its staff to take big risks. Taking risks and occasionally failing should be permitted, with focus then on making sure the few successes actually have big impact.

Instead, it is precisely because we so often dismiss the role of the public sector that we have not allowed it to benefit from key insights from strategic management, decision sciences and organizational behavior—what MBAs learn in business schools for private companies. So there is a self-fulfilling prophecy: the less we believe in the public sector the less we try to reform it and make it intelligent. Both austerity and the continued outsourcing of knowledge from public institutions is a real problem in this regard.

What are some examples of governments leading in innovation today, at the same time as San Francisco startups get the attention of the media?



Recent major advances in fracking/shale gas were initiated by the US Department of Energy (DoE). Similarly, it was ARPA-E (a sister organization inside DoE of DARPA which is in the Department of Defense) which came up with some revolutionary new innovations in battery storage. The BBC in the UK has been an extremely innovative organization in public broadcasting and this is also due to the fact that it has invested over the decades in its own competences and capacity (rather than outsourcing). One of the first personal computers came from the BBC (the BBC Micra which was used in schools and created many spillovers in other areas) and recently the BBC iPlayer is a very innovative Internet based platform for broadcasting TV and radio: all designed in-house. Indeed there have been important spillovers between the BBC and other parts of government, such as GDS (Government Digital Services) where some BBC staff moved to GDS to work on a government website which later won an international design award (gov.uk).

Similarly, there are movements to bring in innovation into how government works (innovation within not just through government)—indeed I was part of a panel in the European Commission dedicated to this and we found fantastic examples around the world, such as in Denmark’s Mindlab. But the point is not whether it is the private or public sector that is more innovative. We know lots about the private innovation efforts, and very little about the public ones. The point of my book was to allow better understanding of the latter so that we can indeed build more dynamic public-private partnerships.  Such partnerships need not only ‘de-risking’ by public sector but actively ‘taking risks’ and we should share not only the risks but also the rewards! Instead by pretending that the public sector is inertial, even when it plays a large role it then fears to take its share, pretending that it΄s just from the tax system that the return comes back. But do you know what the top marginal taxation rate was when NASA was founded in the early 70s? 90%! And of course with all the tax evasion and avoidance the situation is worse. I have recently been writing about different ways in which the public sector can share both risks and rewards through better ‘deals’ on prices, re-investment of profits, retaining a golden share of patents, and at times retaining equity in its downstream investments. And yes, this counters the ideology that says sell, sell, sell (anything public).

What do you think of businesses like UBER or AirBnB, whose technological and economic model challenge country laws? Is this going to escalate to a full blown "war"? And if so, who will win?

I’m not a big fan of this movement because with it, we are focusing on the wrong issues. Firstly, what do we mean by the sharing economy? What is it that we are sharing? Who is gaining? This is not a ‘flat world’. Secondly, the problem with some of these companies is that they actually benefit immensely from public resources, yet don’t pay into the public purse, and spend so much of their efforts to combat regulations, which have actually been fought for decades. Where would Uber be without government funded GPS? Nowhere! And why is Uber allowed to bypass regulations, such as those regulating the need to pick up disabled people? In the short-run, some of these new organizations may save us money—a cheaper taxi ride or a cheaper hotel room. But in the long-run unless we structure them so that they build upon rather than destroy some of the most important social achievements, we allow them in the end to be rent-seeking small affairs. Third, couldn’t we focus the sharing economy on more useful areas like care, rather than just cab rides and hotel rooms? Unfortunately the media like to portray this battle as one of old style backwards taxi drivers versus the new dynamic entrepreneurs. That is false. This is about how to build up more functional innovation ecosystems, which while reducing cost also increase quality, and perhaps also direct efforts towards those important innovations that we need today.  

How could international commercial treaties like TTIP change the innovation landscape? Could we see multinationals transcend national and international law?



There is nothing very new in TTIP… it΄s an extension of different agreements like the North American Free Trade Agreement (NAFTA). So let΄s learn the lessons. There are and always were strong power issues at play — free movement of capital and not so much of labor (for instance) — which drove wages to the bottom. Trade unions were weakened. The reduced impediments did not actually increase real investments (in human or physical capital). So as with any agreement, we must structure it and govern it in such a way that it produces the objectives we want. Even a patent is a contract, it΄s not a ‘right’ (yet we wrongly call them intellectual property rights). Its not a bad idea to have a larger market, but again, it’s the details that matter. And the real issue is what the interests are that determine these details and the deals. We should structure them so all the sides have an equal opportunity to voice and negotiate concerns, and that it does not become a race to simply reduce regulations, and wages.

One of the most important aspects of the Greek bailout is a massive privatization program - down to basic utilities. Would this be beneficial in the medium term?

There is no evidence that privatization by itself causes greater efficiency or competitiveness. There are plenty of examples where in fact it΄s led to the opposite. From the privatization of Telecom Italia in the Italy, to the privatization for the railways in the UK which are in dire state and suffer the lack of maintenance and innovative investment.  But just as with the privatization issue above, the devil is in the detail. If there is a privatization of a public resource, there should be a ‘deal’ that determines the conditions for it. The private side should be forced to increase not decrease investment in improving the products and services being privatized. Even if profits are the objective, these could be had within constraints of a deal. Indeed, some of the most innovative private sector organizations in the world, benefited from governments imposing conditions. Having said that, I believe that some areas, those that reduce ‘public goods’—like water, health, education—should when possible remain in public hands. It is only this way that public value can be guaranteed. There can of course be some private participation, but the profit motive should not regulate the creation of public goods. That turns them into private goods which inevitably will be in the hands of the more privilege—fine for some apps, very bad for clean cheap water or universal education.

Follow-up on the previous question: One of the most important privatizations for Greece - heralded as an essential reform to release such an important activity from the state΄s grasp - has been that of the country΄s main port. However, the company that acquired it, Chinese Cosco, is controlled by the Chinese government. Do you see any irony in that?



Yes it is ironic. And the same thing is happening in the UK. We are privatizing everything only to be bought up by the Chinese state. But this is also because the Chinese state today DOES have a strategy. Regardless of whether it’s the right or wrong strategy, the real issue is that there is not enough patient strategic public capital in the western world. So our infrastructure and innovation is lagging. And the Chinese have to come in and do that. Its also not a coincidence that the Chinese now are also beginning to lead in innovation, from telecoms (Huawei) and the green economy. As innovation is a dynamic characterized by first mover advantages, if Europe continues to hang back, we will be big losers down the road. And here it is important to emphasize that within Europe there are major differences. Indeed, the Chinese have learned from the Germans. The Germans have a large public bank doing what private banks won΄t do, they have dynamic institutions that create links between science and industry (Fraunhofer), and are directing their (higher than average) R&D towards the Energiewende policy. In the same way that in my book I argued that Europe should not do what the US says it does (Jefferson talk) but what it actually does (Hamilton walk), Greece should not do what Germany says it does but what it actually does. But the opposite is happening. And this is a tragedy.

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