DPAM Blog

STATE OF AFFAIRS

• • The pandemic has become a catalyst lifting the prominence of the Italian-American economist Mariana Mazzucato to new heights. The economic and societal recipes described across her acclaimed theories reflected in the best-selling “Entrepreneurial State: Debunking Public vs. Private Sector Myths”, “The Value of everything” and her latest “Mission Economy” essentially upgrade the role of government in general and the impact of public investment and innovation specifically. Mazzucato delivers a harsh critical reading on the concepts of value creation and value extraction. She ponders that the financialization that occurred over the past 50 years has shifted the financial sector from a supporting role in the allocation of capital towards a value-creating sector. On the contrary she points out that the financial sector is rent-seeking at its base, generating income without producing inclusive and just value through new goods and services. Moreover, she states that the narrative of the unproductiveness of government has been caricaturized notwithstanding that most innovative progress was rooted in public funding. Essentially Cold War military funding enabled the birth of the internet and the technological revolution that ensued. She promotes the idea that the state has the capacity to engage in transformational measures and planning whilst at the same time defining a correct definition of value. The word value has been captured through the lens of price discovery and competitive forces and taken hostage by the financial sector redefining value in terms of (maximizing) shareholder value, value chains, adding value. Value only determined by the price dynamic as result of scarcity and preferences. In “Mission Economy”, dedicated to all who fight for the common good, redefining public policy with an objective to redirect growth becomes a key ambition. In order to explore how to ‘do government’ differently, the Institute for Innovation and Public Purpose has become a platform attracting ideas and visions across global issues related to climate, health and digitalization. Governments should claim more leadership by setting common, inspiring and daring goals. Successful public-private partnerships can be established and designed in order to benefit the public interest. Mazzucato stands for rethinking capitalism and government. Now enters Hayek.

• • As a firm believer in the value of nuance I briefly want to touch upon the work of Friedrich Hayek, an Austrian-British economist and philosopher, defender of classical liberalism. In order to bring balance to the above proposition for more government leadership I draw the attention to the messages that Hayek delivered in his seminal work published in 1944: “The Road to Serfdom”. His critique was built on the argument that in a government-led system where challenges are addressed through a central plan replacing competitive market forces and the pricing mechanism, institutions must be established that would take care of formulating such plans. These institutions would have to exercise broad discretionary powers in economic policy. Lacking guidance from competitive profit-and-loss signals, he argued that people who rise to power in such a (socialist) regime might be prone to run the system to their own personal advantage. Hayek went as far as stating that totalitarianism is not a historical accident that emerges because of a poor choice of leaders under a socialist regime. Totalitarianism is the logical outcome of the institutional order of socialist planning. Essentially state-dominated transformations stifle the emergence of counterfactual outcomes and thinking. Visibility or knowledge of opportunity costs would disappear alongside competition. He was a firm believer in the rule of law, private property and contract and a fierce defender of free democracies. According to Hayek, complex systems are best served by leaving competitive market forces in place allowing for better learning (knowledge) and required (social) adjustments.

• • The purpose of the above confrontation is not about taking a stance. Merely I want to draw attention to the risk that unintended consequences might arise the moment a blind belief in the merit of broad-based government interventionism becomes the standard approach. We sense that in a post-pandemic era, new industrial policies, green deals and targeted protectionism might increase the systemic risk. On top of currently high uncertain conditions, additional sources of uncertainty are injected. Mazzucato does not hesitate to point fingers at, what in her view, are culprits. She blames the investment fund industry as feeding the financialization. The efforts and energy that the industry puts into redirecting savings towards governments and corporates backing UN Sustainability Development Goals is disregarded.

• • One of the main questions that remains unresolved is the process that underlies the implementation of strategic plans into successful ventures with highly inclusive societal value. Tinkering, trial and error or sheer luck define capitalism. We should remember that a lot of the public spending that supposedly was at the basis of gigantic entrepreneurial success and reward was not planned. How to regulate the monopolistic behaviour of technology, pharmaceutical or industrial giants is a question for another debate. Both debates should not be mixed up.