One of the world’s most influential economists is on a mission to save capitalism from itself

UCL professor Mariana Mazzucato gives a speech

Mariana Mazzucato was once called “the world’s scariest economist.” She eventually came to terms with it. “People should be scared,” she later told the BBC. “The economy is scary.”

Appearing on the BBC’s Desert Island Discs—a rare venue for an economist—Mazzucato, a professor at the University College London and founder of UCL’s Institute for Innovation and Public Purpose, cited one example of the UK’s frightening economic fragility: the high level of debt households have built up compared to their incomes. For a radio show focused mostly on music and nostalgia, it was heavy stuff.

But Mazzucato herself isn’t scary. She is frank and forthright in service of a much bigger mission. One that could save capitalism from itself.

The dominant economic system of our time is under attack. A decade after the financial crisis, capitalism is held responsible for a variety of major societal ills, including wealth inequality and climate change. There have always been critics of capitalism, but there is now a sense that the displeasure is spreading. Young Americans increasingly say they prefer some type of socialism to capitalism.

Mazzucato’s plan that would remodel capitalism relies, in some ways, on making old ideas new again, inspired by the theories of long-dead economists like Adam Smith and David Ricardo. She wants to foster a debate about value theory, a now obscure bit of economics that she argues died away in the late 19th century with the rise of neoclassical economics.

The central premise of Mazzucato’s work is about the role of the state in innovation. She is an ardent believer that governments should do more than play a passive role in fixing market failures, and be allowed to embrace their entrepreneurial spirit to steer the direction of innovation and economic growth.

The Italian-American economist is more than just a theorist. Her faith in the ability of governments to create inclusive and sustainable prosperity has found a large and receptive global audience. In the US, she has the ear of Congresswoman Alexandria Ocasio-Cortez and presidential hopeful Elizabeth Warren. Across the Atlantic, her “mission-oriented” approach to public policy serves as the foundation of the European Union’s €100 billion ($112 billion) research and innovation program and inspired Scotland’s government to set up a national investment bank.

Western capitalism is asking questions about its identity, and Mazzucato is ready with the answers.

Need for speed

When I first met Mazzucato she was in pain. It was July 2018, less than a year since the launch of the Institute for Innovation and Public Purpose. The IIPP had set up home in a Georgian townhouse on the edge of Russell Square in central London, near other UCL buildings. Sitting in an armchair in her office, Mazzucato explained that she had a slipped disc causing nerve damage and also making her arm numb. “It hurts and I’m tired from the pain,” she said, warning that our chat might be brief.

In the end, the injury did not dull the conversation or slow her down. For over an hour, Mazzucato spoke enthusiastically and at a fast clip about everything from the financialization of the economy to the pharmaceutical industry’s pricing practices to why economics education is ripe for reform. She readily gives you her full attention, which in today’s attention-deficient culture is disarming. The conversation ricochets between her serious critique of everything from the UK’s Labour Party to Elon Musk and warm laughter. (At one point, she says with deadpan humor of her children, “the unexpected third was twins, so be careful.”)

The speed at which she talks mirrors the speed at which she lives her life. Mazzucato seems to be in a constant state of movement. When I spoke to her last month, I caught her dashing between panels at the Aspen Ideas Festival and then again a few days later about to board a flight in Portugal. She cringes when I mention I also saw her at the ultra-elite World Economic Forum in Davos. In the first half of this year, she’s been to Finland, Canada, Spain twice, Switzerland twice, Italy twice, four different US states, the UAE, and Sweden.

 The concept of missions is “get shit done.” She is, needless to say, an in-demand speaker. More importantly, perhaps, she also travels to advise lawmakers on how to create mission-oriented policies—that is, putting her award-winning research into practice. She believes “missions” can address society’s greatest challenges, including climate change, income inequality, and the effects of ageing in wealthier countries. It’s not just policymakers who have to commit to these missions, but also companies, non-profits, and NGOs.

The concept of missions is “get shit done,” she said. In late 2017, the Conservative-led UK government revised its industrial policy and named four “grand challenges”: to put the UK at the forefront of the AI and data revolution; use innovation to help meet the needs of an aging society; lead the global shift to clean growth; and shape the future of mobility. A few months later, the UCL Commission for Mission Oriented Innovation and Industrial Strategy was convened, co-chaired by Mazzucato, to help the government figure out how to turn these challenges into missions.

In May, the commission published a report (pdf) that laid out how the British government should embrace a mission-oriented approach, including detailed missions that were quickly adopted as policy. For example, the clean-growth challenge now has a mission to “at least halve the energy use of new buildings by 2030.” The AI and data challenge has a mission to “transform the prevention, early diagnosis and treatment of chronic diseases by 2030.” Within 18 months, a new government strategy turned into a concrete set of policies and missions, with Mazzzucato’s fingerprints all over them.

When it comes to shaping government policy, Mazzucato also sits on the Scottish government’s Council for Economic Advisers, which pushed first minister Nicola Sturgeon to set up a National Investment Bank, which will be operational next year. The purpose of this bank (pdf) will be to invest in missions, as advocated by Mazzucato, to create inclusive growth and help fund the transition to a low-carbon economy. Meanwhile, a mission-oriented strategy has also been incorporated into Horizon Europe, a €97.6 billion EU research and innovation funding program. One of its purposes is to support “research relating to societal challenges, setting EU-wide missions with ambitious goals around issues that worry us daily.”

Mazzucato’s missions are formal policy all over Europe.

Reinventing capitalism

Mazzucato’s work has also captured the attention of Democrats in the US, not coincidentally during the run-up to an election in which inequality will play a large role. Her approach appeals to politicians who want to make governments stronger and more dynamic, rather than smaller. The Democratic Party in particular is looking for bold ways to push back against populism. Congresswoman Alexandria Ocasio-Cortez named Mazzucato as one of four economists who are helping to shape her economic policy agenda. Even before Ocasio-Cortez was elected to the House of Representatives, Mazzucato had met with her to discuss a Green New Deal, which has become one of the New Yorker’s flagship proposals.

Striking the right balance between the state and the private sector is an elusive goal. Ray Dalio, founder of the world’s largest and most profitable hedge fund, Bridgewater Associates, published a long note earlier this year on how capitalism needs to be reformed to avoid being replaced. “All good things taken to an extreme can be self-destructive and that everything must evolve or die,” he wrote. “This is now true for capitalism.”

While capitalism has lifted hundreds of millions of people out of poverty and spurred life-changing technology, it has also been reliant on the burning of fossil fuels, and some argue that inequality isn’t a faulty outcome but a fundamental feature of the system. Capitalism was supposed to make everyone better off, but long-term wage stagnation and weak productivity growth is a strong challenge to this assumption. The obvious problem is that no other economic model has worked any better.

While socialism might be in vogue—surely helped by Ocasio-Cortez’s membership to the Democratic Socialists of America—Mazzucato has little interest in debates over terminology. “I don’t think these words are helpful,” she said, adding:

“There’s all sorts of different ways to do capitalism. There’s the kind of maximization of shareholder value. There’s the more stakeholder value perspective… that fundamentally affects how public and private come together. That’s what I think needs completely rebooting rather than to start calling things socialism.”

Quibbling about the differences between capitalism, socialism, and democratic socialism is a distraction. “If you start talking about socialism, it’s not going to make [companies] do anything different from what they’re doing now,” she said. “Regardless of what I would like to see in an ideal world, I think realistically we’ll have capitalism.”

Mazzucato’s aversion to socialism but commitment to structural change is reminiscent of what Elizabeth Warren is proposing in her campaign for the Democratic nomination. Warren wouldn’t call herself a socialist, but has built her reputation on financial regulation and consumer protections after the financial crisis. The senator is now campaigning on a platform she calls “economic patriotism.” It’s a plan for government intervention that puts “American workers and middle-class prosperity ahead of multinational profits and Wall Street bonuses.” Mazzucato says she has worked with Warren’s team.

Private value vs public risk

If governments get more involved in the early stages of research and innovation, there is an obvious downside: risk. For every successful innovation, there are many more failures. The US Department of Energy guaranteed loans worth about half a billion dollars to both Tesla and Solyndra. One still exists today, the other went bankrupt in 2011.

There is a public uproar when public investments go wrong, and when they go right the payoffs are often indirect. Mazzucato argues that the rewards should be much more explicit. If the public sector is crucial to major technological developments, then the public should get a larger share in the rewards. “Voters will be more willing to accept the (inevitable) failures if they see that those are compensated by important success,” she wrote in a working paper published in 2017.

 “Government does and should have a big role in supporting innovation.” How could the government do this? Mazzucato’s ideas include retaining equity in a company (or some of the intellectual property rights), using income-contingent loans, or capping prices of the subsequent products. Staunch believers in free markets may argue that this indeed sounds suspiciously like socialism, since it could result in a host of companies partly in the hands of government ownership. Mazzucato believes asking the question about how the public will get a share of the rewards in taxpayer-funded investments, with no particular prescriptions for the answers, has to be part of the policymaking process.

Mazzucato has fans in seemingly unexpected places. Tyler Cowen, an economics professor at George Mason University who co-runs a popular economics blog, is one. Cowen’s latest book, Big Business: A Love Letter to an American Anti-Hero, starts with “A New Pro-Business Manifesto.” He argues that given the current unpredictability of US politics, companies should lead the way in making the US more socially inclusive.

In spite of his defense of corporate America, Cowen agrees with some of what Mazzucato has to say. “Government does and should have a big role in supporting innovation,” he noted. “That said, I think she emphasizes the role of the government, say in the internet, much more than my own account would.” He highlights a popular concern: there are many examples of governments that are too dysfunctional to be up to the task of sensibly directing business ventures. “She is not skeptical enough about the public sector in many settings,” he added.

State entrepreneurs

In 2013, Mazzucato published her first book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, that sought to reframe the narrative of innovation in the government’s favor. She detailed how some of the greatest inventions of the past few decades have their foundations in public-sector funded programs, often via the military or academia.

Take the iPhone. The US Department of Defense and DARPA, its agency that develops new technology, were essential to the creation of the internet and GPS, crucial features of a smartphone. Mazzucato also notes that the iPhone benefitted indirectly from public investment in the growth of the US semiconductor industry and large-scale military procurement of microprocessors, which helped drive down costs and commercialize the technology. More directly, academics at the University of Delaware, funded by a National Science Foundation and CIA fellowship program, developed multi-touch scrolling and gestures for screens; they created a company called FingerWorks that was bought by Apple in 2005, two years before the iPhone was launched. DARPA also funded CALO, an artificial intelligence project that was led by SRI International (formerly Stanford Research Institute). SRI International created a spin-off company, Siri, in 2007 that was bought by Apple a few years later.

Mazzucato isn’t trying to dismiss the work and creativity of Apple’s founder Steve Jobs, or disregard the private sector more broadly. Instead, her book was an effort to try and change how society tends to talk about innovation, and recognize that, for example, Silicon Valley doesn’t do it all alone. Five years later, she published The Value of Everything: Making and Taking in the Global Economy, which delves deeper into why the conventional wisdom is wrong.

“The stories we tell about tech, about the role of finance, have been not just biased, but they have informed problematic policies,” Mazzucato said last year in her office. “Policies that are key drivers of inequality.”

What has allowed this incorrect narrative to persist is a misunderstanding of value, she argues. To be clear, this is value in the economic sense, not values in terms of ethics or morality. Historically in economics, value was determined by the cost of production. Since production was mostly labor, this became a labor theory of value—anyone familiar with the work of Karl Marx (or classical political economy) will recognize this term.

Later, around the end of the 19th century, economics went through what was called the “marginal revolution.” This was when economists, particularly Léon Walras, Carl Menger, and William Stanley Jevons, developed the theory of marginal utility, meaning how much satisfaction you get from a good or service as the consumption of it increases. (Normally this slopes downwards, which is known as the law of diminishing marginal utility). During this time, value essentially became the same thing as price. Prices were determined by supply and demand, considering the marginal utility or marginal cost of something. Value was no longer about the production of a new good or service.

“If value is in the eye of the beholder, if it just depends on how much someone wants something you do, then who are you to say what’s valuable?” she said. “It’s the price itself that determines value.” Mazzucato says we should question this assumption, and instead ask what truly adds value, and what is really productive, to society.

To the Moon

Economics, as a field, still hasn’t fully recovered from the global financial crisis. There is a concern that economists have become so enthralled by mathematics that too many focus only on what they can concretely prove with complex models. There is a renewed call in some corners for economists to find their voice again and take on bigger societal problems, not obscure econometric puzzles.

“The point of being an academic is that you really are paid to do research and paid to think properly and to do both qualitative and quantitative analysis,” Mazzucato said. “And so we should have an obligation to put our understandings that come from this analysis out there for the bettering of the world.” She added:

Sometimes [with] bold statements, academics fear seeming too politically engaged. I just think that’s crazy because if you know there’s evidence your own work can contribute to shifting things you should have the courage to do that.”

Mazzucato herself is among a group of ascendent economists from outside the mainstream of the field. She is well placed to use her political connections and research on innovation to address the existential question of how to fix capitalism.

To explain her missions, Mazzucato often describes them as “moonshots.” She highlights the actual mission to put a man on the Moon, called for by President John F. Kennedy in the early 1960s. It’s the perfect mission: clearly defined, with a tangible outcome, and not prescriptive about what companies, people, or technology should be involved. The mission also served a much bigger goal: to win the Cold War. In Mazzucato’s terminology, the Cold War was the challenge and Apollo 11 was the mission.

At this point, given her ubiquity in policymaking circles, it isn’t surprising to discover that Mazzucato has more than just passing interest in the Moon, since she’s worked with NASA to literally put her ideas into space. She was one of a group of economic advisers to the US space agency about how the public and private sector can work together to foster a new economy in low Earth orbit. Currently, the institute she founded also has European Space Agency funding for PhD students to study how to set up public-private partnerships for space exploration. The goal, she said, is “to make sure we learn from the mistakes on Earth instead of repeating them.”





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