If you wanted to radically alter the economy, making a country such as Britain as dynamic as China or Brazil, what would the state have to do? Intervene, obviously, but how?
That has become a hard question to answer since the onset of free-market economics. Much of the old apparatus of state control has been dismantled. Plus, the political culture in which planners, engineers and technical innovators inhabited the same offices has been shattered.
If a modern-day civil servant wanted to place the proposal to build, say, Concorde on a minister’s desk, there wouldn’t even be an obvious ministry to go to. It was the UK’s Ministry of Supply that set up the supersonic airliner project: it commissioned a prototype aircraft, immediately, at its first meeting.
When state innovation projects worked, they did so because their owners were politicians, who were allowed to think big and who accepted the risk of failure. In the freemarket model, the private sector is given the task of driving innovation. But though the individual results look spectacular – from info-tech, genetics and materials science to neuro-medicine – we have not experienced the same “lift-off” as in previous industrial revolutions, where all the innovations synergise, producing high-dynamism and rising wealth for all.
Instead, in the developed world, amid rapid tech innovation, we sway between low growth and stagnation. If the information revolution creates the possibility of a “third capitalism” – as different from the industrial era as it was from the age of Sir Francis Drake – then it is, so far, a possibility unrealised.
And a growing number of economists believe it will remain so unless we rethink the role of the state. The Sussex University professor Mariana Mazzucato, whose calls for an “entrepreneurial state” were greeted with incomprehension four years ago, recently put together a conference attended by ministers, central bankers and serious investors. The buzzwords were: think big, and do “mission-oriented finance”.
Mazzucato points out the state played a role in financing nearly every key technology in an iPhone, from GPS to the touch screen. She says that, even now, the lion’s share of funding for climate change technologies comes from state investment banks and public utilities, with just 6% coming from private capital. The problem is, the modern state sees this as accidental and residual. It avoids major projects, and their associated risks, seeing its role as mainly to act where the market “fails” – as with the near evaporation of venture capital funding for technology startups in the UK.
Mazzucato, in a paper with LSE professor Carlota Perez, points out the danger of leaving tech to the private sector. In an economy bloated with printed money and cheap credit, if capital can’t find real-world, high-growth, high-profit opportunities to invest in, it will pool into the finance system, creating one bubble after another.
Seen from this angle, the financial crisis looks less like the product of bad practices in the City, and more like a structural crisis. At all previous takeoff points, capital in the finance system flowed out into the real economy, where a paradigm had been established making it easy for businesspeople to invest in tried-and-tested models, with predictable and growing demand.
Solving this problem is not just critical for economics. The clearest unmet need on Earth is for technologies to combat climate change. It’s impossible for markets to direct climate science, or climate technology, because there is no ready-made framework that will make the innovations being tried profitable. It should be a no-brainer that the modern-day equivalent of Concorde or the Apollo projects – classic “mission-oriented” state projects – should be green technology.
History shows innovation happens best when the state shapes it. During the second world war, the US decreed that companies could only profit from making and selling their military technologies – any attempt to derive immediate profit from monopolised intellectual property stood against the public good. Once they knew the American state was trying to achieve an anti-aircraft fire control system first, and a number-crunching static computer later, the greatest innovators alive set to work on making a gun predict the ideas in a fighter pilot’s head. Mainframes – and other technologies – followed, and reaped high profits for the corporations that pioneered them. But it was the state that forced the take-off point to happen.
Thinking big about the economic role of the state no longer means planned allocation of goods, or state provision: it means the state setting pathways for technology and rewarding those who follow them. That means that politicians and civil servants will have to do more than overcome their opposition to picking winners. It means changing the tax system to reward long-term investments in real activities, forcing the finance system to lend to value-creating businesses – and limiting the ability of corporates to use accumulated cash simply to buy their own shares, eating value out of the real economy.
Five years on from Lehman Brothers, we’re still seeing stagnation in terms of busted banks and country debts: if Mazzucato and her collaborators are right, the real problem is bigger – it concerns the economic culture of the state.
Every takeoff point in history has seen the state reorganise the market and promote prosperity. The boom-bust cycles of the past 15 years show we’re at a turning point, but in large parts of the developed world we have states that don’t think they should exist.
If the proponents of modern laissez-faire economics could point to a single economy where technology and markets had worked, alone, to create a vibrant, confident, high-growth economic model, their arguments would be stronger. But it’s China, Singapore, South Korea and Brazil where the success stories happened. The state was at the centre of every one.
Paul Mason is economics editor of Channel 4 News. Follow him @paulmasonnews