October 13, 2016


Capitalism Behaving Badly : It's time to rethink the role that government plays in shaping and supporting policies to solve big problems like climate change and income inequality. (David Rotman  October 12, 2016, MIT Technology Review)

In particular, Mazzucato, who also co-edited the book and co-wrote an introduction with Michael Jacobs, wants to counter the view that free markets inevitably lead to desirable outcomes and that freer markets are always better: the faith that "the 'invisible hand' of the market knows best." In fact, she argues, we should admit that markets are created and shaped by government policies, including government support of innovation.

There is nothing too contentious in that statement, but she extends the argument in a way that is controversial. Not only is it the responsibility of governments to facilitate innovation, which she calls "the driving force behind economic growth and development," but the state should also set its direction; the trajectory of innovation needs to be guided by policies to solve specific problems, whether the aim is increasing productivity or creating a green-energy transition. Mazzucato writes that innovation needs both "well-funded public research and development institutions and strong industrial policies."

Industrial policies--or what ­Mazzucato sometimes calls mission-­oriented public policies--have a long and divisive history. Economists define industrial policy in a very specific way: it's when governments set out to play a deliberate role in directing innovation and growth to achieve a desired objective. Her call for the revival of such policies counters the idea that has held sway for decades among many politicians, particularly in the United States and the U.K., that government is better off not trying to assert a role in steering innovation. She writes that governments should not only try to "level the playing field, as orthodox view would allow." Rather, "they can help tilt the playing field towards the achievement of publicly chosen goals."
For them to do so, ­Mazzucato said in a recent interview, "the whole framework needs to change." The belief that the government should only intervene to "fix" the market in extreme circumstances, rather than acting as a partner in creating and shaping markets, means we're constantly putting "bandages" on problems and "nothing changes." The intractability of today's slow growth and widening inequality can be traced, she says, to the fact that governments in the U.S. and Europe have increasingly shied away from their responsibilities. "We have to admit that policy steers innovation and growth, and so the question is where do we want to steer them?" [...]

The debate over industrial policies played out in the United States and the U.K. in the early 1980s as President Reagan and Prime Minister Thatcher preached the power of free markets and the dangers of government meddling. And for at least the next few decades, the free-market rhetoric clearly won out, as popular wisdom held that such interventions are tantamount to governments picking winners and losers. 

Even advocates of industrial policies acknowledge that they have had a checkered history. In "Green Industrial Policy," Dani Rodrik, an economist at Harvard's John F. Kennedy School of Government, argues that such a strategy is needed to make the sweeping changes required to slow climate change. But he notes that executing industrial policies fairly has been a challenge. While such policies have "undoubtedly worked" in Japan, South Korea, China, and other countries, Rodrik writes, they have a reputation for being gamed in many countries by both businesses and political leaders. And industrial policies to support desirable sectors have given birth to such white elephants as the Concorde, a plane meant to bolster the aerospace industry in the U.K. and France.

Because of this history, he writes, "economists traditionally exhibit scepticism--if not outright hostility--towards industrial policies." But despite the challenge of making them work, he argues, industrial policies "have an indispensable role in putting the global economy on a green growth path," because markets have failed to properly account for the social cost of carbon dioxide emissions and the true technological benefits of risky energy R&D.

Rodrik said in an interview that while "unfortunately" we're stuck with the label "industrial policy," today's versions are very different from ones conceived decades ago. Rather than singling out a specific sector--say, aerospace or steel manufacturing--for support with large investments and tax incentives, new thinking suggests working across sectors to achieve a desired goal such as addressing climate change, using tools such as carbon pricing. "It's really just pushing markets in a direction they wouldn't otherwise go," he says. "The idea is to get government working closely with businesses to achieve more rapid and appropriate growth." 

The entire point of innovation and markets is that we don't really know which way to steer until we generate and try a lot of options.  What government policy can do effectively is determine what we want to steer away from, thereby forcing the innovation to occur more quickly and making it more lucrative immediately.  Rather than picking solar, hydrogen, fusion, wind, etc.; government can encourage entrepeneurs to try them all out by making oil prohibitively expensive.

Posted by at October 13, 2016 5:15 PM