The financial crisis has weakened confidence in market economies everywhere in the Western world. Not that the United States, let alone European countries, were ever wildly deregulated; but opponents of deregulation have grown more vocal.
Rethinking Capitalism, edited by Michael Jacobs and Mariana Mazzucato, should actually be entitled “Rethinking Statism,” for it aims at providing interventionists with a bolder agenda than ever. Jacobs and Mazzucato basically equate limited government with a government that tries to correct market failure—an equation most libertarians would actually dispute. The failings of the world economies, whether before or after the financial crisis of late 2007 to 2009, are laid at the feet of an “orthodox view,” which they sum up in the rather commonsensical statement that “it is not only markets which fail; governments do too,” thus public interventions need to consider “the risk of generating government failures,” which risks may outweigh the potential benefits they aim to generate.
Jacobs and Mazzucato’s agenda is to dispense with this mainstream view. Their message is loud and clear: government is glorious. The naive view of markets that they denounce is similarly lacking in subtlety, a sort of straw man version of laissez-faire. What they would replace it with is an even more naive view.
Markets, the editors argue in their Introduction, “are not simple structures which behave in the ways set out in economic textbooks.” Capitalist economies are “not theoretical abstractions but complex and dynamic systems, embedded in specific societies.” The idea they flirt with is that “real” markets are also the result of public interventions, as even the staunchest free-marketer would hardly deny. What they infer from this is, however, not quite as uncontroversial. On the one hand, they consider the distinction between “private” and “public” unhelpful. On the other, they assume that innovation in free markets comes from “‘mission-oriented’ public policies.”
The key difference between public bodies and private enterprises, though, can hardly be missed—the former being financed by more-or-less-willing taxpayers, the second succeeding or failing depending on their ability to convince consumers to voluntarily buy their products. The appeals to complexity that we find in Rethinking Capitalism are little more than an attempt to mesmerize the reader, so that this difference can be obscured. The fact is that the book’s alternative theory is anything but complex: Government should do more, and it will do well.
The book collects every manner of criticism of “neoliberal order,” however defined. Essay contributors include Stephanie Kelton, L. Randall Wray and Yeva Nersisyan, Andrew Haldane, William Lazonick, Stephany Griffith-Jones and Giovanni Cozzi, Joseph Stiglitz, Colin Crouch, Dimitri Zenghelis and Carlota Perez. The essays are uneven, as happens with many a book of this kind. Colin Crouch, for example, chastises “neoliberalism” for having failed to achieve its promises: “although a call for deregulation is a fundamental part of the neoliberal agenda, in reality it produces a major increase in regulation, but with a changed purpose.” This is far from being an unreasonable point, and would actually force enemies of “neoliberalism” to understand how little of it the world enjoyed in recent decades.
Crouch prefers to build on the old criticism that all-powerful businesses and oligopolies are the necessary outcome of markets. Such an argument, however, only plays a minor part in the book, perhaps because it is predicated on a positive appreciation of at least one version of free-market competition (in which the market is populated by a number of small-sized, competing businesses). Most of these authors try to stay away from anything vaguely resembling an appreciation of the market system. Several are searching for a new rationale for government interventions, and this reviewer will concentrate on those newer arguments.
In her chapter, Mariana Mazzucato summarizes her 2011 book The Entrepreneurial State. It is important to stress that what she claims is not that sometimes government-funded projects driven by a nation’s military establishment have produced technologies that were later commercially developed and thus beneficial to consumers at large. While this would be a factual statement (think of the Global Positionong System), this wouldn’t necessarily suggest that more money ought to be invested in government research and development. Government investments have opportunity costs, too.
Mazzucato is unshakeable in her certainty that social scientists tend to ignore “the way in which the state often does precisely what the private sector does not, such as financing long-term infrastructure projects and innovation.” Since she considers this “creating and shaping markets,” she doesn’t stop at basic R&D but argues that government should invest in applied research and commercial ventures as well. Her example is the British Broadcasting Corporation. The BBC “historically invested in activities bolder and more strategically directed than market failure theory would allow,” hence its “taking up a share of the market that should be reserved for private firms” is not something that ought to be viewed as problematic.
“The inability of the state to pick winners is usually an a priori assumption,” writes Mazzucato, while “very few studies have attempted systematically to evaluate industrial policy of this kind.” This is a spectacular statement that she footnotes with a reference to a paper of hers. One wonders if Professor Mazzucato, an economist at the University of Sussex, ever visits her ancestral country of Italy, where it used to be the case that panettone cakes, tomato sauce, spaghetti, salt, and sunglasses were all produced by government concerns, and commercial banks were de facto government monopolies.
Naturally, denouncing “orthodox” economic theory as a failure comes in handy here, as it spares Mazzucato from dealing with problems of incentives and governance. Sure enough, shareholders often make mistakes and choose CEOs who end up putting their companies on the wrong track. Entrepreneurs err, too. “The market” is a useful abstract notion nonetheless, insofar as it refers to a regime that polices such poor performance by failure. Failure happens to be a powerful incentive to strive to avoid such mistakes.
Governments are run by bureaucracies, organizations that are best led by rules as general, transparent, and inflexible as possible. Would they be the ideal actors to take charge of companies’ governance? On top of that, is government really the right kind of agency to take bold entrepreneurial risks? Mazzucato never even vaguely alludes to the fact that government runs on money that taxpayers gave it. Government’s caretaker duties would seem to conspire against its placing big bets on risky endeavors.
Mazzucato maintains that, whenever progress was made, “the public role was not limited to facilitating . . . the public sector for something that it already wanted to do; it made things happen that otherwise would not have.” For private entrepreneurs and financiers are naturally short-sighted, whereas government can invest without the need to “exit” a new venture to make its own investors happy. Government’s is “patient capital.”
A pithy phrase. But is it true that capital ought to be patient no matter what? The idea seems to be that by continuing to support a given research project, at some point some innovation will come through. This stipulates that there is no opportunity cost for government, or that its pursuit of opportunities knows no limit. This is consistent, in its way. If capital is in fact not scarce, risks are not that risky, as more capital is available no matter what. While claiming that considering “markets” completely separate things from government is naive, Mazzucato actually does precisely that. She describes two different worlds, one where scarcity and the law of gravity matter (markets), and one that is above these pesky consideratios (government).
Mazzucato is rather parsimonious with details. What is the secret of producing bureaucrats with prudence and foresight? What conditions are needed for such paragons to flourish and proliferate? What kind of incentives should motivate them? What kind of democratic control should be exercised over their decision- making?
Neither is she more precise on how exactly government agencies “directed” specific developments. The case of GPS or, even more so, the Internet are more examples of unintended consequences of government investment than “directionality.” That is not how she sees it. She argues that “In financing the race into space . . . and then by initiating the development of the internet and the biotechnology and nanotech sectors, public agencies actively envisioned a new direction of change.”
This seems a terribly narrow view of what the economy is all about. Consumers and their needs are out of the picture. Adam Smith marvelled at the the woolen coat, “the produce of the joint labour of a great multitude of workmen.” Mazzucato marvels at bold projects planned and realized by a few visionaries. She despises the hero-worship of Steve Jobs-like entrepreneurs, but worships her governmental heroes—bureaucrats and, if they work for a government agency, scientists. But what about the little daily endeavors that make for the apparently inexhaustible chains of exchanges that add up to a market economy? What about grocers, shopkeepers, service-providers in small business concerns? What about the cornucopia of consumers goods that flood the market every day? All that seems irrelevant, compared with space travel. But is it really?
Carlota Perez’s chapter in Rethinking Capital argues for government investments that, for example, prove to be environmentally sustainable. Perez does acknowledge consumers, writing of “a shift in consumer demand” that is already reflected in “the lifestyles of the wealthy and the educated younger generation,” which signals “a ‘good life’ that promotes high-quality individual health’.” But if this is so—if consumers are already switching to patterns of expenditures that would allow for what the authors in this collection would consider “sustainable and inclusive growth”—why should government intervene? In particular, why should the government “reorient finance,” or “regulate for durability and maintenance,” or “facilitate the sharing and collaborative economies,” as Perez advocates, if consumers are really seeking precisely this?
Rethinking Capitalism is but the latest example of a notable stream of literature blaming capitalism for not accommodating the desires of its authors as quickly and comprehensively as they would like. Make no mistake, though, it is in its own way an important work. Arguments such as the ones I’ve explored won’t convince an educated layman who comes to the book with no predisposition on the matter. But they are a formidable device to strengthen the convictions of those who already support big government. They would have us believe that the state is good in precisely those circumstances where even most interventionists have typically accepted that it is not: in prompting innovation.
In 1947, the future Nobel Laureate Franco Modigliani wrote that “stasis and routine are the only true danger of a socialist economic system.” A sympathizer with socialism, Modigliani thought nonetheless that there was a potential trade-off between centralized direction of the economy and a society hospitable to innovation. To hear these authors tell it, no such trade-off exists, and most of the innovation that we have in a capitalist society is due to government intervention.
This claim is stated ike a mantra rather than argued for. Perhaps it couldn’t be otherwise.