Economic debates are often presented as black-and-white battles between conservatives calling for smaller government, and progressives arguing for more public spending. But this simplification overlooks the way that markets are co-created by different actors. As economic historian Karl Polanyi wrote in his classic book The Great Transformation, "free markets" are themselves products of state intervention. They were forced into existence.
And yet, while many in the private sector consider themselves "wealth creators" and "value creators," policymakers and civil servants have come to believe that their economic role is more passive. For many governments today, the "state" is at best a market fixer, and this notion of fixing and mending has then translated into other pretty passive words like the role of the state in simply "enabling" or "facilitating" the value creators and business.
One reason for this is that in mainstream economic theory, it basically holds that governments should only intervene when there is a clear market failure. In this view, the state should ensure a level playing field; fund things like public goods, such as infrastructure and defense; and devise mechanisms to mitigate negative externalities such as pollution. And then get out of the way, to allow the real wealth creators to actually produce value. The state might later step back in to redistribute that value that was created in business via taxation.
And when states exceed this mandate, they are accused of creating market distortions. The emergence of "new public management" theory in the 1980s led civil servants to believe that they should take up as little space as possible, because they might get easily captured or corrupted. And this actually led them to fear government failures even more than market failures.
While this thinking has caused governments to adopt some private-sector management tactics, it has also undermined confidence in public institutions and undermined governments' ability to confront modern challenges.
It wasn't always this way. In the decades after World War II, governments took risks and encouraged innovation, and were proud to do so. Many agencies were well funded and attracted top talent. In the United States, for example, collaboration between NASA and DARPA, the Defense Advanced Research Projects Agency, actually created the Internet. While in the UK, a BBC literary project helped drive innovation in computer processors through dynamic use of procurement.
Today, however, many mission-oriented institutions have been weakened, and it's become easier for politicians to call for downsizing and outsourcing than to increase budgets and defend public-sector risk taking.
But this is shortsighted. Modern government does not mean simply redistributing existing wealth or addressing issues affecting the provision of public goods. It also means co-creating value in ambitious ways in different areas. When mission-driven public-sector actors collaborate to tackle problems, they co-create new markets that affect both the rate of growth and its direction.
Furthermore, understanding the co-creation of value leads us to question the way that the term value itself is used in areas like corporate governance. We have been sold on the notion of shareholder value, which assumes that only shareholders take big risks. But is that true? And in the pharmaceutical industry, value-based pricing is used as an excuse to charge extremely high prices that the market can bear, ignoring the role of public investment in creating that value, like the over $30 billion that the National Institutes of Health spend every year. But is that right?
Only by understanding markets as outcomes of the investments and activities of different actors can we move beyond the dogma and start asking more granular, interesting, and dynamic questions, like "what forms of public organizations will be best able to experiment and explore in areas relevant to grand global challenges around health care and sustainable energy?" As John Maynard Keynes argued in 1926 - sustained economic growth requires long-term government planning. But how to do that planning in innovative, creative, and dynamic ways, co-shaping the opportunities of the future, is the question we have ahead of us. And that means that policymakers have to start thinking big again.
Mariana Mazzucato, Professor in the Economics of Innovation and Public Value and Director of the Institute for Innovation and Public Purpose at University College London, is the author of The Value of Everything: Making and Taking in the Global Economy.
Copyright: Project Syndicate, 2018.
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