And secondly, there’s an alternative: she thinks the state is actually well placed to be a creator of value, and should be seen as the “investor of first resort” rather than the “lender of last resort”.
If the orthodoxy since the 1990s has been about the state steering not rowing, Mazzucato wants to see the state dip its oar back in. It’s very much the zeitgeist in Britain at the moment – even Prime Minister Theresa May, a staunch Conservative, espouses a hands-on industrial strategy.
Mazzucato’s critique of the finance industry means she will turn up in Sydney and Melbourne – courtesy of the Centre for Policy Development – at an interesting moment, with the Hayne inquiry having just given Australia’s banks a roasting.
And she’s not afraid to join in. “Deregulation has allowed the financial sector to become obsessed with itself,” she says.
“Is the finance sector contributing to developing high-quality, competitively costed goods and services, or is it just engaging in speculative activity? Is the financial sector doing anything other than recycling money from one area to another?”
She wants economists to ask harder questions about financial services. Why are “unproductive” net interest payments counted towards GDP (a practice that began in the 1970s, she says)? Do venture capitalists routinely take long-term risks, or do they arrive decades after publicly funded research has quietly done all the really risky work? Is the finance sector really funding and driving cutting-edge innovation, beyond the finance sector itself? Are share buybacks a productive use of capital?
“We need to look at what hedge funds are actually doing for the economy, versus simply looking at what they’re charging and counting that in GDP,” she says
She is sceptical that the private sector, the supposedly risk-taking part of the economy, actually has the capacity or appetite to take a punt on “patient, long-term investment” in genuine, value-creating innovation.
But she’s a believer in the capacity of the public sector, which she thinks has the potential to be a strategic and smart investor.
Bringing the state back in
In Mazzucato’s model, the state sets clear long-term objectives or “missions”, aimed at tackling the economy’s big challenges or problems, and then invests in companies willing to deliver them – not “picking the winners” but “picking the willing”. And not “crowding out” private funds, but “crowding in”.
“A state can use the full power of investment, procurement, prizes, grants, to crowd in bottom-up experimentation and exploration. Not random spraying of funds at businesses, and not just involving SMEs – it’s any business that is willing to invest towards a public policy goal or target,” she says.
“Some countries have more patient finance, some countries have been able to steer investment in more long-term ways, some have public banks that are much more ambitious and then ‘crowd in’ the private sector.”
She name-checks China, Dubai, Singapore and Denmark. Only one of which is a Western democracy, it must be said. In Australia and its ilk, bureaucrats and their political masters tend to be risk averse, as every failure ends up a media headline. And surely the short-termism of the democratic political cycle risks turning such public-sector projects into an exercise in box-ticking or even pork-barrelling?
“There’s nothing in the DNA of a state that makes it more bureaucratic, less able to evaluate, less entrepreneurial, less smart,” she counters. “The way we set up our state structures will affect what actually happens.”
She suggests public sector agencies probably need more independence from their political masters, and more input from civil society. Neither of these suggestions is likely to be popular in Canberra’s ministerial suites – but they could well be weighed up during the current Thodey review of the Australian public service, according to Travers McLeod, chief executive at the Centre for Policy Development.
“Our research suggests there’s a growing gap – a staggering gap, really – in what the Australian public wants from government and what government is delivering,” he says.
“The Australian public service has to be rejuvenated so it can think big and play a full part in the great transformations that are upon us.”
Mazzucato’s institute has assembled a collection, or network, of public-sector agencies and is trying to learn lessons about how they were able to make strategic investments that weren’t beset by the usual dysfunction of politics and bureaucracy.
“In most countries, you’d never be able to take on a risk at that level – we’re asking them, what happened, how did you do it?”
But even if states can take risks, what sort of mission would they set? Her checklist includes tackling climate change, the challenge of healthcare and building a digital future.
The trouble is, sometimes innovation comes incrementally and without a clear end destination. Nobody set out to build social media, for example, or even imagined what it might become. But she says incrementalism can lead to less than optimal outcomes.
Looking at the case of social media and big tech, she says that the development process was not well governed. “There’s data that does emerge from everything we do. That data currently gets housed with the companies. Who decided that?” she asks.
“That doesn’t mean we should bash those companies ex-post – they could become part of this emerging platform-capitalism digital economy where we can find better ways of socialising the rewards. Because the risks are already socialised, and now it’s about the distribution of benefits.”
Besides meeting business and government leaders, Mazzucato will give public speeches in Sydney on Tuesday, December 11, and in Melbourne on Wednesday, December 13.