WORTH THINKING ABOUT
David Rotman posts (12 October) HERE
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.
Despite healthy corporate earnings, an employment rate that has slowly rebounded since the financial crisis of 2008, and the outpouring of high-tech distractions from Silicon Valley, many people have an aching sense that there is something deeply wrong with the economy. Slow productivity growth is stunting their financial opportunities; high levels of income inequality in the United States and Europe are fueling public outrage and frustration in those left behind, leading to unprecedentedly angry politics; and yet despite the obvious symptoms, economists and other policy makers have been largely befuddled in explaining the causes and, even more important, the cures for these problems.
That’s the starting point for Rethinking Capitalism. A series of essays by authors including Joseph Stiglitz, an economist at Columbia University who won a Nobel Prize in 2001, and Mariana Mazzucato, a professor of the economics of innovation at the University of Sussex and a rising voice in British politics, the book attempts to provide, as explained in its introduction, “a much better understanding of how modern capitalism works—and why in key ways it now doesn’t.” Together, the essays provide a compelling argument that we need more coherent and deliberate strategic planning in tackling our economic problems, especially in finding more effective ways to reduce greenhouse-gas emissions. …
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, “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 stimulus energy investments were “a bit of a disaster,” says Josh Lerner, a professor at Harvard Business School. “A lot of the problem was in the ways they were implemented. They violated all the rules of how these things should be done.” Not only did the government make large bets on a few companies, in effect picking winners, but it did so without clear rules and criteria for the choices. And, says Lerner, “the selection of the battery and solar companies was extremely opaque. A lot of it seemingly came down to if you had a former assistant secretary of energy doing the lobbying for you.” …
Still, Lerner is not dismissive of government interventions to support green-energy innovation. “You can make the case that the need is greater than ever. A well-designed program would potentially make a lot of sense at this point.” But, he says, “experience tells us there are more misses than hits” with such government interventions. And he suggests that such programs often fail because their creators are not familiar enough with any given technology and its business. “The decisions might seem plausible, but they turn out to be unproductive. The devil is in the details.” …
Even some of the stimulus’s greatest apparent successes now seem to be less effective than originally hoped. Steven Chu, a Nobel Prize–winning physicist, was named secretary of the Department of Energy in early 2009 and implemented many of the bill’s most ambitious efforts to boost energy R&D. It funded large increases in energy research, and Chu created a series of well-conceived centers and initiatives, including the Joint Center for Artificial Photosynthesis and ARPA-E, a program to support early-stage energy technologies. But in subsequent years, budget cutbacks and political pressure took their toll on these projects, which needed patience and consistent funding. As a result, ambitious research and technology initiatives are now ghosts of their once high-profile selves.
The outcome makes one wonder just how such policy initiatives, which include investments in research and engineering projects that require years to bear fruit, will ever survive the constantly changing political moods and government leadership. Creating a rigorous industrial policy to encourage green technologies is no doubt a worthwhile objective. Economists and the lessons from efforts like the stimulus bill can teach us how to design such policies to be robust and effective.
But won’t wise industrial policies also require wise politicians?