Yes, Government Creates Wealth

Economics has never accepted the idea that the public sector creates wealth. But it does—and acknowledging that can lead to sweeping change.

By Mariana Mazzucato

Tagged CapitalismEconomicsfederal governmentFree MarketsGDPGovernmentInequality

Excerpted from The Value of Everything: Making and Taking in the Global Economy by Mariana Mazzucato. Copyright © 2018. Available from PublicAffairs, an imprint of Perseus Books, LLC, a subsidiary of Hachette Book Group, Inc.

The January 2010 edition of The Economist was devoted to the dangers of big government. A large picture of a monster adorned the magazine’s cover. The editorial opined: “The rich world has a clear choice: learn from the mistakes of the past, or else watch Leviathan grow into a true monster.” In a more recent issue, dedicated to future technological revolutions, the magazine was explicit that government should stick to setting the rules of the game: Invest in basic goods like education and infrastructure, but then get out of the way so that revolutionary businesses can do their thing.

This, of course, is hardly a novel view. Throughout the history of economic thought, government has long been seen as necessary but unproductive, a spender and regulator, rather than a value creator. But government’s ability to produce value has been seriously underestimated, an error that has in effect enabled others to have a stronger claim on their wealth creation role.

It is hard to make the pitch for government, though, when the term “public value” doesn’t even currently exist in economics. There is of course the important concept of “public goods” in economics—goods whose production benefits everyone, and which hence require public provision since they are under-produced by the private sector. But the concept has also been used to hinder government activity (restricting specific areas in which it is okay for the public sector to tread) rather than help government think creatively about how it produces value in the economy.

The narrative that government is inefficient and its optimum role should be “limited” to avoid disrupting the market has proven extremely powerful. But this prevailing view of government is wrong; it is more the product of ideological bias than anything else. The stories told about government have undermined its confidence, limited the part it can play in shaping the economy, undervalued its contribution to national output, wrongly led to excessive privatization and outsourcing, ignored the case for the taxpayer sharing in the rewards of a collective—public—process of value creation, and enabled more value extraction. Yet these stories have become accepted as common sense—always a term to be treated circumspectly. We have become accustomed to much talk about the pros and cons of austerity. The debate about government, though, should not be about its size or its budget. The real question is what value government creates—because to ask about the role of government in the economy is inevitably to question its intrinsic value. But how do we measure the value of government activities?

Government Value in the History of Economic Thought

Economics emerged as a discipline in large part to assert the productive primacy of the private sector.

Starting with the French physiocrats in the mid-1700s, economists found that government was required for the orderly functioning of society and thus for setting conditions for the production of value. But in itself, government was not inherently productive; rather, it was a stabilizing background force. The physiocrats pleaded with King Louis XV to laissez-faire—not to micro-manage the economy by siphoning off as much gold as possible, and thereby upset the intricate mechanism by which value was really created—through productivity of the land, not by accumulating precious metal. According to Francois Quesnay’s Tableau Économique, the first modern description of how wealth is created, value produced in agriculture flowed through the economy. But government was absent, “unproductive.” As part of the ruling class, members of the government got a share of the value apportioned simply because they were in power.

Nevertheless, Quesnay knew, the Tableau did not work by itself. There was something to be “governed.” Quesnay argued that the wealth of the nation could be upheld only through “proper management by the general administration”—what we would call “government regulation.” He thought that free competition would best benefit the economy—but to achieve this, far from excluding government, he favored an activist state that would break monopolies and establish the institutional conditions necessary for competition and free trade to flourish and value creation to thrive.

Adam Smith, meanwhile, devoted the fifth book of his 1776 work The Wealth of Nations, which is generally considered to have launched the era of classical economics, to the role of government in the economy. His aim was not only to explain the prosperity of the nation, but also “to supply the state or commonwealth with a revenue sufficient for the public services.” Like Quesnay, Smith believed the state was necessary. Indeed, he was convinced that national wealth could only be increased through division of labor in “a well-governed society,” in which he singled out three crucial functions of government: the military, the judiciary, and other public services such as provision of infrastructure. These are public goods—producers cannot exclude anyone from consuming them. For Smith, such public goods had to be paid for by the state; some sort of taxation was therefore necessary.

David Ricardo was perhaps the most anti-government of the classical economists. Although the title of his The Principles of Political Economy and Taxation contains a key activity of government (taxation), he never considered how taxation could allow government spending to encourage production and hence value creation. For Ricardo, taxes are the “portion of the produce of land and labor, placed at the disposal of government” to spend on areas such as education. If these expenditures are too high, he writes, the capital of the country is diminished, and “distress and ruin will follow.” Ricardo never asks, as Smith did, whether some taxes are necessary to help capitalists carry out production. He assumes infrastructure—the judiciary and so on—as a given. In effect, Ricardo narrows the production of economic value strictly to the private sphere. Admiring Ricardo’s rigorous analytical arguments, in comparison with Smith’s more fluid and interdisciplinary philosophical and political approach, economists followed him and excluded government from the productive sector.

Karl Marx’s view of government, meanwhile, derived from his materialist view of history, whereby the organization of society (including government structures) reflects the economic system (which he called the mode of production) and the underlying social relations: the interaction between classes. So, in his view, under the capitalist mode of production—based on surplus value generated from exploitation of labor—government and law reflected the needs of capitalists. Marx ridiculed some followers of Smith and Ricardo for haranguing state officials as “parasites on the actual producers,” realizing that they were after all necessary to support the capitalist system.

Nevertheless, Marx, like Smith before him, while stressing the necessity of some functions of the state, placed state officials in the category of unproductive laborers outside the production boundary. The capitalist class had an interest in maintaining the state in a position strong enough to guarantee the rule of law and advance their class interests—but nothing more than that.

The neoclassical economists who followed Marx but preceded Keynes did not depart from their predecessors’ view that government was necessary but unproductive. The idea of marginal utility, which was their great innovation, locates value in the price of any transaction that takes place freely in the market. According to this perspective, government produces nothing: It cannot create value. And government’s main source of income is taxes, which are a transfer of existing value created in the private sector.

The immensely influential Alfred Marshall was quite nuanced in his discussion of economic life in his 1890 Principles of Economics, but he still recommended that economics should avoid “as far as possible” the discussion of matters associated with government. He believed that government interference in, or regulation of, the market would often happen in response to attempts by vested interests to rig the market in their favor (i.e. government would be “captured” by such interests)—thus only hurting a particular competitor rather than benefiting society as a whole.

Keynes and Counter-Cyclical Government

To the humble citizen, however, it might not be so obvious that government does not create value. We have seen three ways in which it does so: bailing out the banks after the meltdown; investing in infrastructure, education, and basic science; and funding radical, innovative technologies that are transforming our lives.

The crucial point is that many of these activities involve taking risks and investing—exactly what austerity doesn’t do—and in so doing they create value. But that value is not easily visible, for the simple reason that much of it goes into the pockets of the private sector. One man at least partly understood this problem: John Maynard Keynes.

When in 1929 the global economic crisis struck, recovery seemed elusive. The Great Depression shattered the idea of unbounded economic progress because, contrary to the prevailing theoretical consensus, the economy did not recover by itself. Keynes’s explanation for this was a radical departure from the conventional wisdom of the time. Markets, he claimed, are inherently unstable and, in a recession, may remain “in a chronic condition of sub-normal activity for a considerable period without any marked tendency, either towards recovery or towards complete collapse.” In these circumstances, he stressed, the role of government is crucial: it is the “spender of last resort.”

Let’s remind ourselves that Keynes was concerned in his General Theory (1936) to explain how an economy might find itself in a state of “involuntary unemployment” due to insufficient demand—that is, workers who wanted work would not be able to find it. This, he argued, would produce a low level of GDP, compared to a situation in which the economy would be running at full capacity (and full employment). Neoclassical economic theory is ill suited to explain this situation because it assumes that people choose what they prefer, including how much labor they supply to the market at a given price (the wage), and that the market makes sure to sort things out so that everyone gets the maximum utility out of it. In such a view, unemployment becomes voluntary.

Keynes disposed of the assumption that supply creates its own demand. He argued instead that producers’ expectations of demand and consumption determine their investment, and consequently the employment and production that follow from it; therefore, low expectations could lead to underemployment. This he called the “principle of effective demand”: Investment can fall as a result of expectations or bets on the future—and we know, not least from the 2008 financial crisis, that such bets can go horribly wrong.

On the back of this theory, Keynes proposed a new role for government. When the private sector cuts production in times of downbeat expectations about demand, he argued, government could intervene positively, increasing demand through additional spending, which in turn would lead to more positive expectations of future consumption and induce the private sector to invest, with higher GDP as a result.

In Keynes’s macroeconomics, therefore, government creates value in that it allows the economy to produce more goods and services than it would without government involvement. This was a pivotal shift in the way we regard government’s role in the economy. For Keynes, government was in fact essential because it could create value by reviving demand—precisely when demand might be low, as in recessions or depressions, or when business confidence is low.

Of course, government would have to borrow to finance this spending, which means bigger government debt in a recessionary economy. But higher debt is a result of a crisis, not its cause. Keynes argued that this increased debt should not overly worry the government. Once the recovery was under way, the need for big deficits would pass and the debt could be paid off.

Keynes’s concept of a deficit-led recovery quickly won over governments. It was applied most intensively at the end of the 1930s to stimulate post-Depression growth, and at the beginning of the 1940s as wartime spending. Spreading rapidly after World War II, Keynes’s ideas were widely credited with generating the unprecedented prosperity of the three post-war decades—the trente glorieuses. Toward the end of the twentieth century, Keynes’s ideas earned him a place in Time magazine’s list of the 100 most important people of the century: “His radical idea that governments should spend money they don’t have may have saved capitalism.” As it turned out, these words were prophetic. Some 80 years after the publication of the General Theory, in the wake of the financial crisis, governments around the world introduced stimulus packages: a move that owed much to Keynes.

According to Quesnay’s Tableau Économique, an early description of wealth creation, agriculture produced value, but government was unproductive.

In the end, however, Keynes only went part of the way. He changed our thinking about how government can create value in the bad times, through counter-cyclical policies; but he, and his followers, had much less to say about how it can do so in good times as well. Even as Keynesianism and the post-war boom were at their height, dissenting voices could be heard. With great ingenuity, the American Paul Samuelson—one of the most influential economists of the second half of the twentieth century, a professor at the Massachusetts Institute of Technology and the first American to win the Nobel Prize in Economics—attempted to prove that neoclassical theory could explain how the economy behaved in normal times, except when recessionary periods made monetary policy have little effect: i.e., when increasing the money supply does not lower interest rates and only adds to idle balances rather than spurring growth (what is known as the “liquidity trap”). In essence, Samuelson argued that in normal economic times there was little need for governments to try to manage the economy along Keynesian lines, and that government intervention in these cases (e.g. aimed at increasing employment) would only lead to higher inflation.

In the 1970s, inflation began to increase, opening the way for the monetarists, led by Milton Friedman. A libertarian, Friedman rejected the idea that government spending is beneficial, arguing that it most likely leads to inflation, ignoring that this assumes that the economy is already operating at full capacity so that any extra demand (stimulated by government) would result in higher prices. Keynes’s whole point was that the economy would often be working at under-utilized capacity. Yet for Friedman, what mattered was controlling the quantity of money in the economy. The “new classicals” also challenged Keynes by arguing that government spending was useless and only crowded out private investment. According to them, an increase in the public deficit raises the rate of interest (due to the effect of issuing bonds on interest rates), which, in turn, decreases the amount of private investment. For these reasons, government’s role should be restricted to incentivizing individual producers and workers to supply more output and labor—for example, by cutting taxes.

The new classicals, however, misunderstood how interest rates affect investment. First, interest rates are not a market phenomenon determined by supply and demand. Rather, they are set and controlled by the central bank through monetary policy, and an increase in government expenditure financed by the deficit does not raise the interest rate. Second, lower interest rates do not necessarily lead to more investment, since firms tend to be less sensitive to interest rates and more sensitive to expectations of where future growth opportunities lie. And it is precisely these opportunities that are shaped by active government investment.

Government in the National Accounts

Now that we’ve been through the history, let’s turn to the question of how economics measures the worth of what government does. The national accounts—the standard measures of national output, expenditure, income, and so on—fail to capture the full amount of this government value added and have four major flawed assumptions. First of all, national accounts regard most of government value added only as costs, mainly pay to government employees; in other words, government activity lacks an operating surplus, which would increase its value added. Let’s compare it with the private sector: The share of pay in private-sector value added, on the other hand, is rarely above 70 percent. On that basis, you could say that government value added is on average only 70 percent of what it should be.

Second, the return on investment by government is assumed to be zero; by this logic, it does not earn a surplus. If it were more than zero it would show up as operating surplus. The United States did not officially separate public current expenditures (e.g. costs to run the everyday business of government, such as civil servants’ salaries) and capital expenditure (e.g. to fund new infrastructure) until the 1990s, which strengthened accountants’ impression that the government only spent money.

But of course vital government investments abound: Obvious examples include infrastructure projects like the federal interstate highway system in the United States or motorways in the UK. It makes no sense simply to assume that the return on enormous government investments is zero, when similar investments by the private sector do produce a return. Moreover, it is perfectly possible to estimate a return. One way of doing this is to assume a market rate of return such as the yield on municipal bonds—the overall return on bonds issued by cities. The crucial point here is that pronouncing a zero government return on investment is a political choice, not a scientific inevitability.

Third, to assume that the value of government output equals the value of input means that government activities cannot increase the economy’s productivity in any meaningful way. If the output of government is defined simply as what it costs to do something, then an increase in output will always require the same increase in inputs. In 1998, the UK’s Office for National Statistics began to measure public-sector output by deploying different physical indicators, for example the number of people benefiting from public services (in areas such as health, education, and social security) for every pound spent. In 2005, the British economist Sir Anthony Atkinson improved on this by introducing important changes to the quantity measures of each public service, along with elaborating on some quality measures for health and education. Intriguingly, when these changes were applied, it was found that productivity fell on average by 0.3 percent per year between 1998 and 2008. Productivity increased significantly only after the financial crisis. But the increase was the result of fewer inputs, not improved outputs. Austerity aimed to cut back the inputs (government spending) while producing the “same” outputs. It is hardly surprising that this kind of productivity “improvement” does not result in better services—we only have to look at the long NHS waiting times to see this.

Fourth, governments often own productive businesses such as railways, postal services, or energy providers. But, by accounting convention, state-owned enterprises that sell products at market prices are counted as private enterprises in terms of value added: Public railways are part of the transport sector, not the government sector. So if the state-owned railway makes huge sales and profits (high value added), it boosts the transport sector value added, even if that sector is perhaps only successful because of state ownership. Only government-owned entities that don’t sell at market prices are by definition included in the government sector. In short, from the perspective of national accounting, you don’t count as government if you are doing market production. So, in the case of free public education, while increasing the number of teachers might add to GDP (because they are paid), the value they actually produce does not increase GDP. All of which means that government can only increase its value added with non-market production, thereby obscuring the true importance of government in the economy: value that government businesses do add is not shown in official statistics, nor is the value that education or health generate.

These rules have been made in order to find a straightforward way to account for economic activity. Yet, when you consider the combined weaknesses of accounting conventions, you can’t help but notice that, while every effort has been made to depict finance as productive, the opposite seems to be true for government. Simply because of the way that productivity is defined, the fact that government expenditure is higher than value added reinforces the widely held idea that “unproductive” government has to take before it can spend. This thinking by definition restricts how much government can influence the course of the economy. It underpins the theory of austerity. And it is a consequence of fables about government told over several centuries.

Multiplying Value

National accounts do not consider the interaction between public expenditure and other components of output, consumption, investment, and net exports.

In order to understand this interconnection, economists estimate the value of what is called the “multiplier.” The multiplier was an important reason for Keynes’s positive view of government. Developed by Keynes’s Cambridge student and colleague Richard Kahn, and used by Keynes himself, it formalized the idea that government spending would stimulate the economy. Quite literally: Every pound or dollar that the government spent would be multiplied, because the demand it created would lead to several rounds of additional spending. Importantly, the Keynesian approach also quantified the size of the multiplier, so policymakers—who quickly took up the idea—could support their arguments for stimulus spending with hard numbers.

More precisely, the multiplier refers to the effect that an increase in expenditure (demand) has on total production. Its significance lies in the fact that, in the view of Keynes and Kahn, government spending benefits the economy way beyond the amount of demand that spending generates. The company from which the government purchases its additional goods—let’s say concrete for motorways—pays incomes to its workers, who go out and spend those extra incomes on new goods—let’s say on wide-screen TVs—that another company produces, and that company’s employees have more to spend—let’s say on vacations in Europe—and so it goes on multiplying through the economy. Additional government demand creates several subsequent rounds of spending, multiplying the original amount spent. Government spending in recession was seen as especially powerful in getting the economy back on track, since its effect on overall output was much greater than the actual amount invested.

This powerful and important idea has inevitably attracted controversy, particularly over the size of the multiplier—that is, how much £1 or $1 of government spending generates in the economy. The sizeable literature on the subject can be divided into two schools of thought: the new classical and the Keynesian.

According to the new classicals—the proponents of fiscal austerity measures—the multiplier’s value is less than one, or even negative. They argue that it crowds out private investment. In the case of a negative multiplier, they assume that public expenditure destroys value, since any increase in public expenditure is more than offset by a decrease in the other components of GDP: consumption, investment, and net exports.

However, the Keynesian view has been revived recently; it has been shown that austerity measures implemented in, for example, southern European countries have led to a fall in total output and consequently a rise in unemployment, rather than GDP growth and increased employment. The poor economic performance of these countries calls into question the austerity prescription of the new classical authors. Recent IMF studies have also suggested that government spending has a positive effect on output and that the value of the multiplier is greater than one—to be precise, 1.5. In short, more credence is being given to the view that government expenditure does not destroy private value but can create value added by stimulating private investment and consumption.

Regaining Confidence and Setting Missions

Keynes argued the need for governments to think big—to have a sense of mission, not merely to replicate the private sector but to achieve something fundamentally different from it. It is wrong to interpret him as believing that what is needed from policy is to simply fix what the private sector does not do, or does badly, or at best invest counter-cyclically. After the Great Depression, he claimed that even paying men simply to dig ditches and fill them up again could revive the economy—but his work inspired Franklin Roosevelt to be more ambitious than just advocating what today would be called shovel-ready projects (easy infrastructure). The New Deal included creative activities under the Works Progress Administration, the Civilian Conservation Corps, and the National Youth Administration. Equally, it is not enough to create money in the economy through quantitative easing; what is needed is the creation of new opportunities for investment and growth—infrastructure and finance must be embedded within the greater systemic plans for change.

President John F. Kennedy, who hoped to send the first U.S. astronaut to the moon, used bold language when talking about the need for government to be mission-oriented. In a 1962 speech to Rice University, he said:

We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.

In other words, it is a government’s duty to think big and confront difficulties. Replacing these bold ambitions with financial rigid cost-benefit analysis has dismissed the public value that governments can create. Civil servants are told to step back, minimize costs, think like the private sector and be fearful of making mistakes. Government departments are ordered to cut costs, inevitably also diminishing the skills and capacity of the public structures in question (departments, agencies, etc.). When government stops investing in its own capacity, it becomes more unsure of itself, less able, and the probability of failure increases. It becomes harder to justify the existence of a particular government function, leading to further cuts or eventually to privatization. This lack of belief in government thereby becomes a self-fulfilling prophecy: When we don’t believe in government’s ability to create value, it eventually cannot do so. And, when it does create value, such value is treated as a private-sector success or goes unnoticed.

What is required is a new and deeper understanding of public value, an expression found in philosophy but almost lost in today’s economics.

Government already has developed the key infrastructure and technology upon which twentieth-century capitalism was built, even though it has received inadequate recognition for things like the microchip and global positioning technology. Of course, the story is not always positive. But doing hard things means being willing to explore, experiment, make mistakes and to learn from those mistakes.

Once we recognize that the state is not just a spender but an investor and risk taker, it becomes only sensible to ensure that policy leads to the socialization not only of risks but also of rewards. A better realignment between risks and rewards, across public and private actors, can turn smart, innovation-led growth into inclusive growth. As we have seen, neoclassical value theory for the most part disregards the value created by government, such as an educated workforce, human capital, and the technology that ends up in our smart products. Government is ignored in microeconomics—the study of production—except in regulating the prices of inputs and outputs. It plays a bigger part in macroeconomics, which deals with the economy as a whole, but at best as a redistributor of the wealth created by companies and an investor in the “enabling” conditions companies need—infrastructure, education, skills, and so on.

The marginal theory has fostered the idea that collectively produced value derives from individual contributions. Yet, as the American economist George Akerlof, who shared the Nobel Prize in Economics in 2001, said: “Our marginal products are not ours alone”—they are the fruits of a cumulative process of learning and investment. Collective value creation entails a risk-taking public sector—and yet the usual relationship between risks and rewards, as taught in economics classes, does not seem to apply. So the crucial question is not just about accounting for government value but also rewarding it: How should rewards from investment be divided between the public and private sectors?

As Robert Solow showed, most of the gains in productivity of the first half of the twentieth century can be attributed not to labor and capital but to technological change. And this is due not only to improved education and infrastructure, but also to the collective efforts behind some of the most radical technical changes where the public sector has historically taken a lead role—“the entrepreneurial state.” But the socialization of risks has not been accompanied by the socialization of rewards. We must change that.

From Public Goods to Public Value

It is especially important that we rethink the terminology with which we describe government. Portraying government as a more active value creator—investing, not just spending, and entitled to earn a rate of return—can eventually modify how it is regarded and how it behaves. All too often, governments also see themselves solely as facilitators of a market system, as opposed to co-creators of wealth and markets. And, ironically, this produces exactly the type of government that the critics like to bash: weak and apparently “business-friendly,” but open to capture and corruption, privatizing parts of the economy that should be creating public and collective goods.

A new discourse on value, then, should not simply reverse the preference for the private sector over the public. What is required is a new and deeper understanding of public value, an expression found in philosophy but almost lost in today’s economics. This value is not created exclusively inside or outside a private-sector market, but rather by a whole society; it is also a goal that can be used to shape markets. Once this notion of “public value” is understood and accepted, reappraisals are urgently required—of the idea of public and private and of the nature of value itself.

The idea of “public value” is broader than the currently more popular term “public good.” The latter phrase tends to be used in a negative way, to limit the conception of what governments are allowed to do, rather than to stimulate the imagination to find the best ways to confront the challenges of the future. So the state-owned BBC is thought to serve the public good when it makes documentaries about giraffes in Africa but is questioned if it makes soap operas or talk shows. State agencies can often fund basic science due to the positive externalities, but not downstream applications. Public banks can provide counter-cyclical lending, but they cannot direct their lending to socially valuable areas like the green economy. These arbitrary distinctions reflect a narrow view of the economy, which often results in a public actor being accused of “crowding out” a private one—or, worse still, delving into the dangerous waters of “picking winners”: The state is only supposed to do what the private sector does not want to do, rather than have its own vision of a desirable and achievable future.

Public institutions can reclaim their rightful role as servants of the common good. They must think big and play a full part in the great transformations to come, squaring up to the issues of climate change, aging populations, and the need for twenty-first-century infrastructure and innovation. They must get over the self-fulfilling fear of failure and realize that experimentation and trial and error (and error and error) are part of the learning process. With confidence and responsibility, they can expect success, and in so doing will recruit and retain top-quality employees. They can change the discourse. Instead of de-risking projects, there will be risk-sharing—and reward-sharing.

It might also make sense for private enterprises—which benefit from different types of public investments and subsidies—in return to engage in a fair share of activities that are not immediately profitable. There is much to be learned from the history of Bell Labs, which was born out of the U.S. government’s demand that the monopolist AT&T invest its profits rather than hoard cash, as is so common today. Bell Labs invested in areas that its managers and its government contractors thought could create the greatest possible public value. Its remit went well beyond any narrow definition of telecommunications. The partnership of purely government-funded research and work co-financed by Bell Labs and agencies like DARPA led to phenomenal tangible results—many found in our handbags and pockets today.

A bold view of the role of public policy also requires a change in the metrics used for evaluation of those policies. Today’s typical static cost-benefit analysis is inadequate for decisions that will inevitably have many indirect consequences. A much more dynamic analysis, one that can capture more of the market-shaping process, is urgently required. For example, any measure of the success of a government project to organize a charging infrastructure for electric cars must try to take into account the opportunities offered for further technical development, the reduction of pollution, and the political and ecological gains of lessening reliance on non-renewable oil from countries with objectionable governments.

Today, these ways of thinking could significantly benefit many crucial institutions that are neither fully private nor fully public. Universities could proudly promote the pursuit of knowledge, without having to worry about generating immediately profitable patents and spin-off companies. Medical research institutes could expect strong funding, with much less pressure to fight for attention. Think tanks could shake off the taint of lobbying, once they present their work as being supportive of common values. And cooperative, mutual, and other not-for-profit enterprises could flourish without having to decide which side of the great private–public divide they are really on.

In the new discourse, there would certainly be no more talk of the public sector interfering with or rescuing the private sector. Instead, it would be widely accepted that the two sectors, and all the institutions in between, nourish and reinforce each other in pursuit of the common goal of economic value creation. The sectors’ interactions would be less marked by hostility, and more infused with mutual respect.

This is no easy task, but it is one that will not even begin without a new positioning of all actors as being central to the collective value creation process.

In sum, it is only by thinking big and differently that government can create value—and hope.

Read more about CapitalismEconomicsfederal governmentFree MarketsGDPGovernmentInequality

Mariana Mazzucato is director of the Institute for Innovation & Public Purpose, University College London (UCL) and holds the Chair in the Economics of Innovation and Public Value.

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