We have socialised the risk of innovation but privatised the rewards

http://blogs.lse.ac.uk/politicsandpolicy/5-minutes-with-mariana-mazzucato/

by dil8 • 11 years ago

212 125 11 years ago

blogs.lse.ac.uk

gcb02• 11 years ago

i use that exact same phrase every time anyone tries to include me on a discussion about tipping. (and then promptly leave said discussion)

jordonwii• 11 years ago

Care to elaborate? I don't quite follow.

gcb02• 11 years ago

restaurant owner pass the same risk of failure to the servers (no client, no sales, no food on your plate end of month) in exchange of no extra benefit (if restaurant goes really well, they will probably have to add more servers, keeping the larger profit for owner, but cutting your tips in half, hence, server has no benefit if restaurant is an overnight success)

cwyers• 11 years ago

It seems... far less obvious to me what that means in the context of tipping than it does when the author uses it.

brandonmenc2• 11 years ago

When Google received funding for its algorithm from the National Science Foundation (NSF), is it right that after it earned billions nothing went back to the NSF

Serious mental gymnastics.

Page and Brin doing research with NSF grants isn't even remotely the same thing as Google, their future company, getting a check directly from the government.

Page and Brin produced publicly available research with NSF money. They started a company based on that public research. That company created untold billions of dollars of value out of thin air. Taxes are paid out of those new dollars, some of which go to fund the NSF.

This is exactly how it's supposed to work.

spikels4• 11 years ago

The NSF grant played a minor role but the OP is exagerating it's importance to support her political viewpoint of how the world should be run. More background here:

http://www.politifact.com/georgia/statements/2012/jul/09/bar...

Also the $504,000 SBIC investment in Apple actually returned $44 million apparently to it's sponsoring bank. In fact the program is exactly what the author is against as the frequent losses end up being covered by the government. More here:

http://articles.latimes.com/1990-09-25/business/fi-1303_1_sm...

nmridul• 11 years ago

What if Apple had failed ? This is what she is trying to say. The risk is taken by the public. And the rewards mainly goes to the private entities.

cafebeen7• 11 years ago

Then why does Stanford own the PageRank patent instead of Page and Brin?

brandonmenc2• 11 years ago

I'm not sure what you're getting at. Could you clarify?

spikels4• 11 years ago

Stanford did end up owning a big chunk of Google because of its role in developing the key technology

http://www.matr.net/article-11816.html

tessierashpool4• 11 years ago

Stanford is a private institution.

hcarvalhoalves2• 11 years ago

Not to mention, what actually makes money is AdWords...

hkmurakami• 11 years ago

Without search quality, adwords would be nothing.

frownie• 11 years ago

> Taxes are paid out of those new dollars

Interestingly, here in Belgium, the press often states that Google pay his taxes as requested by the law. And that Google have some very expert accountant who read the law in suach a way that those taxes are close to zero.

I'm afraid Google doesn't pay his taxes like we, the tax payers, think it should...

Of course, that's totally proof-less, but well, I've heard that quite often (cf. intérêts notionnels)...

ErikBjare2• 11 years ago

Since when is Google a he? Perhaps it is some quirk of your language that makes the direct translation take masculine form?

Edit: Sorry if this came off as rude, was not intended.

Perseids• 11 years ago

Google UK Ltd, and other subsidiaries across mainland Europe, pay little tax because they are designated as providers of marketing services to Google Ireland Ltd, the Dublin-based subsidiary whose name appears on invoices to most non-U.S. clients.
Google declares little profit in Ireland because the unit there sends almost all of the profit earned from the non-U.S. clients to the Bermudan affiliate, in the form of licence fees for the use of Google intellectual property.

http://www.huffingtonpost.com/2013/09/30/google-taxes-overse...

Google Inc. avoided about $2 billion in worldwide income taxes in 2011 by shifting $9.8 billion in revenues into a Bermuda shell company, almost double the total from three years before, filings show.

http://www.bloomberg.com/news/articles/2012-12-10/google-rev...

roel_v• 11 years ago

That's orthogonal to this discussion. Google never received Belgian research funding.

(I'm Belgian)

crpatino2• 11 years ago

I'm afraid Google doesn't pay his taxes like we, the tax payers, think it should...

I am sure the same could be said of every company beyond certain size (200-300 employees comes to mind, but this is just a wild guess), regardless of industry.

This is even the same for individuals. If you try to file taxes yourself (or have your employer do it for you, if possible), you will end up paying a higher rate than if you had taken the good sense of forking $100USD to some accountant to give you some basic advice. Of course this only works if you are wealthy enough that those $100US are marginal compared with what you would end up paying in taxes using the DIY approach.

tessierashpool4• 11 years ago

You left out the part where Stanford patented the results of the research, thereby monopolizing it.

Likewise, Google did not create untold billions "out of thin air." Google created untold billions by leveraging NSF-funded research, and the patent which Stanford licensed to them, in the midst of an explosion of new opportunities which was created when the NSF lifted commercial restrictions on the use of the Internet (which had also been built with public funding).

I know Americans like to imagine that even acknowledging the public sector exists is the same thing as surrendering to the USSR, but the USSR doesn't even exist any more, and there's actually a lot of merit in being aware of history and being honest about how economies work.

Just like putting a man on the moon, the Internet was a massive public research project which succeeded wildly. As OP says, America likes to tell a "hands off the market" story about how its government relates to its industries, but that story doesn't match the reality.

therobot242• 11 years ago

Likewise, Google did not create untold billions "out of thin air." Google created untold billions by leveraging NSF-funded research, and the patent which Stanford licensed to them, in the midst of an explosion of new opportunities which was created when the NSF lifted commercial restrictions on the use of the Internet (which had also been built with public funding).

You say it as if it was easy. Like they had it handed to them. Clearly a lot of tumblers fell into place, but that doesn't mean the NSF is due a share of the profits. Would you claim Harvard is due a share of Microsoft if it gave Bill Gates a scholarship?

I know Americans like to imagine that even acknowledging the public sector exists is the same thing as surrendering to the USSR, but the USSR doesn't even exist any more, and there's actually a lot of merit in being aware of history and being honest about how economies work.

What are you getting at? I have no idea what you're trying to say here.

api• 11 years ago

The point about taxes is important. When a company like Google makes a lot of money, a lot of taxation occurs. This allows the government to essentially capture an ROI on that research.

Given current "financial technology," government is indeed the only entity that can make R&D investments that are both high-risk and broad-payoff -- broad-payoff meaning that they pay off unpredictably and often across the entire economy. ROI is captured through economy-wide growth via taxation. Only governments can do this because there is currently no private financial instrument that can securitize that kind of investment or capture its upside.

Is/was the public research that led to PageRank patented? If that were the case, it's the only thing I would disagree with. Public research should not be patented, or if it is it should be made available to all domestic (US tax paying) companies and individuals royalty-free. It'd be appropriate to charge foreign licensees fees, as they are not paying into the US R&D fund, but the impracticality of that makes such a national patent licensing scheme kind of dubious.

Edit: yes -- so my comments above should be tempered by this: https://encrypted.google.com/patents/US6285999

nl5• 11 years ago

The title of this piece is terrible, and detracts from what is actually a thoughtful discussion.

Mazzucato points out how the government is actually good at funding very high risk work, with a low chance of pay off (think DARPA research in the US).

She does say the sentence used in the title, but the context is very important:

What this means is that we have socialized the risk of innovation but privatised the rewards. This dynamic is one of the key drivers of increasing inequality. Because innovation today builds on innovation tomorrow, the ‘capture’ can be very large. This would not be the case if innovation were just a random walk. Policy makers must think very hard how to make value creation activities (done by all the collective actors in the innovation game) rewarded above value extraction activities (in this sense capital gains taxes are way too low). And since the booty from the latter can be very large, redirecting incentives and rewards towards the value creators is essential. The problem is that some of the ‘extractors’ like to sell themselves as the creators.

Her argument appears to be that public funds need to be directed into areas that have a chance of "industry transformation", which may create job or new (tax paying) industries in the country that funded them.

Here argument about public funding of Google and Apple is this:

For every Internet there are many Concordes or Solyndras. Yet this is also true for private venture capital (VC). But while private VC is then able to use the profits from the 1 out of 10 successes to fund the 9 losses, the state has not been allowed to reap a return. Economists think this will happen via tax (from the jobs created, and from the profits of the companies), yet so many of the companies that receive such benefits from state funding, bring their jobs elsewhere, and of course we know they also pay very little tax.

There is possibly a valid point here. Corporate tax minimisation by offshoring profits is a real challenge to the tax system.

I don't think she makes any real suggestion for how to solve the problem, though (Retaining a share of IP rights won't work, because companies can easily disassociate profits from the IP that generated them, meaning that any return-on-profits-generated scheme will fail. See Hollywood Accounting,[1] which does a similar thing in the film world)

[1] http://en.wikipedia.org/wiki/Hollywood_accounting

dmfdmf3• 11 years ago

The title of this piece is terrible...

I agree but not for the same reasons I am sure. This title is an old saw from the socialists and has been around for decades. The implicit conclusion is that to make things "fair" we should socialize risk AND reward. How convenient for the socialists. No. The discussion we should be having is; What is the proper function of government? What is your standard?

Her argument appears to be that public funds need to be directed into areas that have a chance of "industry transformation", which may create job or new (tax paying) industries in the country that funded them.

The end of this road is fascism or communism, take your pick but it doesn't really matter if you value freedom.

nl5• 11 years ago

I think you might have a useful point in there somewhere, but using overly emotive terms ('the socialists', fascism, communism and freedom) isn't useful.

Its worth pointing out that 'the end of the road' is an implication that the extreme end of a political system is a goal. It's not, and it is rare anyone would argue that a hybrid economic system isn't the most sensible.

ralmidani2• 11 years ago

The implicit conclusion is that to make things "fair" we should socialize risk AND reward. How convenient for the socialists.

Straw man. Fairness means:

public funding -> public benefits

private funding -> private benefits

adevine• 11 years ago

I think Fareed Zakaria makes a good argument from this article in 2011: http://www.washingtonpost.com/wp-dyn/content/article/2011/03... . Basically, the share of taxes that go to productive investment (like the Interstate Highway System, GPS, ARPANet, basic research, etc.) is shrinking compared to entitled consumption spending (Social Security, medicare). The current political system in the US makes it exceedingly difficult to either (a) increase government investment spending or (b) decrease entitlement spending.

nl5• 11 years ago

Precisely, and I think that is the point the author should have concentrated on. New approaches there are needed.

spikels4• 11 years ago

Mazzucato provides no real evidence the government is good at funding commercially viable innovation. If you look into the details the two examples she offers were more blind luck than thoughtful investment.

While it's easier to make the case for basic research the governments attempts to sponsor commercial innovation have almost always ended in failure or turned into subsidies for politically connected companies and industries. A good case study was the $600 Flat Panel Display Initative in the 1990s. It's a good bet something similar is currently happening in the various green initiatives.

She is actually correct about these programs socializing risk and privatizing reward. Stanford got the Google shares from research funded by NSF and Continental Illinois got the Apple shares from the SBIC investment guaranteed by SBA.*

However this is the one role government has a unique advantage. And this is a good thing - think NIH, NASA, NSF, etc but also pretty much every social safety net program. Of course she (being quite left) is actually making the case for increase government ownership of public companies or at least greater taxation and license fees.

*-You could argue the U.S. got some this back when that bank failed a few year later in the largest bank failure in US history - until WaMu surpassed it in 2008. Although the $44 million from Apple shares was insignificant compared to the billions in bankruptcy costs. BTW-The Continental Illinois failure is where "too big to fail" was coined.

proveanegative• 11 years ago

Mazzucato provides no real evidence the government is good at funding commercially viable innovation.

Without disagreeing with your point I have to point out that beyond basic research the government has also successfully provided infrastructure for commercial innovation with things like the Internet, GPS and nuclear power. It tends to accomplish this without really trying.

EliRivers2• 11 years ago

Mazzucato provides no real evidence the government is good at funding commercially viable innovation.

She does. Just not here. The piece is called "Five minutes with..."; her arguments that government funds commercially viable innovation are easily found.

I suppose the most obvious commercially viable innovation funded by governments (both directly and through various defence department funds) was computing.

nl5• 11 years ago

Mazzucato provides no real evidence the government is good at funding commercially viable innovation.

I don't think this is her point. Either way, I agree with you.

I also agree that private enterprise is much, much better at commercialising research.

I think her point is that basic research - which the governments are generally pretty good at funding - doesn't provide a good return on investment.

I have some sympathy with this argument, but at the same time I don't think she provides a viable solution for the problem.

As a specific example: DARPA kick-started the entire set driverless car technologies with their well-funded competitions in the early 2000s. This involved both prizes, and direct funding of robotics labs.

One can argue that this was done to seed a solution in the 20-year timeframe, and the fact that we'll probably see a decrease in combat deaths from IEDs in a future war in 10 years as driverless trucks come online is reward enough.

One can also argue that society should see some financial return on that - very risky - seed investment.

Both arguments have merit, and I remain unconvinced either way.

Quanticles• 11 years ago

"Economists think this will happen via tax (from the jobs created, and from the profits of the companies), yet so many of the companies that receive such benefits from state funding, bring their jobs elsewhere, and of course we know they also pay very little tax."

He makes it sound like the USA would be just as well off if big tech companies weren't here.

The US government is basically a ~15% shareholder in all US companies due to salary and other taxes. If they can invest in technology research and build more US companies, then the US government earns a net profit.

I would like to see a breakdown for a major technology company to see what percentage of their revenue goes to income tax withholding, and then see how much government funding went into helping that company come to life.

Edits:

1. Number adjustment

2. By "income tax witholding" I mean the income tax that the employees pay. If 50% of revenue goes to salaries, and 20% of salaries go to income tax witholding, then 10% of a company's revenue goes to income tax.

rtpg2• 11 years ago

remember that time GE paid basically 0% in taxes? the 30% number is only in theory (there is the salary breakdown but I don't think 30% is the number that ends up hitting)

swatow2• 11 years ago

I'm not an expert in taxation, but corporate taxes are just one piece of the pie. There is no way for employees to avoid income tax, and as far as I know, no way for US based shareholders to avoid paying capital gains/dividends taxes.

arjunnarayan• 11 years ago

GE paid 0% tax because the US govt decided to subsidize certain things that it wanted (mostly green energy related things), and implement that subsidy through the tax code via tax deductions and tax credits (because direct subsidies are politically unpalatable). GE promptly went and did exactly what the government wanted, which was invest in those nice expensive things, up to the point where all their taxes were wiped out.

If your beef is that the US govt shouldn't subsidize things via the tax code, then that's a separate issue. If your beef is that GE should pay nonzero taxes, then you should view it as "GE paid X% taxes, and then did things it did not want to do unsubsidized in order to earn back -X% taxes as a reward." In which case, GE did pay taxes. They just then took advantage of an opportunity to earn back those taxes in exchange for investing in green energy related things.

pc86• 11 years ago

The 30% number is also marginal, which is often forgotten by those arguing that corporations (or certain people) aren't paying enough taxes.

adaml_623• 11 years ago

Two assumptions you seem to be making: 1. That profits are paid out through salaries. They aren't. They are moved via clever financial mechanisms to large shareholders and as retained funds. This is why the existence of so many tax havens is a big problem. 2. That Mariana is a male. The person in that interview is quite clearly male.

roymurdock• 11 years ago

Do subsidized projects such as Tesla earn any returns for the government?

reagan83• 11 years ago

Yes, but with low margins. The $465m DOE loan extended to Tesla was repaid, almost a decade before the maturity date, with an effective interest rate of 2.6% (approx $12m).

philwelch3• 11 years ago

Presumably, there is also the public good of having more electric vehicles, which was the rationale for such subsidies in the first place.

DodgyEggplant• 11 years ago

Better title would be when the "modern capitalism is rewarding value extraction over value creation" argument. Think twitter, starting with "do good" argument attracting devs when they need them, then shutting them out later. Who benefits the value of the IPOS? the public?

anaolykarpov2• 11 years ago

I so very much hate socialism. The state, with the money it took from all of us through taxes is presented as a benefactor because it gives small amounts of those money back to research. And she wants the state to have more share from successful research.

The state, any state, is a very bad administrator of funds, because the so called state are basically a bunch of people spending other peoples money on things that they dont understand and they dont really care about. What they care about is building their own public image with those money in order to be reelected.

I'd feel much more confortable in having to pay lower taxes and let the private investors do the investment, because VCS actually care about how their money are spent.

robotresearcher4• 11 years ago

I'd feel less comfortable without NASA, NIH, and DARPA, since I have benefitted a great deal from the work they sponsored. I doubt very much I would have had those benefits so soon without these grossly inefficient agencies that have no idea what they are doing carelessly spending other people's money on creating the space age, the Internet age, and the age of genomics respectively.

I don't believe for a second that private investment would have done these earlier or better if the greedy government had stolen less tax money from you.

edit: downvotes yay! Please enjoy using the Internet to show your distain for giving credit for revolutionary federally-funded technology projects.

tsotha3• 11 years ago

Of the three, I think private investment would have done better than the first two. Even DARPA is notable for a handful of home runs that may have been just luck.

anaolykarpov2• 11 years ago

If it wasnt for the cold war and the space race, I really doubt that NASA would have ever been created. Should we seek for another cold war because its a medium in which some kind of innovation occur? So are regular wars? Should we demand our states to start wars because technology advances during those times?

dnautics3• 11 years ago

I'd feel less comfortable without NASA, NIH, and DARPA, since I have benefitted a great deal from the work they sponsored. I doubt very much I would have had those benefits so soon without these grossly inefficient agencies... I don't believe for a second that private investment would have done these earlier.

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” -Upton Sinclair

Interestingly, one of your examples, genomics, is exactly contradicted by Celera. At the time of inception the human genome project was slated to take 20 years! (We'd only be halfway done with it now). Say what you want about their idiotic and immoral business model - patenting and licensing human genes - the "private arm" of the human genomics project pushed for shotgun sequencing and got the genome sequenced in 3 years; and the hapmap shortly thereafter.

marknutter• 11 years ago

Would you feel less comfortable without the NSA? Or put another way, are you just cherry-picking the agencies you happen to like in order to make your point?

nostromo• 11 years ago

Have you ever read Thus Spoke Zarathustra? You might like this short chapter:

http://4umi.com/nietzsche/zarathustra/11

Frondo• 11 years ago

"a bunch of people spending other peoples money on things that they dont understand and they dont really care about"...

That sounds like it describes the purchasing department in any big corporation, or the got-the-job-through-nepotism nephew or cousin of the owner in a small business.

You know what they say, right? Capitalism works...in theory.

jsprogrammer• 11 years ago

Yep, the cognitive dissonance here is pretty strong.

What is a public corporation, but 'a bunch of people [C-level,VP-level,Manager-level] spending other people'[sic]s[shareholder's] money on things that they[shareholder's] don'[sic]t understand and they[shareholder's] don'[sic]t really care about[shareholders seem to only care about 'ROI' and/or 'ROE']'.

littletimmy• 11 years ago

I completely agree. Let's get rid of taxes, disband the military and the police.

We'll see who owns your "money" after that.

bobwaycott2• 11 years ago

This reads as little more than pure emotion coupled with sweeping universalizing--the state is universally evil, private capital is universally good. Absolutely nothing about states or capital investors can be so easily reduced to such a binary conclusion.

Private capital, and the humans who administer it, has repeatedly mismanaged funds, and been responsible for enormous fuck-ups that have far-reaching and devastating social, environmental, political, economic, material, and global impacts. Private investors routinely make bad investments. They also rather frequently are found to prioritize the extraction of value from their investments in spite of the potential or realized impacts of such extraction.

The state does not take money. We no longer live under feudalism, friend. We no longer labor under the unquestionable divine right of kings. The modern democratic state is, by the free association and choice of its underlying organizational units, and the continued consent of its citizens, asked to assume the role and responsibilities, at least in the US, of the following:

- form a more perfect union

- establish justice

- insure domestic tranquility

- provide for the common defense

- promote the general welfare

- secure the blessing of liberty to its citizens and their posterity

Private capital could never fulfill these obligations, because its focus is most definitely on extracting value from that which it invests in. I doubt very much you'd enjoy living in a world where its investment in you was dependent on extracting value from you (well, actually, you already do, but you don't feel the full brunt of that burden thanks to ... you guessed it ... the state).

Now, if you'd much rather live under feudalism, serfdom, obedience to divine kings, etc., well cool. But those are sociopolitical conditions under which people lived for centuries where they definitely were able to "pay lower taxes and let the private investors do the investment". Those are the systems under which money/property was actually taken from people, because people had no methods or institutions by which they can seek to protect themselves from the arbitrary whims of value extraction, or engage in political action that can bring change. That's why most now-democratic states saw revolutions in their past--it was the only way to make change happen, the only way to abolish systems of unfettered value extraction and replace them with something that protected the masses.

At least in the US, even the revered and worshipped founders realized pretty quickly after becoming an independent nation that taxes were unavoidable, because without public funds, the state could not fulfill the obligations for which it was instituted.

I shudder at the thought of living in a world where people trust VCs to provide that which the state, even in its dysfunction, works to provide.

zo13• 11 years ago

"The state does not take money. We no longer live under feudalism, friend. We no longer labor under the unquestionable divine right of kings. The modern democratic state is, by the free association and choice of its underlying organizational units, and the continued consent of its citizens, asked to assume the role and responsibilities, at least in the US, of the following:"

And what if we do not consent? I certainly don't, and yet I have no where to go. You call it freedom of association, I call it compliance under the threat of imprisonment.

Make no mistake about it, you can use fancy words and ideas to make it noble. However, if you choose to gloss over those that do no consent to your wonderful little 'union' of 'domestic tranquility' then you are not at all better than the feudal kings/lords that you use as a counter-example to democracy.

You know what was the big thing about the Feudal system? Absolute ownership of all land by kings/lords, where the peasants had to rent it by virtue of being born on the land. Oh so very analogous to what we have now where people have very little choice but to live in the state that they are born with. There is simply no alternative, no place where free people can go to pursue actual free-association through peaceful means. You just have to replace 'lords/kings' with 'state/government' and you quickly see the picture.

But of course, I am "free". I am free to move to Somalia, apparently. Either that, or more to another King/Lords piece of land.

jonathansizz2• 11 years ago

The author's argument is presented better and in more detail here: https://news.ycombinator.com/item?id=9168693

timtas• 11 years ago

We've all seen quite clearly in recent years that governments regularly socialize risk with bailouts of supporters and favorites. The worst part is the way they tip their hand in advance (e.g., The Greenspan Put [1]) incentivizing the the most reckless and morally hazardous behavior.

But the article does not aim at this real problem. Rather it's just a basket of plausible sounding but totally unsubstantiated claims and deliberate ignorance of inconvenient facts. For example, we're supposed to view China's giant investments "environmentally friendly technologies" as destined for success. We won't question the competence of the government that has so recently built several cities (yes whole cities, yes plural) which are completely empty while peasants subsist in garbage heaps on their outskirts.

Polemicals like this equate corporatism and cronyism with capitalism and free markets. Then with the straw man destroyed, it's not hard to guess what the solution will be.

[1] http://en.wikipedia.org/wiki/Greenspan_put

kristopolous• 11 years ago

Another political theorist, Albena Azmanova calls this aggregative capitalism. An interview here: http://www.againstthegrain.org/program/1099/tues-22415-post-... and an essay here : http://www.academia.edu/11034347/The_Crisis_of_the_Crisis_of...

A summary from http://events.newschool.edu/event/politics_talk_albena_azman...

A key feature of the new modality is the renewal of the state's redistributive function, with an altered logic of distribution, and a simultaneous increase in the state's administrative power and a decrease in its authority - a process that has failed to trigger a legitimacy crisis of the socio-political system, despite the recent confluence of financial, economic, and social crises. And no wonder society accepts the pain with equanimity, Professor Azmanova will argue, as the very social contract in Western democracies has been recast, thus breathing new life into capitalism.

venomsnake• 11 years ago

There is way to socialize the rewards of innovation. It is called taxation. Why US allows such wide tax evasion is whole other qustion.

dnautics3• 11 years ago

The us has some of the highest tax compliance rates in the world.

dools• 11 years ago

Socialised risk and privatised reward is how government should work. Universal health care is a good example: I am the most obvious benefactor of my own good health, but society also benefits from having healthy citizens.

Revenue generation is only the goal of government so that it can support its citizens.

EliRivers2• 11 years ago

Socialised risk and privatised reward is how government should work.

Banks take (less than they used to, since some legislation was brought back) insane risks because they know Joe public will cover disastrous losses when it goes wrong, and the bankers can keep the massive profits when they get lucky. Socialised risk, private profit.

dschiptsov• 11 years ago

Are we re-inventing "Tragedy of the commons" principle, which is as old as social inequality itself?

logicallee• 11 years ago

The article is a lot better than the title! (I only skimmed, rather than read it though.) People should read it. I agree with a ton there.

But the article's author has a huge blind spot - if you search the article for "tax", you will see just a couple of occurrences, and the author basically dismisses the mechanism. It's almost as though the author had no idea how the state even gets money - the author just thinks the state's role in innovation is underplayed.

That may be true, but the size of the state depends (obviously) on the size of the economy. It's obvious that if the state invests in innovation that causes a 1000x rise in productivity, hugely increasing the size of the economy, then the state also becomes larger, through the usual mechanisms.

Taxes are how anything is socialized - the author almost behaves as though the state's money comes out of nowhere.

Another good example of applying the title incorrectly would be public education. People generally go to elementary and high school for free. They can then go off to work, sometimes even founding companies, which they could never do if they're illiterate. You could consider education a "risk" on these entrepreneurs: not everyone who becomes literate can create a ton of value in private enterprise, either as a founder or someone working for a good salary at a company; but nobody needed to take a risk on these people in elementary school (with 10 years+ until payoff), the state does it. In fact it's mandatory.[1]

So could we say, "We have socialized the risks of education but privatized the rewards?" (in that you're a free person who is now educated.) Well, yes. But who pays for all that public schooling - everyone does. The author perhaps fails to see the relationship between a state causing an increase in society's private benefits - and the fact that that the state is in a position to do so due to the latter.

All the state is, is a percentage of the economy, which is public. It has a good and important role - but that role comes from being a percentage. The Thatcher quote is appropriate: "The problem with socialism is that eventually you run out of other people's money to spend." That never happens if the state remains 20%-30% of the economy. The size of the economy can simply increase indefinitely.

It's not possible (which may surprise the author) for this to happen in a way that doesn't cause the state to also increase in size. So while I agree with the main contention, it bears pointing out that it is a two-way street: private enterprise (and private citizens) get 'free' public goods from state spending, that they don't have to pay for. But the state gets a 'free' percentage of all private enterprise (and private earnings) - in fact, set at whatever it wants. The state can literally tax whatever level it wants and in whatever ways it wants.

So it is, in fact, a two-way street.

[1] see compulsory education - since the 1800's, "Fines were imposed on parents who did not send their children to school and the government took the power to take children away from their parents and apprentice them to others if government officials decided that the parents were "unfit to have the children educated properly"."

crpatino2• 11 years ago

On compulsory education:

If you agree with John Taylor Gatto, you could argue that the purpose of universal education was never to provide children with opportunities to learn how to make a living (apprenticeships rules date from the middle ages, and every other human society solves this problem somehow), but to condition them to blind obedience and dullness... for the direct benefit of the government (in the age of Napoleonic Wars, you needed lots and lots of idiot sheep that would literally march towards the enemy lines and shoot each other at point blank range) and indirectly to the nascent class of industrialist who needed a new kind of workers who would perform the same micro task over and over again with no regard for the total process.

andyjohnson0• 11 years ago

Mazzucato gave an interesting talk [1] about this to the Long Now Foundation back in March 2014.

[1] http://longnow.org/seminars/02014/mar/24/entrepreneurial-sta...

justincormack• 11 years ago

She also has a book, "The Entrepreneurial State".

Rumford• 11 years ago

Please don't tell me this central planning fad is coming back. The last time people were infatuated with the planned society 200 million people died.

zo13• 11 years ago

She just described one of the main benefits of having a state. It allows people to flourish. Of course, excluding obvious scenarios of nefarious uses of public money for personal profit.

The state creates an environment that allows individuals to make profit in a safe way (contracts, violence, laws, etc). An underlying bit of information that is ignored is that the individual profiting means that we all profit, in small and not necessarily measurable ways. And sure why not, why can't the public be the one to bear the risk in the examples stated? It does for everything else. Isn't this the "collective" way?

And I have seen this line of thinking elsewhere, particularly when discussing the merits of having a state at all. The idea that somehow we "owe" the state for all these nice things it gives us beyond what we already pay in personal taxes.

"Go live in Somalia", they would tell me, if you don't like paying taxes.

tessierashpool4• 11 years ago

Best quote in the piece:

Because innovation today builds on innovation tomorrow... Policy makers must think very hard how to make value creation activities (done by all the collective actors in the innovation game) rewarded above value extraction activities (in this sense capital gains taxes are way too low).

Peter Thiel's book talks about this, and on the one hand it is of course very good strategy, yet it's also quite sad and pathetic, because the principle he advocates is that you should focus on capturing a market, rather than creating value.

OP is saying, if this is a logical choice for entrepreneurs to make, then policy makers have done a very bad job at structuring incentives. It would make more sense if policy set up incentives which encouraged creating value over capturing it.

copsarebastards• 11 years ago

I think the author is pointing to a problem but not correctly identifying what the problem is. The problem is deeper.

If the problem were that we have socialized risk of innovation but privatized the rewards, that wouldn't really be a problem. It's a good thing to incentivize innovation.

The real problem is that we don't incentivize innovation.

Instead, we incentivize investment. People who already have money to invest take on small calculated percentages of risk to make back large amounts of money. Frequently the money investors are investing isn't even their own, and they are paid a significant salary to do so, meaning they actually take on none of the risk.

The negative results of this are twofold:

1. Often investors don't invest in innovation. It's equally profitable to invest in number-twiddling schemes that provide no benefit to anyone except the investor, and often that's easier.

2. We speak of companies as if they are single entities. But the reality is that executives and shareholders and of a company are the beneficiaries of any innovation within a company, while innovation typically comes from workers with technical expertise who are typically paid a relatively limited salary perhaps with some minimal stock options.

The way around this problem is typically to get into a company early enough that the line between technical worker and executive is blurred. But that avoids only the problems with lack of reward--it actually exacerbates the risk problem because early commitment to a company is a high-risk endeavor.

In the end, I think that a lot of innovators don't innovate for money anyway--I personally would rather see something I make change the world than make a lot of money off an idea that doesn't make any difference (or makes things worse!). As long as I have enough to live I'm okay. But it would be nice if we stopped pretending that our distribution of wealth is at all meritocratic.

ddingus• 11 years ago

This!

I sure got that as the takeaway. Public investments targeted at innovation we've identified as important, or worth it, whatever should be increased.

There is another aspect to this as well. Check out this history of PDX area Tektronix: http://www.opb.org/television/programs/oregonexperience/segm...

Between Tek, Intel, and a couple others, the area was transformed into something we call "silicon forest" and it spawned a ton of great companies, many of which are in business today.

It was a very interesting mix of private and public investments in education and investment support. Spin offs, not competitive with Tek, got Tek support while ramping up. Colleges offered targeted programs for people to get educated, companies did the same.

The founders got very wealthy, but so did a lot of other people.

We need more of this kind of thing.

UhUhUhUh• 11 years ago

This also seems to be a child of a wider process by which losses tend to be socialized and profits tend to be privatized. Apparently, the system "works" because nearly all the wealth of the planet is in the hands of something like 1% of the population, while the debt, well...

Another aspect is the speed at which profit is made. At one end there is education, for example, which is an exceedingly bad investment in financial terms because it is very slow and very uncertain. At the other end there is pure trading and seed/startup investment, with profit goals of, what, 25% per year.

Who would finance education? Certainly not a financial investor in his right mind.

gustavodemari• 11 years ago

The state needs to do only one thing, don't disturb private initiatives

MichaelMoser123• 11 years ago

Where are Xerox Park and Bell Labs today?

Bell labs was financed because AT&T had a monopoly status on landlines; whatever the costs, AT&T could just raise fees for a cent and cover all expenses. AT&T lost its monopoly so it could no longer pay for Bell labs.

so this monopoly status was good for Bell Labs, but it also covered up the many gross inefficiencies of a monopoly body and it did limit competition - and growth.

I believe the green economy merits much more funding than it is currently receiving by government

I suspect that this is a value based judgment.

Who is to know if the next growth period will rather be based on nano technology, or maybe will be based of artificial intelligence? I guess that civil servants are in a bad position to make such judgments, because they bear little personal responsibility for their decisions.

If one looks at the internet boom, then one can discern many stages here:

- first was the fundamental research that explored the subject of packet switching networks; this was funded by the US military - next was the gradual development of networking technology, which took some ten-fifteen years. Here there were many actors, part of them from research and part from industry - next came the first boom-bust cycle of the nineteens; whatever one thinks of it, it helped to build the required networking infrastructure for wider adoption and it helped to create many technologies that were important for the next stage. - next came the present growth based on targeted advertising / private sector surveillance based on social networks.

No one actor could have directed this process; public sector did facilitate basic research, it created the prerequisites for growth, but actual growth was still several steps away from that; at any of these stages it could have been stopped by some misguided policy decision.

Prof. Mazzucato seems to underestimate the risks that entrepreneurs had to take during this process; Research financed by the public sector is a prerequisite for growth, but state dirigims would not have led to it either;

Dirigism in France created the minitel network, but that is not quite the internet of today.

We have socialised the risk of innovation but privatised the rewards

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