Economist Mariana Mazzucato explains how solving society’s toughest problems starts with rethinking how value is created and innovation is incentivized.
Mariana Mazzucato knows the value of a good story, and her mission is to change the prevailing narrative about economics and society. She wants to convince leaders in business and government to reject the tales spun by neoliberal economists about maximizing shareholder value and to instead buy into a new epic about ambitious missions that foster collaboration between the public and private sectors and civil society in order to solve critical global problems.
She has written two acclaimed books that explore that story. In the first, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, published in 2013, she takes on the myth of Silicon Valley garages and the lone entrepreneur as the genesis of the digital revolution. The biggest technological breakthroughs of the 20th century — those leading to the microprocessor, personal computers, the Internet, and the iPhone — were, she says, essentially funded by a government focused on achieving breakthrough results by backing interesting research. Her second book, The Value of Everything: Making and Taking in the Global Economy, which was picked by strategy+business as one of 2018’s best business books on economics, pushes this argument further. It explains how our current belief that price equates to value has distorted economies to the detriment of society because it undervalues key value creators, including government and entrepreneurial ecosystems (as she calls them), and the interplay between them. The “wolves of Wall Street” are too often glorified in the media at the expense of everyone else. Capitalism, she argues, needs reorienting; governments need to use more muscle to spur business to collaborate on innovation. But this also means reforming government itself so that it is better equipped with 21st-century capabilities.
Mazzucato’s research has won her prizes (including the 2018 Leontief Prize for Advancing the Frontiers of Economic Thought and the 2019 All European Academies Madame de Staël Prize for Cultural Values) and has made her the go-to economist to advise governments and think tanks, including the Organisation for Economic Co-operation and Development, on innovation strategies. Some economists and business leaders may balk at her insistence on the importance of the state in funding innovation and her prescription to make subsidies and government investments contingent on the private sector joining strategic missions. But at a time when anger at inequality is rampant, her arguments are resonating across continents.
In 2017 Mazzucato founded the Institute for Innovation and Public Purpose at University College London (UCL), and in 2018 she succeeded in convincing the European Union to earmark €100 billion (US$117 billion) in its Horizon fund for what she calls “mission-oriented” investments in applied research that are specifically designed to promote innovative solutions to the world’s wicked problems, notably climate change.
Born in Italy, Mazzucato spent her childhood in New Jersey, where her father, a nuclear physicist, joined the Princeton Plasma Physics Laboratory funded by the U.S. government at Princeton University. Her mother was well-known in the community for her Italian cooking, a passion she passed on to her daughter. Mazzucato studied history and international relations at Tufts University, where she became interested in technological change and labor unions. She decided to shift to economics for postgraduate studies to better understand how money makes the world go round. Mazzucato talked to s+b in her office at UCL about innovation and how mission-critical thinking works in practice.
S+B: Let’s start at the beginning: Why were you drawn to economics and innovation after studying history?
MAZZUCATO: History is a fundamental pillar, I think, for understanding the economy, because so many of the problems we have today are not new. Financial crises are reoccurring, depressions reoccur, and yet we seem not to learn the key factors that cause them. That got me interested in economics and how the battle for better working conditions was at the center of “rebellions” and progress for the last 100 years. But if you don’t understand economics, it becomes very hard to understand the ills of the system and how to improve it.
When I was a student at Tufts, all the progressives — and by that I mean students who were interested in making the world a better place — seemed to be focused on the outside. It was the time of apartheid in South Africa, the Contras and Sandinistas in Central America. I found it weird that in a city like Boston, which was very segregated both by neighborhoods and by jobs — most of the hotel workers were black — no one was looking at their own city or their own country. So I became quite involved with the labor union movement in Boston, and through that I came to better understand the U.S. after having lived there for 15 years.
When I decided to study economics for my master’s degree, I wanted a department that taught different types of economic approaches, not just the mainstream neoclassical economic theory. I ended up at the New School in New York, where I studied the mainstream approach and Keynesian economics, post-Keynesian economics, neo-Ricardian economics, and Marxist economics. [My studies] gave me many different, potential equally valid tools for investigating different aspects of economics from different bodies of thought. All these theories of economic value were hotly debated. What happens in most economics departments is the [theories] are unified within one body of thought, and what’s debated is just what to do with that body of thought. How should we use these particular tools to look at gender and equality? Or a developing country’s ability to catch up? But those are just applications of a framework. It’s not debating the underlying framework. [The latter is] what I found interesting.
S+B: What was it about innovation that fascinated you?
MAZZUCATO: My interest in technological innovation came from my work with labor unions, where I learned how changes in production systems and technology affect people’s lives. When you read Marx, as I did, you really appreciate technological change. He was already asking back then what would happen when mechanization replaced labor. The irony about Marx is that he’s probably the most eloquent critic of the capitalist system, but in some ways, its biggest admirer, because he really captured its core, technological innovation in such a detailed, dynamic way — how it affects competition, profits, wages, and inequality. Marx grappled with this from the beginning.
As soon as you take innovation seriously, you start having to throw up in the air so many of the things we learn in mainstream economics: unique equilibria, representative agents, perfect competition. Indeed, the mathematics that we’re taught in mainstream economics departments mainly comes from Newtonian physics. It allows nice, smooth curves to be drawn where there is a maximum point (important if firms are maximizing profits) and a minimum point (minimizing costs). The idea that there will be unique points of equilibria is central to that framework. But if you have a system driven by innovation, there is constant disequilibria, or potentially multiple equilibria and constant differentiation between companies with no representative firm.
[Political economist Joseph] Schumpeter was a lead critic of how mainstream economics dealt poorly with how capitalist firms competed through innovation — and the need for competition theory, and hence competition policy, to better reflect innovation-based competition.
During part of my Ph.D. program, I went to the Santa Fe Institute in New Mexico to study complexity theory. Here, big questions in economics like competition and innovation were being studied through mathematics coming from biology, not physics. [Complexity theory] gives you a language to talk about growth in a different way — while in mainstream economics, growth is looked at through the behavior of the representative average agent, complexity theory teaches us to look at growth far from average events and processes of differentiation.
S+B: You have argued that the problems facing capitalism, specifically those related to innovation, stem from a lack of understanding of how to value the inputs to an economy — and that this has led to distortions in how contributions to value creation are measured. What do you mean?
MAZZUCATO: Value in capitalism has fundamentally been created collectively through different types of actors coming together to solve problems. Workers have contributed. The state has contributed. Of course managers and people on the ground have contributed, but we need a body of thought within economics that really captures that collective value creation.
Maximization of shareholder value is a very narrow approach to understanding value. Indeed, it is just a “story” — which is why I make frequent references to Plato’s maxim that storytellers rule the world. It’s just a story that says shareholders are the biggest risk takers because they are the only agents in the economy without a guaranteed rate of return. They are the residual claimants. Workers get their salaries, banks might get an interest rate, and if there’s something left over in the end, that’s what the shareholders get. The notion that this makes them the biggest risk takers is used to justify why they actually deserve this big booty.
But this is not true: The state didn’t have a guaranteed rate of return when it invented some of the biggest changes that have occurred under capitalism, like the ones I talked about in The Entrepreneurial State: the Internet, GPS, touch screen, Siri. Each one of those occurred through a massive process of experimentation funded by government — with inevitable failures.
Any actor — whether it’s a business, whether it’s a public entity — in order to create value, has to experiment, explore, and fail along the way. So this notion of shareholder value, that only the shareholders have no guaranteed rate of return, completely ignores one of the fundamental principles of value creation: trial and error and error and error. No one has a guaranteed rate of return.
Even though many have critiqued maximization of shareholder value, they’ve only critiqued its consequences, like short-termism, and only a few have critiqued the theory’s underlying principles, which are faulty. And that contributes to the fact that there’s been so little change. Since the financial crisis, we actually have more firms than before spending their net income on things like share buybacks to boost share prices, stock options, and executive pay. We have a whole financial sector, which is increasingly obsessed with itself, financing other parts of finance: finance, insurance, and real estate, for example.
S+B: What do you have in mind as a replacement for the shareholder value concept?
MAZZUCATO: The twin problems I see in modern-day capitalism are the fact that the financial sector is financing itself and industry itself has become financialized, obsessed with short-term quarterly returns. To change that system, you need to debunk the pillars on which those behaviors are based. The problem with the maximization of shareholder value approach is that it has dismissed the role of other actors in the economy, whether state actors or workers. We need a more rigorous understanding of how to maximize stakeholder value and, relatedly, a policy framework that captures the true collective creation of value.
That framework has three aspects. First, you need to identify the different value creators in a system. Second, you need to establish what is actually being created. The direction of change is just as important as the rate. So it’s not just what contributes to GDP growth rates; it’s about the forces that you can identify that are determining whether an economy is becoming more financialized or not. Is it becoming greener, more sustainable, more inclusive, or not? Third, you need to understand how the rewards from value creation are distributed. Are they distributed as collectively as the value itself is created? Or are some getting much more than they actually put in?
In the past, it was the labor unions that challenged working conditions and the distribution of income. They fought for weekends, for the eight-hour workday, and of course for higher pay.
Today, while there is again the debate about the relationship between technology and work, we also need to understand modern forms of value extraction — for example, through the data economy and what I call in my book “platform capitalism.” I think it is key to understand the problems in a pre-distribution way, not only afterward when it is too late. Citizens’ data is being appropriated by companies using publicly funded technology. We can change those relationships — for instance, by allowing public transport, not only Uber, to benefit from data — but that data needs to be available and the knowledge needs to be governed in more equitable and transparent ways. Otherwise, we just end up being able to worry about the problems, like privacy or taxation, when it is too late.
These are the types of big questions Adam Smith used to ask. We like to talk about democracy, but if that’s not reflected in how we produce, in how we distribute, and in how we change our consumption patterns, we will end up with the companies that control the technology calling the shots. For me, what was important in my book The Value of Everything was to reveal the dysfunctions that occur when we don’t debate value — when [value is] just presented as “this is how the economy works.” So it becomes very easy for some actors in the economy to present themselves as value creators, and in the process extract value, because the difference — what’s value creation, what’s value extraction — is no longer part of the way we think about the economy. Because as long as something has a price, it’s considered valuable. And if it doesn’t have a price, like caring for the sick or elderly or public education, it’s not valued or measured properly.
S+B: As an advisor to governments, you certainly have the ear of policymakers. Do you think business wants to be part of this conversation?
MAZZUCATO: There’s something happening right now in the business community that is interesting: There is a call for “purpose.” But this too often resorts to “doing good” with money made in problematic ways — with no real change at the production level. At the same time, there’s a discussion at the meta level of governments around the United Nations’ 17 sustainable development goals; that’s also about missions and purpose. But the two haven’t really been linked. At best you have the corporate social responsibility indicators. That’s why I’m proposing a mission approach to get out of the stalemate we are in now. We should begin with the great challenges of our time, from climate change to fixing health systems. But these need to be made into concrete missions as bold and targeted as getting to the moon was. So instead of just saying “clean the ocean,” let’s collaborate to really get the plastic out. This will require a lot of public and private investment in very different areas, from what goes into [new materials] to how to get [the plastic] stuff out.
Missions require business, government, and civil society organizations to get their act together in concrete ways. How the mission is framed, I think, requires lots of civil society input. It can’t just be completely top-down. The mission to put a man on the moon involved many different sectors, including textiles, nutrition, and of course aeronautics. And government used its power of procurement to combine many different bottom-up solutions — risk taking through experimentation — aimed at a social goal.
It’s important to learn from the Soviet Union’s mistakes. They spent a lot of money on research, but the system was too top-down, so it suffered. But too much bottom-up is also a problem. It’s the combination of a directed mission and bottom-up experimentation that works.
I wrote a report for the European Commission on missions that helped change the legal framework of the €100 billion [$117 billion] Horizon program. In it, I tried to inspire Europe to go for a mission-oriented approach, but also to think through the many changes that would have to occur for how we “do” government. More experimentation and exploration. Less market fixing and more market making. Less de-risking and more welcoming of uncertainty. I gave examples of missions like the ambition for 100 carbon-neutral cities by 2030, as well as ones [involving] oceans and aging populations.
S+B: But what’s in it for business? Where are the incentives to join these new moon shots?
MAZZUCATO: Companies don’t live in vacuums. They receive large benefits from governments — whether in direct investments or indirect benefits through tax cuts. I argue that those benefits should be conditional on businesses being part of the solution, not part of the problem. Whether that means conditions on reinvesting profits instead of [relying heavily on] share buybacks or conditions on how knowledge is shared, there should be less condition-free funding.
To do this, government has to change the way it operates. It should no longer entice business with handouts. You don’t talk about supporting SMEs [small and medium-sized enterprises]. You don’t talk about sectors. You have challenges that entice all types of firms, independent of size and independent of sector, to invest and innovate. The small ones will need extra support, but you don’t help them because they are small — you help them because they are willing. That is why I argue for a “pick the willing” approach.
Think of the pharmaceutical industry. In the U.S., the pharmaceutical industry gets $32 billion a year of innovation financing from the National Institutes of Health, condition free. The drugs that result from this are then priced at exorbitant rates that the public programs [e.g., Medicare in the U.S., the National Health Service in the U.K.] have to subsidize. So the taxpayer pays twice, or even three times. It makes no sense. I often mention that Bell Labs, an important private lab within AT&T that was critical to so many tech innovations, came from an era in which government forced AT&T to reinvest its monopoly profits in innovation as part of the condition of retaining that monopoly. There was a condition. It was a deal.
Knowledge governance needs to be better negotiated. The current patent system represents a bad deal. For example, with patents, the public gives the private sector a 20-year monopoly. For 20 years [patent holders] get protected, but after 20 years, that knowledge is free. But if in the meantime, the patents are too wide (used for strategic reasons to block innovation) and too strong (hard to license), the state gets a bad deal at the end of the 20 years. Furthermore, as patents are increasingly going upstream, this means the tools for research are being patented, and this blocks future innovation. Again, a bad deal.
Companies have been allowed to operate in a particular way that is not good for economies, innovation, or society. You can change those conditions.
S+B: We often associate innovation with entrepreneurs. Where do entrepreneurs fit into your innovation framework?
MAZZUCATO: I don’t believe in hyping up individual entrepreneurs. I believe in entrepreneurial ecosystems, which help get entrepreneurs off the ground. But a focus on a system means looking at how to build environments that are structured in particular ways where the entrepreneurship can thrive. If you compare the Soviet Union and Japan in the 1980s, the Soviet Union was spending way more than Japan in research and development, but it didn’t have a system of innovation. In other words, it didn’t have the linkages between science and industry. In Germany, there are Fraunhofer institutes, funded by the state and industry, for applied scientific research. Entrepreneurship thrives when you have high-quality research and development linked with the business community. Systems also need patient, committed finance. In the U.S., this occurred through the use of active procurement policy linked to strategic government funders like DARPA [the government’s Defense Advanced Research Projects Agency, which funded the basic research for the microprocessor and the Internet] and the Small Business Innovation Research program. The latter makes sure that 3 percent of the budget of particular departments — health, energy, etc. — goes to small and medium-sized enterprises. These are supply-side policies linked to government demand. But in other countries, patient finance comes also through public banks, such as the KfW in Germany or the China Development Bank.
Companies have been allowed to operate in a particular way that is not good for economies, innovation, or society. You can change those conditions.”
Demand-side policies are just as important as supply-side ones. Tesla is a perfect case: On the supply side, it receives a $465 million guaranteed loan from the U.S. Department of Energy, and then it benefits from demand-side policies in Norway for low-carbon vehicles — where it ends up selling close to 30 percent of its vehicles.
Another lesson from Tesla is that it was part of a portfolio of government investments. A similar [dollar] amount went to the solar company Solyndra, which then went bankrupt. We need to think hard about how to make sure the taxpayer is not just bailing out the failures but also gaining from the successes. The return can of course come through taxation — when it is not dodged — but there are other ways too: through equity stakes; through the pricing system (publicly funded drugs should be priced low); through knowledge governance (making sure the patent system is not abused); and through conditions on reinvestment.
S+B: In many countries, that would imply a radical shake-up in the relationship between government and business.
MAZZUCATO: Yes, it would create a more mutualistic system — a less parasitic one. Value is collectively created, so of course business has a role, but you’re not in there on your own. We need to figure out how to both create the dynamic innovation ecosystem that I was talking about and make sure that every actor, not just business, is rewarded for its effort. A focus on the system means also focusing on its reproduction, making sure — as the classical economists focused on — that not too much value is being siphoned out of the system, which eventually can cause it to break down.
S+B: In PwC’s 22nd Annual Global CEO Survey, respondents said the number one threat to their business was overregulation.
MAZZUCATO: The assumption here is that regulation is bad and too much of it even worse. Yes, bad regulation is terrible, but good regulation spurs massive amounts of innovation. What companies should worry about is long-term growth. For that, you need long-term productive capital, not short-term speculative capital. If you want market share, that requires a long-term growth strategy. That was the old discussion in the past in comparing Japan and the U.S.: that Japan was focused on market share, while U.S. companies were more focused on short-term profits.
Bad regulation is terrible, but good regulation spurs massive amounts of innovation.”
Long-term growth requires a strategy, and that requires investing in human capital, in new equipment, thinking about the division of labor, thinking about strategic management, organizational behavior — all the things business schools teach managers. To do that requires time; you need patience. So if you have impatient capital as opposed to patient capital, that’s already a problem. A lot of companies require external capital, and some of that capital has become very short-term and very exit-driven; venture capitalists want an exit in three years. That has caused real problems in sectors like biotechnology, and we should make sure we are learning from those problems and not repeating them in areas like clean tech.
If the system is rewarding those that just move their money around, buying low and selling high, it isn’t creating anything. And if the tax system rewards that sort of behavior, the system suffers. And inequality rises.
None of this is deterministic. There is lot of heterogeneity between sectors, with some being overly financialized. And also heterogeneity within sectors, with very different governance structures that affect investment behavior. Today, some are talking about Apple and its falling innovation. I don’t think this is unrelated to the fact that under Steve Jobs there were few share buybacks and lots of reinvestment of profits into a focus on design and the creation of radical new products. Under Tim Cook, more than $100 billion has gone to share buybacks. Is it such a surprise that Apple has run out of big ideas?
Similarly, people are asking: What’s the next big thing after the Internet? I think that’s the wrong question. The Internet was the solution to a problem of global communications. So, from my point of view, we should get both government and business to focus on the next big problems, and let the technology flow out of that as a spillover. Those problems are out there. Take the U.N.’s 17 sustainable development goals. Break them down into missions and make sure they have public, private, and third-sector [nonprofit] actors working together to solve them.
S+B: Do you believe that we’ve got a regulatory framework that is not fit for purpose to create innovation?
MAZZUCATO: Yes, I think that is right, but I prefer to talk about the need for a more active market-shaping policy. Markets are outcomes of the way that public and private come together, so we need to focus more on how they are coming together. The name of the institute that I run here at UCL speaks to that. It’s the Institute for Innovation and Public Purpose. We need more purpose and more focus on how to design markets that reflect that purpose.
S+B: There is an indication in the surveys that PwC has done that business leaders are at least talking about purpose because their employees, particularly younger ones, are looking for more out of work than just a paycheck.
MAZZUCATO: I’m very skeptical about the social impact bonds or the corporate social responsibility stuff. The change has to be in the value chain. A radical shake-up will happen when governments become more engaged with society-wide missions — when they engage civil society in those moon shots, and support those companies that buy into them. That’s why I say pick the willing; don’t pick the winner. Help those who are willing to engage with you on the big questions. And it’s not about penalizing companies; it’s about not rewarding those that are not playing the game. You take away their subsidies, their tax breaks. Get rid of it all and see where they go. You make all of that conditional on playing the game that improves the social good, and you will get more of the willing coming to the table.
S+B: This sounds a bit like state-controlled innovation, which you’ve already admitted doesn’t work.
MAZZUCATO: No, the game shouldn’t be micromanaged. Innovation dies when you tell companies exactly what to do. How they got to the moon was completely open. Three hundred different projects got them there. None of that was micromanaged. But the endgame was being stimulated through procurement, through prizes, through different grants, through different subsidies. So could you apply that to the whole economy? Why not? You could apply it to the big health priorities: antimicrobial resistance, getting the plastic out of the ocean, making cities carbon neutral, etc. We haven’t thrown the full capacity of government at that.
S+B: Do you think we’re at a tipping point now? Has anything happened that makes you think that people are beginning to understand this?
MAZZUCATO: Yes, I think we are waking up, but the solutions need to be as serious as the wake-up call. The forest fires in California [in 2018] were a wake-up call, as was the U.N. Intergovernmental Panel on Climate Change report telling the globe we have 12 years [to limit global warming to a maximum of 1.5 degrees Celsius]. And the harsh words of Greta [Thunberg, a Swedish teenager who is a climate change activist], telling adults worldwide: We don’t want your hope, we want you to panic that your house is on fire. And in California, it was literally on fire.
What we need is for this call to action to fundamentally change how we think about the governance of all organizations that produce value: how to organize dynamic government agencies outside static silos; how to rethink corporate governance structures so that they are more focused on the long term and they reward all the actors that help create profits; and how to listen to the movements in civil society — whether the green movement or those calling for better healthcare — to formulate the missions of the future that can drive innovation for the decades to come. The populist wave around the world is evidence that this will not succeed if it is not truly participatory, allowing different voices to come to the table, and to negotiate healthier deals, creating an economy that is more innovative, sustainable, and inclusive. I believe it is very difficult, but truly possible.
- Deborah Unger is a senior editor of strategy+business.