Economist Mariana Mazzucato, a long-time advocate of an entrepreneurial state sector, talks about how the pandemic is affecting the relationship between government and business.

Mariana Mazzucato

Mariana Mazzucato

Since the release of her 2013 book, The Entrepreneurial State: debunking public vs. private sector myths, Mariana Mazzucato has gained popularity as a leading and highly visible supporter of governments’ ‘smart’ role in the economy.

The concept has been further crystallised in her academic work – she has since founded the Institute for Innovation and Public Purpose at University College London, where she is a professor in the economics of innovation and public value – and copiously debated on Ted Talks and high-profile stages, including the World Economic Forum.

Here, she answers The Banker’s questions on how the coronavirus pandemic is shaping existing relationships between government, business and finance.

Q: Covid-19 is reinvigorating the debate over public sector funding of key services, such as healthcare, and the state’s role in supporting society’s most vulnerable members. Is ‘big government’ back? 

A: It is certainly high time to move beyond narratives that confine the role of the government to the back seat. Letting businesses steer wealth creation in good times and allowing governments to intervene only when problems arise has led to a critical lack of preparedness and resilience to shocks, both financial and health-related.

The current pandemic has exposed the vulnerabilities within our public institutions, as well as the inability of governments to respond readily and effectively.

Yet reimagining the role of the state is not just about expanding its capacity, but also rethinking its direction and purpose. Governments do not exist just to fix market failures; they have the capacity to actively create and shape markets in order to solve societal challenges. 

In that sense, it is important not to confuse ‘big government’ with ‘smart government’. The unprecedented levels of government support flowing into the economy also require smart state institutions that can direct money towards the creation of public value and, in doing so, drive sustainable and inclusive growth. 

Q: Can public and private sectors engage in a more positive symbiotic relationship despite their chequered past record?

A: Government partnerships with business should be driven by public interest, not profit. This is especially true in the field of public health, where we are now suffering the consequences of the pharmaceutical sector’s failure to develop a coronavirus vaccine since the Sars outbreak in 2003.

With huge sums of public money pouring into big pharma, we have to ensure that the medicines and vaccines produced to combat Covid-19 will be affordable and supplied in sufficient quantities, and that the profits are reinvested back into innovation rather than extracted by shareholders.

Such a focus on collective value creation within public-private partnerships has considerable historical precedent, as I have written about in my books. In 2019, we celebrated the 50th anniversary of the moon landing – an immense feat that required both public and private investment, with the state showing not only immense ability to innovate within but also to negotiate symbiotically with the private sector, [securing] procurement deals and partnership contracts that served the public interest. This is what I mean in my books by an entrepreneurial state

Importantly, this symbiotic relationship must also apply to the emergency support extended to businesses during the pandemic fallout. Bailouts must reward value creation instead of value extraction, and avoid the mistakes of 2008 that saw corporations and executives profit handsomely from taxpayers’ money. Public support should be conditional on retaining workers and restricting share buybacks, while promoting investment in decarbonisation and better working conditions.

Such measures are not designed to be punitive but aim to structure government support through the lens of collective value creation. Governments have a unique opportunity to seize the upper hand in this crisis and lay the groundwork for a sustainable and inclusive economy of the future. 

Q: Does the current situation accelerate the move towards a new type of capitalism? What can we realistically expect?

A: The pandemic has exposed multiple failings of today’s capitalism, including the precarity of work, high levels of private debt and weakened civic infrastructure. The structure of the economy will undoubtedly have to be transformed in order to address these vulnerabilities, and we have a choice in how we want it to be remade.

First, businesses must abandon financialisation and return to fundamental value creation through investing in workers, research and development, and decarbonisation. Second, long-term investment should be dedicated to our public institutions like the NHS, the national health system in the UK, not just emergency aid, in order to reverse years of damaging austerity and rebuild the capacity to withstand future challenges. Finally, we must embrace the ability of the state to be more mission oriented, to steer innovation towards achieving public goals.

With my 2018 report on missions, I managed to convince the European Commission to structure some of its innovation funding in this way, but the opportunity goes beyond innovation [up to] outcomes-driven governments. This means being more of a market shaper and not just a market fixer.

With current trends pointing towards an increasingly uninhabitable planet, Covid-19 will not be the last major shock to threaten society. The future of capitalism must be sustainable and inclusive, but also resilient enough to tackle the societal challenges ahead. 

Q: This pandemic also highlights banks’ role in society. If they are to be considered utilities, how should they be governed? Do regulators need a stronger say in their activities?

A: While we are not yet in a banking crisis, banks are nevertheless intimately tied up with the Covid-19 fallout, being both exposed to the high levels of household and corporate debt and acting in many countries as the mechanism through which government support is delivered to businesses. But the difficulties currently faced by banks in performing this vital social role have emphasised what a lot of us already knew: the banking sector just does not lend to businesses all that much any more.

In the UK, where the Coronavirus Business Interruption Loan Scheme has been marred by a lack of bank processing capacity and punitive terms, only 8% of bank lending went to businesses in 2019, of which only 2-3% went to small and medium-sized enterprises.

This dynamic has serious implications for the recovery period ahead. The billions of dollars of extra liquidity being created to shore up the economy will only contribute to long-run growth if it is channelled towards productive investments. Just as regulators act to prevent banks building systemic exposures in speculative assets, so too should they provide guidance to steer credit allocation towards activities that support sustainable, inclusive growth.This could be achieved by coordinating monetary and fiscal policy in support of a green industrial strategy, or by using state investment banks and patient public finance to ‘crowd in’ private finance.  

Q: How will the world look after Covid-19? Will it be united with a new impetus towards global coordination, solidarity and trade, or will countries retrench within national borders, as the fragility of existing blocs (the EU, for example) is exposed?

A: First of all, it is clear that we will not come out of the other end of this pandemic without international consensus. Working towards a Covid-19 vaccine is the Herculean mission of the moment and will not be achieved without large-scale global coordination, as the extraordinary work of the Coalition for Epidemic Preparedness Innovation is demonstrating. Moreover, coordinated action across nations and institutions is arguably what has thus far prevented the pandemic from morphing into broader financial contagion.

The US Federal Reserve has relaunched and extended its dollar swap lines to foreign central banks, while the International Monetary Fund (IMF) and the World Bank have expanded lending and debt relief. With a catastrophic debt crisis looming in emerging economies, global solidarity is evident in widespread support for debt relief, as well as calls to reform the IMF’s role and capabilities.  

The post-pandemic economy will ideally be one where we learn the lessons from the emergency measures and use them for the day-to-day, not just the crisis. This should include outcome-based budgets and procurement to drive solutions to problems from inequality to climate and health challenges; new forms of public and private collaborations, that are driven by public interest and not private profit; a stakeholder value model of corporate governance that rewards workers and improves conditions at work, while also driving sustainable growth; and a strengthened set of public institutions like the NHS in the UK, which should not have to fight for survival but be properly funded and appreciated in both good and bad times. Clapping is surely not enough. 

Mariana Mazzucato is professor in the economics of innovation and public value at University College London (UCL), where she is founding director of the Institute for Innovation and Public Purpose. She is author of The Entrepreneurial State: debunking public vs. private sector myths (2013) and The Value of Everything: making and taking in the global economy (2018). 

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