Transcript: Martin Wolf interviews Mariana Mazzucato — Can the state innovate?

This is an audio transcript of The Economics Show podcast episode: ‘Martin Wolf interviews Mariana Mazzucato — Can the state innovate?’

John F Kennedy voice clip
And they may well ask why climb the highest mountain? Why, 35 years ago, fly the Atlantic? Why does Rice play Texas? We choose to go to the Moon.

Martin Wolf
On the 12th September 1962, US President John F Kennedy spoke these famous words.

John F Kennedy voice clip
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.

Martin Wolf
As he reaffirmed his nation’s commitment to beat the Soviets in the space race, not because it is easy, but because it is hard. It was an enormous undertaking in terms of resources, political willpower and above all, technological innovation. But reach the moon, they did. Today, the world faces challenges of an even greater scale be it climate change, global pandemics or a new cold war. But are governments still capable of driving the innovation required to meet these challenges? Today’s guest says that they can and they must.

[MUSIC PLAYING]

This is The Economics Show. I’m Martin Wolf in London. And in this episode, I’m talking to Mariana Mazzucato, professor in the economics of innovation and public value at University College London and founding director of the UCL Institute for Innovation and Public Purpose. Mariana, welcome to the show.

Mariana Mazzucato
Thank you. So happy to be here.

Martin Wolf
So let me start, if I may, with the first book of yours I read, which was published in 2013, and it was called The Entrepreneurial State: Debunking Public vs. Private Sector Myths. And this was the first coherent, historically based book I’d read done in the modern era on why industrial policy, interventionist policy by governments was fundamental to making modern economies work. That the state, in fact could be, should be and has successfully been entrepreneurial. So what I’m interested in is how you came about doing that book, what drove you to it and why you think it proved so influential.

Mariana Mazzucato
So thanks for that question because that is in fact the seed of a lot of what I am doing today, for example, around mission-oriented policy. You can’t have smart policies without, I believe, an entrepreneurial state. So what does that mean? Entrepreneurship means risk-taking, experimentation, welcoming uncertainty, shaping and creating markets. And yet we bought into this idea that at best, the state can fix markets or redistribute value that’s being created somewhere else, usually in the private sector. So I wrote The Entrepreneurial State first as a pamphlet right after the financial crisis in 2011, at a time when this narrative — which I think is a false narrative but it serves certain interests — that the state should administer, regulate, save the banks from going bankrupt and then step out of the way again was very strong.

And across Europe, there was this massive austerity wave and the austerity was being done in order to recover after that crisis. But also in Europe often saying we need to stimulate innovation. We should ask ourselves, why are the Googles, the Amazons, you know, all these dynamic companies coming out of the US, whereas we’re too slow in Europe? And the answer was, oh we need to become more agile and, you know, a slimmer state and we need to cut. In fact, we had this huge austerity wave. And the book said, really? You want to innovate? Then what do we actually know about innovation? Would the US even have had the Silicon Valley kind of miracle had the state not played a much greater role than the slimmed down at best market-fixing understanding of the state that economic theory but also practice kind of deliberates.

And so the book was about the history of Silicon Valley and the role that a decentralised network of state institutions across the whole innovation chain, not just basic research, also applied research, also patient long-term finance. For example, In-Q-Tel, which is the CIA’s large public venture capital fund. Anyway, that whole history from Darpa, NSF SBIR, these entrepreneurial state organisations. And I tell the story that without those we wouldn’t have today the kind of competitiveness that people attribute in the US to the free market.

Martin Wolf
So obviously this was a very counterintuitive view at that time. It’s not what most people thought about what had happened. People thought, you know, Steve Jobs created Apple and the whole slew of subsequent innovations came from that. And the iPhone was one. And you argue that actually this idea of the heroic entrepreneur who started the business from scratch is quite wrong. Could you spell that out a little bit more with those examples? Just so that people understand what you’re saying about what really happened, because it’s so important in understanding what you think about this fundamental process.

Mariana Mazzucato
So first of all, Steve Jobs did create Apple and he was a really good, I think, CEO because he reinvested most of the profits back into the company and into innovation. However, he would have had nothing to create had there not been all this smart technology, had there not been the internet, GPS, touch screen, Siri, all these technologies that make smartphones today smart and not stupid. So it’s not enough to have entrepreneurship at the individual company level. What we require are entrepreneurial systems. That’s what I talk about, entrepreneurship not as this myth of the lone entrepreneur, the garage tinkerer or the CEO of a great company like Apple.

We have to admit, Apple’s success came from also being able to surf a massive wave of publicly funded technology. And some entrepreneurs and CEOs appreciate that. For example, Bill Gates often talks about the need for a more innovative state. He actually once invited me to go out to Seattle. I didn’t even see the emails at first. I thought it was a computer hacker who was, you know, pretending to be Gates. And then his team was like, could she please answer these emails? So he flew me out, spent a whole day with him, and he said, look, loved your book. I just think we’re missing it today around what should be happening with the green revolution. So we had a very interesting day together on the back of which, by the way, he then ended up also writing some very provocative and forthright articles. I think there was actually one in The Atlantic about the need for more state investment.

Martin Wolf
I would come in a minute to what you want us to do now, but let’s go back to understand this history a little bit more. You emphasise particularly the development of the digital sector very broadly. So what were the government institutions? So you’ve already mentioned Darpa, which many people know about, but you mentioned also others that people know less about. What were those government institutions that played a seminal role in creating the new digital economy with which we’re now familiar? You know, how did they work together? Did government actually design them in a coherent way or was it a product of serendipity? How much of it was a product of a huge defence sector? Try and understand how that worked, and that seems to me the basis for learning how to do that again in different circumstances now.

Mariana Mazzucato
In fact, my main interest after writing The Entrepreneurial State, even in conferences I organised, for example, one back in 2014 where I brought together what I called at the time mission-oriented organisations like Darpa, like the KfW in Germany, a public bank. The idea was what can we learn of what it means for entrepreneurial state organisations to be problem-oriented? Because those organisations that I talked about, like Darpa, which is an innovation agency in the US Department of Defense, what distinguishes it is that it has always been problem-oriented. The way that the internet came to be was because Darpa, through a military industrial complex remit, was trying to find solutions to problems, for example, how to get the satellites to communicate. The internet was the answer.

Similarly, the navy, they needed to know where all the ships were and, you know, having better oversight of — a wartime need — GPS was the answer. The other examples that I give in the book of organisations are in the health sector, the National Institutes of Health, which have financed most of the big drug innovations in the US. Most new molecular entities with priority ratings for their revolutionary drugs traced their research to the National Institutes of Health, which, by the way, Trump just very recently said he wants to diminish its budget. This would be the first time in history. Reagan increased it. Every Republican administration and Democratic administration has increased the funding to the NIH. So better understanding, how does the NIH work, but also where has it failed? And one of the big lessons was that the US got the investment side right, but then got wrong the deal. In other words, we socialised risks but privatised the rewards. Does it make sense that the prices of medicines which trace most of their high-risk capital-intensive early-stage research don’t reflect that public contribution? Does it make sense that the intellectual property rights aren’t structured to reflect that?

So intellectual property rights patents should not be as wide as they are, so used just for strategic reasons, as strong as they are, hard to license, and as upstream as they are. That’s not what the patent system was actually set out to do. It’s been captured by not just pharmaceutical companies, other companies as well, that have created what I think is a very bad deal for the public side, because we shouldn’t forget intellectual property rights, like many other rights, are not given to us by God. It’s the right that the state gives the private sector for 17 to 20 years to have what’s called monopoly profits. So you can appropriate the profits from an innovation and not have other companies copy you immediately. But what the state gets out of it is more diffusion. By actually codifying and writing down the actual innovation, then ultimately, once a patent is up, it can also be diffused more, right? Because others can learn from it. And an entrepreneurial state should be confident to strike the right deal. It’s not enough to invest if then we allow all the profits just to go to the private sector.

Martin Wolf
So list the moonshots you want. Just give us a framework. Just list the things that you think it is important for governments to be doing right now.

Mariana Mazzucato
Sure. Is it OK if I first say what I mean by moonshot? Because that’s different from the entrepreneurial state.

Martin Wolf
Yes. Absolutely.

Mariana Mazzucato
So moonshots are about how do you then work with others around really bold challenges and not just the military industrial complex one, but just tracing it back to the Apollo program, just think of what was there. First Kennedy saying, we’re doing it because it’s hard, not because it’s easy. That’s a cultural mindset. Second, they actually were very clear on what the mission was. It wasn’t just space race or beat the Russians or Sputnik. It was, let’s get to the Moon and back in a short amount of time. So there was urgency, it was a very clear direction, but also with characteristics. So you could actually answer yes or no, did you achieve it? Sometimes if missions are too vague, that’s not a mission, that’s just a challenge. Third, they realised they had to work with as many private sector companies as possible. The estimates are about 400,000 people got us to the Moon and back and they had to work with so many different sectors. It was not just aerospace, it was nutrition, materials, electronics and software. And they realised they would never get there, first of all, without changing the bureaucracy of Nasa, but especially the tools.

They had this very boring way to work with the private sector through cost-plus procurement. The first thing the head of procurement did was to change procurement to being challenge-oriented with incentives for innovation and quality improvement. So outcomes orientation too. What would the astronauts wear? How would they go to the bathroom, literally. How would they eat and what would they eat? So all these problems that were there, they set out to the private sector, right, that this was a confident public sector that knew what the mission was, broke it down into hundreds of homework problems and worked in this outcomes-oriented way with the private sector, the solutions of which we all know. Camera phones, foil blankets, baby formula, baby diapers, a software. The origin of software as we know it today actually came from, you know, what was required in the lunar module and that sharing of information.

So my interest is, you know, why do we only know how to do this around wars or like, you know, the beat-the-Russians moment? Why not apply that mission-oriented thinking to health where we saw with Covid we had excess deaths because of these really weak health systems we have globally, but health not just in terms of the life sciences or pharmaceutical drug, but real challenges that countries face around their health for all goals. You know, 4.5bn people lack full access to essential health services. That’s more than half of the world population. But just think of particular health challenges. Turn them into those moonshots that are not just about one industry, but are as much about the preventative care, right? And all of a sudden that’s again about lifestyle. Climate, of course, climate change is on course to cause 83mn excess deaths by the end of the century due to rising temperatures caused by greenhouse gas emissions.

And just like the Moon landing was not just about aerospace, climate, of course, is not just about renewable energy. It’s about what we eat, how we move, how we build. A net zero mission, for example, for any country really needs to be intersectoral.

Martin Wolf
OK. It’s time for us now to take a short break. When we return, I’m going to ask you some tough questions about what you’ve said, because there are plenty of people out there who have substantial misgivings and indeed are significantly sceptical about what you’re proposing.

[MONEY CLINIC TRAILER PLAYING]

Martin Wolf
We’re back from the break. Mariana, it is fair to say, as I’ve already indicated, that many of your views are indeed very much back in fashion, and we’ve seen governments pursue them to a considerable extent. But there’s still lots of scepticism in government and outside. And I’d like to start with the moonshot idea and the way you developed it and all the sectors that have to come together.

When you think of the original moonshot — Kennedy’s moonshot — it clearly had huge consequences in many sectors. But essentially its aim, if you were being crude, was sort of a political vanity project. It was to show off American technology. It didn’t have any obvious purpose beyond getting to the Moon. And getting to the Moon itself hasn’t led to anything very significant, though the technology in the process has done so. So it’s very different from what you talked about later on in defining this, which really amounts to sort of quite significant social re-engineering. It’s a social project. It’s a technology project. It’s a cultural project. All these things together. So is the moonshot idea a useful way of thinking about what you’re actually trying to sell, what you, in fact, were selling to us about this basic idea?

Mariana Mazzucato
So the point of the moonshot example for me is we would not even get to the Moon today if we did policy as stupidly as we do policy today. So again, if the state is just de-risking or facilitating or just, you know, patching things up here and there, we would have never been able to get to the Moon. So my moonshot approach is not saying space race, you know, military-industrial complex, copy that. It’s saying, hey, what would it look like if for climate, for health, for water, we had bold, inspirational goals, treated them with the urgency that we treat wars. With wars money comes out of thin air. Even in Germany, you know, after the Russian war in Ukraine, billions were created for that war effort. Just months before, they were fighting over whether there was any money for climate or health. So for war, historically, every country has managed to create money. For our social problems, we pretend there is no money. That’s because we treat war as an urgent problem. Covid was an urgent problem. Money was created. I’d say dynamic public-private partnerships were created. We also figured out how little competency, capabilities and preparedness we had during Covid. You know, it made no sense, I believe, to pay Deloitte 1.5mn a day in the United Kingdom to do test-and-trace. What you need is government capacity, knowledge, capabilities to work well with the private sector. And those capabilities, by the way, Nasa was pretty confident of its capabilities. But the same guy who was the head of procurement, Ernest Brackett, he warned Nasa back in the ‘60s. He said, if we continue to outsource our knowledge, as he was starting to witness, he said, we will get captured by brochuremanship. Really important because that’s what I then argue in my latest book, The Big Con, has happened. We have decimated a lot of government capacity, capabilities which we had for the Moon landing within the civil service with massive outsourcing. It’s fine for government to work with others as we did to get to the Moon. But when government doesn’t even have the capacity, the intelligence, the capabilities, they won’t know how to work with others.

And Ernest Brackett said, we will get captured by brochuremanship. In other words, the private sector will come in and say, we’ll work with you, look how good we are, and they’ll show us these shiny brochures because they didn’t have PowerPoints at the time, which, you know, McKinsey and Deloitte and the others have today. And his point was, we won’t know who’s good and who’s bad. We won’t even understand the challenges, we won’t know how to write the terms of reference. We’ll get captured. So having a capable, entrepreneurial, outcomes-oriented state is critical to know how to work with the private sector.

So all these challenges — water, health, climate — require huge amounts of collective intelligence. And we no longer have mission-oriented institutions. We’re no longer investing within the capacity and the capabilities. We are getting captured along the way. And by the way, the private sector, the good private sector, those who want to be investing in the biggest challenges of our time — and there’s many — don’t have then a good partner to work with. We need to create those dynamic, agile, flexible bureaucracies. That’s why I’ve set up a whole institute at University College London, which is called the Institute for Innovation and Public Purpose, which even tries to rewrite the curriculum that we give in our masters in public administrations, MPAs. If you look at the curriculum for an MBA, it’s much more exciting. It’s strategic management, organisational behaviour, decision sciences. It’s all about value-creation. What’s the equivalent in an MPA? Well, it’s going to be a boring curriculum if all you’re worried about is fixing a market failure.

Martin Wolf
So let’s think about what is involved in doing this. And when I listen to you, I think there are two sorts of challenges. There’s an institutional challenge, creating institutions that do what you want. And . . . but there’s equally, perhaps even more so, a political challenge in persuading the public and the politicians that they need to want a completely different sort of state and to do things which they’re likely to find very intrusive. And because it will involve remaking things that they’ve become quite used to. So let’s focus on these two huge challenges. What would you have to do to make the state able to do what you want and how long will it take?

Mariana Mazzucato
So what missions do is they require the governments to not pick winners, not think that they already know ex-ante what are the technologies of the future, what are the sectors we’re going to call the top sectors, but to pick those problems that then require lots of different actors who are willing to work with government to solve those problems. It’s hard. But the first thing is to change the mindset. This is about setting bold objectives and becoming serious about it and making sure those objectives don’t go down the rabbit hole of one ministry. I believe that missions have to be at the centre of government, and that zero emission is not just for the Department of Energy. A wellbeing and health mission is not just for the Department of Health.

So in Brazil right now, I find it very interesting — with Lula’s administration whom I have been working with — that the ecological transition strategy is actually in the president’s office. And that requires the different ministries, including finance, to rethink their role. In Germany only once they were very clear around their energy strategy. That meant that their public bank had to change how it was interacting, for example, with the steel sector. Steel in Germany received a loan conditional that they commit to lowering the material content of production. How they did it was up to them. But the only reason there is green steel in Germany is because the government set that as a condition to a loan, whereas in the UK, for example, we tend just to give out money to sectors including steel, that are in trouble with no ask of what we need from that sector. Training, investment, innovation.

During Covid in the UK, we gave a huge amount, I think it was about 600mn to easyJet, one of our airlines, no conditions attached. In France, during Covid, a more confident government, not perfect, but interesting to see the difference, the loans given to both Renault and Air France were conditional that those companies commit to reducing their carbon emissions over three or five years.

Of course the private sector would prefer just to be given a handout, but society ultimately won’t benefit by just having money, you know, helicopter money. This is all about making sure that we’re, again, working with the willing around big goals and making sure that we don’t waste any lever. So when we’re just giving out money or having tax incentives or bailing out banks and so on and so forth, without a direction, we risk to have economies that generate high profits and not high investment. And ultimately, because growth is a function of investment, it’s not surprising that low-growth countries have low investment, have low productivity. These are all related, but we need directed growth. Emissions, to me, is just an example of how to do that.

Martin Wolf
So one of the questions I have, if we think of the motivations for governments to do this and the politics, that we are sort of moving back into what looks like another cold war, which is a conflict with China, at least from the US point of view, but beginning to emerge also in European thinking. From your point of view, given the objectives you want us to pursue, is this a good thing? Because unpleasant though it is, it will get people motivated to doing things, for instance, making sure that China doesn’t dominate the renewable energy chain? Or is it a bad thing because basically it makes it impossible for us to collaborate over what are in many cases actually not national, but global problems?

Mariana Mazzucato
It’s interesting. I was interviewed by the Financial Times’ The Banker magazine. Does that still exist?

Martin Wolf
I think it does, yes.

Mariana Mazzucato
OK, great. Some years ago, and I was asked to comment on China. I think it must have been during Trump’s first administration. And I said China is learning the secrets of the US’s entrepreneurial state at the same time that the US is unlearning those lessons, because at the time Trump was following more of a mercantilistic policy of tariffs, walls, trade wars, whereas the history of US competitiveness was from this active industrial strategy through this decentralised network of public agencies working with the private sector. And I argued that China was looking very carefully at that history. And fast forward today, what’s interesting in China is they have put their money where their mouth is. They have made huge amounts of investment. So the reason they are winning the electric vehicle race and the renewable energy race is because they have invested massively in that.

Now, obviously, then there’s the geopolitical side of things. And what’s definitely true, which I argued in Mission Economy, is that unless we treat these problems as urgent, as related to security concerns, then we just don’t see money being created. So what’s the lesson? Not to just start spending a lot on wars, but how do we treat the climate crisis, the health crisis, for example, to be prepared for the next pandemic? What does it mean to treat those problems with an equal level of urgency, commitment and good public-private partnerships? By the way, when Darpa or even Barda, similar organisation in the US Department of Defense, have spent money on health, the soldiers get sick on the battlefield, the Department of Defense, because they want to win the war, have always structured the public-private partnership properly with advance purchase agreements which keep prices and costs low with good negotiation on intellectual property rights, with sharing of knowledge, and especially make sure that soldiers have access to what the Department of Defense invested in. It’s just obvious.

Why do we not use that kind of logic when it’s just these societal, health-related challenges? So the truth is that only with war or when with health pandemics when it’s too late because excess deaths are happening, we wake up, then the normal times come back and we become stupid again. So my point is not wars are good; frame this as the military-industrial complex. It’s how come we know how to do it just when it’s about war. So, you know, let’s then admit that the reason we’re not doing it for these societal challenges is we have chosen not to treat them with urgency.

Martin Wolf
All innovation is a trial-and-error process. And things fail. They succeed and they fail. Politicians, and I’ve seen, we’ve seen this in, for instance, that all the hysteria about Solyndra in the US, and politicians like making hay of their opponents’ failures. And that tends to make governments, I think, very timid. How do you make the politics of failure work?

Mariana Mazzucato
So I actually used the Solyndra example already back when I wrote The Entrepreneurial State. The same time that Solyndra got this massive guaranteed loan, it was close to 500mn, Tesla got basically the same amount, 465mn. What the US did right was actually see these things as a portfolio for the green transition. This was Obama post-financial crisis, whereas Europe was just doing austerity. They had an 800bn fiscal stimulus and they designed policies like this. Where they went wrong is they socialised risks, privatised rewards. So Solyndra went bust. Taxpayer had to pay up the bill and got pretty mad. And politicians, you know, fought over that. Tesla goes well and we allowed, you know, all the profits to go private.

What they should have done, instead of saying to Tesla, if you don’t pay back the loan, we get 3mn shares in your company. They should have said, if you are successful, you will show gratefulness by allowing us to have 3mn shares in your company. And that’s part of the deal. The price per share went from 9 to 90. That difference multiplied by 3mn would have more than paid back the Solyndra loss. And that’s what I mean by an entrepreneurial state. It’s a public venture capitalist. Instead of just helicopter money and pick up the downside and allow the upside to go private.

Martin Wolf
Can we do this moonshot, this sort of restructuring of the way we approach the future collaboratively? Because we actually really are talking about governments, national governments, but a lot of these things are actually global challenges and that’s already implied in the way you put it. Doing things globally, global health, climate and so forth, this is another big leap. It’s bad enough you already said all the national governments are hopeless and now you want to make them all to work together. That seems almost unimaginable.

Mariana Mazzucato
So I don’t think they are hopeless. I think unless we rethink the role of state, they will remain too weak to work well on these global problems. So the G20, for example, I was asked by Lula to work around a G20 report around climate. And what we said was it’s not enough to have a green industrial strategy, but we need it. It’s not enough to have green finance, but we need it. What we need is a global governance system on top of that, which makes sure that what looks good in one country, for example Biden’s Inflation Reduction Act, which had a huge level of kind of green transition, green investments in there, is also good for other countries. Why? Because the climate challenge is a global challenge. Just like we can’t have vaccine apartheid during Covid, we can’t have green nationalism because the climate problem is a global one. And so, for example, technology-sharing, knowledge-sharing agreements that make sure that with the subsidies in the US for green investments, it’s not siphoning out green capital from Africa, that doesn’t happen on its own. We have to design it into these global governance mechanisms. The problem is, where would that sit? Is it a reformed WTO or not?

And similarly, I just worked for two years on the Global Commission on the Economics of Water. Similarly, we say the global hydrological cycle is global. Deforestation in Brazil has been shown to cause droughts and floods in other parts of the world. So the global partnership around this is absolutely needed if the mission itself is a global mission to preserve the global hydrological cycle. But, you know, again, during Covid, we knew we were globally connected. We were only as safe as our neighbour was not just on the street, but globally. And yet we’ve resorted ultimately to nationalistic policies which were terrible. So we should be learning from these mistakes and not waiting whether it’s for the next pandemic or the next massive climate problem to learn how to work globally.

Martin Wolf
Mariana Mazzucato, thank you so much for joining me. And I must say I’m looking forward to seeing whether progress will be made in the direction you seek under the new US president.

Mariana Mazzucato
I do, too.

Martin Wolf
Thank you.

Mariana Mazzucato
Thank you.

[MUSIC PLAYING]

Martin Wolf
That’s all for this week. You’ve been listening to The Economics Show with me, Martin Wolf. This episode was produced by Laurence Knight, with original music from Breen Turner. Our executive producer is Manuela Saragosa. Cheryl Brumley is the FT’s global head of audio. I’m Martin Wolf. Thanks for listening.