April 2014 newsletter - Letter to the editor - Government investment
01 Apr 2014
Mariana Mazzucato, in her Features piece ‘Government investment, technology and growth’ (Newsletter no.163 October 2013) sets out a seemingly compelling argument in favour of government sponsored and funded ‘mission oriented’ investments to drive long-run economic growth. It is a cogently argued case but I have a feeling that there is here a whiff of strategic trade theory: the idea that governments can shift rents to domestic from foreign citizens by intervening, in order to gain first mover advantage, in the development phase of (prospective) industries dominated by scale economies. It is perhaps no co-incidence that Mazzucato highlights, in support of her own proposals, the late twentieth century activities of the US government and its involvement with R&D intensive companies. It was precisely such companies that were in focus when the US government flirted with the idea of strategic trade policy at a time when Laura Tyson, a proponent of the idea, was Chairman of the Council of Economic Advisers, during the Clinton Presidency.
Mazzucato’s basic argument for intervention places much emphasis on the assumption that businesses are too ‘timid’ to invest in high risk, potentially ground-breaking, new technologies and therefore governments need to take the lead. Spending large sums of public money, however, will not, Mazzucato claims, add to long-term debt because of the fillip to GDP that will come as a result of such government enterprise (picking winners of course). What I find particularly interesting is her argument that private finance, even at current low rates of interest, is just ‘too risk-averse — afraid — to engage with industries characterised by high technological and market risk’. In her piece Mazzucato does not elaborate on why the capital markets should be timid or why they should now be timid when this clearly was not the case in the past. One has only to reflect on entrepreneurial behaviour during the Victorian Age to see the evidence of risk taking on a grand scale. For example, the Victorians and their Georgian forebears during the Industrial Revolution, built 50, 000 kilometres of canals, turnpikes and railways, many projects requiring huge financial outlays on vast structures, without a penny of public money.
So, to my mind, the interesting issue is why, as Mazzucato is suggesting, has the behaviour of the capitalist changed so much? Perhaps I can conclude by offering a possible answer to the enigma. I would suggest that the capitalist in the twentieth century became so used to the government stepping in, particularly after the command economies of the two world wars, that the markets became reliant on, if not addicted to, government guarantees, bail-outs and subsidy and became risk-averse in the process. One might say that the risk aversion that Mazzucato relies upon for her argument is itself borne out of government debt.