The investments that went into what we call today artificial intelligence, including, you know, LM models and think which models, speech recognition dates, you know, decades. And like so many other areas, that was led by government. So if you look at even DARPA, which, as you know, was the lead investor in the internet, it came from problems mainly in the military-industrial complex that then required, ultimately, what we're calling artificial intelligence today. But again, in The Entrepreneurial State, I talked about how everything in our smartphones that makes them smarter — not stupid internet, GPS, touchscreens, Siri, and so on — where government finance was very scary today. What makes today different with AI is that that's not really necessarily going to be true much longer. Why? Because these massive economic rents — and I call them rents, not profits — so excess profits in excess of what these companies actually did, because we privatized all the rewards from this massive social and collectively created value in this area. They have so much money, right? Trillions. Not billions, trillions. The salaries they are paying to the top researchers in universities, both public and private universities, and to people who used to work in the NASAs, the DARPAs, the coffers in Chile — they are going now to work in these companies. And that hemorrhaging of talent, of top research expertise — I don't think people are talking about this enough. It literally is the biggest change.
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
We're still here in Madrid. Tracy.
Still here. You have a good time?
I am. I've eaten a lot of ham and cheese, and that's pretty much all I can say.
Yeah, I'm going to turn into a ham on by the time I leave. I'm certain of that.
You know, so we are at the Bloomberg CityLab conference. You know, it's funny, like the mayoral level of politics is not something we spend a ton of time typically on. But I would say, like, it definitely — you know, when I think about it, when I'm like here and like listening to a lot of conversations, it's just so obviously like connected to a lot of the themes we talk about, because so much of our discussions have to do with something related to, you know, innovation or technology or implementation of policy and how it spans both the public and private sectors.
Yeah. I mean, also when I think about a lot of topics like AI or housing affordability or inequality, like cities — I think CityLab actually used this phrase at one point — but cities are really at the frontline of all of those challenges, right? And trying to implement policy at that local level in a way that's like very easy to see and observe and also to judge.
Totally. Yeah. No, it's exactly right. And I think maybe there's something like, you know, I don't — it feels like to some extent the mayoral level of any governance is sort of maybe the least ideological and the most like, you know, we talked to the Baltimore mayor, for example, and so much of his theme was just like talking to other mayors, like, what's working in your city and what's not working and so forth. They all have such similar challenges. So many things have been like repeated, you know, one time after another that, like, they all can sort of speak the same language and all have the same issues.
Yeah, it's funny, you kind of get that local idea swapping at a mayoral level that I cannot imagine necessarily happening in national politics. Like, can you imagine Trump and Xi Jinping getting together and be like, oh, we implemented this really cool, like, national transportation program. Have you tried it?
Yeah. You know, you hear like these stories, right, of a governor — a governor sometimes or a mayor will go to like another country and is like, oh, we can learn from what the city did on transit or whatever, but now you don't really hear that the same way at the real national level, which is where a lot of our discussions tend to sit.
Absolutely. And I'm really excited about today's episode. We're going to be speaking with a guest who I would say, like, since we've been doing Odd Lots, is actually one of the more frequently requested, long requested, and so it's sort of a failure on our part that, like, we just, like, never made it happen before. But yeah, someone who like really like whose whole career is like dedicated to a lot of Odd Lots of things.
Well, we waited until we could do it at Madrid. That's a perfect — just like do it at any other random venue.
Yes, it was all very strategically designed. So we really do have the perfect guest, someone that a lot of guests have wanted to listen, to hear from for a long time. We're going to be speaking with Mariana Mazzucato, professor at University College London and founder of the Institute for Innovation and Public Purpose, author of several books sort of touching on these themes of technology, public sector, private sector, the roots of innovation, how these things actually get deployed. So Professor Mazzucato, thank you so much for coming on Odd Lots. Thrilled to finally have you on. Finally, finally — completely our fault for not having made it happen sooner. But what do you do? Start it. What are you doing here? What brings you to this particular conference? What attracts you here?
Well, first of all, I'm here also because the government of Spain is really kind of leading the way in many areas that I'm very interested in, especially the kind of new economic thinking that needs to underpin how we rethink government. And so I was meeting with both the Prime Minister and the Minister for the Economy, Carlos Cuerpo, who I'm on a panel on today with, about a council that we've just set up. It's called the Global Council for a Common Good Economy. Anyway, and besides that, I'm also here to speak at the Bloomberg CityLab event about this new public sector capability index that we've been developing with them as a partner, which is really about, you know, reinvesting inside the civil service so that they can really tackle those wicked, complex problems instead of, you know, hiring Deloitte during Covid and giving them 1.5 million a day to do test and trace, which they failed at in the UK.
I definitely want to get you to go off on consultants. But before we do, like when you meet with someone like the Prime Minister of Spain, what is it that they want to know from you? Like what information or expertise are they seeking?
Right. Well, I'm actually quite lucky that my books actually get read by the Prime Minister. So usually what happens is that they've — especially The Entrepreneurial State, which I, you know, wrote in 2013, that had quite a bit of an effect here. They even wrote a report called 'El Estado Emprendedor en España.' And they really want to ask me, you know, what does that mean? What does it mean for actually even being able to fail, for example. Right. So venture capitalists are always bragging about all the failures that they had in order to get a success, you know, whereas as soon as a civil servant or a minister fails or a prime minister fails, front page of the papers. So they're very interested in the kind of narrative change, but also the cultural change, but especially the theoretical underpinning within, say, a finance ministry or an economics ministry that needs to then accompany rethinking government. Because otherwise, if you continue to have the old economic models where we judge things by cost-benefit analysis and net present value, all these really static metrics, we would have never even bothered going to the moon. Okay, first of all, in the 1960s, had we thought of it as a cost-benefit calculation.
And so what should replace that? Right. So you mentioned The Entrepreneurial State being published in 2013. And I feel like I need to emphasize this because like there has been this mind shift since the 2020 pandemic on industrial policy. And we kind of take it almost as a given, especially on this show, that there is a role for governments to play when it comes to innovation and entrepreneurship. But you were there very early. Did you feel vindicated by the 2020 shift?
Well, I think there's a bit of a misunderstanding that just because government is spending a lot of money, investing a lot of money, whether it's the IRA or the Next Generation EU 2 trillion recovery plan in Europe, that that means that industrial strategy is back or that, you know, government is being really strategic. It depends. And I mean, that's the whole point, right? You know, how are we actually framing it? Is it just a lot of tax incentives? Are we focused too much on sectors? To what degree is industrial strategy actually helping to create a more inclusive, sustainable, innovation-driven economy? Or is it just another way of handouts and subsidies to particular sectors? And then we end up socializing risks and privatizing rewards. And also, I mean, I used to joke that the US government has always had an industrial strategy, but, you know, pretending not to. And they've always, you know, talked — Jefferson talked but acted the Hamilton talk, or the Hamiltonian kind of more, you know, proactive government strategy. But by pretending that wasn't there, they kept a lot of things under the radar. And the joke bit is just that finally people understood what the hell it was talking about because of the musical — before the musical came out. Anyway. So I think that's really important to recognize that industrial strategy has always been there. Yeah, except that in certain phases, including now in some countries, it's not really strategy in terms of being driven by public purpose, which, as you said, is the title of this Institute for Innovation and Public Purpose I direct. It's been just kind of vertical strategies, focused on sectors, technologies, types of firms. Right. The whole focus on small and medium enterprises. So what I've been trying to do is to say stop focusing on sectors, technologies and firms, focus on big problems. Right? As bold as going to the moon and back in a short amount of time. The mission idea, the missions that then require sectoral support. But you're not getting support because you are a particular sector. Yeah, you're getting support if you're willing. So moving away from picking winners to picking the willing — if you're willing to work with government around these very difficult challenges, which could be, as I don't want to say simple, but as concrete as making sure that every child in the country has healthy, tasty, sustainable school lunch. Right? Not just school lunch. That was the Reagan thing where he said ketchup is a vegetable so we can reduce the cost. We all had T-shirts of Reagan and ketchup, which was the vegetable is what the T-shirt said. So having moonshots, even on something as simple as a cafeteria, that then requires innovation across many different areas. It requires government to wake up and not just have that be done, for example, from the Department of Education, you know, Department of Agriculture, health, education, finance would work together on a moonshot of healthy, tasty, sustainable school lunch. So that inter-ministerial coordination, which we saw during Covid. Yeah, right. So we had the war room, the Situation Room, you know, the military, education, health and so on together because we had these really difficult challenges. But as soon as Covid stops, we go back to very siloed ways of thinking.
As someone with two kids in the New York City public schools, I can absolutely confirm that the degree to which they associate the mayor with school lunch policy is extremely real. And they'll talk about like, oh, we used to have these like really nice waffles or something, and then Eric Adams got rid of them or so. Like they're really like key single-issue voters. Like single-issue. They're like really pay attention to the degree to which school lunch policy shifts with administration. And just like they're really yeah. They really think what is state capacity? Well, we've been using this term for years on the podcast. And we were like during Covid, we're like, you know, it took, you know, a long time to stand up testing facilities for censoring people like our lack of state capacity. But what is it? What's the difference?
So we actually distinguish between the word capacity. Okay. Routines, kind of administrative routines, and then capabilities. Okay. So what states are often — what governments are often lacking are those kind of dynamic capabilities. So capacity partly is like literally do you even have fiscal space? Do you have a budget? Okay. But also, you know, how are you thinking about that budget in terms of do you — well, put it this way. Capacity is, you know, number of people working in your administration, the budget that's been allocated, perhaps also the training, you know, that the civil service actually has. But capabilities are what you actually then do with it. Are you agile? Are you flexible? Are you able to pivot during Covid and actually start working in this more again inter-ministerial way? Do you know how to work with others? Right. You know, do you set up good partnerships or are they problematic partnerships? And also you were talking before about what you're learning here, which is fantastic, about how mayors can learn from each other. Right. Have you invested in your ability to learn, to adapt? And so I think that latter, you know, this concept of dynamic capabilities is a much more complex area to be investing in. And the only reason you would do it is if you actually have a theory about government that is more than what traditional economists think about government, which is at best — well, at worst, get out of the way; at best, fix the market failure. So as soon as you say actually it's about shaping and co-creating a different type of economy and society that works for people and planet, then the question is, what does that mean for the capabilities that you need? If you're just fixing, then you just need a lot of bandages. And that's in fact what we get. We get very reactive, kind of filling-the-gap kind of policies.
Pendulum constantly swinging.
Exactly, exactly. But I mean capacity of course is essential without, you know, a budget and fiscal space, you can do nothing. That third category that I mentioned quickly, administrative routines, that's, you know, are you also, you know, do you have a stable environment where you can learn by doing? Because if you're constantly changing what you're doing, it's going to be hard to have a learning-by-doing dynamic. So those kind of administrative routines, I even see this on my university where as soon as you get a lot of turnover, even those kind of basic routines aren't there. But capability. So these three areas — capacity, routines and capabilities, you know, are equally important. But the capabilities are really what I find are lacking. And it goes back, as I was mentioning before, to the underlying economic dogma that has underpinned the way that we think about policy, government at different levels, that by design, not by coincidence, is reactive.
Have consultants become a substitute for state capacity, routine administrative ability? Right. I always wonder how we got to the point where consultants are so big anyway, because it feels like every time you hire a consultant, it's almost an admission of failure on your part to be able to do something right. And nevertheless, it's a widely accepted practice across governments.
So my last book actually was called The Big Con, so con, free consulting, and the subtitle was how we've weakened businesses, infantilized our governments and warped our economies, basically due to this consultification. I wouldn't blame the consultants. I mean, I actually blame governments, right? Like, why are you opening the door so wide, right, to consultants? And it's fine to have advisers and some consultants. The problem is when they are actually doing the core tasks that government should do. Again, test and trace during Covid was a core task. And so I think it really stems from, I'd say, the 80s when we, you know, the kind of Reagan-Thatcher years, if you want, it always goes back to Reagan. Yeah. But actually in the UK, for example, it even increased more during the Labour government. So it's not, it's not, you know, one party. But it did begin, I'd say, in the 80s with this kind of downsizing of governments, which then ironically cost them more because as soon as you start downsizing without really strategically thinking what you need and what you don't need — of course you should trim the fat. There's no reason to have a, you know, a bloated government structure. But when it's done for ideological reasons and not strategic reasons, then, you know, ironically, then you end up not having those capabilities that you need as soon as you have a flood, or, you know, Brexit or Covid. And so I think then what happens with the consultants is, you know, it's not their fault that they're invited in. I do think it's very problematic what they end up doing once they're in. So there's huge conflicts of interest. Well, the biggest conflict of interest being that they have no incentive really to make government better later because they would have no contracts. It'd be like having a therapist your whole life that therapist is not very good.
Which is just how the therapy model.
Yeah. Well, do you remember this came up in that episode we did about construction in New York and this idea that like one of the reasons it's so expensive and takes so long for like public-funded projects is because consultants have no incentive to actually get the project done.
