Can Capitalism Serve the Common Good? - ft. Mariana Mazzucato | Capitalisn't

In a world where we talk about goals constantly, where we even have the SDGs that every country signed up to, are we even capable of getting any closer to achieving those goals? And I say no, by design, not by coincidence.

Nobody handed us these markets. They were designed — patent law, corporate charters, procurement rules — would get bailed out and what is left to fail. Every one of those was a choice somebody made, and that somebody was not you.

What I was interested in was the common good, and actually philosophy as a discipline has debated it much more rigorously and dynamically, I think, than economics. My critique of, for example, notions of the public good in economics is that it's just a correction, right? If the private sector doesn't invest in something — whether it's defense systems, basic research, clean water — we expect the public sector to come in and fill the gap. So the thesis of the book was we need to learn from philosophers how the common good is an objective. It's not a correction. And how we relate to each other along the way — capital-labor relationships, government-citizen relationships, and especially what I focus on, public-private relationships — matter as much as what we're trying to do. And that notion of good, the objective, should be embodied in the contract. So in the relationships, how they're designed from the beginning, ex ante, in a predistributive way, so we stop having to pick up the mess ex post.

Now we're both Italian, by the way. Luigi surely studied philosophy because he, luckily, he's very lucky, he went to an Italian high school, probably.

Classical. Actually, every Italian actually knows philosophy. I was born in Italy, unfortunately we moved to Princeton when I was little. So it's also a bit of a philosophy, how do you say, wannabe for me.

That's such a good point because that's also why I wrote the book, to be honest. I'm going to keep saying that for every question you ask, to call out those who are common goodwashing, right? This word actually means everything and nothing. So the idea of having a compass to break down the common good into these five principles. These elements are supposed to hold anyone — whether it's businesses who show up in Davos and talk about a purpose-oriented business, or governments who say they're interested in the SDGs or any goals — to hold them accountable. One is even being very clear on what you're trying to do. There's so much vagueness. Think of the SDGs. They're very vague. So, climate change, okay, yes, it's a problem. What would climate action look like if it was really kind of purpose-oriented? So that also people can contest what that purpose and direction is. And that brings us to the second element, which is co-creation and participatory kind of fora. In other words, who sets the goals? Is it just a technocratic state telling us all what's good for us, or do we, based on these broad challenges — which should really be how governments also get elected — actually make sure that they then land and are kind of co-created with people based on their lived experience? The third principle is knowledge sharing. There's no point in talking about the common good if we continue to privatize all the knowledge along the way. Just look at what happened during COVID, where only one of the companies agreed to share knowledge even during a global health pandemic — that was AstraZeneca. Fourth is sharing rewards, based on a lot of the work I've done on the history of Silicon Valley: huge amounts of public investment, shared the risks, privatized the rewards. And fifth, transparency and accountability. If we don't even know who's doing what or who's earning what and why, it's very hard to govern a system towards the common good.

Those normative kind of ideas of what we should be achieving, the book does not talk about. The book says: in a world where we talk about goals constantly, where we even have the SDGs that every country signed up to, are we even capable of getting any closer to achieving those goals? And I say no, by design, not by coincidence. And that's not just because you have certain, you know, leaders like Trump who, you know, debates the science and says we don't even have climate change. Even those who really believe in it are not achieving the goals. And I just say it's really impossible in an advanced capitalist society where you have large multinational corporations, medium-sized companies, small companies, startups, lots of different civil society organizations, different state actors to work together. If at best we think about one of the most important actors, which is the state, that at best sees its role as filling the gap, it's going to be impossible for you even to build the capacity, the capabilities, the intelligence within, because how it's been framed from the start has been to just fix a market failure. So how do we start from a different position, a Polanyian kind of position? I don't know if you read Karl Polanyi's amazing book, The Great Transformation. He wrote it in 1944. He says markets wouldn't even have existed without being forced into existence through very active public administration. So that already breaks down the idea of state versus market. The market is an outcome of how we govern public institutions, how we govern private institutions, and how we govern their relationship. And when you have companies that are just wed to shareholder value, government organizations that are just kind of inertial, not flexible, and just thinking that at best they can fix markets, it's going to be very hard for them to work well together. And you're going to have a pretty problematic relationship between the two. And in terms of that kind of ecosystem, as I said before, you will often have that actor, which is the business sector, that's glorified as creating value, and the other one is just redistributing, administering, fixing, de-risking, facilitating, also having a very hard time to attract the kind of talent that you require to set up a good relationship.

I didn't want that subtitle. Look at this — this is the English subtitle.

The things the publishers do to us.

So a system which is driven by incentives for change, that stimulates entrepreneurship, you know, knowledge, technology and so on, I think is extremely important. How to direct that innovation — not top-down micromanaging in a technocratic way, which as we know will kill the innovation, but with strong direction. So the second institution is governments that are democratically, so not dictatorship, elected. The question is then how does that government work with business, which is a fundamental aspect of capitalism, right? The modern enterprise, the firm. How do we also admit that companies can be governed in very different ways? So I don't think there's one way to do capitalism. Corporate governance in Scandinavia and in other parts of the world might have trade unions on the board of that company at the table to not just defend the worker, or increase the wages, improve working conditions, but to actually set the direction of change. So that's another thing which doesn't exist in capitalism, but in some capitalist countries I would definitely keep, which is experimentation of different corporate governance forms which admit that value is created collectively. You know, labor creates value. Again, that's a very important thing that came from Marxist economics. But by the way, people don't realize that Marx said so many interesting things about capitalism. Forget communism. He actually talked a lot about innovation. He studied the effect of innovation on, you know, different economic dynamics. What's striking about neoclassical economics, as Schumpeter said, was that almost in order to talk about innovation you have to talk about imperfect competition. And so of course we all know that we don't have a bunch of small companies that are perfectly competitive — fine, all economists know that. But what's weird about neoclassical economics, Schumpeter said, was that to talk about innovation you had to then distance yourself from this benchmark of perfect competition. And how weird is it, given that competition itself between companies is also the answer to your question, which is it's a key dynamic of capitalism, it's a key characteristic of capitalism, and then to talk about it, to talk about how they're competing through innovation, we have to talk about imperfect competition. He said we obviously have the wrong theory of competition. That was actually Schumpeter's really important contribution. So I think those three things I would retain: that we have a system which is driven by innovation, a system where to compete firms are having to kind of produce higher quality, I would say accessible products. But the direction of that innovation will often bring us the wrong kind of economy, the wrong kind of society. Look at what's happening today with artificial intelligence, which is completely undirected.

By the way, it's one of the first times that such a large innovation is so undirected. I wrote about it in my previous book, The Entrepreneurial State, where large innovations that we've had from the IT revolution, nanotech, biotech, the whole energy revolution, often came out of huge problems that the government was actually trying to solve. Right? The internet came from government wanting to get the satellites to communicate. GPS came from the Navy wanting to know where the ships were. The fact that we've had this problem-oriented innovation mainly driven by the military-industrial complex, which then involved lots of private sector actors — 400,000 people got us to the moon in the private sector but directed by government. I think that's a really functional way to think about innovation: strong direction by government, lots of private initiative, bottom-up, not micromanaged. But the big question that I've been putting in my previous books was: why do we only know how to do that with the military-industrial complex? Why haven't we figured out how to have this bottom-up innovation, intersectoral in industry, directed by government for our health challenges, water challenges, biodiversity challenges and so on? And so what I would retain are these kind of fundamental levers of a government that in theory can help direct the show, not by micromanaging, but using tools like outcomes-oriented procurement or public loan systems to incentivize innovation in the business sector, which will be competing amongst each other for market share, but that it's directed not top-down towards solving big problems. Some will win, some will fail. What I would throw out is this financialized form of capitalism. You know, $7 trillion have been used by the top companies in the last 10 years just to buy back their shares, to boost stock prices, stock options, executive pay — that is a result of coming back to shareholder value capitalism. I would definitely throw that out. Finance, how the financial sector itself is structured. In my country, the UK, 80% of finance goes back to finance. So finance, insurance and real estate. So we have been very poor in the modern form of, say, mainly Anglo-Saxon capitalism to get finance to do its job in the real economy instead of just a gambling casino. I would get rid of something that you've written about, Luigi, in terms of how we are governing intellectual property. I mean, that's not what patents were for. We are currently patenting really upstream in the innovation process. It was mainly meant to be more downstream. Patents are way too wide. They're just used for strategic reasons, too strong, hard to license. So we have misgoverned a fundamental tool that should in fact be incentivizing innovation, instead it's blocking innovation and creating very large monopolies. But again, this brings me to kind of two books ago when I wrote Mission Economy. What The Common Good says is actually to do this stuff not for the military, but on health, on energy, on the digital divide, on inequality. The problem is it's so easy just to come up with these goals, but what we see happening along the way is a really dysfunctional public-private partnership along the way, and so to have a compass which holds that relationship accountable.

Okay, so I mean there's a lot in what you said and I'm not sure where to start. So first of all, Schumpeter had two big questions, right? One was: is it large firms or small firms that are more innovative? And another one was: does innovation lead to a more competitive or more monopolistic market structure? He changed his mind along the way. At first he actually took on much more the notion that it's going to be small companies competing and that's going to create the more Schumpeterian dynamic. And then he's like, actually, if you look at what's happening with innovation, with these large research and development laboratories that are needed in order to compete, we're going to end up only having large monopolistic companies that are even able to enter that competitive race, and the rest are going to get kind of shaken out of the system. I think the more interesting work was asking not which is true, but under what conditions — whether it's what kind of industries you're looking at, what phase in the industry life cycle. With AI, I think what's interesting first of all: currently all the knowledge, like all the top AI geeks, engineers, you know, computer scientists and so on who know a lot about AI, are working for the companies. There's a huge hemorrhaging of talent from the universities and definitely from the public sector. We have to reverse that, and government will never know how to govern AI in the public interest, for the common good, whatever word you want to say, without the knowledge of how this stuff works. It's actually incredible how little mission there is, in terms of mission economy that I've talked about, by governments around AI. At best, you hear them saying, 'Oh, AI can help us solve this problem, whether it's health or climate action and so on.' But in terms of how it's being governed and regulated and innovated in — because government for the previous technological revolutions didn't just regulate, it also invested, it led the investment, it led the innovation in the ways that I talked about before — that is no longer happening. So this is really the wild west, and that's not necessarily competition, right? That's just very unregulated capitalism where because there's no rules, there's also potentially less reason to innovate. Don't forget that a lot of innovation comes about because there's rules. We would all be dead if we were just eating, you know, food or medicine that could be produced in any which way, because there's regulation of the pharmaceutical industry. That industry had to innovate more, right? Because it couldn't just do anything and sit on its back and produce whatever.

What the debate is, which I tried to debunk, was that then the government should step out of the way, do the basic research, and then slowly that research will get diffused and companies can benefit from it, and somehow other kind of more applied innovations will happen, venture capital will step in, fund startups and so on. And I said, really, in what world? That's not what happened in Silicon Valley. Of course government invested in the upstream basic research, but it also had these, you know, places where basic research and applied research came together, and the DARPA, ARPA-type institutions. So not just the NSF type, but those kind of more applied, further downstream. We had public venture capital associations like In-Q-Tel, which very few people talk about. It's a CIA-run venture capital company that actually was very important in funding some companies that today we think just came out of private venture capital. Private venture capital was important, but it often came after the government gave these SBIR-type grants — so Small Business Innovation Research grants to small companies through procurement contracts — which allowed those small companies to scale. So I actually, in the book The Entrepreneurial State, look at how a lot of venture capital funding came only after government gave that more patient, long-term funding, because venture capital is very impatient. They often want to exit or IPO or do buyouts in three to five years, where most of the big innovations in IT, again in biotech, nanotech, AI, required 15 to 20-year cycles, and most of that early, high-risk, capital-intensive, patient financing came from government. So the point of The Entrepreneurial State was not to say, you know, companies are crap and you just need governments. It was to say, hey, look at this amazing capitalist innovation machine. Look at what was actually required by smart strategic outcomes along the whole innovation chain. Look at how they worked with the private sector, often trying to solve problems. My previous point, which I won't repeat. And then why do we only know how to do it in wartime? Why do we only know how to do it for the military-industrial complex? Then it's a choice that we make. It's not any natural property of the system to not do that also for these other challenges, again health, climate and so on. And the point of the private sector, of course they should make a profit, but not excess profits. What's really interesting, by the way, is that NASA, because they were very confident of their role in the moon landing, they put into all the contracts with the private sector 'no excess profits', which means no rents, which Adam Smith cared about. Right? Adam Smith — the free market wasn't free from the state, it was free from rents. That distinction, I don't think in modern political economy is as alive as it used to be with, you know, Ricardo, Smith, Marx, and others in that tradition. Classical political economy: the difference between profits and rents, Schumpeterian profits versus Ricardian rents. That's what government should be doing, working with the private sector, not getting captured along the way, and making sure that we have not just profits, but that they're profits that are fair given who did what — literally sharing risks and rewards.

You know, if we want to say government just do what neoclassical theory says, which is invest in the basic research side of things and then get out of the way, we would have never had Tesla. The US actually had a massive fiscal stimulus, an $800 billion fiscal stimulus under Obama with the Secretary of Energy. They set up ARPA-E, like DARPA but for energy. But they also started to give out all these guaranteed loans in a portfolio approach, so trying not to put all their eggs in one basket, to different companies that were in that kind of, you know, clean tech, renewable energy revolution, because they wanted a green stimulus. Some companies that got the loans were companies like Solyndra, which ended up going bankrupt. They got $500 million in a guaranteed loan. Tesla, a very different company within the same kind of portfolio, got something like $465 million. So Solyndra goes bust. Taxpayer picks up the bill. Taxpayers rightly perhaps pissed off. They're like, why do we have to pick up the bill just when things go wrong? But that's not how it was presented. Tesla does well. And where does the money go? Where do the profits go? Private. What they said to Tesla? They said, if you don't pay back the loan, we want 3 million shares in your company. They should have said, and here's my point, we are going to get 3 million shares if you do pay back the loan. They did pay back the loan. The loan was taken out in 2009, paid back in 2013. Price per share in that period went from 9 to 90. That difference multiplied by 3 million would have gone back into some sort of public venture capital fund ideally, and it would have paid back the Solyndra loss and the next round of investment. But coming back to Luigi, I do agree that when you're funding basic research, you shouldn't care about that. You just want the spillovers to be as high as possible. It would make no sense to talk about equity stakes for research. This wasn't research. This was a guaranteed loan. And it makes no sense for governments to give guarantees and only pick up the mess and not get a share back of the return for these downstream investments. Or I've talked about this also: it's not just about money. You can also make sure that you're not getting screwed, basically. So if you're investing, what is it, $40 billion a year through the NIH, for God's sakes make sure the prices of the drugs that come out of that research aren't going, you know, to infinity, which value-based pricing basically allows them to do, and then the state has to come back in through Medicare, Medicaid or whatever to subsidize the price.

Okay. True.

I'm again really glad you asked this because that's another big misunderstanding that I somehow glorify the ability of governments to do this. The reason I set up the institute that I run at University College London, the Institute for Innovation and Public Purpose, is I believe there isn't any state capacity right now to think in a mission-oriented way, let alone for us to also be able to contest what those missions are, you know, when it's just some sort of technocratic stupid mission. So we've outsourced actually a lot of the capacity to Deloitte, to McKinsey, to KPMG. We've stopped investing in the capacity of government even to be mission-oriented. Forget the point about whether it's military-industrial complex or not — I'll come back to that in a minute. Think about Italy during IRI, the big SOE. So interesting that the early, early phase of IRI, they managed to make the big motorway, the Autostrada del Sole in Italy, in four years. I don't know if you've seen the Torino-Milano Autostrada for the last 20 years — they can barely finish it. And so that first phase, the people that IRI managed to attract were some of the top managers in Italy. It was an honor to work there. It was public but not politicized. Later it became public and super politicized. All the different parties got their kind of piece of the pie, and later it became privatized. And those second and third phases were equally disastrous, which should wake us up to: it's not about public or private, it's also about these governance issues that we talked about before. But also with Italy, it's really interesting, and this comes to your military point: during COVID, you might remember Italy was one of the first countries that was hardest hit in...

Northern Italy and lots of people were dying, and Italy managed to do actually what the US did. They took a wartime tool — in the US it was the Defense Production Procurement Act — to basically go from being 100% reliant on Chinese PPE to being 100% reliant on local small and medium companies. I think it was 137 companies in Italy produced all of Italian PPE in three months. COVID stops, we all become stupid again and go back to using procurement in a stupid way, or just funding sectors and not problems, so on and so forth.

And you know, in a country that has had reform of public administration over and over, which has never actually led to investing within the dynamic capabilities, you know, but just cut or increased, and also gotten so captured by industry. Look at Fiat, which benefits from state money all the time, like all the large Italian companies do with Cassa Depositi e Prestiti. When times are low, the Italian state comes in, pays the bill; times are good, they just go off and make their profits. Fiat, a very financialized company. It was only when Sergio Marchionne went to the US — he was the head of Fiat, he later passed away — when he wanted to buy Chrysler, which was in American hands because the US state during the financial crisis nationalized not only the banks but also the automobile companies, they said, 'Hey, Fiat, we see what you're doing in Italy, you're basically just, you know, on your ass, basically not innovating. In this country, if you want to buy Chrysler, you're going to have to invest in hybrid technology.' And they said, 'Okay,' it was part of the condition.

And this is the key to my theory, to my approach. It's not about state or business; it's how do you get a good relationship? What are the conditionalities? I wrote a paper with Dani Rodrik about conditionalities — the conditionalities that should be at the center of a public-private relationship that allows us actually to solve problems. So it's not about Italy being slow or fast. It's about the conditions in Italy of a parasitic relationship between public and private, a lot of inertia and very weak government capacity. Not because government is weak per se, its DNA, but we've allowed it and made it weak.

Well, first of all, it's whether we're talking about static efficiency or dynamic efficiency. And I believe we should definitely be thinking about dynamic efficiency, again in that entrepreneurial way of making sure that we have incentives for innovation, that we make sure that companies that maybe might be talking about efficiency but are definitely not efficient when they're just, you know, giving all the money out as dividends and share buybacks and so on. That's not an efficient system. That's an extractive system. That's a financialized system. So the word efficiency is, I think, often used as a bit of a masquerade for just like slogans. Like those are just words, it doesn't mean anything.

If you look at how most sectors are structured, they're not efficient. The fact that 80% of industrial wastewater is not recycled — that's not efficient. That's just a really bad contract, right? Like the state in most countries is giving the water right to a private enterprise, whether it's Anheuser-Busch or PepsiCo, without putting a condition that you have to recycle the industrial wastewater and not just waste it in a world where we have two billion people without access actually to safe drinking water. That's just a really bad contract. So I do believe in efficiency, but not in and of itself. I believe in goals, and to achieve those goals you have to invest and innovate.

And it's not surprising that to get to the moon, which is goal-oriented, we ended up with so much innovation, which also increased productivity, but no one was talking about productivity, no one was talking about economic growth. There was actual goals, and it stimulated huge amounts of growth. I don't know any country that doesn't want to grow or doesn't talk about productivity or efficiency, but they don't achieve it because they actually have a system that doesn't then catalyze that public and private investment. Or that also — and this is a separate issue — the direction of that investment then causes massive problems to our planetary boundaries. But that's the kind of climate discussion which we didn't really touch on, but it's obviously the biggest problem of our time.

No. No. I mean, of course, I'm not a no-trade-off anything, but I mean, I run a family with four children who I had in five years. I can tell you there's lots of trade-offs there. So what I meant to say in that quote that you read out, just to be very specific, is that there is a false dichotomy out there. It's actually made governments fall. So the German government, the previous government to the current one, fell because of what I often see as a false trade-off. Same thing happened in the UK, actually, where you have the Minister of Finance and then the Minister of Environment kind of going head-to-head.

And so the idea is no. Okay, yes, the Minister of Environment, of course, you're right. Of course there's climate change. Gee, it'd be great to do what you're saying, but dude, we want to grow and we have to just think about kind of the hardcore growth objectives. And I think that's false because of course there's a trade-off if you're doing it completely wrong, if you're just throwing money at problems without any clue. But if you do what I argue, which is take the really important societal challenges including hunger — so take an example that I've worked on recently: make sure that every child in a country has access to healthy, sustainable and tasty lunch as a program. That's going to require huge amounts of innovation also within government. It's going to require that interministerial coordination.

Department of Agriculture, Department of Health, Department of Environment, Department of Finance — use procurement to help local manufacturers produce food that's sustainable across the whole supply chain, including the digital service side of it. In other words, fast forward to a modern kind of data economy as opposed to just 'feed the kids and pretend that ketchup is a vegetable,' which is what Reagan once said when he wanted to reduce the cost of school meals. So by having these bold challenges — not just lunch, healthy, tasty, sustainable lunch — that's going to require a lot of investment, innovation, training, new forms of partnerships, public and private, new form of government like wake up and work interministerially in an outcomes-oriented way.

And because I believe that growth is a function of investment, innovation, training, and dynamism, you've then achieved two things: you've solved a goal while also stimulating growth. And that's a purely social one. Even more so for anyone that also requires lots of innovation around, again, biodiversity loss, climate, the digital divide, which is a huge problem as we saw during COVID where many kids didn't continue to have access to education because they didn't have access to kind of modern digital systems. Of course, there's limited budgets, but that too is sort of false.

In other words, if you are smart and catalyze a multiplier effect, if for every dollar of public investment you crowd in private investment due to this way to set up the system through emissions and conditions, ultimately your public money is expanding productive capacity. That's a future budget. That's future tax receipts, right? Whereas if you are just giving out money, you know, in a redistributive way kind of Maduro style or whatever, or if you have really stupid tax policy like Liz Truss did in the UK and that, you know, sink your economy, obviously that doesn't work. So I'm not about just spend, spend, spend, there's no trade-offs. It's about invest in a strategic outcomes-oriented way.

Work well with the business to solve problems. Help those that are willing. So I always say pick the willing, don't pick the winners. And ultimately if you do it right you both solve the problems and expand your productive capacity, which is your future budget.