Let's rethink the idea of the state: it must be a catalyst for big, bold ideas

As George Osborne envisages a smaller state, economist Mariana Mazzucato argues instead that a programme of forward-thinking public spending is crucial for a creative, prosperous society. We must stop seeing the state as a malign influence or a waste of taxpayers' money

• 
• • Mariana Mazzucato
  • The Observer, Sunday 15 December 2013

Bright spark: a government that ‘thinks big and makes things happen’ will also serrve as a catalyst to the private sector. Photograph: David Burton /Alamy

In his epic book, The End of Laissez-Faire (1926), John Maynard Keynes wrote a sentence that should be the guiding light for politicians around the globe. "The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all."

In other words, the point of public policy is to make big things happen that would not have happened anyway. To do this, big budgets are not enough: big thinking and big brains are key.

While economists usually talk about things that are not done at all (or done inadequately) by the private sector as "public goods", investments in "big" public goods like the UK national health service, or the investments that led to new technologies behind putting a "man on the moon", required even more than fixing the "public good" problem. They required the willingness and ability to dream up big "missions". The current narrative we are being sold about the state as a "meddler" in capitalism is putting not only these missions under threat, but even more narrowly defined public goods.

Public goods are goods whose benefits are spread so widely that it is hard for business to profit from them (or stop others profiting from them). So they don't attract private investment. Examples include transport infrastructure, healthcare, research and education.

Even if you're an avid free-marketeer you can't avoid benefiting, directly and indirectly, from such public investments. You gain directly through the roads you drive down, the rules and policing which ensure their safety, the BBC radio you listen to, schools and universities that train the doctors and pilots you depend on, parks, theatre, films and museums that nurture our national identity. You also gain, indirectly, through enormous public subsidies without which private schools, hospitals and utility providers would never be able to deliver affordably and still make a profit. These are conferred as tax breaks, and provision of vital skills and infrastructure at state expense.

While social welfare is relentlessly trimmed and targeted, corporate welfare grows inexorably, as business widens its relief from the taxes that fund public infrastructure (while tax credits top-up its less generous wage packets). And the non-appropriable benefits of knowledge – costly to produce, cheap to acquire and use once published – spread the influence of public goods much wider. Nuclear fusion, fuel cells, asset-pricing formulas and genome maps are discoveries for all, not just one company. But it now seems like the doubters, those who contest the idea of "public goods", have won the contest. The state's provision of many of these goods – notably transport, education, housing and healthcare – is being privatised or outsourced at an increasing rate. Indeed privatisation and outsourcing are happening at such a rapid pace in the UK they are practically being given away – as the sale of Royal Mail at rock bottom prices revealed recently – denying the state a return for its near-century long investment.

Yet because we are told the state is simply a "spender" and meddling "regulator", and not a key investor in valuable goods and services, it is easier to deny the state a return from its investment: risk is socialised, rewards privatised. This not only eliminates any return on public investment but also destroys institutions that have taken decades to build up, and rapidly erodes any idea of public service distinct from private profit.

When public goods are privatised they lose their "public good" nature: it does become possible to profit from distributing mail, running trains, renting out homes and providing education. We're continually promised that, due to efficiency gains and innovations prompted by the profit motive, public goods can be delivered more cheaply and effectively by the private sector. All this while still giving their providers a decent profit, so that more is invested.

Has privatisation of UK rail provided lower prices, more innovation and investment? Has contracting-out prison security to G4S made that system more efficient and high quality? Have outsourced NHS services provided the taxpayer with higher quality healthcare that's still free of charge and assigned on merit? Users' impressions and regulators' performance indicators give at best a mixed signal on service quality. Private firms' commercial confidentiality – often a stark contrast with the right-to-know approach to public enterprise – makes it hard to identify or measure any changes in efficiency.

So the state is robbed of its deserved returns of investment, and public services are worsening – but is the state at least relieved of the associated costs and financial burden? No. What's very clear is that while private profits are now being made, public subsidy has not disappeared. The UK government explicitly subsidises its "privatised" utilities, with net transfers amounting to (among others) more than £2bn annually for train operating companies, and £10bn in investment guarantees alone for new nuclear power station builders (these, ironically, include other countries' state-owned utility firms – willing to advance their capital under the generous long-term price arrangements offered by the government, while their privatised UK counterparts like Centrica dismiss these as too risky and return their cash to shareholders).

Private companies can receive further implicit subsidies through investment guarantees and tax breaks; ad hoc assistance (such as meeting energy firms' decommissioning costs, and taking over pension liabilities to enable privatisation, as with Royal Mail and the remnants of the coal industry); rules that enable the circumvention of corporate taxes that are already below income-tax rates (and falling fast); and the assurance that the state will step back in to repossess (without penalty) any operations the private sector finds too expensive, as with Network Rail and the East Coast train-operating franchise.

But in the US, UK and all across Europe, where it's almost universally argued that today's governments are too big, these subsidies are rarely called into question. The debate focuses on the need for public debt levels to come down. And since taxes are judged to be too high – on the basis of very unclear arguments regarding incentives – debt reduction ends up relying on massive public-spending cuts. Growth will supposedly be stimulated by reducing the size of the public sector though privatisation and outsourcing – alongside the eternally-promised reduction of tax and "red tape", which is seen to be hindering an otherwise dynamic private sector.

Typically, the last UK budget focused on targeted tax reductions which are more fairly termed "tax expenditures", lifting a "burden" from companies that other sectors (mainly public services) will have to absorb. These include a drop in corporation tax to 20% from April 2015 (explicitly designed to undercut the rest of the G20), more reliefs from national insurance, and reductions in regulation – always hailed as reducing cost, despite the financial sector's recent warning on where those short-term savings can later lead.

Is tax too high? In the US, the top marginal income tax rate was close to 90% under Republican president Dwight Eisenhower – widely recognised as reigning over one of the highest growth periods in US history. Today the total US tax bill is the lowest it has ever been. The spending cuts about to hit the US – the infamous "sequester", which will damage institutions ranging from Nasa to social services – would not be needed if the US tax bill (24.8% of GDP) were only four percentage points lower than the OECD average (33.4%), instead of eight points.

Yet tax cuts usually achieve no discernible increase in investment, only a measurable increase in inequality. This is because what actually guides business investment is not the "bottom line" (costs, as affected by tax) but anticipation of where the future big technological and market opportunities are.

In the UK, Pfizer did not move its largest R&D lab in Sandwich, Kent to Boston due to lower tax or regulation but due to the £32bn a year that the US National Institutes of Health (NIH) spends on the bio-medical knowledge base that feeds them. Equally, although it was the National Venture Capital Association that in the mid-1970s negotiated huge reductions in US capital gains tax (from 40% to 20% in just six years), venture capital was actually following the footsteps of strategic public funding. In biotech, it entered the game 15 years after the state did the hard stuff.

And when the UK's Labour government reduced the minimum time for private equity investment to qualify for similar tax breaks from 10 to two years,it made venture capital even more short-termist, increasing golfing time not investing time. For the private sector, opportunities lie not in the creation of major new knowledge and technology but in the returns on investment in "intellectual property" that others have commissioned and not yet commercialised. Profit flows from privately capturing the "external benefits" conferred by public goods, when the public sector continues to underwrite them

The challenge today is to bring back knowledge and expertise into government that can drive the big missions of the future. Yet current de-skilling and de-capacitating government will not allow that. As I discuss in my new book, The Entrepreneurial State:debunking private vs. public sector myths, all the technologies that make the iPhone so smart were indeed pioneered by a well-funded US government: the internet, GPS, touch-screen display, and even the latest Siri voice-activated personal assistant.

All of these came out of agencies that were driven by missions, mainly around security – and funding not only the upstream "public good" research but also applied research and early-stage funding for companies. New missions today should be expanded around problems posed by climate change, ageing, inequality and youth unemployment. But while it's great that Steve Jobs had the genius to put those government technologies into a well-designed gadget, and great, more generally, for entrepreneurs to surf this publicly funded wave, who will fund the next wave with starved public budgets and a financialised and tax-avoiding private sector?

As the late historian Tony Judt used to stress, we should invent and impose a new narrative and new terminology to describe the role of government. The language being used to describe government activity is illuminating. The recent RBS sale was depicted as government retaining the "bad" debt, and selling the "good" debt to the private sector. The contrast could not be starker: bad government, good business – a needless inversion of the public good.

And public investments in long-term areas like R&D are described as government only "de-risking" the private sector, when actually what it is doing is actively and courageously taking on the risk precisely where the private sector – increasingly more concerned with the price of stock options than long-run growth opportunities – is too scared to tread. Once the entrepreneurial and risk-taking role of government is admitted, this should result in a sharing of the rewards – whether through equity of retaining a golden share of the patent rights. By privatising public goods, outsourcing government functions, and the constant state bashing (government as "meddler", at best "de-risker") we are inevitably killing the ability of government to think big and make things happen that otherwise would not have happened. The state starts to lose its capabilities, capacity, knowledge and expertise.

Examples that counter this trend – and language – should be celebrated. When the BBC invested in iPlayer – the world's most innovative platform for online broadcasting – instead of outsourcing it, it went against the grain. It brought brains and knowledge into a public sector institution. When recently the Government Digital Services (GDS) – part of the UK's Cabinet Office – wanted to create its own website, the usual solution was to outsource it to Serco, a private company that has recently won many government contracts (even Obamacare insurance work).

Dissatisfied with the mediocre site that Serco offered, GDS brought in coders and engineers with iPlayer experience, who went on to produce an award-winning websitethat is costing the government a fraction of what Serco was charging. And in so doing also made government smarter – attracting, not haemorrhaging, the knowledge and capabilities required for dreaming up the missions of the future.

To foster growth we must not downsize the state but rethink it. That means developing, not axing, competences and dynamism in the public sector. When evaluating its performance, we must rediscover the point of the public sector: to make things happen that would not have happened anyway.

When the BBC is accused of "crowding out" private broadcasters, the difference in quality of the programmes is considered a subjective issue not worthy of economic analysis. Yet it is only by observing and measuring that difference that we can accurately judge its performance. The same is true for the ability of public sector institutions not only to subsidise pharmaceutical companies but actually to transform the technological and market landscape on which they operate.

The public sector must produce public goods, and through the creation of new missions catalyse investment by the private sector – inspiring and supporting it to enter in high-risk areas it would not normally approach. To do so it requires the ability to attract top expertise – to "pick" broadly defined directions, as IT and internet were picked in the past, and "green" should be picked in the future. Some investments will win, some will fail. Indeed, Obama's recent $500m guaranteed loan to a solar company Solyndra failed, while the same investment in Tesla's electric motor won big time – making Elon Muskricher.

But as long as we admit the state is a risk-taking courageous investor in the areas the private sector avoids, it should increase its courage by earning back a reward for such successes, which can fund not only the (inevitable) losses but also the next round of investments. Instead, calling it names for the losses, ignoring the wins, and outsourcing the competence and capabilities, is ridding it of the courage, ability and brains to create the missions, hence opportunities, of the future. And without brains, all government will be able to do is not make big things happen but simply serve a private sector that is concerned only with serving itself.

Where's the Big Idea?

by M J Akbar

Ever since ideology committed suicide in the early 1990s, those in power have sought to fill the vacuum with ideas. Most ideas were perceptive and prescriptive; some were even brilliant. The flexibility was exhilarating after too many decades of doctrine born in an open mind but killed by a closed one.

Pragmatism became politically correct. But a serious problem was soon evident: it was difficult to make ideas work without a framework. The patterns of democracy encouraged spasmodic birth but hindered growth. Politics eroded the time necessary for nurture. A five-year term in office began with loads of self-congratulation. Then eager eggheads sat down to set policy into language that could buy advocacy from media and support from the legislature. But if the process entered the third, or worse fourth, it was overtaken by uncertainty, spluttered and shuffled before the withdrawal symptoms arrived.

Some ideas, of course, do get through. The first UPA government can take legitimate credit for the nuclear deal with the United States, and the employment programme code named NREGA. The trouble was that both promised more than they delivered.

The nuclear deal was sold to voters as the launching pad for India’s rise into superpower zone. Objective reality argued against hyperbole, but through some heavy winking by powerful politicians, illusion acquired the strength of hope. Enough young voters thought that the door to an Indo-American dream had been flung open. Today, UPA dare not talk about this mirage. The pact of the century has disappeared into some mysterious rabbit hole of amnesia.

NREGA, similarly, was meant to be the first great stride in a transformative journey towards poverty eradication. Instead, its bulk was eaten away by the familiar demons of indifference and corruption. Since 2009, the poor have received lectures on how to live on Rs 32 a day rather than a carefully structured and realistic route map out of the poverty line. They watched while a cabal of politicians and cronies fattened themselves on an unprecedented scale. It is not easy to boggle the Indian voter’s mind, but corruption in the last few years has thoroughly boggled it. In the twilight of its second term, UPA is trying to fight off the gathering darkness with a Food Security Bill, but it is never easy to do in the last six months what could so easily have been done in the first six.

It is usual practice to highlight achievement in any obituary. What is memorable about UPA2 is not positive; the little that is positive is not memorable. The average of scams was at least two a season. All we recall is a repeated sequence of exposure, denial, street anger and authoritarian response until some minister promises legislation that will cure every malaise.

When the glow disappears from bright sparks, even their ideas get dim. Whatever the disease, the medicine is the same. Law minister Kapil Sibal, who plunges into every crisis with the dexterity of Don Quixote, is pushing the brilliant thought of a new law that will cure cricket of sleaze forever and ever. Excuse me: but is match-fixing legal just now?

Every law can be strengthened, but that is not the urgent problem. The present law is good enough for the existing crooks. This is not the first instance of the game being sold. BCCI has banned cricketers for match-fixing but never handed them over for prosecution. Why? To muffle the sound of skeletons rattling from cashstacked cupboards? 

Adulation and sensational levels of money are a heady cocktail, and if some young men get inebriated, it is only a temptation waiting to explode. But the dirt is controlled by older men wearing the heavy make-up of lies. When Delhi police broke the story, they sought to limit the scandal to three idiots from the Rajasthan team. One assumes they were naive since one cannot presume they were complicit. Some very clever men are involved. You can see frightened faces from Chennai to Delhi. 

For the people, sleaze has become a blur, with politicians visible in every crime, from coal to cricket. There is no ideology yet which cleanses the stables, and there will be none until the dregs of current thought have become irrelevant. Nevertheless, another 1990 moment has arrived. Things cannot continue with just a bit of tinkering along the way. 

The next government needs a radical and rational platform of ideas that recognizes how dysfunctional this system has become, and finds the courage to sweep below the carpet. The nerve points of the nation have shifted to the young. They do not want merely a different government; they want a new course that will take India out of this jungle of greed in which governance has become synonymous with greed, and the street a playground for lechery. If nothing is done, their patience will turn into rage.

Ugly is the new Beautiful

 VIEW GALLERY

At the launch tonight of Design Museum co-founder Stephen Bayley's new book, Ugly: the Aesthetics of Everything, guests will be served ugly canapés and ugly cocktails.

In attendance will be Mugly, an eight-year-old hairless Chinese Crested dog from Peterborough, who is the recent winner of the Ugliest Dog in the World contest, held annually in California, as well as models from the Ugly Model agency, including one woman credited with "looking like a fish".

At what is billed as London's first "ugly party", a grand café will be decked out with "ghoulish objects" and "revolting curios", including a stuffed pug giving birth to a flying pig and blown-up images from Bayley's book, including one of Myra Hindley. "My barman is working on a grey- coloured cocktail and Martinis with gherkins in them," says Bayley. "Talking about beauty is boring – when you get talking about ugliness it gets interesting."

His book Ugly explores the complexities of ugliness and makes the point that without ugliness, there would be no beauty. He has cherry-picked items for his book, including kitsch flying ducks, hideous pink-haired troll dolls – even the postmodernist architecture of the Sainsbury Wing of the National Gallery gets singled out. Ugliness is fascinating, he claims – take the repugnant The Ugly Duchess by Quentin Massys – "It's one of the most popular postcards sold in London's National Gallery shop and rivals the sales of Monet's tranquil Water-Lilies," he says.

There are also images of the Eiffel Tower and the Albert Memorial: "In 1887 leading Paris intellectuals ganged up and said the Eiffel Tower, which was being built, was a 'hateful column of bolted tin… useless and monstrous'", he says. "Now the Eiffel Tower is regarded as one of the most touching, romantic French monuments. The Albert Memorial was loathed and detested – now it is charming, delightful and evocative."

There are no chapters in Ugly, which is Bayley's sequel to Taste, published 1991; instead it's full of long paragraphs of ideas exploring ugliness – a subject not many people have written about.

"I'm not being prescriptive about what is ugly – I'm just provoking ideas about our assumptions of ugliness," says Bayley.

"I'm not looking for agreement. When we talk about design, it is this attempt to introduce beauty by the Modern movement. They told us that if things were functional they would be beautiful – but as soon as you investigate what is beauty – I would say the evidence is mixed. A bomb-dropping Boeing B-52 is extraordinarily functional, but is it beautiful even though it is morally repugnant? What about a gun?

"Our view of what is and what isn't beautiful changes over time. Maybe there are no permanent values in the world of art. It is certainly a question that needs to be asked. If the whole world was beautiful it would in fact be extremely boring. We need a measure of ugliness to understand beauty. You can only understand heaven if you have a concept of hell. "

Bayley focuses on Ernö Goldfinger's Trellick Tower in west London: "If there ever was a test for taste, it's this," he says. The tall housing block built in 1972 was listed by English Heritage in 1998. "It was deplored by many as a brutalist horror. Now half the world regards it as an eyesore – the other half regards it as heroic and uplifting. Maybe they are both are right. Any minute now Prince Charles will come to admire it. "

Gebrüder Thonet's mass-produced Model No. 14 chair (1859), the original café chair, was revered by Le Corbusier as "the ultimate in elegant design".

"I like the chair – I like clean, unfussy, undecorated things – but I don't think it's inevitably, timelessly perfect," says Bayley, who also includes an image of an Amorphophallus titanum, known as the corpse flower, which "smells of death" and looks phallic. "Can nature be ugly? Personally, I think it can," he says.

There is no end to the fascination of ugliness for Bayley, whose book opens with a photograph of a pig and then Frankenstein. He adds: "If you are talking to architecture students and you ask them to deliberately design something ugly, it is very difficult. It is very difficult to create ugliness – what we call ugly seems to be accidental."

But whether you would want Matthias Grunewald's oil painting The Isenheim Altarpiece (1516) of a man with skin disease on your wall is quite another matter. Or indeed Hieronymus Bosch's triptych The Garden of Earthly Delights (c.1490-1510) depicting Hell, and full of disfigurements and mutations.

There is an image, too, of John Constable's Windmill among Houses and Rainbow – not because it is ugly. "I want to make the point that while we are all worried about the industrialisation of the countryside, this is what Constable's idyllic scenes of the countryside were often about."

Bayley also includes gargoyles from Notre-Dame de Paris, and anti-Jewish Nazi propaganda posters, in which Jews are depicted as ugly caricatures.

One section of the book, "The problem with hair", has images of the monster in I was a Teenage Werewolf (1957), which shows, he says, "how abnormal hair retains a disturbing power".

"Firstly if you take a long view of the history of art, ideas about beauty are not permanent – and secondly, things that are ugly can be fascinating and perversely attractive" says Bayley. "No matter what your views, you couldn't read this book and not either come out lacerated, stimulated, annoyed or in total agreement with my genius. 

It's not a historical narrative but it's a collection of consistent and interesting and stimulating ideas."

'Ugly: the Aesthetics of Everything', by Stephen Bayley, is published by Goodman Fiell (£25
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