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.

Government and Innovation - A much-maligned engine of innovation

Matin Wolf in FT 

Conventional economics offers abstract models; conventional wisdom insists the answer lies with private entrepreneurship. In this brilliant book, Mariana Mazzucato, a Sussex university professor of economics who specialises in science and technology, argues that the former is useless and the latter incomplete. Yes, innovation depends on bold entrepreneurship. But the entity that takes the boldest risks and achieves the biggest breakthroughs is not the private sector; it is the much-maligned state.

Mazzucato notes that “75 per cent of the new molecular entities [approved by the Food and Drug Administration between 1993 and 2004] trace their research ... to publicly funded National Institutes of Health (NIH) labs in the US”. The UK’s Medical Research Council discovered monoclonal antibodies, which are the foundation of biotechnology. Such discoveries are then handed cheaply to private companies that reap huge profits.

A perhaps even more potent example is the information and communications revolution. The US National Science Foundation funded the algorithm that drove Google’s search engine. Early funding for Apple came from the US government’s Small Business Investment Company. Moreover, “All the technologies which make the iPhone ‘smart’ are also state-funded ... the internet, wireless networks, the global positioning system, microelectronics, touchscreen displays and the latest voice-activated SIRI personal assistant.” Apple put this together, brilliantly. But it was gathering the fruit of seven decades of state-supported innovation.

Why is the state’s role so important? The answer lies in the huge uncertainties, time spans and costs associated with fundamental, science-based innovation. Private companies cannot and will not bear these costs, partly because they cannot be sure to reap the fruits and partly because these fruits lie so far in the future.

Indeed, the more competitive and finance-driven the economy, the less the private sector will be willing to bear such risks. Buying back shares is apparently a far more attractive way of using surplus cash than spending on fundamental innovation. The days of AT&T’s path-breaking Bell Labs are long gone. In any case, the private sector could not have created the internet or GPS. Only the US military had the resources to do so.

Arguably, the most important engines of innovation in the past five decades have been the US Defense Advanced Research Projects Agency and the NIH. Today, if the world is to make fundamental breakthroughs in energy technologies, states will play a big role. Indeed, the US government even helped drive the development of the hydraulic fracturing of shale rock.

Mazzucato insists this involves more than state support of research and development, vital though that is (in the US, the government funds a quarter of R&D and nearly 60 per cent of basic research). But the state is also an active entrepreneur, taking risks and, of course, accepting the inevitable failures. America has been a developmental state since the days of Alexander Hamilton. Indeed, the nation’s recent role as the premier promoter of fundamental innovations owes as much to its state as to the get-up-and-go of its entrepreneurs. 

Germany’s failure to remain at the forefront of today’s new technologies, in contrast to before the second world war, may be down to the limited role now accorded its state.

Mazzucato loves puncturing myths about risk-loving venture capital and risk-avoiding bureaucrats. Does it matter that the role of the state has been written out of the story? She argues that it does.

First, policy makers increasingly believe the myth that the state is only an obstacle, thereby depriving innovation of support and humanity of its best prospects for prosperity. Indeed, the scorn heaped on government also deprives it of the will and capacity to take entrepreneurial risks.

Second, government has also increasingly accepted that it funds the risks, while the private sector reaps the rewards. What is emerging, then, is not a truly symbiotic ecosystem of innovation, but a parasitic one, in which the most lossmaking elements are socialised, while the profitmaking ones are largely privatised. Do ordinary taxpayers understand that their taxes fund the fundamental innovations that drive their economy?

This book has a controversial thesis. But it is basically right. The failure to recognise the role of the government in driving innovation may well be the greatest threat to rising prosperity.

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It’s a Myth That Entrepreneurs Drive New Technology

For real innovation, thank the state.

By Mariana Mazzucato|Posted Sunday, Sept. 1, 2013, at 5:00 AM

Some of our hero worship of tech entrepreneurs like Facebook CEO Mark Zuckerberg would be better directed at the government.

Photo by Justin Sullivan/Getty Images

Images of tech entrepreneurs such as Mark Zuckerberg and Steve Jobs are continually thrown at us by politicians, economists, and the media. The message is that innovation is best left in the hands of these individuals and the wider private sector, and that the state—bureaucratic and sluggish—should keep out. A telling 2012 article in the Economistclaimed that, to be innovative, governments must "stick to the basics" such as spending on infrastructure, education, and skills, leaving the rest to the revolutionary garage tinkerers.

Yet it is ideology, not evidence, that fuels this image. A quick look at the pioneering technologies of the past century points to the state, not the private sector, as the most decisive player in the game.

Whether an innovation will be a success is uncertain, and it can take longer than traditional banks or venture capitalists are willing to wait. In countries such as the United States, China, Singapore, and Denmark, the state has provided the kind of patient and long-term finance new technologies need to get off the ground. Investments of this kind have often been driven by big missions, from putting a human on the moon to solving climate change. This has required not only funding basic research—the typical "public good" that most economists admit needs state help—but applied research and seed funding too.

Apple is a perfect example. In its early stages, the company received government cash support via a $500,000 small-business investment company grant. And every technology that makes the iPhone a smartphone owes its vision and funding to the state: the Internet, GPS, touch-screen displays, and even the voice-activated smartphone assistant Siri all received state cash. The U.S. Defense Advanced Research Projects Agencybankrolled the Internet, and the CIA and the military funded GPS. So, although the United States is sold to us as the model example of progress through private enterprise, innovation there has benefited from a very interventionist state.

The examples don't just come from the military arena, either. The U.S. National Institutes of Health spends about $30 billion every year on pharmaceutical and biotechnology research and is responsible for 75 percent of the most innovative new drugs annually. Even the algorithm behind Google benefited from U.S. National Science Foundationfunding.

Across the world we see state investment banks financing innovation. Green energy is a great example. From Germany's KfW state bank to the Chinese and Brazilian development banks, state-run finance is playing an increasing role in the development of the next big thing: green tech.

In this era of obsession with reducing public debt—and the size of the state more generally—it is vital to dispel the myth that the public sector will be less innovative than the private sector. Otherwise, the state's ability to continue to play its enterprising role will be weakened. Stories about how progress is led by entrepreneurs and venture capitalists have aided lobbyists for the U.S. venture capital industry in negotiating lower capital gains and corporate income taxes—hurting the ability of the state to refill its innovation fund.

The fact that companies like Apple and Google pay hardly any tax—relative to their massive profits—is all the more problematic, given the significant contributions they have had from the government. Thus, the "real" economy (made up of goods and services) has experienced a shift similar to that of the "financial" economy: The risk has been increasingly moved to the public sector while the private sector keeps the rewards. Indeed, one of the most perverse trends in recent years is that while the state has increased its funding of R&D and innovation, the private sector is apparently de-committing itself. In the name of "open innovation," big pharma is closing down its R&D labs, relying more on small biotech companies and public funds to do the hard stuff. Is this a symbiotic public-private partnership or a parasitic one?

It is time for the state to get something back for its investments. How? First, this requires an admission that the state does more than just fix market failures—the usual way economists justify state spending. The state has shaped and created markets and, in doing so, taken on great risks. Second, we must ask where the reward is for such risk-taking and admit that it is no longer coming from the tax systems. Third, we must think creatively about how that reward can come back.

There are many ways for this to happen. The repayment of some loans for students depends on income, so why not do this for companies? When Google's future owners received a grant from the NSF, the contract should have said: If and when the beneficiaries of the grant make $X billion, a contribution will be made back to the NSF.

Other ways include giving the state bank or agency that invested a stake in the company. A good example is Finland, where the government-backed innovation fund SITRA retained equity when it invested in Nokia. There is also the possibility of keeping a share of the intellectual property rights, which are almost totally given away in the current system.

Recognizing the state as a lead risk-taker, and enabling it to reap a reward, will not only make the innovation system stronger, it will also spread the profits of growth more fairly. This will ensure that education, health, and transportation can benefit from state investments in innovation, instead of just the small number of people who see themselves as wealth creators, while relying increasingly on the courageous, entrepreneurial state.

How to humiliate brands via social media

'Don't fly @BritishAirways'? 

For those with an axe to grind and a broadband account to exploit, here are a few ways to dot-complain on social media

• 
• • Arwa Mahdawi
  • theguardian.com, Wednesday 4 September 2013 13.40 BST

Hasan Syed, disgruntled with the way British Airways handled his father's lost luggage, paid $1,000 to promote a tweet that read "Don't fly @BritishAirways. Photograph: Toby Melville/Reuters

As the first law of digita ldynamics states, much of the energy expended within the internet relates to a) porn; b) cats; or c) complaining. The irate customer service tweet or Facebook update is familiar to us all. But while we may be used to people venting their frustrations online, Hasan Syed has just taken the power of anti-social networking to giddy new heights. Disgruntled with the way British Airways handled his father's lost luggage, Syed paid $1,000 (£640) to promote a tweet that read "Don't fly @BritishAirways. Their customer service is horrendous." This has now been seen by tens of thousands of people and promptly picked up by media outlets around the world.

The fine art of complaining has come a long way thanks to technology. Back in the pre-digital day you had to sit down and write a strongly-worded letter if you wanted to call out brands behaving badly. Those wishing to take a more direct approach could go wave a placard or, as a friend of mine once did, superglue your hands to a multinational's revolving doors. Nowadays, however, you can make your voice heard without risking appendages or wasting a stamp. So, for those with an axe to grind and a broadband account to exploit, here are a few ways to dot-complain in the modern age.

1. Bashtag

Last year Starbucks attracted widespread ire after it avoided paying corporation tax in the UK. So, in one attempt to make people feel all warm and fuzzy about its brand again, Starbucks invited the twitterati to display happy holiday messages on a big screen outside London's Natural History Museum in London by using the #spreadthecheer hashtag. Visitors to the Museum were promptly treated to a number of tweets along the lines of "Hey #Starbucks, PAY YOUR FUCKING TAX #spreadthecheer".

Starbucks isn't the first victim of what is termed "bashtagging." Some bright spark at McDonald's once came up with the great idea of letting people share their heart(burn)warming experiences with the brand via a #McDStories hashtag campaign. Voila, tweets like: "One time I walked into McDonalds and I could smell Type 2 diabetes floating in the air and I threw up. #McDStories."

2. Game Google

Google isn't just a search engine, it's a reputation engine. Like it or not, in the eyes of many, you are what you are on Google. And, for several years, former Republican presidential hopeful Rick Santorum found that what he was on Google was a "frothy mix of lube and fecal matter that is sometimes the byproduct of anal sex." This, by the way, wasn't down to a series of questionable decisions by the OED, but the result of a carefully orchestrated campaign by columnist Dan Savage. After Santorum ludicrously compared homosexuality to bestiality in a media interview, Savage gamed Google's search algorithm so that the first result for Santorum that came up linked to a what the New Yorker described as the "unprintable definition" Savage had created to protest Santorum's homophobia.

3. Use your Wifi network name as a targeted billboard

If you live in an area full of upwardly pretentious types you may have noticed a trend of creative Wifi network naming. Instead of settling for LINKSYS53z, for example, a 21st century quipster might call their network PrettyFlyForaWifi. However, as well as using it as a vehicle for unoriginal puns, some people are harnessing their network names to passively-aggressively complain to their neighbours. There is one person in my building whose network is called YOURMUSICSUCKS, for example. I severely curtailed my moments of guilty One Direction pleasure after that appeared.

4. But, wait, the luggage?

While some casual bashtagging or Google-bombing may be cathartic, sometimes catharsis is the only payoff. However, it looks like Syed's $1,000 BA-bashing may have resulted in more than just a warm flush of vengeance. As well as providing fleeting fame, it also seems to have delivered his luggage. Early this morning Syed tweeted "I got what I wanted. I win." Revenge may be a dish best served cold but sometimes, it seems, a little digital degradation can make for a satisfying hors d'œuvre.

How cryptography is a key weapon in the fight against empire states

What began as a means of retaining individual freedom can now be used by smaller states to fend off the ambitions of larger ones

• 
• • Julian Assange
  • guardian.co.uk, Tuesday 9 July 2013 12.45 BST

'Africa is coming online, but with hardware supplied by China. Will the internet be the means by which Africa continues to be subjugated into the 21st century?' Photograph: Mao Siqian/Corbis

The original cypherpunks were mostly Californian libertarians. I was from a different tradition but we all sought to protect individual freedom from state tyranny. Cryptography was our secret weapon. It has been forgotten how subversive this was. Cryptography was then the exclusive property of states, for use in their various wars. By writing our own software and disseminating it far and wide we liberated cryptography, democratised it and spread it through the frontiers of the new internet.

The resulting crackdown, under various "arms trafficking" laws, failed. Cryptography became standardised in web browsers and other software that people now use on a daily basis. Strong cryptography is a vital tool in fighting state oppression. That is the message in my book, Cypherpunks. But the movement for the universal availability of strong cryptography must be made to do more than this. Our future does not lie in the liberty of individuals alone.

Our work in WikiLeaks imparts a keen understanding of the dynamics of the international order and the logic of empire. During WikiLeaks' rise we have seen evidence of small countries bullied and dominated by larger ones or infiltrated by foreign enterprise and made to act against themselves. We have seen the popular will denied expression, elections bought and sold, and the riches of countries such as Kenya stolen and auctioned off to plutocrats in London and New York.

The struggle for Latin American self-determination is important for many more people than live in Latin America, because it shows the rest of the world that it can be done. But Latin American independence is still in its infancy. Attempts at subversion of Latin American democracy are still happening, including most recently in Honduras, Haiti, Ecuador and Venezuela.

This is why the message of the cypherpunks is of special importance to Latin American audiences. Mass surveillance is not just an issue for democracy and governance – it's a geopolitical issue. The surveillance of a whole population by a foreign power naturally threatens sovereignty. Intervention after intervention in the affairs of Latin American democracy have taught us to be realistic. We know that the old powers will still exploit any advantage to delay or suppress the outbreak of Latin American independence.

Consider simple geography. Everyone knows oil resources drive global geopolitics. The flow of oil determines who is dominant, who is invaded, and who is ostracised from the global community. Physical control over even a segment of an oil pipeline yields great geopolitical power. Governments in this position can extract huge concessions. In a stroke, the Kremlin can sentence eastern Europe and Germany to a winter without heat. And even the prospect of Tehran running a pipeline eastwards to India and China is a pretext for bellicose logic from Washington.

But the new great game is not the war for oil pipelines. It is the war for information pipelines: the control over fibre-optic cable paths that spread undersea and overland. The new global treasure is control over the giant data flows that connect whole continents and civlisations, linking the communications of billions of people and organisations.

It is no secret that, on the internet and on the phone, all roads to and from Latin America lead through the United States. Internet infrastructure directs 99% of the traffic to and from South America over fibre-optic lines that physically traverse US borders. The US government has shown no scruples about breaking its own law to tap into these lines and spy on its own citizens. There are no such laws against spying on foreign citizens. Every day, hundreds of millions of messages from the entire Latin American continent are devoured by US spy agencies, and stored forever in warehouses the size of small cities. The geographical facts about the infrastructure of the internet therefore have consequences for the independence and sovereignty of Latin America.

The problem also transcends geography. Many Latin American governments and militaries secure their secrets with cryptographic hardware. These are boxes and software that scramble messages and then unscramble them on the other end. Governments purchase them to keep their secrets secret – often at great expense to the people – because they are correctly afraid of interception of their communications.

But the companies who sell these expensive devices enjoy close ties with the US intelligence community. Their CEOs and senior employees are often mathematicians and engineers from the NSA capitalising on the inventions they created for the surveillance state. Their devices are often deliberately broken: broken with a purpose. It doesn't matter who is using them or how they are used – US agencies can still unscramble the signal and read the messages.

These devices are sold to Latin American and other countries as a way to protect their secrets but they are really a way of stealing secrets.

Meanwhile, the United States is accelerating the next great arms race. The discoveries of the Stuxnet virus – and then the Duqu and Flame viruses – herald a new era of highly complex weaponised software made by powerful states to attack weaker states. Their aggressive first-strike use on Iran is determined to undermine Iranian efforts at national sovereignty, a prospect that is anathema to US and Israeli interests in the region.

Once upon a time the use of computer viruses as offensive weapons was a plot device in science fiction novels. Now it is a global reality spurred on by the reckless behaviour of the Barack Obama administration in violation of international law. Other states will now follow suit, enhancing their offensive capacity to catch up.

The United States is not the only culprit. In recent years, the internet infrastructure of countries such as Uganda has been enriched by direct Chinese investment. Hefty loans are doled out in return for African contracts to Chinese companies to build internet backbone infrastructure linking schools, government ministries and communities into the global fibre-optic system.

Africa is coming online, but with hardware supplied by an aspirant foreign superpower. Will the African internet be the means by which Africa continues to be subjugated into the 21st century? Is Africa once again becoming a theatre for confrontation between the global powers?

These are just some of the important ways in which the message of the cypherpunks goes beyond the struggle for individual liberty. Cryptography can protect not just the civil liberties and rights of individuals, but the sovereignty and independence of whole countries, solidarity between groups with common cause, and the project of global emancipation. It can be used to fight not just the tyranny of the state over the individual but the tyranny of the empire over smaller states.

NSA spying revelations: why so many are keen to play down the debate

The mass surveillance that Edward Snowden has exposed asks questions not only of government but of telecoms companies too

• 
• • Nick Hopkins
  • guardian.co.uk, Tuesday 2 July 2013 17.51 BST

GCHQ reportedly snooped on foreign politicians attending two G20 summit meetings in London in 2009. Photograph: Barry Batchelor/PA

Covering the Edward Snowden story has not been straightforward for many in the mainstream media, which is reflected in the disjointed coverage it has received in the UK so far. For the newspapers that campaigned so hard to get the communications data bill thrown out because of the implications for privacy, he should be a hero. But then the brash young American "stole" the material, came to the Guardian with it, and has ended up stranded in Russia, where he may or may not receive asylum with the help of Julian Assange. All of which makes him rather unpalatable to many in Fleet Street – and indeed the House of Commons. For many of them, the easier story to tell was the one about Snowden's girlfriend, who was left bereft in Hawaii.

This week there have been more revelations about the way the US spied on the EU, which followed the Guardian's disclosures about how the British snooped on diplomats from Turkey and South Africa, among others, at the G20 summit in London four years ago. This has caused genuine fury among those targeted, particularly the Germans and the French. But their anger has been met with shoulder-shrugging indignation from former British diplomats and security experts, who say this sort of thing happens all the time.

They would hardly say anything different. In all likelihood, they have either authorised or benefited from such covert intelligence gathering, so the lack of biting analysis was entirely predictable. For those in the media unsure how to deal with Snowden, and rather hoping the complex saga would go away, this was another easy escape route: "No story here, let's move on."

But there is a story. It gets lost, all too conveniently, in the diplomatic rows and the character-assassinations, but ultimately it is the legacy of the Snowden files. The documents have shown that intelligence agencies in the UK and the US are harvesting vast amounts of information about millions of people. This is fact, not fantasy. They are doing this right now, on a scale that could not have been envisaged five years ago, let alone when the laws covering the collection and retention of data were drafted. They are also sharing this treasure trove of intelligence with each other, and other close allies.

In the UK, the same ministers who sign off operations to spy on our allies, are also approving countless warrants to allow GCHQ to siphon off data from cables that carry internet traffic in and out of the country. Emails, conversations on Skype, the details of phone calls – they all go into the intelligence pot ready for analysis and digestion.

The methods that GCHQ has developed may be ingenious. But are they right? Do the laws really legitimise this activity? And can the handful of MPs and commissioners tasked with the scrutinising the agencies really keep on top of all this? Do they have the staff, the expertise? Those are the questions that need proper argument. The reassurances of senior cabinet ministers, such as William Hague, who is responsible for GCHQ, needed to be tested, not just repeated unchallenged.

Those who wail about the leaks affecting national security might consider the words of Bruce Schneier, a security specialist, who wrote in the New York Times: "The argument that exposing these documents helps the terrorists doesn't even pass the laugh test; there's nothing here that changes anything any potential terrorist would do or not do."

And where are the telecoms companies in all this, and the internet service providers? For now, they are still keeping quiet. But at some point they will be asked to explain to their millions of customers what they knew about this industrial-scale snooping. None of this is easy, and ministers and intelligence officials would like nothing more than to shut down the debate. The clues are in their discomfort.

Just because something has value doesn't mean it has a price

If every last shred of incidental online value is given a price tag, we'll never harvest the full fruits of our ingenuity

• 
• • Cory Doctorow
  • guardian.co.uk, Tuesday 8 January 2013 11.01 GMT

Google is a case-study in harvesting positive externalities. Photograph: Britta Pedersen/EPA

 

When future economists look back on the dawn of the internet era, they will marvel that an age of such technological marvel was attended by a widespread, infantile mania for preventing positive externalities.

"Externalities" are the economist's catchall term for the spillover effects experienced by the people who are affected by others' activities. Most of the 20th century was spent locked in battle with the corporate vice of externalising negative costs. Companies are beholden to their shareholders, and so they are meant to save every penny they can, even when saving that penny might cost the rest of society several pounds. The classic example is toxic waste: processing industrial waste before it leaves the factory is a costly proposition, and so, whenever it is possible to do so, companies have defaulted to dumping their waste into the wider world. This is a much cheaper option — for the company.

For the world, it's vastly more costly. After all, when the offensive sludge is all neatly gathered at the effluent pipe's head-end, it is concentrated and handy, and can be gathered and fed into whatever decontamination or sequestration system is appropriate.

But once the sludge has exited the pipe and is out in the world, it has to be gathered up before it can be dealt with. Contaminated coolant can be sealed in barrels at the factory and sent for secure burial. Once it's dumped in a stream, you have to figure out how to get it out of the stream before you can clean it up – this is notoriously difficult.

What's more, streams feed into rivers, and rivers into oceans, and people drink from them and swim in them and eat the animals that swim in them and rely on them. What started as a waste-containment problem has become a public health emergency and an environmental catastrophe – the company's savings are the world's loss.

So policy wonks have spent a century thinking about creating the carrots and sticks necessary to minimise this externalising behaviour. The idea is to work out a system of fines and punishments that make it economically irrational to dump sludge, because the savings from doing so are offset by the penalties for getting caught. Getting this number right is notoriously hard, because you have to factor in some kind of multiplier of the penalty that accounts for the discount that rational – albeit psychopathically immoral – companies will apply based on the likelihood that they will not get caught.

Virtuous circles

But what about positive externalities? Historically, these have been a lot less contentious, and it's easy to see why. A positive externality arises when you do something you want to do that also makes life better for someone else. For example, if you drive your car slowly and carefully to avoid a wreck, a positive externality is that other users of the road have a safer time of it, too. If you keep up your front garden because it pleases you, your neighbours get the positive externality of slightly buoyed-up property values from living on a nicely kept street.

Positive externalities — virtuous cycles — are all around us. Your kid learns to speak because of all the people around her who carry on conversations and because of the TV shows and radio programmes where speaking occurs (as do immigrants like my grandmother, whose English fluency owes much to daytime TV after she came to Canada from Russia).

My flat – on the top floor, above a commercial building – gets some of the rising heat from the building below, capturing our downstairs neighbour's exhaust heat (on the other hand, we provide a positive externality to them by insulating their roof with our home).

The net is the natural home of positive externalities. Start with the "network effect" – the way that adding people to the network creates more value for existing users of the network (one fax machine is useless, two fax machines are slightly useful, a billion fax machines are indispensable, at least, until the web makes them obsolete). Every website that came along increased the likelihood that new users would find some reason to join the internet. Every new user that came along increased the likelihood that someone would make a website that tried to reach that user.

This is a kind of anti-entropic magic trick, using the exhaust from one process to create fuel for the next one. The most famous example is Google's PageRank algorithm, which began when the company's founders realised that every time a web creator added a link from one site to another, there was a kind of implied vote for the linked-to site – when I link to you, I'm implicitly saying that you have something I think others should see. This citation analysis (a common practice in academia, where journals who are widely cited are considered more valuable than less-cited journals; and where journal-articles that are more widely cited are considered more valuable as well) was wildly successful, and it showed that there was, latent on the web, an invisible mesh of authority that could be made visible with the right kind of analysis.

Google is a case-study in harvesting positive externalities. It offered a free, voice-based directory assistance number, and used the interactions users had with its software to build a corpus of common phrases, expressed in multiple accents and under a wide range of field conditions. Then it used this to train the voice-recognition software that powers its Android-based phone-search. Likewise, it mined all the publicly available translations on the web – EU documents that appeared in multiple languages, fan-based translations for subtitles on cult cartoons, and everything else it could find – and used this to train its automated translation engine, providing it with the context that it needed to figure out the nuance and sense of ambiguous phrases.

There are other companies that do well by harvesting these positive externalities. Facebook provides its users with a handy platform for socialising, and then – notoriously – mines their social graph to figure out how to sell things to them.

However, there's a wide difference between the two companies: much of Google's business revolves around capturing externalities from things you were going to make anyway. In many cases, the resources Google mines are public and remain in place even after Google's finished with them (for example, anyone can index the web and do the same citation analysis as Google).

Both Facebook and Google also try to entice the world into activities that generate externalities. Facebook is a giant behaviourist experiment designed to tempt you into systematically undervaluing your privacy, and it uses game-like mechanics to extract more personal data and more social-graph enumeration from its users. Google's a little less obvious about its enticements, but clearly, offering services such as YouTube and Blogger are mostly about figuring out how to earn money from the exhaust-stream from individual and corporate creativity. Facebook, and to a lesser extent, Google, try to claim ownership over your externalities by locking them up in proprietary walled gardens.

Taking a cut

But back to our era's defining mania: resentment over positive externalities. Many people and companies have concluded that if someone, somewhere, is getting value from their labour, that they should get a cut of that value. Irish newspapers are paying solicitors to demand money from websites that link to them, on the grounds that a website is improved if it contains a reference to the news, and that improvement needs to be paid for. Many people have accused Google of "ripping off" the public by indexing content, or analysing it, or both. Jaron Lanier recently accused Google of misappropriating translators' labour by using online translated documents as a training set for its machine-translation engine – an extreme version of many labour-oriented critiques of online business.

And take DRM – digital rights management – which is used to restrict the way you use the media you buy, such as ebooks, videos, and games.

DRM systems have been deployed to stop people from selling used games, to stop them lending their ebooks, to stop them from taking DVDs from one country to another. This is pure positive-externality resentment.

The reasoning for DRM goes like this: "I sold you this [ebook/game/video] for the following uses. If you figure out a way to get any more value out of it, it belongs to me, and you can't have it, until and unless I decide to sell it to you."

In the pre-digital world, this would have been laughable. "I sold you that book: if you want to use it to keep the table from wobbling, you'll have to pay me extra." Or: "I sold you that game to play in your house. How dare you bring it on holiday with you?! You owe me!" Or: "That TV was sold to you for the purposes of watching programmes, not to be used as a white-noise machine to lull your newborn to sleep, and certainly not to support a pile of knick-knacks!"

Of course, removing positive externalities also removes value. Cars are worth more because of the used-car market. University textbooks command a higher price because of the market for used textbooks. If either sector managed to kill those externalities, it would be selling goods that its customers valued less (and would likely find that they demanded lower prices for them, too).

I was at a TV DRM meeting once where a representative from the US-led Motion Picture Association proposed that broadcasters should be able to selectively block the use of wireless retransmitters – the sort of thing that lets you have a receiver in the sitting-room that fed a TV set in your bedroom – because "watching TV in a room other than the one the show is being received in has value, and if it has value, we need to be able to charge money for it".

That's the crux of this irrational fear of positive externalities: "If something I do has value, I deserve a cut." It's one thing to say that someone who hires you to do a job, or purchases your product, should pay you money. But positive externalities are the waste-product of something we were already going to do. They're things that you have thrown away, that you have thrown off, that you have generated in the process of enjoying yourself and living your life.

The mania to internalise your positive externalities is the essence of cutting off your nose to spite your face. I walk down the street whistling a jaunty tune because I'm in a good mood — but stop as soon as I see someone smiling and enjoying the music. I keep my porchlight on to read by on a warm night, but if I catch you using the light to read your map, I switch it off, because those are my photons — I paid for 'em!

Worse still: the infectious idea of internalising externalities turns its victims into grasping, would-be rentiers. You translate a document because you need it in two languages. I come along and use those translations to teach a computer something about context. You tell me I owe you a slice of all the revenue my software generates. That's just crazy. It's like saying that someone who figures out how to recycle the rubbish you set out at the kerb should give you a piece of their earnings. Harvesting positive externalities involves collecting billions of minute shreds of residual value – snippets of discarded string –and balling them up into something big and useful.

If every shred needs to be accounted for and paid for, then the harvest won't happen. Paying for every link you make, or every link you count, or every document you analyse is a losing game. Forget payment: the process of figuring out who to pay and how much is owed would totally swamp the expected return from whatever it is you're planning on making out of all those unloved scraps.

In other words, if all latent value from our activity has a price-tag attached to it, it won't get us all paid – instead, it will just stop other people from making cool, useful, interesting and valuable things out of our waste-product.