Public investment please

What with financialisation and a taste for fossil fuels, it seems that the private sector is incapable of financing a green transition. But what can the government do to compensate for this?

While economic theory tends to view the public sector as a cumbersome barrier to business, with blundering government intervention likely to result in cronyism and ‘government failure’, economist Marianna Mazzucato, is out to challenge this caricature. Contrary to conventional economic wisdom, which sees the correct role of government as (at most) fixing flaws in markets leaving the dynamic private sector to get on with innovation, she argues that state investment has underpinned some of the most revolutionary technological developments of the last few decades (Mazzucato 2011). In the video below she explains her thesis and examines the iphone to reveal the many ways in which public investment enabled the creation of one of Silicon Valley’s most iconic products.

These examples are much more than just fun facts as Mazzucato argues that they show government acting as an ‘entrepreneurial state’ willing to take the biggest investment risks that scare the comparatively timid and impatient private sector. In particular, she highlights how the Defense Advanced Research Projects Agency has acted as a technology pioneer overseeing the early stages of the internet among many other important developments. Trenzel et al (2012) provide another interesting example, examining how government intervention facilitated the shale gas revolution in the US.

Listening to contemporary politicians with their mantra of ‘getting the deficit down’, you might be inclined to dismiss Mazzucato’s argument as interesting but irrelevant: government might have been able to can get things done in the past but in the wake of the financial crisis it simply doesn’t have the financial resources to take the big investment risks any more. Mazzucato also addresses this issue of financing, stating that governments in the past have been far too reluctant to reap the rewards of their investments. If the public sector stopped being so modest about its entrepreneurial role and started demanding remuneration from the companies that profit from publicly funded innovations, government investment could be self-financing. Furthermore, figures recently published by the Overseas Development Institute (Whitley 2013) show that government subsidies offered to the coal, oil and gas industries amount to £2.6bn a year, making Britain the fifth largest fossil fuel subsidiser in the world.

Mazzucato believes that the next sector waiting to benefit from public sector innovation is green tech and I agree. Britain, however, is falling behind countries like the US and South Korea where publicly-funded green initiatives have already been developed:

Taken from 'The Green Investment Gap' (PIRC 2011)

The UK government should stop subsidising fossil fuels and start an active programme of green investment. A green-investment bank simply won’t be enough as history shows that only after government has taken the biggest investment risks will the private sector start loosening its purse strings.