0:33 Intro. [Recording date: December 6, 2018.] Russ Roberts: My guest is Mariana Mazzucato.... Her latest book is The Value of Everything: Making and Taking in the Global Economy, which is the subject of today's conversation.... Underlying your book is the idea that the economics profession has misunderstood the nature of what is valuable and how to think about it, and that in turn has hampered good public policy. Summarize your argument. Mariana Mazzucato: So, one the key points in the book is actually that we've stopped debating value. So, ironically, the concept has left economics departments and gone to business schools where the word is all over the place, in terms of shareholder value, value chains or shared value--a more trendy way to talk about it. But economics used to, basically for 400 years, actually debate: what are the productive parts of the economy, and what are the, perhaps, unproductive parts that, if they grow too large will siphon out resources. So, the Physiocrats back in the 1700s were very concerned about how the landlords of the time seemed to be siphoning out too much value compared to the value that was actually being created by the value-creators in their minds, who were the farm laborers. Similarly, the Classical economists--people like Adam Smith, David Ricardo, and Karl Marx--they focused on the value creation that occurred basically by industrial labor inside factories. And so someone like Adam Smith was very interested in the division of labor within these factories: how thinking about that division would increase productivity, growth, and hence the Wealth of Nations. And Karl Marx complemented that also with his big focus on the role of technological change and the effect that would actually have on the amount of labor required, which he thought was one of the key sources of surplus value and profits in the system through the exploitation of labor. So, he questioned whether capitalism itself would be able to reproduce itself, given what was happening on the labor side. But, just to say, the big revolution that happened, which I pinpoint in the book, was that this concern with the objective conditions of production--in other words, what was actually happening in the agricultural land, what was happening with the factories, with the machinery, with the division of labor and technological change--that then changed with modern neoclassical thinking, and the attention went to a subjective understanding of value, where value was actually basically in the eye of the beholder. So, supply and demand curves, preferences, all this focus on the individual firm the individual consumer, the individual worker--so even wages are looked at in terms of preferences workers have for leisure versus work. And what I do in the book is I don't say, 'Oh, look at today's value theory; it's totally wrong.' What I actually argue is that the debate around value has disappeared. Value itself is no longer contested. What we end up having is kind of a fuzzy, flimsy notion of value which makes it much easier for value extraction activities to actually pass for value creation [?]. That's what's new. It's not that value extraction itself is new. That was already, as the Physiocrats highlighted, happening in the 1700s. But the landlords of the time didn't pretend to be value creators. They didn't pretend to be innovators or fundamentally creative parts of society. They just said, 'Give me your money.' That's why, by the way, Adam Smith called rent 'robbery' and landlords 'thieves.' They were seen as basically earning income by doing nothing. So, rent itself, as a category, rent as an economic category, was seen as unearned income. Whereas today that concept is seen just as an imperfection towards a competitive price. But, so, this big revolution of making value go from an objective to a subjective category, but in the process, economics students no longer are being taught that there's actually different notions of value, and that this fundamentally affects how we measure GDP, for example, or how we think about governance in particular types of organizations, in business or elsewhere. Then it makes it very difficult to steer economies in ways that actually produces innovation-led [?] growth, sustainable growth, inclusive growth, which everyone seems to want.

5:09 Russ Roberts: So, where we agree here is, I think--let me restate the part of your--let me try to restate your argument in a slightly different way. I think a lot of capitalists--free market people like myself--would argue that profits are earned. To get a profit you have to make something of value that people like, and if they are willing to pay for it, obviously they like it--that's the subjective part. And I think we agree on that. Where we also agree is that there are some profits that don't appear to be producing real value, and that would be, say, the financial sector, where their profitability and the incredible growth in their profitability does not seem to be correlated with producing value. And, I have smart friends who will, when I point out that this is a problem--smart friends who happen to agree with me ideologically--they say, 'But don't we need a big financial sector to enhance growth and to fund good activities, etc.?' And my answer to that is No; and I suspect that's your answer, also. Mariana Mazzucato: Well, see, it depends. It's quite curious, because Adam Smith, again, who was one of the three main classical economists--first of all, he would differ from you in how you talk about the free market. For Adam Smith, it wasn't free from the state. It was free from rent. Free from rent seeking, and in order to limit rent seeking in the economy, which he understood to be unearned income, so, people kind of just moving things around and yet getting funds for that, you actually needed also more smart state[?]. But the other thing is that-- Russ Roberts: I don't disagree with any of that. Mariana Mazzucato: Yeah. Yeah. Yeah. Russ Roberts: I agree with all of that-- Mariana Mazzucato: Yeah. I guess I would mean more how the common economist also sometimes uses the word free market. I don't think most people realize that Adam Smith meant free from rent, not free from the state. But, sort of, another point in terms of Smith and how he comes into this discussion is, he actually made a list--it was quite a funny list, actually--of those activities he thought were productive and those he thought were unproductive. The unproductive list is quite funny, because he seemed to not like opera very much, so he would put opera dancers, opera singers, and all sorts of musicians. Which didn't mean he didn't think they were important: he just thought they weren't actually creating value. What I think Marx did which Adam Smith didn't do is he didn't make this static list, like: this is where production happens, this is where value is created, and this is where it sort of doesn't happen. He actually looked at what was happening. So, if you were driving a truck with certain types of merchandise in a particular direction you might actually be creating value; if you were just kind of driving around luxuriously[?], you weren't. In other words, the financial sector itself: it's not about finance being good or bad, or being value-creating or value-extracting. It's, 'Well, what is finance actually doing?' And don't forget that Marx's objective was actually quite different. He was very interested in how surplus value and exploitation occurs in the economy. But, still, he had a more dynamic understanding of these categories. And I think the question of finance today, the real question is: How can we reform finance, for example, for it to have a more direct relationship with capacity in the real economy? For example, in industry. And, how would we have to then change the ways that it is relating to the real economy, but also literally maybe think up new types of financial institutions. An example would be, you know, innovation which is very key to economic growth doesn't require any type of finance. It requires patient, long-term strategic finance of the kind that some public banks are providing around the world--you know, Huawei, number one telecoms company in the world today would not have existed without the patient finance it received from the China Development Bank. Similarly, the Internet never would have happened without the patient finance received from a DARPA-type institution [Defense Advanced Research Projects Agency] in the United States. And so, this kind of need for more patient committed long-term finance would be one way to turn finance to be more valuable, in terms of being better able to drive the long-term capacity-building in the economy, versus just kind of saying finance has been too extractive and we need more kind of industrial capacity. Because industry itself has become overly financialized. Many companies--you know, Pfizer and Cisco spent huge amounts of their income just on buying back their shares to boost stock options and executive pay. Russ Roberts: Yeah. That doesn't bother me. We might talk about that. I think that's a bit of a red herring.

9:52 Russ Roberts: But, I want to make a quibble about Adam Smith, and then I want to move on to more substantive stuff. I am pretty confident Adam Smith never used the phrase 'free market.' So, when we talk about whether that means free from the state or free from rent, the part I agree with is that surely Adam Smith was a big fan of competition, and knew that without it business would often create cartels and try to raise prices and exploit consumers. That's clearly--he was very aware of the profit motive. But he also was very wary of over[?] involvement of government in the economy. So, you know, I think he was both a fan of competition and a fan of limited intervention. He's not an anarchist; neither am I. Most people I know who call themselves 'free market,' they don't literally mean no government. But I think the interesting places where you and I disagree and we're going to get to soon are over what's the appropriate role for government. Thinking about finance, my dislike of the financial sector or concern about the financial sector is its ability to use other people's money to invest and to create financial vehicles; and that, to me, is overwhelmingly driven by the opportunity to use government money from bailouts and the prospect of bailouts. Do you worry about that? It seems to me in your book, at least in one place, you were a fan of the bailouts. Do you think those were a mistake? And do they worry you--or do they worry you? [*silence* Russ: Mariana, are you there? I lost you. I'm going to call you back, if you can't hear me.... *callback sounds*] Mariana Mazzucato: Helloo. Russ Roberts: Hey. I don't know what happened there. I lost you. Mariana Mazzucato: Oh, that's weird. Can you hear me now? Russ Roberts: I can. Did you hear me ask that question? Mariana Mazzucato: I heard you. I heard you all fine. So, I can answer the question about the bailout. Everything. Russ Roberts: Yeah. So, take a breath and go ahead. Mariana Mazzucato: So, I'm not either a fan or an unfan about the bailouts. In terms of the bailouts, what was interesting for me is that many people don't realize that government saved the capitalist system from falling apart, through the bailouts. Now, where I'm definitely not a fan is that, you know, you shouldn't just bail out a system. If you bail it out--which they did, and against saved the capitalist system from basically exploding, in terms of, you know finance, global finance, was saved--there should have been very strong conditions attached to what had to happen. Even just purely financial conditions, to be honest. I mean, you know, the level of risk also that governments took in the bailout process should have been rewarded. So, if the taxpayer is saving Goldman-Sachs, what did the taxpayer get back from in terms of that risk-reward relationship? And I find, to be honest, this is a general problem. You know, when government gave a guaranteed loan to Solyndra for $500 million, it gave almost the same amount to Tesla. Solyndra went bust. Taxpayer bailed out Solyndra and got pretty peeved off in the process. But why did they not get a direct return from the Tesla investment? Because, of course, what we know--and any venture capitalist would admit this--for every success you have when you are investing in innovative areas, you are going to have to accept quite a high failure rate. And, what was very interesting, also, because this all happened right after the Financial Crisis, by the way, these investments that then were made in different types of green tech areas--what Obama said to Tesla is the opposite of what he should have said. He should have said that if you don't pay back the loan, we get 3 million shares in your company. And the price per share when Tesla received the loan in 2009 was $9 a share. When it paid it back--because it was successful--2013, it was $90 per share. Imagine that difference multiplied by 3 million: That would have more than paid back the Solyndra loss and the next round of investment. That same mentality could have been, also, played out with Goldman Sachs--not just getting back the money, but getting it back with a high level of interest, given that the taxpayer was, you know, taking on. And so this is the problem. And I think this probably gets to the heart of where you and I disagree: I don't see the role of government as just kind of enabling and facilitating, investing in infrastructure, you know, roads, police force, private property historically, and capitalism--which is a system that has been fundamentally driven by innovation. The government, when organized--big 'when'; I'm Italian, so I know when this goes wrong--when organized properly through these DARPA-type institutions, but also, you know, around the world we see these popping up in different forms, has actually been an Investor of First Resort. Not just a lender of last resort. Has allowed certain high-risk, high capital-intensive areas to be financed before the business sector is willing to put their money in. In fact, the history of Venture Capital is very clear: they've only come in after the government paid the wave [paved the way?], you know, for example, in biotech, 20-30 years of National Institutes of Health spending before the Venture Capitalists came in. So, in terms of the bailouts, where I see they went wrong was not so much the bailout itself, but the complete lack of conditions attached to make sure that the public sector and the taxpayers and the process got back a reward for this big risk that they took in bailing out banks that could have just then ended up going under.

15:37 Russ Roberts: So, we disagree on that, in that I don't think they saved capitalism. I think they'd already hampered it and done some things in the past with previous bailouts before 2008 that helped set the stage for it. But that's a different talk, a different conversation. I want to move away from that, because I think what you've said about the government and the government's potential to be reimbursed or to share in the gains is the really interesting question. It's the, I think the most innovative part of your work. And, so, I want to step back. So, you argue that there's been a lot of innovation in the last decades that was government-funded, government-started; and that venture capitalists reaped the benefits of and taxpayers got little or nothing from other than indirect taxing of profitability of the corporations that then investors enjoyed-- Mariana Mazzucato: If that. Russ Roberts: But, I want to go back earlier than that. Certainly, the transformation of the standard of living of the modern world over the last 300 years--government did not play a crucial, innovative role in that. Or did it? In other words, in my view, which you characterize quite accurately, I want government to set the rules--allow for courts, property rights, police, defense, infrastructure that's poorly provided by the private sector like sewage, perhaps. But, that was government's role until maybe 70 or 80 years ago. And the first 200 years of the Industrial Revolution did transform the standard of living through innovation and technology without government taking an active role. Or do you disagree with that? Mariana Mazzucato: So, I think there's two different issues. One is that the government has historically, definitely played a basic role. So, funding the roads, including the railroads, and you know, schools, and kind of what we call in economic-speak or innovation-speak, these horizontal conditions that without which, you know, it would be very hard to have successful commerce and competition between companies that wanted to invest and innovate, because you wouldn't basically have the groundwork there. And those aren't areas--infrastructure is not an area where the private sector has been willing to invest in. Where I differ is that, you know, basically how we talk about this in economics is that this is about fixing market failure: So, fixing those areas where the private sector is not investing, whether that's due to a positive externality--so areas where the spillovers from that investment are so large it's hard to appropriate the profits from that, so the private sector doesn't invest, so public sector has to come in. That's by the way, why I sound American; but I'm Italian, so my Dad does basic research on nuclear fusion physics, so he left it to go to the United States because the U.S. Department of Energy has been a big investor in these kinds of basic research--energy, areas of the private sector, you know, wasn't willing to invest in. Very little controversy there. Or negative externalities--pollution, you know, it's the opposite problem where companies aren't including in their cost structures the kind of negative things they are doing like polluting, so the government might have to come in with something like a carbon tax. So, this notion of what the government is for--it's not that it's wrong. It's just very limited. It's just fixing a problem. And those problems definitely exist. There's big market failures. What my approach has been is to say, 'Well, let's step back a minute. That explains some things, but it doesn't help explain innovation.' Kind of, big, important general-purpose technology, so, revolutionary changes that have occurred around the Internet, around aviation, around renewable energy, around nanotech, biotech--which actually required government to play a much larger role--which I call market-shaping and market co-creating, not just market fixing. And this is not a repeat, not about the state versus the private sector. Private sector, of course is important; and all those different areas that I just mentioned. Very important private businesses were, you know, part of that private valuation process. But the role of public sector wasn't just, you know, creating the background infrastructure, skills, and education or some rules of the game that leveled the playing field. They were also acting as an Investor of First Resort. Everything in your smart phone, if you have a smart phone, which I assume you do because we are Skyping and you must have some smart products in front of you--everything that makes those products smart and not stupid were government financed. Forget whether it was a civil servant or public servant, you know, who actually thought about it. But the money, the high risk funds, did not come from Venture Capital. It came from government-- Russ Roberts: Well, some of it-- Mariana Mazzucato: the Internet. Russ Roberts: Some of it. Not all of it. Mariana Mazzucato: Let me just list them. In your smart phone. I assume you have a smart phone. Russ Roberts: I do. Mariana Mazzucato: Hah, hah, hah. You don't have one of those little curly-wired ones. Right. So, Internet, GPS [Global Positioning System], touch screen display, Siri--they were all government financed. Other things, of course were financed by business. But I'm not debating that. We know that. Those things-- Russ Roberts: No. Those things-- Mariana Mazzucato: all over the world--hmm? Russ Roberts: Those things that were financed by government--touch-screen, GPS, Siri, etc.--they were partly funded by government. Things, innovations that made them possible in their final form were funded by government. But of course there were other innovations that made them useful and practical, and-- Mariana Mazzucato: Yeah. No one is debating that. But, see, we are on--what I'm not doing is saying the private sector is not important. What you are potentially doing--and maybe you are not but some other people are, many people are, is denying the role that government played in doing more than just the infrastructure. Government, around, even around--you know, battery storage today, which the equivalent, it's a huge innovation, it's actually downstream, it's not just basic research, the biggest innovation came out of ARPA-E, which is the sister organization of DARPA, which is in the Department of Defense, which basically came up with the Internet. Now, the point is not, 'Oh, there was also some private sector activity.' We know that. The real question is: How could it be that a whole book on Steve Jobs, that great book by Isaacson, which also turned into a movie, that not one page, not one paragraph, not one sentence, not one little word--this is my point--not one word on any of the public investments that made Apple's success possible? Which is not to say the people working at Apple are not incredibly smart, geniuses, and Apple as a company is not fantastic. I think that's true. But, you know, for example, the great design, and the fact that Steve Jobs also took these calligraphy classes: that's all well documented there. And that, itself is incredibly important. I would never dismiss that. But why do we dismiss the role of government? And, also, the self-fulfilling prophecy, by the way, is when you do dismiss one, dismisses all the role of government, we also don't ask the difficult questions: Well, what does this mean? How should we actually set up different types of public organizations so they welcome risk-taking, welcome exploration, experimentation, and can be innovative, as innovative as DARPA was but in the areas like health or energy or whatever. These key questions that business schools ask of private business, because they know, correctly so, that business is innovative and value-creating, they take classes like strategic management, organizational behavior, decision sciences. There is none of that [?] meaning for public servants. So we end up getting the inertial, slow, bureaucratic public servants, and that we call them 'bureaucratic, slow, and inertial,' well, that's how we made them, because we didn't admit, actually, these success stories of when government was organized differently.

22:55 Russ Roberts: So, I would never deny any of that. I think that's all true. I think that's all true. I think the real question, which is the big question you pose, and I think it's a great question, is: What do we make of this? What are the implications of this reality? So, we do romanticize, often, and I'm guilty of this, the private sector's use of these underlying technologies. And I maybe don't sufficiently remember or champion the role that government innovation played in allowing them to flourish. But I think there's a flip side of that, which is that we don't want to over-romanticize what government achieved-- Mariana Mazzucato: Definitely-- Russ Roberts: in particular, almost all of these innovations came out of the Defense Department, the military. The space program. Things that--the United States is really good at. My--I'm going to give you a different perspective on government from the standard one or yours, which is: Government is really good at two things--killing people and taking money from one group and giving it to another. And the killing part--the United States has got a really good military. That's one of its most successful things. That's led to a bunch of good things, at times, and some really horrible things at other times. That's not the scope of this conversation. But, a sidelight of that, the ridiculous amount of money that we've devoted to the military in the United States, is that, 'Yeah, we've come up with a bunch of technologies that were used in ways that were never intended, never planned by the government.' As, some private innovations have also come out that way. So, the question then is: Would--what do we make of that? Obviously, you are not going to suggest we should increase the size of the military budget in the United States because it has all these positive spillovers, I assume. What do we do with the fact that, yes, some government innovation, particularly from the military, has been useful to private sector actors? Mariana Mazzucato: Right. So, one of the points of my book--my other book, the Entrepreneurial State book--was-- Russ Roberts: which we'll also link to-- Mariana Mazzucato: Yes. Sorry. Which was basically to document what you just said, which is the role that the military--through, by the way, different types of organizations--it wasn't just kind of top-down, you know, department of the Military. It was through the kind of more nimble DARPA-type institutions had on innovation. But then the next question was, 'So, what are the lessons being learned or not being learned?' Unfortunately, lots of lessons are not learned about how we might devise similar types of organizations in other areas--which actually are urgent, and they also have security implications. Now, I should first start by saying they have been learned, in some areas. So, in health, you know, the National Institutes of Health, in the United States, publicly funded body, spent over $30 billion dollars a year on financing some of the most high-risk, high capital-intensive parts of the innovation cycle in both biotech and pharmaceuticals. And, in fact, the Health Department basically is second to the Department of Defense. Department of Energy, as well, as I mentioned before, fusion, but not just fusion, lots of applied areas, for example, through ARPA-E that I mentioned, which is the sister-organization of DARPA. So, in some ways one could say, we have--you know, it used to be just the military/industrial complex, in fact all those different organized technologies I mentioned--Internet, GPS [Global Positioning System]--you know, those are kind of--the Navy basically discovered GPS. You know, those lessons have been somewhat carried over to these other areas. But the point that I've actually been working on a lot with global governments--and ironically, Trump is unlearning the Silicon Valley story at the same time that China is learning it, hah; that should be a big worry for Americans interested in competitiveness--what's interesting is: How do we then take really important challenges that we have, whether it's around climate change, the future of health systems, growing inequality in some countries? So, just take what we call the Sustainable Development Goals, these 17 goals that over 100 countries have signed up to: How do you turn them into not just these kind of blah-blah challenges, but really concrete moonshots that could actually also have some innovation road-mapping, both through international organizations together--because many of these challenges are global--but also within countries, even at the city level, or at the state level, if you see what California is at least talking about doing around climate change. 'What would it look like, question mark, to have kind of a mission-oriented approach towards the way that public and private sector actors co-invest across the whole innovation chain to tackle particular challenges?' And, by the way, I just wrote a report--it's probably the thing I'm most proud of, which came out last February, February 2018, for the European Commission. You know, I'm Italian but live in the United Kingdom but grew up in the United States; I'm a bit of a chameleon here, but I wrote it for the Commission to say, 'Hey, guys, you spent all this money on innovation, but look at what happened in the United States when they did the moonshot.' To go to moon and back again in one generation required not only, you know, really agency like NASA [National Aeronautics and Space Administration] coming up with that ambition--very aspirational, bold, and high risk. But also required lots of different sectors in the industrial base to work on that problem. So, it wasn't just aeronautics. It was also clothing. You couldn't go to the moon in jeans and a tee shirt. Nutrition: You couldn't just eat a hamburger or hot dog up there. Right? So, lots of different sectors had to innovate. And invest. To get there. That should be important today when we see the record-level hoarding that we have in both Europe and the United States. But also, lots of different projects and kind of homework problems had to be resolved. Hundreds. Of which many failed. And the ones that succeeded are precisely those in our smart products today. So, it's not about public or private, but how do you also set a really strategic direction for this public investment? So, instead of the NIH [National Institutes of Health] just plowing in $32 billion a year and kind of just assuming that somehow this is going to end up resolving great health problems and then allowing--I mean, this is what's crazy--allowing the pharmaceutical industry to set whatever price they want through this dysfunctional notion of value that they call value-based pricing, why not learn from that mission-oriented approach to the moon and kind of implement that for how we think of the big challenges around health and energy?

29:15 Russ Roberts: So, I think NASA is quite an interesting case. There was a very specific goal: Get to the moon and back. We mobilized through the public sector and the private sector as you point out, an enormous amount of resources. I happen to be a very romantic lover of space travel, so I'm really glad we went, personally; but I'm not sure it was worth it. And I think that's the challenge. It's hard to pick the goal. Should the goal be immobilize everything to cure cancer? So, which kind? Should the goal be to cure various other health challenges? Should we try to get better water, cleaner water in Africa? I mean, there's so many human challenges. And the question is: Will the government do a good job? And I think NIH is a good example. I am a big fan of NIH. I think there's a very powerful case for government funding of basic funding of research. But there's also a good case for private funding through foundations; and they're doing that, of course, as well. There's fads in medicine that the NIH responds to. There are fads in political goals that influence, political forces that influence what NIH spends its money on--which I'm not sure are a good thing. But, I think the deeper point--I want to come back to your point about Solyndra and Tesla, which I think is a more interesting point of practical public policy. You make the point, which I think is undeniable, that government spending often leads to benefits that will go uncaptured, say, by taxpayers and then get captured by, say, venture capitalists or the pharmaceutical industry in the case of NIH. I want to hear the case for why I should care about that. What should--it's undeniably true. It just doesn't seem to me to be necessarily--it's undeniably true that government spending has side-benefits for private actors, and for taxpayers. And that there's value created by some government activity; maybe a lot. Why does that imply that government should be a profit center and receiver of revenue when those go well? Mariana Mazzucato: Okay. So, I think, first of all, you framed it really well. It's a really important question. And I'll sort of unpick[?unpack?] different dimensions of it. First of all, the public did care. The U.S. population apparently cared a lot when Solyndra went bust. There was a whole discussion, almost every paper I saw at least addressed it, which was: What is government doing? Government should not be picking winners. It should be doing those background kind of investments that we were talking about in the beginning: set the rules of the game, protect private property, invest in roads and infrastructure, and then get out of the way. So, the first point is to say: Actually, government has historically done much more than that; and sometimes it succeeded, and sometimes it has failed. The Solyndra loss, which everyone seemed to know about, was a failure. Why did they not know about the Tesla success? Most people would not know that Tesla's initial investment came from Uncle Sam [nickname for the U.S. government--Econlib Ed.]. Nor would they know that Elon Musk, the person behind Tesla--and forget his more recent reputation after he started tweeting--Twitter seems to be the downfall of many people; maybe I should stop tweeting--you know, Elon Musk himself has received $5 billion dollars of different forms for his three companies, SpaceX, SolarCity, and Tesla. So, the first point is just the marketing. Government has actually been quite stupid. It hasn't marketed the successes. It's just allowed people to know about the failures, because it's very easy to criticize things when they go wrong. The second point is: It's not true that government just funds basic R&D [Research and Development]. Because I would agree with you, to be honest: When government is funding basic R&D, forget it. Don't worry about getting a monetary return. You do it precisely because it's a public good. Those spillovers do spill over in terms of the great knowledge that is, you know, created--you know, the private sector was not willing to fund, for the reasons I laid out before. And that, itself, is a return. To the country. You've created this great thing called The Knowledge Base. But the truth is: Government has gone way beyond that in recent years, precisely because finance has become increasingly short-termist. Much of the long-term, patient finance downstream--and by 'downstream' I mean to the actual companies, like the Tesla investment, which is a $465 million guaranteed loan to one company--that's very different from, you know, funding a nuclear fusion that I was mentioning before, my father moved from Italy to the United States for--that, I think, is naive. It's simply naive for government not to at least ask: What should the return be, beyond some sort of, you know, basic spillovers? Because there isn't a basic spillover. That's for the Tesla car. Which, by the way, is quite expensive, so it's not as if it reaches every American. For those kinds of downstream investments, unlike the basic R&D, there's all sorts of different ways that government could get a return. One could be equity. I'm not necessarily a big fan of that. It's just interesting that the government did think about it. But in the opposite way it should have: It said, 'If you don't pay back the loan, we get 3 million shares.' I'm saying it should have said the opposite. But there's other ways that it could think about the return. I just wrote a report called "The People's Prescription," rethinking health innovation for public value for the pharmaceutical industry. And there the public return could also be conditions on re-investment--you know, lots of these big pharmaceutical companies, but also the big energy companies don't reinvest their profits. They increasingly hoard them. Or use them for share buybacks. Which would be fine if these were atomistic, you know, companies, just getting their profits out of the blue. But if it also is due to public investment, there could be that condition. Which, by the way, is the condition that got us Bell Labs. AT&T [American Telephone and Telegraph] was forced to reinvest its profits in order to retain its monopoly status. That's where Bell Labs came from. It could be conditions on the IPR [Intellectual Property Rights]--so, the patent system. Today, we are, we have a dysfunctional patent system. I have nothing against patents. But, we have allowed patents to be--so, intellectual property rights--to go increasingly upstream so that the tools for research are being patented. That's a bad deal for the state, which has given a 20-year monopoly on, to a company. What ideally would happen after those 20 years is that knowledge gets diffused more than it used to be in the Middle Ages when there was just secrecy: Nothing was written down. The patents actually, you know, codify this knowledge. But if we patented the science, then it becomes very hard for that to happen. Or, it could also be conditions on pricing. And that's the obvious thing that we should have done with the medicines, which receive something like 2/3rds of the research funding from the state. Why don't the medicine prices reflect that? So, those are just examples--you know, equity, reinvestment, IPR, or prices could be the way that government gets less naive for its public investments so we don't just socialize risks, but also socialize rewards. Not in a Communist way, but to make capitalism more functional. Russ Roberts: So, I agree with you on the patents. We have a dysfunctional system. And I recommend listeners go to the Robin Feldman episode--we'll put a link up to that--where he talked about some of the ways that the system is currently being abused by the pharmaceutical industry. So, I agree with you on that.

36:31 Russ Roberts: I want to talk about this general issue of patience and short-termism. Government is pretty short term, too. Most politicians have a very short time horizon. I don't see any reason to think they are going to be more long-term than private sector investors. And, in fact, we see right now--we've seen it many times--private sector R&D, enormous amounts of money going into areas that are very iffy and that take a very large amount of patience: the genetic mapping of the genome--of course, much of it came from the public sector, but a lot of it's come from the private sector. People are waiting for that return in biotech; it's not really come along. But people continue to invest in it and become optimistic it will happen. But, of course, along the way, a lot of people will have lost a lot of money because it took too long for their horizon. Similarly, the driverless car: extraordinary amounts of money being put into it by enormous companies spending huge amounts of money for a long, long period of time. So, I don't see patience as the biggest problem with why we don't have more innovation. I see the fundamental problem being that it's just really hard to do. And, I don't see why--I agree with you and the government has spent some time and money doing things beyond the rules. It's occasionally successful: to be crude about it, I would say a pig every once in a while finds a truffle. So that the military sector, for example, does come up with lots of things that it didn't intend that have nice human impact beyond war. But, what's the evidence that government is going to do this well? Why would we encourage government to step outside its rule-making, rule-keeping area and do things like Tesla and Solyndra? Tesla--I'm against it. I wish they hadn't given that loan guarantee. It might have happened by the private sector anyway. But it did turn out pretty well, so far. We'll see. You know, people debate about whether Tesla is really a viable concern in the absence of government help of other kinds. But, I mean, government does lots of things really badly in the United States. School system--one of its fundamental roles, which should be spending a lot more time and potentially money if it could spend it well. It doesn't do well. So, I think that's the fundamental reason that so many Americans are skeptical about a more active role for government innovation. Forget the Department of Motor Vehicles, which is a standard--or the Post Office--things, for small government, people like to pick on. [?] pick on the big stuff: education, a thing government should be doing and should be doing well, doesn't do well. Why should we have a more active role? Why should government compete with private sector investors for innovation? Why should it be involved? Let's let the private sector--which is very imperfect at it: it's hard to do. These are people who have a lot of money at stake, and they still make lots of mistakes. Why would we think government officials would do better? Mariana Mazzucato: Okay. So, first of all, I went to a state school in New Jersey, Princeton High School, and it was a great state school. There's other state schools that are terrible. There's some private companies that work really well, very efficient, produce great products and services that the world wants to buy; other ones that don't. So, my point, as I mentioned before, is there's nothing in the DNA of the public sector, or the private sector, that will necessarily make it a good innovator, because we have admitted that the private sector is essential, as it is, to innovation. We ask really difficult questions to it; and that's why the top CEOs (chief executive officers) all go to some great business schools, to study those issues. One of my colleagues wrote a book called Rejuvenating the Mature Corporation. Why? Because when corporations get big and heavy and bureaucratic, they can get really inertial and slow and dinosaurish. So they have to rethink themselves. When the government becomes big and bureaucratic, we just say, 'Oh, that's government. Government is bureaucratic.' So, the first thing is to recognize that value is in fact potentially created collectively by different types of actors, including, by the way--this isn't just about public and private--the third sector has become, so the voluntary, philanthropic sector is becoming increasingly important in some areas, like say the Gates Foundation around health, but also, we should never forget trade unions. We would not have weekends; we would not have the 8-hour workday; we would not have children not working in the factories without trade unions fighting for that. Which was a fundamental force in capitalism to make it work as it currently does. It was a part of this market co-creation process that I mentioned in the beginning. So, if we then hone in on the public sector, we should ask difficult questions to it: How should you organize yourself? Because, if you're not organized properly, you won't be able to organize your activities, whether it's education, health, or energy, or particular investments in those areas well. So the real question should be what has happened in recent years to the way the United States has thought about education, including, by the way, the outsourcing of the capacity of the government to even be innovative. I mean, I've seen this from NASA to other organizations around the world: they've increasingly disinvested in their own ability to think big and to have internal capabilities, which we all know is important in the private sector. But the other really important issue you raise is the short-termism, because the business sector short term is due to certain factors, for example the pressure from shareholders. But the governments are often short termists for the reasons of elections. You know, if an election happens every four years, or five years, or whatever, that might make the politician at best just have a little pet project just so they have their name on it. Or, at worst just not want to make any important investment and just kind of hand out some money to potential voters, and that's all sorts of issues around corruption and capture can occur there. And that's true. So, my question is, and this is why I set up this Institute for Innovation and Public Purpose at University College London, is to actually pose those questions. So, for example: Well, how was DARPA set up? Or, because everyone knows about DARPA, let me mention a different organization: How was the Italian IRI [Istituto per la Ricostruzione Industriale] set up? Russ Roberts: Can you spell that? Mariana Mazzucato: So, it's I-R-I. It was called the--what was it called, actually? I think it was the Istituto per la Ricostruzione Industriale. It was basically the public entity that was set up under Mussolini. Sorry, I hate to talk about its original foundations. But it became one of the most innovative organizations in Italy when it was transitioning from an agricultural economy to an industrial economy. And it had 3 phases: public and not politicized; public and super-politicized--so, each party put its hands in; and then privatized. And the 2nd and 3rd stages were equally bad, in terms of its ability to actually be ambitious and innovative. The first phase, it actually constructed what's called the Autostrada del Sole--the motorway that goes from the top of the boot to the bottom of the boot [reference to boot-like appearance of Italy's geography--Econlib Ed.], toward Sicily, in 4 years. And it was a huge amount of kilometers. Whereas recently it could barely do the Turin-to-Milan. So, how it was actually constructed in that early phase, which was independent from all the political parties getting their hands in, actually made it one of the coolest places to work: The top Italian managers found it to be an honor to work inside IRI. In more recent history I found that was very interesting: When Obama was doing his fiscal stimulus package, which in Europe we kind of forgot to do because we just obsessed about austerity, he had about an $800 billion that he wanted to pour into the system. And initially, he, I think, had some really interesting ambitions around it. He really wanted to green the economy. And so, he--this was the period, precisely the period, that ARPA-E ended up getting set up, in 2009 one year after the Crisis. And because he had an ambition to direct the fiscal stimulus--and he really started talking about the green kind of manufacturing--you know, how to use green as a direction for the whole economy--it was an honor for a Nobel Prize winning physicist called Steve Chu, a Chinese American, to direct that agency. The Department of Energy, for a certain period was directed by a Nobel Prize winning physicist who then set up ARPA-E. But he would never even wanted to do it--forget what actually happened and what didn't. Just talk about talent. You know, how do you attract talent? No Nobel Prize winning physicist would have wanted to have work for an agency whose agreement was: 'Well, go help Elon Musk. Go de-risk Elon Musk. Go fix a market failure.' It really had a mission, as ambitious as the DOD [Department of Defense] has had to win the war, or go out to space. And that becomes one of the ways that you also attract talent. Then, how you use your tools--for example, procurement policy, price schemes, grants--to really crowd in that bottom-up experimentation. Because we know top-down doesn't work; that's why the Soviet system failed. But, how do you use government instruments--let's just take procurement policy, which is government's purchasing power--to kind of be very clear on what government wants. For example, 'We want soldiers not to die when they are inside their tanks.' Well, driverless cars are not a bad solution to that. And that's basically where the initial investments in driverless cars came from. Fracking, by the way, came mainly from the DOE [Department of Energy]. Which doesn't mean that the private sector later wasn't important. Of course, it was. But what you often see from these mission-oriented public agencies is they laid the way. They took on the initial risk. They also had a bold, kind of inspiration, to solve a public need--which could be either fighting the war or curing a disease or getting a renewable source of energy--which then, if done in ambitious ways, lays the groundwork for then the private sector to increase their expectations of where these future growth possibilities lie. The irony is that when government doesn't have that ambition, it ends up actually doing what we end up blaming government for--either being too boring and slow, or even worse, crowding out--this word that economists like, 'crowding out'--the private sector, because they end up doing what the private sector should do but doesn't do.

46:48 Russ Roberts: Well, I think crowding out is important to think about. How important it is, is always an empirical question. But, one of the challenges we haven't talked about is that--I meant to mention this when we talked about the space achievements of NASA and getting to moon--we don't know what the opportunity cost is of that. We don't know what was foregone. We don't know what investments or activities didn't take place. We look at the success; and we [?] happy about it. And that's true. You know, the same would be true of Bell Labs, other things that led to good outcomes, ones that we point to, that we happen to like. I want to go back to one thing you said, though, because I think it's important. I don't think trade unions have much to do with the fact that children don't work in the mines, or anywhere else any more: that there's a weekend or a shorter work week. We have a shorter work week for the last--the amount of time people work has been falling steadily because we want to work less. We are richer. It's a market force. And trade unions occasionally have asked for. But, if it wasn't happening through market forces, and it wasn't what people wanted, it would have been very hard to get. And often--they are increasingly less important now, for that reason. Mariana Mazzucato: That's historically just wrong. I mean, trade unionists and workers. I mean just talk about workers: trade unions are simply their organization that kind of bargains for them but that workers fought for, many and died for, many of these advantages that you just mentioned. Russ Roberts: I think they would have happened anyway. I don't think there's--I don't think there's--I don't think there would be working-- Mariana Mazzucato: --well, there's that's--there's no [?] that. I mean, I could say the private sector would have invented the Internet. I mean, but you have no way to actually prove that. So, let's just talk [?] Russ Roberts: But wait a minute. Hang on. Hang on. There is some evidence for it. It's not just an empty claim. The fact that the work week is getting shorter, now, without unions-- Mariana Mazzucato: Yeah, yeah. I would agree with that. Yeah. But the 8-hour work day is something that was specifically fought for by Trade Unions. You know, the fact that construction workers have construction hats, when they got that job was fought for by trade unions. Otherwise things were falling on their heads. And people actually had to pay for their own construction hats. There's many different examples I could give you like that that was fought for. That doesn't mean that we glorify trade unions. I personally think that they should be much offensive and less defensive with technology. They should, if we had a stakeholder, governance-type of corporate governance, trade unions would be at the table, you know, saying whatever--I don't know, whether it's good or bad, whether saying it is not even the point. But they would be debating alongside the shareholders, alongside the managers, alongside some businesses--sorry, government officials that would be at the table given the subsidies that these businesses are receiving: what form of, you know, sort of, new digital landscape are we, you know, co-creating together and why we should really kind of think through how to allow or how to construct the type of, you know, kind of big data, AI [Artificial Intelligence] kind of a market that is currently developing instead of always ex-post worry about the effects it might be having on labor or taxation. But, your other question I think is a really important one, which is: Was the Moonshot even something to do, to have happened anyway? So, one of the issues is: If you take a systems perspective, which I do take, because I really believe in innovation systems--and what I mean by that is, the Soviet Union was spending a huge amount on innovation, one of the biggest funders of it in the world. But, where science--sorry, I should say, science and the whole knowledge base, where it didn't turn into innovation in terms of commercializable innovation, because they didn't have innovation systems. They didn't have those, for example, science industry linkages. They didn't have a financial system that was flexible. So, systems do matter. So, even though you put in a lot of R&D money, that won't lead to innovation, unless you have that system. So once you take that--I mean, that's just one example. But once you really unpick that in terms of the real kinds of granular structures that were kind of important in terms of important like Silicon Valley, then you could ask, even if we hadn't gotten to the moon and back again but you actually structured the innovation system properly so that you had both public and private actors across that innovation chain working in this dynamic way as they in fact did. In that case. Would all these spillovers, which ended up happening along the way have happened anyway? And I think the answer there is, sort of, 'Yes.' Which is that what really matters is the process, the system. So, if you have a linear, top-down system, where you think that just because you put in a lot of money that somehow is going to, you know, lead to great things at the end, that almost never works. If you get, kind of the feedback loops happening, this is something by the way that United States has started to underfund. You know, Germany, has these Fraunhaufer Institutes. The United Kingdom is investing in these catical[?] centers. This is really one of the great things that the United States did have, which was, you know, centers where industry and big science kind of basic blue-sky science met, in places like Stanford and places via great national labs. If we stop not only funding them but stop also making sure that they are structured in ambitious ways that are not also measured in really static ways--that they have to prove their economic value tomorrow--then, you know, they will remain very important parts of that system. But, you know, in some ways, I think that the way we elect politicians should be based on the moonshots. I mean, look at Alexandria Ocasio-Cortez's campaign in and around the green new deal. Forget whether she's right or wrong. But that's how she campaigned. We shouldn't be using, you know, net present value and cost-benefit calculations on whether we should be going to the moon. That should be what politicians, you know, kind of argue for in order to get elected. You know: 'We want a green transition. We want a digital revolution. We think we should be tackling the big productivity challenges.' That's how we should be in a democratic society, electing our politicians. Then once they are elected, we should make sure that we have the right kind of public institutions, private institutions, third-sector institutions, interesting places for them to collaborate and dialog together on how to then achieve those goals. But, unfortunately, I would argue that the political process has also become incredibly static and miserable, where we are also not also debating some of the biggest challenges of our times. And people are getting elected based on pretty flimsy promises. Russ Roberts: Well, we probably agree on that.

53:06 Russ Roberts: I want to go back to something you said about risk-taking, because it's another part of our--an area that I think is easily missed. You said in passing--and it's all over your book, as well, about how the public sector "takes the risk." They took the risk with Tesla. That panned out. They took the risk with Solyndra. That didn't pan out. They--the NIH, all the fundamental research that's taking place there--there's a lot of uncertainty. But, the problem is--this is I would say the crucial difference between the public and private sector and I challenge I think to your vision of a larger public role, is that: The public sector doesn't really have to take risk. Because it can always raise money at the point of a gun, through the tax system. Whereas the private sector runs out of money. If the idea doesn't work, there is, eventually, they can't attract investment any more and it disappears. Do you worry about that? Is it a problem with the public sector--that--I know we don't want to overstate the role of profits; but since there's often no accounting measure of success or failure for investments of these kinds we are talking about, how will we know that they are done well? And what's to stop bad ideas from continuing to take money away from good ideas? Mariana Mazzucato: So, I would even be more extreme than you are in this, in some ways. I would be agreeing with you, but even more than you just said. Which is that the government actually doesn't rely on taxes. It can even just, literally print the money. That's what it does when we go to war. I don't think you've ever heard the government say, 'Oh, we can't go to Afghanistan. We don't have enough tax money. We can't go to Iraq. We can't fight World War Two.' In those cases--and this comes back to your previous point about the military industrial complex, when things were seen, or framed, in terms of security issues, urgency, national priorities, they can, unlike family, unlike a household, just create that money. And hence, also, potentially run into this--well, actually run into this accountability question. So, but that's a first very important point which sometimes would work against some of what may be some of your listeners think, which is that the government should be acting like a responsible household, because you shouldn't be spending the money you don't have. So the first point is, governments are not households. They actually can, A). Print the money. And B). well, this is when you have your own Central Bank, by the way--in Europe that's different--and also you can stimulate the economy. And if done so properly, you can also generate a lot of tax revenue if you also want to fund your priorities through tax revenues. So that's just the first kind of clarification-- Russ Roberts: but, that's true, but-- Mariana Mazzucato: But then your point comes in, which is the important point, which is: Then, there's a big distinction, right? You know, if a private sector company doesn't do things well, it'll just fail. By the way: That's not always true. Just look at all of Trump's businesses. He just got up again because he got bailed out, so that's your bailout question before. But anyway, so that's a really important question, which is: What is the right way to then account for, measure, evaluate government activity, given that, you know, it's different from a private sector company? Which in theory, not in practice, but in theory would go under if it under-performs? So, the first issue is, kind of more pro-active kind of point, which is the point I was making before: Well, let's learn from those parts of government that worked well, precisely on that issue. One of DARPA's great success points is precisely knew when to turn the tap off. This wasn't just turning the tap on, throwing a lot of public money in. The reason the DARPA, the ARPA-Es, and the global, you know, the few global organizations that have been able to replicate that kind of organization of the public sector have been successful have been they not only have the missions that we were talking about before, but also were flexible--you know, taking risks, but also flexible inside to know how should we turn this tap off because it just isn't going anywhere. And that requires going against the grain. Because if someone is in there just for career reasons or just wanting to, you know, please the supervisor, you just might keep the tap on. So also you show that that organization funded all these great things. But, if it's not, you know, happening, turn it off. And knowing how to turn off the tap is a skill. It means also having dynamic metrics. Because you don't want to turn it off too quickly. Because that might lead to short-termism. But if it's not going anywhere, stop funding it. But the other issue is: We should have dynamic metrics. So, let me give you a really concrete example. The Concorde Plane--it's not flying. Is that a failure? It's definitely a private sector failure. Because the private sector would want to build the plane--that is, flying, and they are earning profits from it. That would be stupid if it's not flying. The public sector--I mean, that was a publicly funded project--the actual investments made in the Concorde had massive spillovers across the economy in all sorts of other sectors that actually led to innovation in different sectors. Now, the last thing I want to do is say that the Concorde plane was a good investment or the right investment or a success. But the metrics we have that governments should have, should be dynamic metrics; which in this case should be able to capture explicitly the spillovers that occur across the economy with that investment, even if that investment the final outcome fails. That kind of comes back to my point about the moonshot: even if we hadn't gotten to the moon, had there been a functional dynamic, innovative ecosystem, innovation system, then maybe it would have been less important getting to the moon as long as all as those spillovers happened, which again are inside our smart phones today. Now, all I want to say with this is it's hard. None of this means, 'Oh, it's easy. Just throw a lot of public money at stuff.' In fact, in Italy, the country I'm from, what's interesting is these lessons haven't been learned. So there's a lot of public money going to all sorts of things, but there aren't the right public structures. And by the way: One of the obsessions that economics have with the deficit, you know, 'Oh, let's keep the deficit low,' actually makes little sense when you look at different countries. Italy has always had a low deficit. It's almost always been lower than Germany's, for example. But its Debt/GDP [Debt-to-GDP] is very high. So, Debt/GDP is not the same thing as the Deficit. And precisely because it's public and private actors, both of them, in the last 20 years have been pretty rubbish, structuring themselves in strategic ways, providing that patient long-term finance in both areas, also the private sector, then their productivity hasn't grown. So, long-run GDP hasn't grown. But that's the denominator of Debt/GDP. And even with a mildly rising deficit, Debt/GDP can in theory go to infinity if the denominator is not growing. Now, again, that doesn't mean just spend, spend, spend. But what my point is: Spend Wisely. Strategically. And structure the organizations in both the public and the private sector in ways that are smart, mission-oriented, and also work together well, because almost all the challenges we have ahead have to happen in partnership.