Capitalisn’t: Can Capitalism Serve the Common Good?

Episode Transcript

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

Bethany McLean: Go look in your medicine cabinet. There's a good chance the science behind whatever's in there was paid for by you at a university lab funded by the National Institutes of Health, but the patent isn't yours, nor do you set the price.

Luigi Zingales: Same story with the phone in your pocket, the touchscreen, the GPS, the voice assistants; trace them back far enough, and you find research the public paid for. The public took the risk; somebody else took the reward.

Bethany: Economists have a name for this kind of thing. They call it a market failure, something you patch with a subsidy here, a regulation there.

Luigi: Mariana Mazzucato says passion is the wrong idea entirely. Nobody handed us these markets. They were designed: patent law, corporate charters, procurement rules, what gets bailed out and what is left to fail. Every one of those was a choice somebody made, and that somebody was not you.

Bethany: Her new book says we could choose differently and build an economy around what she calls the common good.

Luigi: Which sounds wonderful. It's also the oldest con in Washington. Every lobbyist on K Street has a story about how his client serves the common good, and the government she wants to put in charge of redesigning markets is the same government that keeps getting captured by the companies it will be redesigning them against.

Bethany: Which is this, a real program for changing capitalism, or a set of words capitalism will happily adopt while changing nothing? It isn't an academic question. Mazzucato has chaired a commission at the World Health Organization. She's advised Brazil, South Africa, Scotland, and Barbados. Her language turned up in Keir Starmer's manifesto. These ideas are already being taken seriously inside governments.

Luigi: Not that the Keir Starmer manifesto lasted very long.

[laughter]

Bethany: That's fair enough.

Luigi: Her new book offers a compass for an economy organized around the common good. Public purpose, participation, shared knowledge, shared awards, and accountability.

Bethany: We were talking about something before you joined that I wanted to start with, which is that you aren't a philosopher by training, but your new book is infused, obviously, with a deep philosophical lens. Why do you think perhaps that philosophy is called for at this moment in time?

Mariana: What I was interested in was the common good, and actually philosophy as a discipline has debated it much more rigorously, dynamically, I think, than economics. My critique of, for example, notions of the public good in economics is that it's just a correction. If the private sector doesn't invest in something, whether it's defense systems, basic research, clean water, we expect the public sector to come in and fill the gap.

The thesis of the book was we need to learn from philosophers how the common good is an objective, it's not a correction, and the how we relate to each other along the way, capital-labor relationships, government-citizen relationships, and especially what I focus on, public-private relationships matter as much as what we're trying to do. That notion of good, the objective, should be embodied in the contract, so in the relationship, how they're designed from the beginning, ex ante, in a pre-distributive way, so we stop having to pick up the mess ex post.

Luigi: We're both Italian.

Mariana: By the way, Luigi surely studied philosophy because, luckily, he's very lucky he went to an Italian high school, probably il liceo scientifico or classico, which one?

Luigi: Classico, of course. How can you possibly ask?

Mariana: Classico. Every Italian actually knows philosophy. I was born in Italy. Unfortunately, we moved to Princeton when I was little, so it's also a bit of philosophy-- how do you say? Wannabe for me. [laughs]

Luigi: Actually, it's funny. Growing up in Italy, I became allergic to the notion of the common good. First of all, there is a history of the common good being used, for example, by the fascist regime. How do you stay away from that?

Mariana: That's such a good point because that's also why I wrote the book, to be honest. I'm going to keep saying that for every question you ask, to call out those who are common good-washing. This word actually means everything and nothing. The idea of having a compass to break down the common good into these five principles, these elements, are supposed to hold anyone, whether it's businesses who show up in Davos and talk about a purpose-oriented business or governments who say they're interested in SDGs or any goals, to hold them accountable.

One is even being very clear on what you're trying to do. There's so much vagueness. Think of the SDGs. They're very vague. Climate change. Yes, it's a problem. What would climate action look like if it was really purpose-oriented, so that also people can contest what that purpose and direction is? That brings us to the second element, which is co-creation and participatory fora. In other words, who sets the goals?

Is it just a technocratic state telling us all what's good for us, or do we, based on these broad challenges, which should really be how governments also get elected, to actually make sure that they then land and are co-created with people based on their lived experience? The third principle is knowledge sharing. There's no point in talking about the common good if we continue to privatize all the knowledge along the way. Just look at what happened during COVID, where only one of the companies agreed to share knowledge even during a global health pandemic. That was AstraZeneca.

Fourth is sharing rewards. Based on a lot of the work I've done on the history of Silicon Valley, huge amounts of public investment. Share the risks, privatize the rewards. Fifth, transparency and accountability. If we don't even know who's doing what or who's earning what and why, it's very hard to govern a system towards the common good.

Bethany: There's a chicken-and-egg issue here, I think, that I'm getting confused by, and that's: does the common good inform the principles? We start with the common good, and then the principles grow out of that, or do the principles point the way to the common good?

Mariana: Those normative ideas of what we should be achieving, the book does not talk about. The book says, in a world where we talk about goals constantly, where we even have the SDGs that every country signed up to, are we even capable of getting any closer to achieving those goals? I say, no, by design, not by coincidence. That's not just because you have certain leaders like Trump who debates the science and says we don't even have climate change. Even those who really believe in it are not achieving the goals.

I just say it's really impossible in an advanced capitalist society where you have large multinational corporations, medium-sized companies, small companies, startups, lots of different civil society organizations, different state actors to work together; if at best we think about one of the most important actors, which is the state, that at best sees its role as filling the gap. It's going to be impossible for you even to build the capacity, the capabilities, the intelligence within because how it's been framed from the start has been to just fix the market failure.

How do we start from a different position and a Polanyian position? I don't know if you read Karl Polanyi's amazing book, The Great Transformation. He wrote it in 1944. He says markets wouldn't even have existed without being forced into existence through very active public administration. That already breaks down the idea of state versus market. The market is an outcome of how we govern public institutions, how we govern private institutions, and how we govern their relationship.

When you have companies that are just wed to shareholder value, government organizations that are just inertial, not flexible, and just thinking that at best they can fix markets, it's going to be very hard for them to work well together. You're going to have a pretty problematic relationship between the two. In terms of that ecosystem, as I said before, you will often have that actor, which is the business sector, that's glorified as creating value, and the other one is just redistributing, administering, fixing, de-risking, facilitating, also having a very hard time to attract the kind of talent that you require to set up a good relationship.

Luigi: Maybe this was imposed by your publisher, but the subtitle of the US edition says that you promised to make capitalists work for all of us.

Mariana: I didn't want that subtitle. This is the English subtitle. [laughs]

Bethany: The things that publishers do to us. [laughs]

Luigi: You accepted it. What are the non-negotiable capitalist institution in your preferred system?

Mariana: A system which is driven by incentives for change that stimulates entrepreneurship, knowledge, technology, and so on, I think, is extremely important. How to direct that innovation. Not top-down micromanaging in a technocratic way, which, as we know, will kill the innovation, but with a strong direction. The second institution is governments that are democratically, not dictatorship, elected. The question is then: how does that government work with business, which is a fundamental aspect of capitalism, the modern enterprise, the firm?

How do we also admit that companies can be governed in very different ways? I don't think there's one way to do capitalism. Corporate governance in Scandinavia and in other parts of the world might have trade unions on the board of that company at the table to not just defend the worker, "Oh, increase the wages, improve working conditions," but to actually set the direction of change. That's another thing which doesn't exist in capitalism, but in some capitalist countries, I would definitely keep, which is experimentation of different corporate governance forms, which admit that value is created collectively. Labor creates value.

Again, that's a very important thing that came from Marxist economics. By the way, people don't realize that Marx said so many interesting things about capitalism. Forget communism. He actually talked a lot about innovation. He studied the effect of innovation on different economic dynamics. What's striking about neoclassical economics, as Schumpeter said, was in order to talk about innovation, you have to talk about imperfect competition.

Of course, we all know that we don't have a bunch of small companies that are perfectly competitive. Fine, all economists know that. What's weird about neoclassical economics, Schumpeter said, was that to talk about innovation, you have to then distance yourself from this benchmark of perfect competition, and how weird is it, given that competition itself between companies is also the answer to your question, which is it's a key dynamic of capitalism. It's a key characteristic of capitalism.

Then to talk about how they're competing through innovation, we have to talk about imperfect competition. He said, "We obviously have the wrong theory of competition." That was actually Schumpeter's really important contribution. I think those three things I would retain: that we have a system which is driven by innovation, a system where, to compete, firms are having to produce higher-quality, I would say, accessible products, but the direction of that innovation will often bring us the wrong kind of economy, the wrong kind of society. Look at what's happening today with artificial intelligence, which is completely undirected.

By the way, it's one of the first times that such a large innovation is so undirected. I wrote about in my previous book, The Entrepreneurial State, where large innovations that we've had from the IT revolution, nanotech, biotech, the whole energy revolution often came out of huge problems that the government was actually trying to solve. The internet came from government wanting to get the satellites to communicate. GPS came from the Navy wanting to know where the ships were.

The fact that we've had this problem-oriented innovation, mainly driven by the military-industrial complex, which then involved lots of private-sector actors: 400,000 people got us to the moon in the private sector, but directed by government. I think that's a really functional way to think about innovation. Strong direction by government, lots of private initiative, bottom-up, not micromanaged.

The big question that I've been putting in my previous books was, why do we only know how to do that with the military-industrial complex? Why haven't we figured out how to have this bottom-up innovation, intersectoral, in industry, directed by government for our health challenges, water challenges, biodiversity challenges, and so on?

What I would retain are these fundamental levers of a government that, in theory, can help direct the show, not by micromanaging, but using tools like outcomes-oriented procurement or public loan systems to incentivize innovation in the business sector, which will be competing amongst each other for market share, but that it's directed not top-down, towards solving big problems. Some will win, some will fail.

What I would throw out is this financialized form of capitalism. $7 trillion have been used by the top companies in the last 10 years just to buy back their shares, to boost stock prices, stock options, executive pay. That is a result of coming back to shareholder value. Capitalism, I would definitely throw that out. [chuckles] Finance, how the financial sector itself is structured. In my country, in the UK, 80% of finance goes back to finance, so finance, insurance, and real estate. We have been very poor in the modern form of, let's say, mainly Anglo-Saxon capitalism to get finance to do its job in the real economy instead of just a gambling casino.

I would get rid of something that you've written about, Luigi, in terms of how we are governing intellectual property. That's not what patents were for. We are currently patenting really upstream in the innovation process. It was mainly meant to be more downstream. Patents are way too wide, so just used for strategic reasons, too strong, hard to license. We have misgoverned a fundamental tool that should, in fact, be incentivizing innovation instead of blocking innovation and creating very large monopolies.

Again, this brings me to two books ago when I wrote Mission Economy. What the common good says is actually to do this stuff, not for the military, but on health, on energy, on the digital divide, on inequality. The problem is it's so easy just to come up with these goals, but that what we see happening along the way is a really dysfunctional public-private partnership along the way, and so to have a compass which holds that relationship accountable.

Bethany: Come back to this idea of Schumpeter and imperfect competition and how it applies to AI. At least as I understand his argument, it's that imperfect competition isn't merely the price of innovation, but one of its engines; the prospect of temporary monopoly profits gives firms the incentive and the resources to take enormous risks, and creative destruction eventually dislodges them.

Does AI vindicate that argument, or does it reveal its limits in the sense that, in a market where all of this becomes concentrated in a handful of firms, how do we distinguish productive Schumpeterian monopoly from an incumbent-- Then, also through the lens of efficiency, how do you think about this? Because right now, what's driving AI is the idea that we must compete as viciously as possible because otherwise China is going to get ahead of us. Where is that idea steering us wrong as well?

Mariana: There's a lot in what you said. [chuckles] I'm not sure where to start. First of all, Schumpeter had two big questions. One was, is it large firms or small firms that are more innovative? Another one was, does innovation lead to a more competitive or more monopolistic market structure? He changed his mind along the way. At first, he actually took on much more the notion that it's going to be small companies competing, and that's going to create the more Schumpeterian dynamic.

Then he's like, "Actually, if you look at what's happening with innovation, with these large research and development laboratories that are needed in order to compete, we're going to end up only having large monopolistic companies that are even able to enter that competitive race, and the rest are going to get shaken out of the system." I think the more interesting work was asking not which is true, but under what conditions, whether it's what kind of industries you're looking at, what phase in the industry lifecycle.

With AI, I think what's interesting, first of all, currently all the knowledge, all the top AI geeks, engineers, computer scientists, and so on, who know a lot about AI are working for the companies. There's a huge hemorrhaging of talent from the universities and definitely from the public sector. We have to reverse that, and government will never know how to govern AI in the public interest for the common good, whatever word you want to say, without the knowledge of how this stuff works.

It's actually incredible how little mission there is, in terms of mission economy that I've talked about, by governments around AI. At best, you hear them saying, "Oh, AI can help us solve this problem, whether it's health or climate action and so on." In terms of how it's being governed and regulated, and innovated in, because government, for the previous technological revolutions, didn't just regulate, it also invested. It led the investment; it led the innovation in the ways that I talked about before.

That is no longer happening. This is really the Wild West. That's not necessarily competition. [chuckles] That's just very unregulated capitalism where, because there's no rules, there's also potentially less reason to innovate. Don't forget that a lot of innovation comes about because there's rules. We would all be dead if we were just eating food or medicine that could be produced in any which way. Because there's regulation of the pharmaceutical industry, that industry had to innovate more, because it couldn't just do anything and sit on its back and produce whatever.

Luigi: I don't think any economist will argue with you that fundamental research should be financed by the state. If I understand correctly, and please correct me if I'm wrong, where you differ is that you don't like firms to profit out of the research of the state, when I thought this was not a bug but a feature of the capitalist system. The Soviet Union was very good at producing military research, was terrible at using the research in other applications. That's where America has been great. That's, in my view, a benefit of the capitalist system. In what way do you want to kill this part?

Mariana: What the debate is, which I tried to debunk, was that then the government should step out of the way. Do the basic research, and then slowly, that research will get diffused, and companies can benefit from it, and somehow great other more applied innovations will happen. Venture capital will step in, fund startups, and so on. I said, "Really? In what world?" That's not what happened in Silicon Valley. Of course, government invested in the upstream basic research, but it also had these places where basic research and applied research came together in the DARPA, ARPA-type institutions. Not just the NSF type, but those more applied.

Further downstream, we had public venture capital associations like In-Q-Tel, which very few people talk about. It's a CIA-run venture capital company that actually was very important in funding some companies that today we think just came out of private venture capital. Private venture capital was important, but it often came after the government gave these SBIR-type grants, Small Business Innovation Research grants to small companies through procurement contracts, which allowed those small companies to scale.

I actually, in the book, The Entrepreneurial State, look at how a lot of venture capital funding came only after government gave that more patient, long-term funding because venture capital is very impatient. They often want to exit or IPO or do buyouts in three to five years, where most of the big innovations in IT, again, in biotech, nanotech, AI required 15 to 20-year cycles, and most of that early, high-risk, capital-intensive, patient financing came from government.

The point of the entrepreneurial state was not to say, "Companies are crap, and you just need government." It was to say, "Hey, look at this amazing capitalist innovation machine. Look at what was actually required by smart, strategic, outcomes-oriented government along the whole innovation chain. Look at how they worked with the private sector, often trying to solve problems," my previous point, which I won't repeat. Then, "Why do we only know how to do it in wartime? Why do we only know how to do it for military-industrial complex?"

Then it's a choice that we make. It's not any natural property of the system to not do that also for these other challenges, again, health, climate, and so on. The point of the private sector, of course, they should make a profit, but not excess profits. What's really interesting, by the way, is that NASA, because they were very confident of their role in the moon landing, they put into all the contracts with the private sector no excess profits, which means no rents, which Adam Smith cared about.

Adam Smith: the free market wasn't free from the state; it was free from rents. That distinction, I don't think, in modern political economy, is as alive as it used to be with Ricardo, Smith, Marx, and others in that traditional classical political economy. The difference between profits and rents, Schumpeterian profits versus Ricardian rents, that's what governments should be doing, working with the private sector, not getting captured along the way, and making sure that we have not just profits, but the profits that are fair, given who did what, literally sharing risks and rewards.

Bethany: One of the ways you write about this in the book, one of the very practical ways you write about it is through what happened with Tesla and what happened with Solyndra. Can you explain that and explain what it is that you think should have happened with those two companies versus what did happen?

Mariana: If we want to say government just do what neoclassical theory says, which is invest in the basic research side of things and then get out of the way, we would have never had Tesla. The US actually had a massive fiscal stimulus, an $800 billion fiscal stimulus under Obama. With the Secretary of Energy, they set up ARPA-E, like DARPA, but for energy. They also started to give out all these guaranteed loans in a portfolio approach, trying not to put all their eggs in one basket, to different companies that were in that clean-tech, renewable energy revolution because they wanted a green stimulus.

Some companies got the loans were companies like Solyndra, which ended up going bankrupt. They got $500 million in a guaranteed loan. Tesla, very different company within the same portfolio, got something like $465 million. Solyndra goes bust. Taxpayer picks up the bill. Taxpayers, rightly perhaps pissed off, they're like, "Why do we have to pick up the bill just when things go wrong?" That's not how it was presented. Tesla does well. Where does the money go? Where do the profits go? Private.

What they said to Tesla, they said, "If you don't pay back the loan, we want 3 million shares in your company." They should have said, and here's my point, "We are going to get 3 million shares if you do pay back the loan." They did pay back the loan. The loan was taken out in 2009, paid back in 2013. Price per share in that period went from 9 to 90. That difference multiplied by 3 million would have gone back into some sort of public venture capital fund, ideally, and it would have paid back the Solyndra loss and the next round of investment.

Coming back to Luigi, I do agree that when you're funding basic research, you shouldn't care about that. You just want the spillovers to be as high as possible. It would make no sense to talk about equity stakes for research. This wasn't research. This was a guaranteed loan, and it makes no sense for governments to give guarantees and only pick up the mess and not get a share back of the return for these downstream investments. I've talked about this also. It's not just about money. You can also make sure that you're not getting screwed, basically.

If you're investing, what is it, $40 billion a year through the NIH, for God's sake, make sure the prices of the drugs that come out of that research aren't going to infinity, which value-based pricing basically allows them to do, and then the state has to come back in through Medicare, Medicaid, or whatever to subsidize the price.

Luigi: You make an excellent point about the fact that the military-industrial complex is much better at running large government projects than anybody else, especially at time of war. One potential explanation is at time of war, everybody feels at risk. If you are in Ukraine, Ukraine is a corrupt country, but, gee, they are producing the best drone on the face of Earth; but why? Because they know that if they don't produce the best drone, everybody is going to become enslaved by the Russians.

I think that there is a incentive that is very strong that you don't have in other situations. I know you've written about government capability, et cetera, but you didn't grow up in Italy. I grew up in Italy, and let me bring you an example that is very big in my mind because, speaking about mission, I think there are very few missions, at least for me, more important than Saving Venice.

Mariana: True.

Luigi: This mission was launched, believe it or not, 60 years ago when there was a major historical flood in 1966. It took from 1966 to 2003 to start a project called MOSE. It took another 17 years and $7 billion, twice as much as it already took, for the MOSE to be completed. By the time completed, the MOSE is completely useless because now, with global warming, et cetera, you need to close the entry of the lagoon so often that you kill the lagoon. Basically, we wasted 60 years, $7 billion doing, I'm sorry to say, at least on the face of it, a mission-based project. How do you avoid these disasters?

Mariana: I'm, again, really glad you asked this because that's another big misunderstanding that I somehow glorify the ability of governments to do this. The reason I set up the institute that I run at University College London, the Institute for Innovation and Public Purpose, is I believe there isn't any state capacity right now to think in a mission-oriented way, let alone for us to also be able to contest what those missions are when it's just some sort of technocratic stupid mission.

We've outsourced actually a lot of the capacity to Deloitte, to McKinsey, to KPMG. We've stopped investing in the capacity of government even to be mission-oriented. Forget the point about whether it's military-industrial complex or not. I'll come back to that in a minute. Think about Italy during the IRI, [Italian language] the big SOE. So interesting that the early, early phase of IRI, they managed to make the big motorway, the Autostrada del Sol, in Italy in four years. I don't know if you've seen the Torino-Milano Autostrada for the last 20 years. They can barely finish it.

That first phase, the people that IRI managed to attract were some of the top managers in Italy. It was an honor to work there. It was public but not politicized. Later, it became public and super politicized. All the different parties got their piece of the pie. Later, it became privatized. Those second and third phases were equally disastrous, which should wake us up to it's not about public or private. It's also about these governance issues that we talked about before.

Also, with Italy, it's really interesting, and this comes to your military point. During COVID, you might remember Italy was one of the first countries that was hardest hit in Northern Italy. Lots of people were dying. Italy managed to do actually what the US did. They took a wartime tool, in the US, it was the Defense Production Procurement Act, to basically go from being 100% reliant on Chinese PPE to being 100% reliant on local small, medium companies.

I think it was 137 companies in Italy produced all of Italian PPE in three months. COVID stops, we all become stupid again and go back to using procurement in a stupid way or just funding sectors and not problems, so on and so forth. In a country that has had [Italian language], a reform of public administration, over and over, which has never actually led to investing within the dynamic capabilities, but just cut or increased, and also gotten so captured by industry. Look at Fiat, which benefits from state money all the time, like all the large Italian companies do with Cassa Integrazione.

When times are low, the Italian state comes in, pays the bill. Times are good, they just go off and make their profits. Fiat's a very financialized company. It was only when Sergio Marchionne went to the US; he was the head of Fiat; he later passed away. When he wanted to buy Chrysler, which was in American hands because the US state, during the financial crisis, nationalized not only the banks but also the automobile companies. They said, "Hey, Fiat, we see what you're doing in Italy. You're basically just on your ass, basically not innovating.

"In this country, if you want to buy Chrysler, you're going to have to invest in hybrid technology." They said, "Okay." It was part of the condition. This is the key to my approach, if you want. It's not about state or business. It's: how do you get a good relationship? What are the conditionalities? I wrote a paper with Dani Rodrik about conditionalities. The conditionalities that should be at the center of a public-private relationship that allows us, actually, to solve problems.

It's not about Italy being slow or fast. It's about the conditions in Italy of a parasitic relationship between public and private, a lot of inertia, and very weak government capacity, not because government is weak, per se, its DNA, but we've allowed it and made it weak.

Bethany: One of the ideas we've been exploring with thinkers on both the left and what you would think of as traditionally the right has been that efficiency is insufficient to get what we want out of an economy. Is it fair to say that one way to think about your work is that efficiency cannot be the overriding goal through which we shape our world? If that's fair, how do we do it differently given the extent to which efficiency has become the goal of capitalism, or at least of publicly traded corporations, even large privately held corporations too, through which so much of our world is shaped?

Mariana: First of all, it's whether we're talking about static efficiency or dynamic efficiency. I believe we should definitely be thinking about dynamic efficiency again in that Schumpeterian way of making sure that we have incentives for innovation, that we make sure that companies that maybe might be talking about efficiency but are definitely not efficient when they're just giving all the money out as dividends and share buybacks and so on. That's not an efficient system. That's an extractive system. That's a financialized system.

The word efficiency is, I think, often used as a bit of a masquerade for just slogans. Those are just words. It doesn't mean anything. If you look at how most sectors are structured, they're not efficient. The fact that 80% of industrial wastewater is not recycled, that's not efficient. That's just a really shitty contract. The state in most countries is giving the water right to a private enterprise, whether it's Anheuser-Busch or Pepsi Cola, by putting a condition that you have to recycle the industrial wastewater and not just waste it in a world where we have 2 billion people without access, actually, to safe drinking water. That's just a really bad contract.

I do believe in efficiency, but not in and of itself. I believe in goals. To achieve those goals, you have to invest and innovate. It's not surprising that to get to the moon, which is goal-oriented, we ended up with so much innovation, which also increased productivity. No one was talking about productivity. No one was talking about economic growth. There was actual goals, and it stimulated huge amounts of growth.

I don't know any country that doesn't want to grow or doesn't talk about productivity or efficiency, but they don't achieve it because they actually have a system that doesn't then catalyze that public and private investment, or that also, and this is a separate issue, the direction of that investment then causes massive problems for our planetary boundaries. That's the climate discussion, which we didn't really touch on, but it's obviously the biggest problem of our time.

Bethany: A last question from me. I always thought that economists were all about trade-offs. You write in your book, "It is wrong to think that there is a crude trade-off between societal well-being and economic growth and that human suffering may be the price to pay for economic growth." Do you believe there are any trade-offs that we need to make, and what are those? Are you a no-trade-off economist?

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

The idea is, "No. Okay, yes, the Minister of Environment, of course, you're right. Of course, there's climate change. Yes, it'd be great to do what you're saying, but, dude, we want to grow. We have to just think about the hardcore growth objectives." I think that's false because, of course, there's a trade-off if you're doing it completely wrong, if you're just throwing money at problems without any clue. If you do what I argue, which is take the really important societal challenges, including hunger. Take an example that I've worked on recently.

Make sure that every child in a country has access to healthy, sustainable, and tasty lunch as a program. That's going to require huge amounts of innovation also within government. It's going to require the inter-ministerial coordination: Department of Agriculture, Department of Health, Department of Environment, Department of Finance. Use procurement to help local manufacturers produce food that's sustainable across the whole supply chain, including the digital service side of it.

In other words, fast forward to a modern data economy, as opposed to what? Just feed the kids and pretend that ketchup is a vegetable, which is what Reagan once said when he wanted to reduce the cost of school meals. By having these bold challenges, not just lunch, healthy, tasty, sustainable lunch, that's going to require a lot of investment, innovation, training, new forms of partnerships, public and private, new form of government, like wake up and work inter-ministerially in an outcomes-oriented way.

Because I believe that growth is a function of investment, innovation, training, and dynamism, you've then achieved two things. You've solved a goal while also stimulating growth. That's a purely social one, even more so for anyone that also requires lots of innovation around, again, biodiversity loss, climate, the digital divide, which is a huge problem, as we saw during COVID, where many kids didn't continue to have access to education because they didn't have access to modern digital systems.

Of course, there's limited budgets, but that too is false. In other words, if you are smart and catalyze a multiplier effect, if for every dollar of public investment, you crowd in private investment due to this way to set up the system through emissions and conditions, ultimately, your public money is expanding productive capacity. That's a future budget. That's future tax receipts. Whereas if you are just giving out money in a redistributive way, Maduro style or whatever, or if you have really stupid tax policy, like Liz Truss did in the UK, and that's going to sink your economy, obviously, that doesn't work.

I'm not about just, "Spend, spend, spend. There's no trade-offs." It's about invest in a strategic outcomes-oriented way, work well with the business to solve problems, help those that are willing. I always say, "Pick the willing, don't pick the winners." Ultimately, if you do it right, you both solve the problems and expand your productive capacity, which is your future budget.

Luigi: For three years, you were on the board of an Italian electric utility. [crosstalk]

Mariana: Yes, I called you, remember?

Luigi: Yes, absolutely.

Mariana: I asked you, "Should I?" You said yes. [laughs]

Luigi: Yes. Now I want to know the report. I want to know: if you were asked, "What are you trying to maximize when you're on the board?" what you were trying to maximize, and how you went along with the other board members on that. Did the NL have a mission? Why don't you discuss it?

Mariana: Obviously, there's only so much I can say. First of all, I don't do boards. I critique capitalism and trying to make it better. I don't sit on a board; then I myself might get captured. I talked to a lot of people that said, "No, Mariana, you write a lot about this stuff, but you need to know what it's like in the boardroom. You need to actually understand it from the inside." I remember you yourself actually said, "Do it, do it. It's going to be interesting." The first answer is, it was fascinating. [laughs]

What did I learn? A, and you have to tell me if this is true on most boards; it's amazing the lack of knowledge within boards of what these companies do. It was people from finance, people from accounting, people from PR, and people from consulting. No one was an energy expert. This is a company in the energy sector. That was the biggest wake-up call. Second, a complete mismatch between understanding the financial accounts and the real economy. What I see in global capitalism.

This mismatch between finance and production, I saw within the board discussions themselves that when we were talking about financial measures, they were unlinked to what the company actually does and the real economy challenges the company was facing. It was finance for finance. I don't know. It was just interesting. The question that I came away thinking is, "How can these companies even survive with such a structure, with such a powerful governance body is disassociated from what the company actually does?' [laughs]

Luigi: One last question from my side. In your previous book, The Big Con, you discuss how consultants are embedded in governments and monetize access. What is the analogous accountability structure for economic advisors? Because I wrote a paper called Prevented Economist Capture. I want to know, what is your view of how to do that?

Mariana: I think there's two points there. One is, was the book against any advisors? No, government, of course, should have advisors, but who's advising them? If you have an oncology strategy, you better have the top oncologists in the world. Don't call Deloitte. [laughs] Our government actually called Deloitte during COVID, paying them $1.5 million a day for Test and Trace. Deloitte had no clue about Test and Trace. It's amazing how government, because they also are very risk-averse, bringing in consultants to rubber-stamp decisions and policies. By the way, the private sector does it too.

They often don't necessarily have the in-house expertise. They might know a bit like you, and I might know something about energy, but it's incredible that McKinsey was advising Australia on their massive climate strategy when actually the government had in-house capability. That's what we also look at. What is the reason why, even when you have it, let alone why did you stop building that capability? Why are you not using it? Why do you want that rubber stamp? However, of course, you need advice.

You can't hire in-government people-- everyone who knows everything. Of course not. You should work well with academics, whether they're doctors, whether they're zoologists, whether they're economists. The problem is when those same economists, like these consulting companies, end up living on those contracts; they're not actually doing their job, maybe in universities, teaching, or whatever; there is a conflict of interest. There's very little incentive to make sure that government is better the next round.

There's very little learning in these contracts. In the case of the consulting companies, there's also lots of conflicts where they're advising both sides of the street. They might be consulting with ESCOM, a state-owned enterprise for energy in South Africa, and the treasury that should be regulating ESCOM. In the case of PWC in Australia, they were advising the medical device companies and the regulators of the medical device-- that's just obvious that should be illegal, period.

In terms of economists, we all disagree. The beauty of economics is it should be seen as a social science, even though economics likes to portray itself more as a natural science in terms of how it uses math and so on. We debate. What's important for a government, if it's talking to one economist, is make sure you know that they're coming with a bit of baggage, with their own, how do you say, theory. We have different takes on this.

As long as it's not seen as knowledge from heaven that somehow this is a deterministic field and that there's one way of seeing it, I think that's the first thing that I would advise, including when I speak to governments. I advise governments mainly through my institute. We don't charge the governments. We get research grants that then pay for us to work with the government, for example, on procurement or industrial strategy and so on. We are not living based on that income.

We live in academia where we are trying to build that next generation of students. Because of the knowledge we're accumulating with our research, we might find ourselves in the position of consulting or advising. I think the conflicts of interest are much, much lower than these massive consulting companies that just live on that, where there's literally almost no incentive to make sure that the partner that you're consulting with is actually smarter in the next round.

Luigi: I thought that there's a tension between saying nothing precisely or precisely nothing.

[laughter]

Luigi: I think that most of the economic literature is into precisely nothing because they're so precise that basically what they're saying is irrelevant. She's completely at the other end of the spectrum. On the positive side, I think that she touches, in my view, very, very important topics. If you want, she has the courage to touch them in a way that most people don't have the courage. They stay away because they cannot measure precisely, and so they don't say that.

What I miss is more systematic work and evidence of what it takes for the government to work. This is what I was trying to push with my work conditions. In war, the defense procurement worked pretty damn well. If you include the moon mission, because at the end of the day, it was a Cold War, and it was a competition, you basically see that whenever there is this element, the government is able to produce decently. As an economist, I like to look at incentives.

What is different with war, you are at the risk of being annihilated, and so you are less willing to be selfish and look at your career when there is something so big at risk. If that's the case, I'm pretty depressed on the ability to make the government work in another situation. I presented her with some important moments where the government didn't work. I think that Saving Venice is a pretty damn good mission.

Bethany: I thought that was incredibly compelling.

Luigi: You expect that everybody takes the high road for that. It failed miserably. I couldn't understand. She pointed out that there are problems, that there is no government capacity. I understand, but how do you make this mission work? The new element in the book that she presented, I think, is to make projects more accountable to people, which I think is maybe a solution. That is exactly, by the way, the opposite direction of the abundance agenda. They say we should roll over things as fast as possible. In that sense, it's an interesting contrast to the abundance agenda. I wish I'd believed that worked perfectly, but I don't.

Bethany: It seems that the key question is still this question. Just because government shapes markets doesn't necessarily mean it can shape them intelligently. If you want a government to start shaping markets intelligently, how do you get to that capable government? There's this chicken-and-egg issue in her argument: which comes first? I'm still not sure I see a way out of that. Did you?

Luigi: Again, trying to defend what she does, I would say you need to have sufficient expertise inside the government. To be honest, even libertarian like Tyler Cohen recently has come out saying we need to build government capacity more. How do you create this government capacity? In my view, you need two things. You need, number one, to pay these people well. Singapore has a pretty capable government. Why? They pay a hell of a lot to these people. Not pay peanuts. In Italy, they are paid peanuts. The expression, when you pay peanuts, you get monkeys.

Bethany: [laughs] I do not know that expression.

Luigi: That's the case. I think you need to pay these people well, but also you need to have an ideology or mission. I think it's more like a big ideology that supports that. The military has this ideology that is inculcated to you through years of training: that you put the defense of the country above your own life. That's a pretty big statement that not a lot of people are willing to make or recognize, but in the military, that's what you're trained. I don't think that the random person that is working for any administration has this kind of dedication to the government.

Bethany: That brings us back to, I think, a conversation we've had on this podcast before, which is that one of the important things that used to work well was that there was a prestige associated with certain government jobs that made up for the loss of income. In our current times, not only has that prestige declined as people's faith in government has gone down, but the gap between what you can make in the private sector and what you can make in the government has escalated dramatically.

In other words, if the argument you're making is the right one, we've gone in exactly the opposite direction on both fronts over the last decades. I wonder if that slide is reversible; what it would take to reverse that change, because people are never going to make in government jobs what they make in the private sector. How do you possibly reverse what's happened? How do you bring back prestige to government jobs? It seems like a process that once the slide has been put into place, it's very difficult to reverse it. I worry about that. If what you're getting at is the right answer, I don't know that it's fixable in the United States.

Luigi: I actually am a little bit more optimistic than you are because you see a lot of kids who are desperately trying to find a job that gives them a purpose in life. If there was a career that say, "Look, we don't pay you wonderfully, but we pay you decently, and we are dedicated to do the good of the country, which is not really democratic or republican, but is really longer-term," I think you will have people doing that.

Bethany: I'm going to be optimistic that the younger generations are better than we were, that maybe my generation, maybe even the millennials, that we're sort of the apex of this and that maybe the change is already happening.

Luigi: I have an old high school friend who blames our generation precisely for that. I think our generation is the first that could travel everywhere, that could go everywhere, that could make a lot of money in the private sector. To some extent, we completely hollow out the administration. Even look in terms of career politicians. I can tell you in Europe, but also in America, the only late boomer, early Generation X is President Obama. Everybody else was basically all the boomer generation, or now the new generation is really, really much younger. There is a gap in what broadly is our generation. I think we have a responsibility because we did not provide the infrastructure of the public service.

Bethany: Did she say anything that redeemed the common good in your eyes?

Luigi: Look, I think the world has become infinitely more interdependent. It's a little bit difficult, especially when you think in terms of international economics, et cetera, to ignore the externalities we all produce everywhere. We need some way to re-internalize this externality. This is where I say she goes into very difficult territory. I'm not so sure she has the silver bullet, but I think she deserves some credit for trying. Let me share this. If you go around economists, the blue ballad of the economist with the right pedigree, Mariana Mazzucato is hated.

Bethany: Oh.

Luigi: Yes, she's hated because she plays by a different set of rules. She doesn't publish article in the Big Five, which are the totem of our profession. She claims she uses math, but she uses different math that's not mainstream, et cetera. She became very popular with books. She's not particularly appreciated. Why? Precisely because she says nothing precisely. Economists value a lot being precise and value much less the value of the questions.

Bethany: That's fascinating. It obviously makes me like her a lot more to know that she's hated by the profession. I think that speaks well of her. It is also really interesting that this is this broader tension in economics and probably elsewhere too, that because she uses words to get at big ideas versus using numbers to prove small ideas. That's an interesting tension in your profession, and probably an interesting tension everywhere because if you actually are trying to say something that hasn't been said before and that invents a new way of thinking, the numbers might not be there to support it.

I think this is even true of great scientific discoveries. I think I remember reading this about Newton at some point, and maybe even Einstein, that they had to invent the math to prove the idea because the idea came first. Maybe that analogy is broadly transferable to economics too. Sometimes the idea has to come first, and then later on, you have to invent the math to back up the idea.

Now, I'm really going on a tangent, but that's one of the fundamental things that might keep humans humans going forward in the world of AI because we can come up with the idea and then get the math to back it up, whereas AI is always going to have to have the math first. That may not be the thing that leads to the big idea. How's that for a grand thought?

Luigi: I'm not so sure that is true about AI, but that's for another podcast.

[laughter]

Bethany: That's for another podcast, exactly. Are we good?

Luigi: Matt?

Matt Hodapp: Can I ask you a question?

Bethany: Yes.

Luigi: Please.

Matt: One of the big takeaways, I think, from the wrap and the conversation is the idea that during wartime, incentives about survival from possible annihilation create these outcomes that are positive. Could AI be like a wartime footing that, in many cases, would touch on many of the issues that we talked about on the show all the time, that could permanently change some of these economic dynamics for the better? For instance, the capacity during COVID increased, and that wasn't a war, per se.

For instance, let's say you really do get the permanent labor displacement that a lot of people are saying from AI. We've always said that the market is better at figuring out what people should be up to. If you're saying that an annihilation incentive can actually create a good outcome for the government, could the government suddenly become quite good at directing people and directing labor and finding things for people to do because it now has an incentive to do so, or things are going to get very ugly very fast?

Bethany: It's a great question that also terrifies me because if I think about that in very concrete terms, that means the government has to get it together. [laughs] My estimate of the likelihood of the government getting it together is not high, so that is quite terrifying. Luigi, what do you think?

Luigi: No, I disagree about AI because I think that what war and COVID are in common is that there was a complete unity on the front. Everybody was fighting COVID. I don't think anybody was rooting for COVID to succeed. Except for traders; that's true also in war. It's clearly not true with AI because AI is mostly a political economy problem. We are divided about AI. Maybe this is the secret of a mission. If you have a mission that is shared by everybody with a passion, you basically don't need economic incentives.

That's what religion is great. If you get people to be completely dedicated to something supernatural, you have them to do stuff that normal human being would not do. Think about Mormons. Every Mormon gives up one or two years of their life in young age to do a mission in a separate country. When I grew up, I was forced to do the military service. I would have gone to jail otherwise, and I would not have done it out of passion. That's the difference. Go ahead.

Bethany: I was going to say, I think we just got at a really key point, which is that there is something above self-interest and above profit that will motivate people to move in the same direction and accomplish something good, but you have to be really careful about what that big thing is because that big idea can also be a dangerous idea. I also think that you just got at the key problem with AI is this divide. What is really good for society, which is making sure that people continue to have jobs and an ability to function, is not what the people in charge of big tech companies care about at all or want to see happen. Their interests are different from that. That's a fundamental problem.

Luigi: Yes, I think that we nailed it. If you eliminate the political economy, if there is no political economy, you can have great cohesive objective and great result without much of an effort. That's true when you're fighting a disease, or you're fighting an enemy. Short of that, it's hard to do it.

Bethany: You have to be really careful about what that big idea is because that big unifying idea, per your questions and fears about the common good, can also be something that isn't actually working toward a good end goal in the end, too. Even war brings people together, yes, but there's a loser on the other side of that.

Luigi: Of course, because during war, we weigh zero, the rest of humankind.

[laughter]

Bethany: That's the point.