What is crucial for this ambition is that it is met with green job policies that recognise this is an economy-wide transformation and that it must be governed in ways asks questions about both the rate of change, and also the direction of change, and how that direction can produce not only sustainable growth but inclusive growth (Mazzucato, McPherson, 2019).
Basic theory: from neoclassical market-fixing to market-shaping
| Key: • No style: direct extract • Orange highlight: Not my critical reflection • Red highlight: My critical reflection
| Neoclassical economics theory (Supply and demand) | Market failure theory | Systems of innovation approach | The role of the state | Types of Government interventions | Public value / Public choice / public management theory | Market shaping | ROAR | Market shaping interventions | Moving forward from market shaping and measuring complexity | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Mazzucato, M. and Perez, C. (2022). Redirecting Growth: inclusive, sustainable and innovation-led. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2022-16). https://www.ucl.ac.uk/bartlett/public-purpose/wp2022-16. | | | | | | | • Greening the economy requires nothing less than a moon-shot worthy mission. To tackle the climate crisis, we need cross-sectoral change across the entire economy (Mazzucato, 2021). Only a common direction can contribute such synergies
• ‘Green growth’ can become the next big technological and market opportunity, stimulating and leading private and public investment. | | | | | | | | • Arrow, K. J. 1951. “An Extension of the Basic Theorems of Classical Welfare Economics.” In Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability, edited by J. Neyman, 507–532. Berkeley: University of California Press | | | | As indicated by Kenneth Arrow (1962), while a market failure approach can be utilised to understand why, for example, private firms underinvest in R&D, it is not so useful in guiding the direction of public investment in R&D, because of the inherent uncertainty involved in the outcomes from such investment. Indeed, Arrow called for alternative approaches to analysing public investment and policies for innovation.
Impossibility theory: Economist Kenneth Arrow produced a mathematical formulation that seemed to prove that democracy cannot ‘work’. His impossibility theorem and related formulations have been interpreted as being ‘destructive of the possibility of reasoned and democratic social choice’ (Sen 1999). According to Buchanan (2003, pp. 1-4), Arrow’s theory indicates that imposing majority will on the outvoted minority would inevitably lead to outcomes that are ‘inefficient and unjust’. | | | | | | | | | | | • Chang, H.-J. (2002) Breaking the mould: an institutionalist political economy alternative to the neo‐liberal theory of the market and the state. Cambridge Journal of Economics, 26(5), 539-599 | Neoclassical economics is, at its core, an economics about the market or, more precisely, about the barter exchange economy
Therefore, for neoclassical economists, for whom the market is essentially the economy, if the market fails, the economy fails. Of course, many neoclassical economists of neoliberal leaning would argue that market failures do not occur often and that, given the possibility of government failure, it is usually better to live with failing markets than attempting state intervention | Market failureî refers to a situation when the market does not work like what is expected of the ideal market. But what is the ideal market supposed to do?
In the neoliberal framework, the ideal market is equated with the ìperfectly competitive marketî of neoclassical economics.8 However, the neoclassical theory of the market is only one of the many legitimate theories of market, and not a particularly good one at that. There are, to borrow Hirschmanís phrase, many ìrival views of market societyî (Hirschman, 1982a). And therefore the same market could be seen as failing by some people while others regard it as normally functioning, depending on their respective theories of the market.
The point that I have just tried to illustrate with the above examples is that, when we talk about market failures, we need to make it clear what we expect from the ideal market, only against which the failures of the existing markets can be defined. Otherwise, the concept of market failure becomes empty, as in the same market where one person sees a perfection another person can see a miserable failure, and vice versa (the above example about non-competitive market illustrates this point very well). Only when we make our own theory of the market clear, can we make our notion of market failure clear. | | The neoliberal discourse on the role of the state, and indeed the welfare economics discourse that it dethroned, is about whether state intervention can improve upon the workings of the free market. Even many of those who do not agree with the conclusions that are drawn from this discourse seem to regard the mode of discourse itself as unproblematic.
The most obvious example of the market primacy assumption is the Contractarian explanation of the origin of the state, which the Austrian-Libertarian wing of neoliberalism has used with great political effects. In this view, the state emerged as a ìcontractualî solution to the collective action problem of providing the public good of law and order, especially the security of private property, which is seen as necessary (and often sufficient) for markets to function (Nozick, 1974; Buchanan, 1986). *Thus, this view explains even the very existence of the state itself as a marketlike (contractual) reaction to market failure.
It is well known, of course, that this explanation is at odds with the historical evidence, as even many of its proponents acknowledge. However, the fact that it is still taken so seriously among the neoliberal thinkers is symptomatic of their adherence to the market primacy assumption.
***(NOZICK, R. Anarchy, Utopia and the State, Oxford, Basil Blackwell, 1974.) (BUCHANAN, J. Contractarianism and democracyî, in J. Buchanan, Liberty, Market and State, Brighton, Wheatsheaf Books Ltd., 1986.) | Even in the United Kingdom, where the market economy is supposed to have emerged ìspontaneouslyî, state intervention played a critical role in the emergence of individual markets and of the market system. In Polanyiís words “[t]he road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism” | | | | | My main criticism of the neoliberal analysis of the role of the state is not that its policy recommendations are too anti-interventionist, as some of its critics argue. My main criticism is that the very way in which it envisages the market, the state, institutions and politics, as well as their mutual relationships, is highly problematic. | | | | | • Dequech, D. (2007). Neoclassical, mainstream, orthodox, and heterodox economics. Journal of Post Keynesian Economics, 30(2), 279–302. | Defining neoclassical economics is not easy, not least because what one may call neoclassical economics has changed over the years.
What is called here neoclassical economics is characterized by the combination of the following features:
In an advanced society, regulations cover all aspects of every production process.** They set limits on the extraction of natural resources from the soil. They discipline the production process itself, with respect to safety, working conditions, carcinogens and much else. They establish standards for the quality of the product. They limit the emission of waste products… [Moreover,] all living systems — whether biological, mechanical or social — function in accord with certain immutable principles, governed by thermodynamic law. All extract resources from their environment. All process those resources, generating useful energy, put to purpose. And all release waste. But most important for the present argument, all biological, mechanical and social systems must regulate their use of resources. They regulate to keep energy released in the consumption of resources within the tolerances of the materials available for containing and directing that energy to useful effect | | | | | Polanyi, K. 1957. The Great Transformation: The Political and Economic Origins of Our Time. Boston: Beacon Press.[1944] | | | | | In the scripting of neoclassical economics, public goods and collective action are seen as a problem because, being ‘non-rivalrous’ and ‘non-excludable’, means that they are not amenable to market production (Sekera, 2022). For governments and firms, this simply means that there is no incentive for a collective action that would contribute to a common goal that would benefit all.
The simple fact being that because they are ‘non-rivalrous’ and ‘non-excludable’ they are not amenable to market production - meaning that there is not incentive for governments and firms to collectively contribute to a common goal that would benefit all.
Being ‘non-rivalrous’ and ‘non-excludable’ means they are not amenable to market production | | Karl Polanyi’s (1957) insight that capitalist markets and indeed economic growth itself result from the interaction between different sectors of the economy, including the private sector, the public sector and civil society organisations.
This more collective view also benefits from a different understanding of the market itself, with the market as an outcome of the interactions of individuals, firms and the state, as discussed in the work of Karl Polanyi (1957) | | | | | | | | Sekera, J. (2020). The public economy: Understanding government as a producer. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2020-01) | “In mainstream economics scripting, government is either bumbler or villain. Cast as market fixer, intervenor, enforcer or redistributor, the state cannot but act inefficiently or, worse, illegitimately. Public goods and collective action are called ‘problems’, the commons a ‘tragedy’.”
Robert Johnson, President of the Institute for New Economic Thinking (INET), said in his remarks on the launch of INET’s independent Commission on Global Economic Transformation, ‘the existing paradigm can’t meet the challenges we face. That paradigm romanticizes unfettered markets while it overestimates the capacity of national governments to address human problems — at a time when the domain of the sovereign is smaller than the scope of the market’ (Institute for New Economic Thinking, 2017) | In the public non-market, the most basic drivers and dynamics of mainstream economics do not apply. In the central dynamics of the public products economy there are no ‘buyers’, no ‘sellers’, no ‘exchange’. There is no market-model competition, but only ‘pseudo-privatisation’ (Siltala 2013). The purpose is not profit but meeting identified societal need. Satisfying ‘customers’ does not produce revenue. There are no ‘customers’ — people don’t pay directly; they pay collectively. In a non-market, outcome goals are devilishly difficult to define — unlike the simple market goal of maximising profit. Results are often obscured because of factors unique to non-markets, where invisibility of outputs and absence of harmful conditions are hallmarks of success (Sekera 2016).
| Maxime Desmarais-Tremblay (2013, 2017), a recent chronicler of Musgrave’s work, explains that as early as his 1937 PhD thesis, Musgrave ‘considers a national economy as a system that comprises two legitimate spheres—the market economy and the public economy — in an interrelationship, both drawing from the same pool of resources...
Musgrave did not see the market as the baseline for all economic life and neither was it for the study of public finance.’ Musgrave, according to Desmarais-Tremblay, understood the public economy as a socially designed economic system to address collective needs, where ‘the actual collective wants and socially interpreted individual wants satisfied by publicly provided goods depend on historical, political, and social factors’ (Desmarais-Tremblay 2017). | Economic historian Roger Backhouse (2005) has traced in detail the ‘profound changes in economic theory’ that took place between 1970 and 2000 with the triumph of rational choice economics, which fostered a ‘remarkable and dramatic change in attitudes towards the role of the state in economic activity… a radical shift of worldview’. Along with the rise of ‘free market’ economics, the ‘ideology of rational choice’ led to a belief among economists that government action creates perverse outcomes, which in turn produced a ‘climate of opinion’ within economics biased against government
Precarity, lower living standards; declining well-being, decaying infrastructure Steep divides in annual income, increasingly precarious personal health and shelter, declining living standards for the working class, declining life expectancy (in the US), declining societal wellbeing, and decaying infrastructure have been widely documented. Hollowed out, contracted out and out of favour, central governments are no longer in a strong position to maintain the necessary services, income security, protections and infrastructures needed today, let alone to ward off future vulnerabilities or prepare for unintended consequences of technological successes.` | In the market-centric world of mainstream economics, public goods today are pronounced ‘a problem’ because, being ‘non-rivalrous’ and ‘non-excludable’, they are not amenable to market production.
The ‘collective action problem’ insists that, without coercion, people will fail to work towards or contribute to a common goal that would benefit all.
The ‘tragedy of the commons’ probably owes its staying power more to clever naming than to its supposed insight that, since people act in their own self-interest, they will not voluntarily collaborate to preserve a ‘commons’
In mainstream economics, price is the determinant of value. Therefore, if goods and services are supplied without a price — i.e. they are ‘free’ at the point of receipt or usage — they cannot be valued, or calculating their value is difficult, i.e. a ‘problem’. This is, of course, one of the difficulties intrinsic to traditional calculations of government contribution to GDP: public economy outputs cannot be accurately valued because they are not sold | Beyond such ‘marketisation’ of government, we have seen widespread privatisation and contracting out of public services (Sekera 2016, 2017), amounting to what Verkuil (2007) has termed the ‘outsourcing of sovereignty’. This routine commodification and profitisation of government has led to its disfigurement, dismemberment and destruction. | Government as a producer: Neither economics nor public administration theories adequately address the state’s function as a producer. Neoclassical economic theory squints at government through the lens of ‘market failure’, blind to government’s presence as a legitimate economic producer in its own right.
Intended outcomes of markets and public economy: The intended outcome of market production, at its most basic level, is profit. Without profits the agent of the market system — the firm — cannot survive (unless, of course, it receives subsidies from an outside source). In the market, measuring outcomes is simply a calculus of profitability. And there is only one constituency to satisfy: customers36.
The intended outcome of public economy production relates back to purpose. A good or service is produced to meet some identified need, which has been specified or at least implied, in the authorising legislation that makes production possible. | | Marc Wuyts (1992) argued that public goods are ‘socially defined and constructed’ and ‘result from public action prompted by… perceived public needs.’ He explicitly rejected ‘orthodox economic theory’ in which ‘public goods are defined solely with respect to the inherent characteristics of the goods and services concerned.’ (emphasis added)
Wuyts’ distinction is a crucial one. And he is empirically correct. Public goods are not defined by some inherent characteristic, like ‘non-rivalry’ or ‘non-excludability’ as Samuelson (and some in the German public economics group) would have it and as millions of students have learned in economics courses all over the world. Any classic Samuelsonian example — whether it be lighthouses, fireworks or warfare — has been provided both by market agents for profit and by government (Sekera 2014)
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Production — whether market or non-market — produces both tangible goods like cars and streets, and intangible services like insurance and education. But in the public sector (with its power to create and enforce legal obligation), intangibles also include products that the market cannot produce: rights and obligations
Whether we have public schools or only private education, public ‘freeways’ or private toll roads, private fee-charging fire services or public fire departments, all of these, and everything else produced by the public economy, stem from a decision made ultimately by the polity in a democratic nation-state (or by another type of ‘sovereign’ in other forms of governance; see discussion of ‘sovereignty’ below).
How, then, can we think of public purpose — meeting ‘collective need’ — as causative from a systems perspective? Various taxonomies of collective needs and public purposes have been suggested in the past.
I offer the following categorisation of the purposes of public production: • to supply goods or services not supplied by other means; • to solve multifaceted or complex social, technological or economic problems; • to make particular goods or services accessible to all regardless of ability to pay; or • to achieve single-provider efficiencies (economies of scale; network effects) that simultaneously ensure universal access.
Non-market production is need-driven, not demand-driven.20 In the public non-market, needs are articulated and become a systemic driver through distributed decision-making -- the process of electorally manifested collective choice, a system ‘by which individual preferences are socially structured’ (Gutmann 1987, p. 134, quoted by French 1998, p. 339).T | Most scholars of public performance measurement have not dealt with, or even mentioned, the complexity and difficultly of defining outcomes. A few who do are Radin (2012); Moynihan (2008); Pollitt (2000); and Pollitt, Bouckaert and van Dooren (2009).The fundamental need to tackle this problem has been overlooked or minimised in most of the literature on, and practice of, public sector performance measurement
Metrics and measurement schemes basically ignore the diverse categories and multiplicity of products the public domain produces:
Invisibility Since public goods and services are created to meet the unmet needs of a society or to solve complex social or economic problems, once the needs are met or problems solved, they ‘vanish’. Invisibility is a hallmark of effectiveness in the public economy system. Even when public goods, services and processes are not invisible, they may be opaque: that is, taxpayers cannot easily or directly see what they have paid for | | | | | Studenski, P. (1939). Government as a producer. Annals of the American Academy of Political and Social Science, 206, pp. 23-34 | | | | Studenski argued that ‘Government is a productive, wealth-creating organisation. It supplies direct utilities as well as aids to private production.‘ (1939, p. 34). He elaborated:
‘Under all forms of organized society, economic activity has required some collective effort in addition to the individual one, and this is still true of the modern society. The notion that production for exchange is alone ‘productive’ is preposterous.’
‘Production consists in the creation of utilities. Government furnishes services and goods which satisfy the two tests of economic value — namely, utility and scarcity. They satisfy human needs and must be economically used. Government is, therefore, engaged in production just as much as is private enterprise. Government employees are just as much producers as are private employees and entrepreneurs. To deny this fact is to demonstrate one’s faulty economic education or the fact that one’s idolatry for business has thwarted one’s vision.’ | | | | | | | | | | | • Nelson, R. R. 1987. “Roles of Government in a Mixed Economy.” Journal of Policy Analysis and Management 6 (4): 541–566. doi:10.2307/3323507. | | Markets are always institutional constructs and this requires asking not why markets fail, but rather what conditions are required for “getting the work done”? (Nelson 1987) | | In many cases, government “is better regarded as a useful actor in its own right, and even as a precondition for other institutions to work decently, than as an actor reluctantly involved because they do not” (Nelson, 1987p. 556). | | | | | | | | | | | • Mazzucato, M., & Ryan-Collins, J. (2022). Putting value creation back into “public value”: from market-fixing to market-shaping. Journal of Economic Policy Reform, 1-16 | | Market failure theory (MFT) provides a clear delineation of why and when the public sector should intervene in an economy. It has its origins in neoclassical welfare economics and takes the first fundamental theorem (FFT) of welfare economics (Arrow 1951) as its starting point.
The FFT states that markets are the most efficient allocators of resources under three specific conditions: (1) there is a complete set of markets, so that all supplied/demanded goods and services are traded at publicly known prices; (2) all consumers and producers behave competitively (that is, all agents are price-takers); and (3) an equilibrium exists. Under these three conditions, the allocation of resources by markets is Pareto-optimal (no other allocation will make a consumer or producer better off without making someone else worse off) and the state has no role at all in the value creation process.
Violations of any of the three assumptions lead to inefficient allocation of resources by markets, i.e. market failures. If markets are not Pareto-efficient, then everyone could be made better off through public policies that correct the market failure. MFT suggests that governments intervene to “fix” markets when the market fails due to positive externalities, negative externalities, and information asymmetries | | “The concept of market failure emerged out of neoclassical welfare economics as an abstract theoretical concept rather than a framework for guiding policy. However, it has been interpreted and employed by policymakers as a justification for public policy intervention and in doing so relegated the role of the public sector to one of “market fixing”
— The role of the state is key here, since it is the only institution with the power to shape markets and direct economic activity in socially desirable directions – or “missions” – to achieve publicly accepted outcomes (Mazzucato 2013, 2016). | What is the role of the public sector in the (neoclassical) economic theory of value creation? In economics, public actors are recognised as having a role in terms of “fixing” market failures (explored below) or “enabling” value creation by investing in areas like skills, research, and education, which are key, for example, to the development of technology and for a skilled workforce (the labour input).
In the case of positive externalities created by “public goods” (such as herd immunity or basic research) the state must produce what the private sector doesn’t (vaccines and basic research), and in the case of negative externalities (like pollution) the state must devise market mechanisms to internalise external costs (e.g. carbon taxes). | A more positive theory of public value requires beginning with a notion of the public good not as a correction to a failure, but as an end in itself; an objective that can only come about if linked to a process through which value is created.
Public value in this conception is broader than the version developed in the public administration literature, which largely confines itself to the delivery of public services – or a legitimisation of the role of the public servant – rather than the role of government in shaping effective markets and the wider public outcomes that are broadly recognised as desirable. Such outcomes would include ecological sustainability, a more even distribution of wealth and income, high-quality care for the elderly and fulfilling work. | we argue public value creation must involve the public sector setting a direction and public purpose for private and public actors to collaborate and innovate to solve societal problems. This is a “marketshaping” and/or “market-creating” role rather than a “market-fixing” role. It is inherently positive rather than negative in framing. It also requires an ontological shift – rather than markets being seen as abstract phenomena that “work by themselves”, they are better understood as outcomes of the interactions between public and private actors, following Karl Polanyi.
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“The question should be how to shape and co-create markets, not just how to correct them”
To separate out “public” from “market value” is misguided. Instead, public value should be understood as a way of measuring progress towards the achievement of broad and widely accepted societal goals (for example, a rapid but orderly transition to a netzero carbon economy).
Such goals can only be achieved through collaboration between both private and public sectors, which together, via the process of innovation, co-create and co-shape markets (Mazzucato 2016).
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Markets as outcomes: We propose an alternative approach that begins with the notion of public value as collectively generated by a range of stakeholders, including the market, the state and civil society.
Key here is the emphasis on value creation at the core: not “public” value but value itself – with a clear delineation of the role of the different actors that are central to its formation. While in economics value is, in essence, created inside businesses and only facilitated by the public sector, in this view value is co-created and requires a stakeholder understanding of capitalism itself (Hall and Soskice 2001).
This view draws on the work of economist Elinor Ostrom (2005) who described the very complex structures and relationships of various types of institutions. She shows that a radical state-private division is, to use her word, barren.
| | Public policies should not be seen as simple corrections to the (market failure) problem of positive externalities, but as objectives in and of themselves. These requires imagination, investment and capabilities. One of the biggest lessons of the Covid-19 crisis was that state capacity to manage a crisis of this proportion is dependent on the cumulative investments that a state has made on its ability to govern, do and manage (Mazzucato and Kattel 2020). While the crisis was serious for all, it was especially a challenge for countries that ignored the needed investments in their dynamic capabilities (Kattel and Mazzucato 2018).
The broad and deep presence of public organisations across the entire innovation chain requires understanding the more active role that public organisations play in providing patient, long-term finance (being “investor of first resort”) and in areas of high risk/uncertainty, with the risk-averse private sector entering only later.
Missions require different actors to come together, so while the state can play the role of setting a direction, the bottom-up solutions that follow create an economic multiplier from cross-sector investments. This is then not a top-down model of public administration but one where decentralized group of public agencies work together on major challenges to provide R&D funding and overcome network failures; a “developmental network state” (Block and Keller 2009; see also Breznitz and Ornston 2013). | Furthermore, if the public part of value creation is guided by different criteria from the private sector, it must also be evaluated differently. Rather than checking which market failure has been corrected, the question is what form of new market has been created?
New evaluation indicators are needed to capture the economy-wide benefits of such policies, including the (un/intended) dynamic spillovers and the “additionality” – making things happen that would not have otherwise occurred. For this purpose, it is essential to move beyond cost-benefit analysis and allocative efficiency approaches to embrace a more dynamic notion of efficiency (see Kattel et al. 2018 for an elaboration). | | | | | • Mazzucato, M. (2016). From market fixing to market-creating: a new framework for innovation policy. Industry and Innovation, 23(2), 140-156. | | MFT justifies public intervention in the economy only if it is geared toward fixing situations in which markets fail to efficiently allocate resources (Arrow Citation1951). The market failure approach suggests that governments intervene to fix markets by investing in areas characterized by positive or negative externalities. For example, positive externalities arising from public goods (which are non-rivalrous and non-excludable) will be characterized by underinvestment by the private sector and will therefore require public investment.
A particular source of market failure comes from negative externalities that arise from the production or use of goods and services such as climate change, traffic congestion, or antibiotic resistance, for which there is no market.
Many of the most significant societal challenges are characterized as negative externalities. Such failures work at the system level; that is, they amount to system failures.
While MFT provides interesting insights, it is at best useful for describing a steady-state scenario in which public policy aims to put patches on existing trajectories provided by markets. It is less useful when policy is required to dynamically create and shape new markets; that is, “transformation.”
This means it is problematic for addressing innovation and societal challenges because it cannot explain the kinds of transformative, catalytic, mission-oriented public investments (Foray et al. Citation2012, Mazzucato and Penna Citation2015, Nelson Citation1977) that created new technologies and sectors that did not previously exist. | | limiting our understanding of the role of the public sector to one that simply “administers,” “fixes,” “regulates,” and at best “facilitates” and “de-risks” the private sector prevents us from thinking creatively about how to allow public sector vision, risk-taking, and investment to lead and structure the necessary transformational changes.
by viewing public sector action as solutions to problems that arise from different types of failures – whether these be coordination failures or network failures – it has indirectly perpetuated the view of the public sector as a passive force that can only facilitate change, rather than lead it. | | | Societal challenges require technological, behavioral, and systemic changes and have much to learn from those mission-oriented feats that led to putting humans on the moon and to the emergence of new general-purpose technologies ranging from the Internet to biotechnology and nanotechnology (Foray et al. Citation2012).
It was only possible to achieve those missions when the public and private sectors worked together to create new technologies and sectors (Mowery, Nelson, and Martin Citation2010; Ruttan Citation2006). Crucially, the public side of such partnerships was not limited to incentivizing, facilitating, or de-risking the private sector. Rather, it required that (public) risks be taken through choosing a particular direction of change (Mazzucato Citation2013a). | Routes and directionality: Understanding the role of policy as setting the direction of change. Policies that aim to correct markets assume that once the sources of the failure have been addressed, market forces will efficiently direct the economy to a path of growth and development. However, markets are “blind” (Dosi 1982) and the direction of change provided by markets often represents suboptimal outcomes from a societal point of view.
Organization: Transforming public organizations into ones that welcome learning, experimentation and self-discovery. Therefore, a crucial element in organizing the state for its market-creating role is building its absorptive capacity (Cohen and Levinthal 1990), a concept that has hitherto been restricted to private organizations. This absorptive capacity will enable public agencies to learn in a process of investment, discovery, and experimentation, and see policy as process (Hirschman 1967).
Assessment and evaluation: Transforming static metrics into dynamic ones.
Risks and Rewards: building symbiotic private–public partnerships that form new deals between public and private sectors so that rewards as well as risks are shared
https://www.thersa.org/globalassets/pdfs/reports/mission-oriented-policy-innovation-report.pdf | | | | | | | • Lundvall, B. A. 1992. National Innovation System: Towards a Theory of Innovation and Interactive Learning. London: Pinter. [Google Scholar] | | | Policies based on building systems of innovation focus on the need for nations to build a “network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies” (Freeman Citation1995). The emphasis here is not on the stock of R&D, but on the circulation of knowledge and its diffusion throughout the economy (Lundvall Citation1992). Institutional change is not assessed through criteria based on static allocative efficiency, but rather on how such change promotes technological and structural change.
This perspective is neither macro nor micro, but more meso, where individual firms are seen as part of broader network of firms with which they cooperate and compete. The systems of innovation approach have been crucial for highlighting deficiencies in the market failure perspective, as it regards innovation policy (Freeman Citation1995; Lundvall Citation1992).
It has emphasized the inability of MFT to tackle lock-in effects and to specific types of institutional failures that arise from feedback processes along the entire innovation chain (Verspagen Citation2006). | The view of the public sector as at best facilitating change, rather than directly creating it, has been symptomatic of not only the market failure approach to policy intervention, but also of the evolutionary approach that has emphasized the role of public policy in terms of fixing system failures (Lundvall Citation1992).
This is because the systems of innovation perspective has focused primarily on the need to build horizontal linkages between actors.
| Policies that aim to correct markets assume that once the sources of the failure have been addressed, market forces will efficiently direct the economy to a path of growth and development. However, markets are “blind” (Dosi Citation1982) and the direction of change provided by markets often represents suboptimal outcomes from a societal point of view. | | “in the spirit of Karl Polanyi’s understanding of markets as outcomes embedded in policy processes” | | To guide a market-creating view, the paper has considered insights from alternative (heterodox) literatures on the role of the state into producing structural change and transformation. Four critical issues must be considered when building such a framework: (1) the direction of change promoted by policy; (2) the nature of (public and private) organizations that can welcome the underlying uncertainty and discovery process; (3) the evaluation of mission-oriented and market-creation policies; and (4) the ways in which both risks and rewards can be shared so that smart growth can also result in inclusive growth.
| Considering the need for government policy to transform, be catalytic, and create and shape markets rather just fix them helps reframe the key questions of economic policy from static ones that deal with crowding out and picking winners to more dynamic ones that help form the types of public–private interactions that can create new innovation and industrial landscapes. The point is not to prescribe specific technologies, but to provide directions of change around which bottom-up solutions can then experiment. | | | | | Rainer Kattel, Mariana Mazzucato, Mission-oriented innovation policy and dynamic capabilities in the public sector, Industrial and Corporate Change, Volume 27, Issue 5, October 2018, Pages 787–801, https://doi.org/10.1093/icc/dty032 | | | | | | | | | | | | | | | Mazzucato, M. and Perez, C. (2022). Redirecting Growth: inclusive, sustainable and innovation-led. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2022-16). https://www.ucl.ac.uk/bartlett/public-purpose/wp2022-16. | | | | | | | | | | | | | |