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[music] A. Rose:Good evening, I'm Alexander Rose, the executive director at the Long Now Foundation. As many of you know we have long been working on the renovation of our space at Fort Mason and we have been calling it the salon kind of generically but we finally decided on a name it is called the Interval, basically the space in between and we are the construction is just now finishing up. The book shelves are all in and many of you I assumed have been seeing of the booklist we have been publishing for the 3000 volume manual for civilization. Booklist have been coming in from people like Maria Popova, Kevin Kelly, Stewart Brand, Neil Gaiman just agreed to do a list of books on storytelling which ought to be fantastic. So those are all coming in and we will probably have at least 1000 of those volumes on our shelves. We will be also soon be sending out the list of the first 1000 books that we would really love to get used and donated so we dont have to buy them new and cut down more trees. So hopefully some of you have a lot of these books in your collection. The other little bits of news are that the chalkboard robot some of you may remember that part of the design you can see it up there, that chalk board is actually a robot. Its now being built by Jurg Lehni in Switzerland who has already built several chalkboard robots we found him kind of at the last minute thought we had invented the idea but he had. And there are still more opportunities to sponsor a bottle or a shelf and it will be filled with the gin or whisky of your choice before we open. And so please do we are at the last about $75,000 with the fund raising that we need to do and then will actually be able to pay our contractors as they finish up and open our doors and that will be great. So now I'm gonna introduce our long short for this evening. Many of you know, we often do a short film about long term thinking and this one is particularly a propos tonight basically a 50 year Deep Space Network project that clearly would never have done with private money. Deep Space Network is basically required to do the kinds of things that we do in space. Clearly if you can't talk to your spacecraft and they can't talk to you, theres no point in sending them out there. The Deep Space Network makes everything that we do possible. Imagine landing night for example for curiosity without the Deep Space Network there would be no one in there because there would be nothing to see and you would be hearing nothing from the space craft. No touch down confirm, no cheering no nothing. The Deep Space Network is what helps us figure out where the spacecraft is. We wouldnt even get close to Mars without it. The Deep Space Networks comprises of three complexes around the world placed about 120 degrees apart. This ensures us that we are constantly in touch with the spacecraft as the earth rotates. We are today tracking 33 spacecraft, not only the U.S. spacecraft also the spacecraft from other countries, and remember, this is not only talking to the spacecraft but we have been able to do radar and radio astronomy and it was the radar on this antenna that actually was used for even the men landing on the moon. Fifty years ago, director of JPL, Dr. Pickering and NASA established the Deep Space Network to provide communications for all the deep space missions rather than having each of the missions build their own ground network. We used to use big analog recorders for telemetry signals used a 2 inch wide tape in the beginning, the first computers we put it we had 64,000 words maximum and we had to be able to support every mission, NASA missions, other foreign missions and this technology and computers allow that to happen. If you look at the Cassini mission, we got a transmitter about an average of 800 to 900 million miles away. The transmitter is about the power of your refrigerator light bulb and that is what is bringing all these incredible images and data back. I think its a resource to be treasured but its a resource that also needs to be nourished. We are looking at missions with higher data rate, more complicated missions with more instruments on the missions. We are looking at optical comm, and with optical comm one day, we should have streaming videos, you can see real time rather than a simulation. Seeing our success in almost a real time and knowing right away and seeing those pictures all possible because of DSN. If there was no DSN, there will be no missions. We always remind the missions, dont leave the earth without us. [applause] S. Brand:Dont leave the earth without it. Good evening, I'm Stewart Brand from Long Now Foundation. A long term is making me encourage it. And that all sounds kind of like, well thats probably conservative thinking. But actually long term thinking can and should be radical which then gets you into the field of innovation which then gets you into layers and levels of innovation. I'm gesturing toward dealt here. And innovations usually recur within a field so then who starts the field? Who is thinking so far ahead, so far toward the horizon? Who is dealing with an entity so big and slow and hard to steer that they have to think and rise in level? Thats one of the things we hire our governments to do. And one of the few people who has really examined how that whole process works is our speaker, Mariana Mazzucato. M. Mazzucato: Thank you very much Stewart and thanks to you all for coming here. My objective is to convince you in the next 45 minutes, which is how long I'm gonna talk, that we absolutely have to change the words, the way we talk about the state if we want to nurture what everyone today is talking about which is the need for public private partnerships cause I think that while we know and while we talk a lot about the private sector and how important is it to drive innovation to drive growth, to produce the kind of Silicon Valley type dynamics. We have not only under estimated under talk about the role of the state but actually the words we use to talk about it both in economic theory which we will talk a little bit about but also just in common day jargon in the media and also the words the politicians use is extremely problematic and is actually bad not just for the future of innovation but also for our ability to tact the big challenges today which are you know, what kind of growth do we actually want. We are in a moment where we've just experienced probably the worst or one of the worst cause sometimes we forget about the previous ones, but worst financial crisis where countries all over the world, the U.S., Europe, Latin America and Africa are trying to nurture a post crisis recovery and in some cases especially in the Anglo-Saxon countries so the UK and the US to re-balance away from speculative finance towards the real economy and so, you know, industrial policies actually back its no longer a bad world, but really you know, policy makers are also saying that we just dont want smart innovation led growth, which is extremely important, but we also want that growth to be more inclusive less inequality and more sustainable. So sustainable overtime we cannot keep using resources at the level that we have without thinking about the long term sustainability of that growth. And the real problem here is that, you know, this actually requires massive big creative thinking and the public sector obviously has a huge role in the policies around that space and we have a massive crisis I think today one of the biggest crisis is not just the financial crisis but the crisis in thinking. And this is really my objective you know, nurture at least here and especially later in the question time conversion about how we can actually change the way we talk about the public sector the states role in this massive transformational process that we need. And just some background, how economist talk about this problem, and this is important how economist talk about it Keynes, so you probably know John Maynard Keynes who is an economist who is known to be probably the most important, in fact actually talking about the role of government, he also had this wonderful quote where he said, you know, practical men and women who think they are completely devoid of any sort of political influence and influence sort of economic theory or actually the slaves of defunct economist. So economic theory is actually out there determining how policy makers and journalist and also just the common men and women in the street often talk about things without them even knowing what that theory is. And so what I want to talk to you first here in my first slide is that how economist talks about the role of the public sector is very, very limited. Its about fixing different types of problems in the market. The most typical problem is that when you have a public good like basic research which is very hard to appropriate the returns from that then you have a market failure and so the government has to intervene and fund that. Also when you have different types of positive and network externalities, when you have again, I will use the example of basic research, you have very strong positive externalities in other words the spill over is very high thats one of the reasons why its also very hard to appropriate the returns so in different areas where you have a high spill overs, education, defence mending, clean air, you have not enough private investment and so the government has to come in. Now there is a very little debate about this okay, so the reason I speak like you know, I sound American but I'm actually Italian and Steward did a great job in pronouncing my name even though when he asked me how should I pronounced it I said, Pretend I'm Japanese cause then it sounds, you know, matsukato which actually means Christmas tree apparently or something like Christmas tree in Japanese and the reason I sound American because when I was 5 years old we came into America because my father is a nuclear fusion physicist and that scenario where its you know, pretty commonly understood that of course, thats gonna be government funded because its you know, once its actually gonna be discovered, its gonna be extremely hard for any private sector organization to appropriate that profits from that right because its a big discovery which will be known to all. Now, this is extremely limited view. Okay, so marker failure is of course exists, we now know today that they exists more than ever after these massive types of financial market failures that we just had but its interesting that in order to actually tackle those problems, you know, smart innovation led growth which is also inclusive which is also sustainable if you had government that was just fixing different types of market failures, you can imagine its gonna be quite hard to tackle those challenges and I have found in my own work very inspiring this work by Karl Polanyi who was a sociologist and sort of historian, in between those two fields, who really shed light on you know, what the role of the state has been in the history of capitalism, he actually takes the word the market and really decomposes it what he says is that, local markets, you know, selling kind of fruits and vegetables on the corner of a street and international markets are actually you know, really predate capitalism. They have been around for kind of 3000 years, but the capitalist market which is usually what we talk about when use the word market, is very recent. Its only about 250 years old and its not natural in any way it was actually imposed by the state not just by laws but different types of funding and that book itself I think is one of the most important books to really debunk if you want the way we usually talk about the state versus market I'm not going to go into that kind of historical perspective I'm gonna be focusing at least in the first part of my talk on innovation and what we know the role of the state has been but its a very important book which I recommend you to read because it just shows that even when we're just talking about the market in general we have to understand that it is actually the outcome of different types of organizations in this by the way is very important because today you know, coming back to those of problem of short term and long term thinking we often hear, you know, somehow the market which is making particular companies short termist and thinking too much about their quarterly profits but actually you then look at particular types of sectors which I will be mentioning later and you see massively different ways in which companies in those sectors are reacting to market pressures and you know, markets are outcomes, outcomes of what of organization or types organizations, government organizations, business organizations and household organizations. So again, one of the objectives I have is also to convince you to just start thinking about that what kind of business organizations and what kind of government organizations. I won't be talking so much about households, do we actually need today achieve the kind of growth that we want instead of thinking public versus private business versus state. So now whats interesting is that the way, you know, this conversation about government is just fixing these market failures leads to what I said was a very narrow view which is this view that somehow, yes of course government is important but its only important in this very restricted domain, you know, this is an example from the economist which is saying that government should stick to the basics and what those basics are, are in fact these kind of public good areas right so, infrastructure, education, research okay. This was a special issue I was thinking about, you know, what is the next big thing after the internet? They are talking about nano technology, green technology and they were very explicit as the economist often as in the editorial section. And they said, you know, government okay you know, of course we need government you know, also just for private property, you know, proper legal system but stay in your place whats gonna, you know, lead the revolution are the revolutionaries. And who are the revolutionaries? Well you are sitting in San Francisco very close to all these revolutionary guys, its the Steve Jobses, the Zuckerbergs, you know, the Facebooks, the Amazons, the Twitters those kinds of organizations and people that led to them and while we need government and we also know that you know, bureaucracy is sort of needed of course, oops I went to quickly, and what we need government to do is to stay you know, restricted, why? Because what we want is change, we want dynamism, we want the kind of you know, hunger and foolishness that Steve Jobs talked about but government, you know, its not gonna achieve that and if in fact it gets to be too big its gonna in fact impede that kind of dynamism that we want in order to achieve this smart innovation led growth. And so in fact, policy makers, and I talk to policy makers all the time, I live in Europe, in London so I talk to mainly your PN policy makers but I find that this image is actually pretty international, this image being that you have business which, sort of been in the cage. There is different types of impediment not allowing it really kind of roar right? So you have a lion in a cage and the role of the government besides funding the basics is also to slowly take away these impediments. So different types of taxes, right, tax incentives, reduction of tax but also tinkering whether its R&D tax or other types of tax incentives but especially taking away all these you know, red tape, this bureaucracy, this regulation okay, this view of business as a roaring lion in a cage and government important for creating the conditions for that lion to rage, roar and create that innovation knowledge economy and also government to take away these impediments is extremely strong. In fact, if you look at lots of the post crisis policies that are trying to foster this kind of innovation at least in the UK for example, I count to something like 14 new types of tax incentives right? So thats about taking away the impediments and the assumption that then this lion is gonna come out. Now whats very interesting about this quote, which is again Keyness quote, John Maynard Keynes who is one of the most important economist who actually thought about the role of the government in the economy right or wrong is not the point but he is probably the biggest thinker about why government is actually required to intervene in the capitalist economy, he actually got a bit stuck, you know, this is a wonderful letter, it was actually a private letter. No longer as you are all looking at it, that he wrote to Roosevelt in 1938 where, and I'm not going to read the whole quote, but he is kind of saying, Well I used this word animal spirits, right so the word animal spirits came from his analysis of why you actually need a government to intervene he said, if you look at GDP which is how we calculate growth, the consumption expenditure, private business investment, government expenditure and net exports. C + I + D + X N. I is private business investment is the one he focused on a lot, he said its too pro cyclical and its also always volatile okay. In fact, if you are ever interested in looking at this date, I will just get an excel sheet, hopefully you know how to use it unlike Reinhart and Rogoff who we know have problems with it, but no comment. That wasnt very nice, and you actually plot investment. You can get this data from the government bureau of economic analysis website and you just plot it overtime it really is like that. Whereas consumption expenditure which is one of the biggest component of GDP is actually quite stable. Its more or less a monotonic function of disposable income. And what he said is that the reason, you know, well first of all that the fact that this I is so volatile is the reason you need G to come in, government expenditure, to stabilize aggregate demand but what was interesting was the word he used to describe I right? He said its driven by animal spirits. So thats why it is so volatile so you can't just tinker with tax and interest rates and get it to increase whose what animal spirits are is the gut instinct about where the future technological and market opportunities are okay. And he said because thats quite uncertain and really uncertain, its not just risky, its uncertain so completely unpredictable, its very hard to manage that I just with tinkering with tax and interest thats why government has to stand ready to inject demand in you know, times of recession especially. And in this letter he is kind of like thinking to himself because this has not been taken up by any big Kansian economist you know, people like Stiglitz and Krugman who writes in the media today. I dont think I have thought enough about this question here which is oh dear, what if its not wolves, tigers and lions in that cage, what if its like a gerbil or a pussycat you know, thats gonna be very different in terms of policy makers, now I'm kind of embellishing what probably is going on in his head because this was obviously a very specific time in which he is writing, but let me just say what I'm thinking, if it is a domesticated animal, not a lion and wolf and tiger, the role of policy is no longer just to take away the impediments and let this lion roar is actually to get that pussycat to grow into a lion to actually get the courage up to want to invest okay. And today by the way, where we have record level hoarding rates right, there is no lack of money there is just a complete lack of courage to be investing. In the US the hoarding rate of the private sector today is close to two trillion dollars. In Europe its close to one trillion. But this isnt just since the crisis, we have lots of hoarding going on, lack of want to invest. This is a huge problem for policy makers how to unlock it and if you're just thinking that you have to take away the impediments, its going to be much harder if in that cage you have again, a gerbil, now Warren Buffett who is an extremely smart man, we know because also he has made all sorts of money using this smarts even though I think often for others its been just being in the right place at the right time that this guy has consistently made lots of money from some of his knowledge I think this is an extremely important quote which actually supports what Keynes is trying to say which is that, you know, investment is not about just taking you know, making it easier. He says, you know, when capital gains rates were quite high, and I'm gonna come back to that rate by the way so remember the year he actually put up there, 1976 capital gains in the US was close to 40% and in 1981 it was already 50% less than that and since then has been coming down, I will come this point later. But he says, People invest to make money and potential taxes so costs of that investment have never scared them off. So you invest when you have those gut instincts about where these future opportunities are okay. This is a radical point and this comes back to the whole animal spirits. So then the question really is, you know, what then drives those new opportunities, those technological and market opportunities which are so important for driving business investment which is a very important part of GDP. And where is the revolutionary coming back to that economist quote, if you want spirit of those investments, is it true that government is just completely undersell bureaucratic and only needed to create the conditions for this revolutionary private sector to do their thing. And I think its very illustrative to then think about you know, particular types of technologies not just going from an iPhone 4 to an iPhone 5 but you know, revolutionary general purpose technologies which have affected how all sectors work okay, thats what a general purpose technology means, a new technology was really radically increases, for example, productivity in sectors beyond the particular area where it emerged and whats absolutely fascinating about all these examples, nanotech, the internet, biotech and I will give you some data later on the emerging green if you space internationally is that what government deed and I'll focus mainly on the US in these examples but increasingly its outside of the US did so much more than just fix the public good problem okay. So this is the innovation chain from basic research to product commercialization and the orange names there are public sector organizations in the US, state organizations, which played an absolutely pivotal role, a revolutionary role and a mission oriented role. This is a very important point. So many of the investments that led to those general purpose technologies were not fixing market failures, they were actually creating big missions. Government was thinking big, it was thinking in a revolutionary pretty radical way from putting a man on the moon which actually required 17 different sectors to interact, to thinking of the internet before the internet existed, thinking up nanotech, the word nanotechnology itself came out of scientist who were working within the National Science Foundation. That story is very well described in that particular book. And whats also interesting here is that the early stage funds from any of the companies were provided by the public sector. So me just move on to that particular graft, so you know, when you think of early stage seed finances, extremely risky in the early stage, thats why its called early stage of finance and whats striking is that it was often government funding in particular through the small business innovation research program but also the SVIC, STTR all public funds which have been even more important than private venture capital. So Apple, Compact, Intel all got early stage funding, not only from the public sector but some public funds were absolutely critical in the case of Compact and Intel it was SVIR, in the case of Apple it was 500k, which at that time was a lot, provided by an SVIC grant. But you know, again, coming back to this word revolutionary which that economist article used, you know, what makes an iPhone a revolutionary phone, its obviously what you can do with that phone and this is a particular graph out of my book where I show that every single technology which makes you do cool things, whether you know, searching the web through the internet, GPS knowing where you are, touchscreen display being able to use that phone in a very easy way, even the new Siri voice activated system which on my phone never seems to work, but you know, apparently its a revolutionary technology, it was all government funded, all of it. These are the particular state agencies which you know, its really important that when I use the word state, I'm not talking about big brother, you know, even a ministry I'm talking about a decentralized network of different agencies which are absolutely fundamental to the outcome of these technologies and so of course someone like Steve Jobs was absolutely essentially and there is not enough people like him with a sense of design of simplicity of putting those existing technologies together in a very cool way, thats extremely important role, absolutely fundamental, we know a lot about that, there is that great biography but not one page of that biography actually mentions the public funding which went into this revolutionary new phone. Now, often when I talk about this in Europe they get scared they are like, Oh my gosh, she is talking about the military industrial complex and no we dont like that, right and the point is well no, you know, that ended up becoming a model, the dark but type model that actually funded the internet we see that type of organization, that type of funding well actually across different apartment today, whether its health or energy, this is the funding which is absolutely outstanding I think in terms of the numbers that goes into, so its public funding through the National Institutes Of Health which nurture a particular area which is basically life sciences, biotech and pharma, 32 billion a year was spent in 2012. Okay, so if we are very worried to our debt to GDP, well of course, this does increase debt but if this kind of funding is also fostering growth right, which is the denominator of that to GDP, this is what is actually needed also to reduce that to GDP. The problem in a country like Italy which is where I'm from is not that they were spending too much, in fact, if you look at the deficit level in Italy before the crisis it was actually quite small, it was about 3-4% less than Germany. The problem in Italy is that for 20 years, they have not been spending on these kind of areas like R&D and human capital formation which means that you know, the GDP growth has been almost nil for 14 or 15 years and so even with a moderate deficit, the debt to GDP if the denominator is growing at zero, and the numerator is growing even at just 3-4% that ratio by definition can almost go into infinity and now whats interesting also about this NIH funding again, coming back to the word revolutionary, is that different studies including a great book by Marcia Angells called The Truth Behind The Drug Companies shows that that funding has been absolutely essential not just to you know, general research but actually to the development of particular drugs in other words, the revolutionary new molecular entities with priority rating instead of just me two drugs slight variations of existing drugs. So its been fundamental to fostering change dynamism, revolutionary, innovations within this particular sector. Now, I called my book The Entrepreneurial State, because entrepreneurship is not just about setting up a company it is in fact doing what I have been talking about which is the ability and willingness to engage with real risk and uncertainly. And so if you think of any sector in terms of the technology and market risk, the point is that its that upper right hand quadrant which is often completely starved of private finance and I will show you later figure, in the green economy where the upper right hand quadrant is in fact being funded almost exclusively today by the public sector think of it, in terms of capital intensity on the vertical axis, technological and market risk on the horizontal, the upper right hand quadrant is where we dont see business today entering in the green space. Now, you know, one of the issues that the economist there was thinking about was, you know, what will be the next big general purpose technology. What is going to be the next big change if we think of Silicon Valley close to this place where we are talking today, some of the big changes are in fact you know, being engineered today by companies like Tesla Motors. Tesla Motors received a 500 million guaranteed loan from the Obama administration its the same amount that Solyndra received. We all know about Solyndra we dont know much, well many people dont know that Tesla also received the exact same amount of money, when I say innovation is uncertain, I mean its really uncertain for every internet, you have 10 concords and concord is actually bad example for failure cause if you actually look at all the spill overs that happened from that publicly funded experiment, it was actually quite successful but the plane itself was not a success and its often used an example of government failing you know, trying to get too involved picking winners and you know, but I've shown you up until now is you know, Apple was picked, Compact was picked, Intel was picked, the internet was picked, the GPS was picked. Its not about whether government should be picking but how it does it and how it also, I will log you later, is able to rip in some reward when it actually succeeds in order precisely to fund the losses. So again, looking at green which many of us are hoping is really gonna be the next big thing, its very interesting to ask, you know, who is funding what in that green and so yes, thats the upper right hand quadrant is completely being starved today, for example, private venture capital. And whats interesting is that its not lack of money, in fact the whole sort of finance debate is interesting because we often think there is sort of lack of money and I just mentioned before in the private sector, there is plenty of money its just not being spent. We also have plenty of venture capital is just you know, today its not actually engaging in some of the more difficult areas, why is this? Because the venture capital model itself is based on the X. You want returns in about 3-5 years. You want the X to happen in that time period and increasingly through an IPO an initial public offering. Now, thats fine for a particular areas its not fine for the areas like clean tech, like nanotech, like biotech that take 15-20 years, thats the innovation cycle, 15-20 years. And whats interesting, and I will tell you then the capital gain story that Warren Buffet was talking about, you know, the reason that capital gains fell so drastically, 50% in 6 years from 1976 to 1981 was actually because the National Venture Capital Association which formed in 1976 lobbied government extremely hard in that year started to saying, You know, we are in the innovators, we are the entrepreneurs, reduce our capital gains tax and we will invest. And they were very successful. I do lots of different studies of innovation at the sectorial level and also at the industry level and national level and I started looking at, you know, what do studies actually tell us about that relationship between capital gains and investment in innovation or even investment in general and there is no relationship. Because precisely what Warren Buffet was saying, if you want to invest, you will invest if you think thats a good opportunity. The only effect that capital gains taxes had in reducing to the level it has but also within the capital gains tax the particular details is actually has been to fuel an equality. In the UK when they tried to foster silicon round about, thats what they call it in the east of London, one of the first things they did, and this was actually a labor government that did it, it was Gordon Brown when he was the head of treasury for Tony Blair they thought we need venture capital. This is the secret to Silicon Valley. And what they did was they reduced the time that private equity has to be invested in order to be legible for tax reductions from 10 years to 2 years okay. So when I say that venture capital is short termist, its not that it has to be a short termist, by hyping up its role we have actually, in both the US and the UK made it increasingly short termist okay. That particular change in the UK actually rendered venture capital more short termist. Whats interesting as private finance has become more short termist for example, just focusing on the X through the IPO in 3 years in the case of venture capital, what we've seen, and this is actually quite recent, is the role of particular types of public financial institutions increased okay. So the Bloomberg new energy finances, a database where you can actually look at the entire worlds public and private types of finance in the green space. And in 2011, I remember the figure, if you took all of private finance in the world, so its corporate, private equity, venture capital and stock market, it was 11 billion. And then just a particular type of public finance so not like Department Of Energy or E type stuff, just for public banks okay. So these are state investment bank, it was the German KFW, the Chinese, China Development Bank, the European Investment Bank and Brazilian Development Bank it amounted to 80 billion. And whats interesting is that this is new okay. Because it used to be that these banks, this data here in particular is the KFW, its a German State Investment Bank, this Bank used to basically do what Keynes said what they had to do where Keynes said, the role of the public sectors not to do what the private sector does. What does the private sector does, is it invest too much on the boom, too little on the bust. So what the public organization should do is be counter cyclical not pro cyclical. So they used to just focus on this counter cyclicality so during recessions when private banks stop lending, the credit crunch they would sort of kick in and lend. And they would also focus on what we call capital development of the economy so infrastructure projects. What we are increasingly seeing in the next big thing is the role of this public banks, directing so picking, directing this counter cyclical loans and disbursements into particular areas and the green area has in fact been pretty generally picked by the most active banks which are basically the Brazilian, the Chinese, the German and the European Investment Banks. Of course, other countries do have state investment banks, I'm talking about the mission oriented ones, both the German government and the Chinese government have a very specific mission around green, the Chinas 2020 goal in fact is to produce 20% energy for the entire economy from renewables and this China Development Bank has been playing, a dart type role picking particular type of innovative companies including, by the way, Huawei, which is number one today in the telecommunications, its the number one company even without the US market it hasnt been allowed to enter the US market, received a massive loan from the China Development Bank, but if you look at these figures they are absolutely outstanding you know, particular companies receiving loans in the billions. And this is why it is often accused of being anti-competitive okay. It goes against the competition rules, but its actually quite difficult if its true, and I would argue it is true and this might be something we debate later, if its true that private finances retreating from the real economy, and I will show you a figure later also proving it, then you know, and if innovation takes a long time and doesnt just require any type of finance but actually requires is long term committed patient finance than, and if innovation is you know, the way that firms actually compete, these is Shew Paters point by the way, Shew Paters said that all of neoclassical mainstream economics is very static and it assumes that you know, like innovation can only be talked about in terms of imperfect competition. This will be a whole other talks I'm not go there, but the point is if in modern capitalism, firms compete through innovation if innovation requires is long term patient committed finance and if that type of finance is increasingly not found in the private sector, which has become too financialized or short term speculative, call it what you want, then its quite natural then that this kind of finance will have to come out of the DARPA types, the NIH type, the NSF types, the China Development type institutions, so what is this mean for competition rules. You know, this is a big question the competition authorities actually have to grapple with. The NDS is the Brazilian Development Bank which by the way, when I go there I go quite a bit to Brazil because of different research projects and I've been looking into this bank, what is absolutely fascinating about this bank is that is actually achieved what DARPA has achieved in terms of attracting talent right we often hear, or even just think of the Department Of Energy in the US run by a Nobel prize winning physicist Steven Chu up until recently you know, serious brain guy coming in bringing a level of vision, dynamism and talent which often we think is you know, not normal if you want for a public sector institution run by a bunch born bureaucrats. Well in Brazil, if you are top economist coming out one of the Brazilian top economics departments or increasingly coming back to Brazil by say Harvard economics, this is one of the best jobs you can get is actually to go to this bank and its a public bank, its not a Goldman Sachs Bank. Its very hard to actually do that now. I dont have time now to tell you how theyve done that but how to actually bring that kind of talent expertise in dynamism into this public sector institutions is the challenge. When you walk to ARPA-E which is you know, trying to do an energy what DARPA deed for the internet its actually pretty cool. I mean, it does feel like Google, theres a bunch of nerdy geeks and a lots about energy riding on backboards talking to each other bringing in top scientist from places like Norway and Denmark, which by the way are two of the countries that are investing a lot in renewables. It is a place of experimentation where failure is welcome because you know that for, you know, for every Tesla you will have 10 Solyndra and you know, this again is the point I won't read it but this is a very nice quote from the Global Wind Energy Council where they are very clear that you know, its what kind of finance we need and its increasingly, this was just a study that they performed across the world, what kind of institutions are actually financing the green revolution and they concluded that it was these, you know, different types of public sector institutions because the private financial markets were so short termist. Now, this is important right, because we are saying we need these public and private partnerships but we're often just talking about the public sides de-risking the private side. I mean, how lame is that right? I mean is just that what I've described there de-risking the private side? No. These are examples in countries that have been successful and of course the US holds Silicon Valley type model is one of the examples that many countries around the world are trying to copy, you know, this is taking on risk right. This is being courageous setting these missions, man on the moon, green economy, internet and taking on that risk and attracting, this is as fundamental I just said it before but I will repeat it now, attracting the kind of big thinkers who are willing to engage in these missions. But usually, you know, we talk just about the public and private in this very static way. Now, I have already mentioned that one of the problems here is that the private investments today are falling. We dont have I mean, another sort of provocative way to put it. We do not have in the green revolution the kind of commitment and long termism that we had in the IT revolution in the private sector. The Xerox PARC and Bell Labs were in private companies and they were fundamental to the IT investments investing alongside the state. What we have today are, I mean this is a wonderful quote, this is Bill Gates, you know, who is one of the 7 CEOs in this American Energy Industry Council and you know, Bill Gates is a smart guy. He doesnt say, you know, he doesnt say government get out of the way, you are big meddler. He is very specific here, he is saying, Hey, government is important. In fact, you know, what we follow. And the private sectors follows after the government has taken on the big risk. He is very specific here though notice he is saying basic research and I've just tried to convince you at least that in fact these government investments were along the entire innovation chain but will forgive him just for that little error. But the problem is, you know, as I said that American Energy Industry Council is 7 countries and because I sometimes have fun with thinking about these issues I started doing some calculations with a colleague of mine Billasonic. We calculated how much those 7 companies that are represented in the American Energy Industry Council have been themselves investing in this big green race because what they were asking for or are asking for is actually something that I think is very valid. I know we shouldnt cut back government we need more government and how much we want government to be doing the ARPA-E type projects and they ask government to spend 16 billion more a year in cleantech and to give additional 1 billion or ARPA-E you know, he is very visionary but themselves were not co-investing. And again, you know, whereas this Xerox PARC in that space and why this is a problem and this financialization, I was mentioning before. Because the share buy backs, okay what they are is focusing on boosting stock prices, boosting stock options to boost executive pay in the end. If you ask companies, in fact, let me get that in two seconds first I want to tell you whats on this screen. This is a proxy for when people say, we are too financialized. What do they mean? They mean that the phase at which the financial sector has grown has completely out pays the real economy. This data here is for the UK for the US its even worse, but I just wanted to show you that you know, you're not alone in this problem. This is showing you that financial intermediation you can barely see it as a percentage of growth value added how it out phase the real economy which is basically that black line everything but finance and agriculture and this is by the way one of the reasons that industrial policy is back because in policy maker say we have to rebalance away from finance, away from this terrible derivatives, credit default flops, hedge spans towards the real economy right? So towards life sciences, IT, the creative sector. What they dont realise is just how financial lies the real economy itself has become right. So this is one of the points I've been making which is the private part of the public private partnerships has not been investing big time as it used to. You should worry about the black line there, that is showing you the amount of repurchases so buy backs to R&D spending okay. So many companies, I shouldnt name them but I have a feeling that in my next slide I do name them, I might have to quickly, because I'm not sure who your sponsors are. I have been spending things, you know, a particular I have in mind has spent more money in biotech on buy backs and R&D in every single year for the last decade except 2004. The total amount of buy backs that the Fortune 500 companies have spent in the last decade, 3 trillion. When you ask these companies, why are you doing that, why arent you spending in R&D, why arent you spending on human capital formation. They said, cause there is no opportunities. This is the right thing to do. You know, when there are no opportunities for investment, you know, giving back the money to the shareholders is the right thing to do. You then look at the, those sectors where this phenomena is the worst, our health and oil. There is no opportunities in renewables, there is no opportunities in you know, worldwide diseases. We just showed before who is actually spending in those areas and this is not public versus private. This is not what I'm saying. I'm not saying good guy or bad guy. I'm saying this is part of the debate that we should be having to have that kind of smart innovation led growth. What kind of companies do we actually need to be investing alongside the state and why is it that we always have to justify any type of state intervention instead of actually trying to justify public policy which is gonna to try foster also more of the Xerox part type investments and not allow, here let me go quickly over that one, cause I did realise I recently gave a talk and I have all the name of the sponsors and afterwards there were like, we're gonna have to take that off your slides later, I think this will be easier for you. No I'm kidding. Okay, look that back. Okay good. By the way, Apple is really interesting because under Steve Jobs, Apple did no share buy backs. When you look at particular sectors, at the beginning when I said markets or outcomes, if you look at telecommunications as mentioned before Huawei number one no share buy backs, Erickson number two no share buy backs, Cisco massive share buy backs. Okay, these are choices that companies have to make. Pharma and biotech are extremely problematic but as I showed you before, also the emerging clean tech space is also very problematic. Now, why is this important and why did I have in my first slide this whole thing about value creation and value extraction? Well, one of my key points is that by completely dismissing and not talking about the role of the public sector and by that I mean, the tax payers that are in fact funding all these different agencies, the DARPAs. ARPA-E, NSF, SBIR in the US but in these other countries for example the state investment banks. By not talking and admitting the role that the public sector plays in this entrepreneurial knowledge-based economy, we have in fact socialized the risks but privatized the rewards. You know, Googles algorithm funded by NSF, we know how much Google pays back tax to the government. Apple its had been in the headlines right, Amazon, these are companies that have you know, benefitted extremely not just from the roads, not just from the educated work force but specifically from government taking on massive risks in particular technologies that their profits today are riding on and of course these companies themselves have done amazing things as the example I gave Steve Jobs but if its true, if its true that the government played a pivotal role in fostering these technologies through its ability to think and long a run way, then who is gonna fund the next round right? Do you know what tax was the marginal income tax was under Eisenhower, who was not a communist, close to 90, yeah I mean this is a Republican general. Now I'm not of course advocating that we should go back to that kind of tax rate but the point is how those tax rates fell, how capital gains tax fell. It actually co-evolved with the discourse and narrative about who the innovators where, who the entrepreneurs were, who was fundamental for the knowledge economy. And in fact, those reductions in tax today, and I dont want to talk so much about the rate of the tax, because that is not the point but this discussion about government way and do things like R&D tax credits is not evidence driven. I have studied a lot these R&D tax credits, there is almost no additionality. In other words, they dont make R&D happen that would not have happen anyway. They do have an affect in countries like the US where you do have this huge public funds which are then driving the investments so that the R&D tax credit is like icing on the cake but they dont make the R&D happen okay. And this also a big problem in Europe by the way where we are reducing, we dont have public labs anymore, they have all been destroyed and then we do, you know, engage with these R&D tax credits and venture capital thinking that big things are gonna happen and then scratch your heads and you know, why it didnt. But quickly, because I dont want to take up too much time, yeah I need to finish in about 5 minutes. You know, this whole risk and reward thing has become sort of front page right, front page also on the streets this issue about the 1% and the 99%, this graph here just shows you again, it aint a finance problem, there are plenty of profits out there, there is record level profits in fact and how a very nice way also to think about it because you can calculate GDP in different ways demand, product but also income and if we look at income parts, you know, the profit to wage ratio has just gone off the charts especially if you look at over the last 100 years. Now, the explanation that we usually hear about this in terms of you know, innovation, inequality, some people being left behind, yes profits are soaring but thats because, hey some people had some great ideas and they are making profits from that another is, yes workers are you know, fundamental for the production process but those who dont have the right skills are getting left behind and so thats foster the very important in fact, discussion about retraining and how to allow those left behind to catch up however, is that really whats driving you know, that difference. Is it perhaps something else. I mean, I would argue that the skills problem which technically economist talk about these in terms of the skill bias of technical change. Explain sort of the middle problem right so the problems that we have in achieving middle class type jobs that are of the type that we used to have, I dont want to go into the skills problem because it is quite complex, but the 1% and 99% problem the fact that something like 50% of the gains in the IT revolution era have gone to the 1% is that because of skills. What I would argue is that in fact its about value extraction and one of the really interesting facts about innovation right by people who actually study innovations so its a collective process, its very uncertain, its not just risky but its also cumulative okay. So people like Brian Arthur and Paul David have talked about innovation in terms of it being path dependent okay. Innovation is persistent, innovation today depends on innovation yesterday, and its cumulative and what we have is in fact because we havent had the right story about who is actually contributing to the process, we have actually allowed particular types of agents including large venture capital companies to enter late, sort of you know, this is time on the horizontal axis half way through, and reap not just their marginal contribution, okay, the rewards compared to the actual risk they took but actually rip the entire integral underneath that curve. Now, what to do okay, well there are all sorts of things one can do and I dont want to advocate anyone particular measure, in fact you will need a lot of lawyers in the room to do that, but we havent had the debate okay. I mean, are taxes enough? Forget even just the fact that they have been falling and that we dont have the right necessarily I would say political atmosphere today to even talk about tax. So lets just forget tax lets just assume it is being collected, okay everyone is paying their tax. Is that really the way that government would be able to reap back its reward in a situation where, again, for every Tesla you have 10 Solyndras. Thats a massive failure rate right, and venture capital has also, venture capital investments something like 9 out of 10 fail but the one winning investment right, so for Kleiner-Perkins that Genentech investment more than covers the losses and also covers the next round. We dont have that for government why? Because we havent admitted that its a venture capitalist. By the way, if you look around the world there are some countries where this venture capital role of government is much obvious and one these is Israel. But in the US you know, one of the funds has actually come out of the CIA through In-Q-Tel you guys probably know that because you think a lot about innovation in this area but you know, most people in the US would be like, what you know, CIA doing public venture capital? Well yes. In fact the touch screen display investment also before that I mentioned was also funded by the CIA not through In-Q-Tel though. Anyway, you know, why not retain some equity. Sitra public funding agency in Finland that invested in early stage Nokia did retain equity and made a lot of money from that investment which then funded the next round. The fact that the Nokia you know, has not been too smart in reacting to the smart phone thats a different problem thats not because you know, receive that money, but the state investment banks for example, whats very interesting is they obviously retain equity because they are investment banks. But we also have a real issue with the patent system the IPR system we have the Bayh-Dole Act which was a good, I think policy which in 1980 allowed publicly funded research to be patented which couldnt be before that, this was a measure that was thought of in order to enable more commercialization and get science out of universities and actually into producing products and in fact foster the whole biotech revolution because many of these patents actually then became spin outs but there is, if you actually read that act, its a very big act it actually says in there, but of course we have to make sure the taxpayer doesnt pay twice well that would be kind of stupid, so one way to do that would be actually to allow government to have a say on the prices. It has never executed that right and I think also the reason is because of this again, this discourse we have right? If the role of the government is just to foster innovation in the private sector, create this conditions and then allow these revolutionaries to do their things and what right do you have to sort of you know, talk about prices. It should be these innovative companies that set their prices to recoup their costs. Well increasingly in fact, if you go to some of these big conferences at the financial times organizes for the pharmaceutical industry, they are very outrightly saying, were gonna close down our big R&D labs and our private companies because in fact, the open innovation system is allowing more and more to get the sort of niche radical ideas either out of these small biotech companies or when there are on the set of this big NIH funding, in fact Pfizer recently closed a plant in Sandwich, Kent and move to Boston not because of lower tax or lower regulation but because of that NIH funding. Anyway, they are saying quite openly that they are gonna close down these R&D labs but the discourse is all about this open innovation system. But of course, the pricing policies have very much been based on the fact that the R part of R&D is so uncertain so one question would be as you are outsourcing increasingly that R to the public sector then how much, you know, how much uncertainty do you really have to be actually be still charging these you know, absolutely very high prices which make the taxpayers that have funded the research not even be able to afford it even in countries with a welfare state its still the state that then funds the welfare state so it is still paying twice. And yeah so income contingent loans, we do it for students, why not for companies. And you know, how again, to do this is very complicated but hey, if you can send a man or woman to the moon, we can figure this stuff out. You know, Google, again this grant that was given to the two Google guys who then, you know, ended up the grant, resulted in the algorithm behind Google there still could be something even in those grants says, you know what this is just a grant, do your thing. But if it results in something that leads to X billion, then overtime something will come back to, lets call it an innovation fund, to fund the next round. Now again, I'm putting it in a very simplistic way of course, it will be easy to find a fault with how I just said it, but the point is lets have that conversation and of course by that conversation not only will we make sure that we get a sustainable cycle where for example the profits from the internet can then fund the next big thing which might be green which instead today we have a serious budgetary problems in these organizations that are supposed funding the next big round, this editorial piece that came out today in the New York Times in my book I was very happy to see it, I wasnt expecting it in fact, talked about the huge cuts that are being made to the public research system in the US in the name of you know, reducing the deficit in keeping things tight in order to foster growth you know, prosperity is going to help us overcome crisis by snailing down government that has actually resulted in a 40 billion reduction in public R&D funding but its also going to potentially make this growth more inclusive okay not just smart, not just more sustainable but also inclusive. There has been you know, lots of talk about the public school system in Silicon Valley, you know, how wrong is that, that a place that receives so much direct funding both for the companies and the technologies hasnt resulted in a more equitable and inclusive public education system. Now, when I say its a discursive battle, by the way theres another great book by Tony Judh I dont know if you heard of him, the book was III Fares the Land, he actually says, he says lets look at the last kind of 40 years of the way we talk about the state and how thats co-evolved with kind of you know, bashing away at the notion of the welfare state and he talks about this globally and he says, you know, all of the sudden in the 1970s this word administration pops up, that didnt actually exist before to describe what government does. And you know, he just has it there in a little line of a particular paragraph but to me it just completely jumped out. I mean, how boring is that? Who would want to go work in the government if thats all government is doing? Regulating, administering, meddling right. So actually how we talk about the state completely then affects the kind of people and talent and dynamism and ability to think big in this missionary way, or missionary sounds that mission way, and I'm not going into all these words but you might have heard some of them right. I mean, crowding in and crowding out. We often hear that government when it gets to activist crowding out private finance but within this particular areas I've been looking at, you know, whether its green or IT in the beginning of IT what the government did was not even just crowd in, which is the usual Keynesian defence of what government is doing which means that when you have underutilized capacity, if you have government investing through the multiplier effect that increases GDP so what you are actually is doing is increasing the amount of total funds both for public and private right, thats the usual Keynesian defence thats why you need the government to actually invest in times like this in a recession, what I've just describe before in this different areas is government doing much more than just crowding in its actually investing in new areas and frontier areas which create a new space which is kind of like, I mean, there is no word for it, I just call it dynamizing in. But the fact that we dont have a word for it actually also then affects how we valuate, you know, how we measure up the performance of these investments. We actually dont have indicators that can describe to us what government deed so its much easier in fact to come up with this kind of crowding out type analysis. I see this even by the way, with other types of organizations like the BBC which is a public broadcaster in the UK which also gets accused of crowding out private broadcasting cause it such has a big share. The quality of BBC programs, I dont know if you ever watch them, but its pretty high. But whats interesting and lots of these economic analysis of the BBC and its potential crowding out of the private broadcasters, the economist riding the, well in this case an actual economist not the Economist magazine, they will say, but of course you know, we are economist you know, we can't have normative or subjective interpretation of the quality of the program so we're just gonna keep quality constant right and so, you know, Sky, Rupert Murdoch or whatever you know, we're gonna assume that the quality is just something we can't measure. Now, thats really problematic and I also see it in more technical studies of for example, private and public venture capital comparing the returns completely dismissing and not looking at the very different risks space that the public venture capital in this case is that I'm thinking of this are Scandinavian public venture capital funds were investing in a very different risk landscape with much higher uncertainty that should in fact compare the returns. If you dont have a measure for that, you're gonna bias it from the start against these public investments. De-risking I have already said, lets change that word, you share the risks and hence you share the rewards. And again, that will affect how we attract you know, the best and brightest because it becomes the self-fulfilling prophecy. The more you just talk about the state at best fixing a marker failure, you know, the more you are actually also affecting the kind of person that wants to go into that particular organization. If you're someone who wants to think big and experiment and feel part of an institution that is really raising the stakes and doing frontier stuff and all you're doing is fixing market failures that actually might affect your choice of where to go. Of course, its gonna be more exciting to go work in Google and Goldman Sachs that it is to go work for a public ministry in some country. And by the way, this is a big problem in Europe where we are constantly asking ourselves, God, why can't we do our Silicon Valley kind of thing and you know, why are all these great companies coming out of the US? The answer has been because they havent had this sort of analysis understanding that venture capital surfed away about state investments the answer has been we have to increase the market and reduce the state. And that is completely what we are witnessing today. Its not just since the crisis. If you look at the innovation discourse in Europe its about in order to have the Silicon Valleys we need to reduce the size of the public sector we need to foster you know, early stage seed finance and so this huge, as I've already said, rise of all these different types of venture capital funds and tax policies to foster that kind of funds. And then whats interesting I dont know if you know this terrible word pigs I'm allowed to say it because I'm Italian right, if I was a German this wouldnt be good right because you know, the Italy, Greece, Spain parts they are pigs, this is what Goldman Sachs said, it was just literally the words then we actually increase to Ireland as well so its no longer as pigs which is a bit less politically incorrect but these are the weak, these are the weak Euro zone countries okay. And as you know, we often think, oh god you know, they are, you know, holding things down, the German wallet is gonna be financing them during the bail outs what we dont say is that you know, these countries its not that they were spending too much, they were spending very badly. Again, the German deficit was actually higher than the Italian deficit but if these countries, the pigs, are not spending an R&D on human capital formation on education but also setting up these particular types of funding cycles that I've been talking about which are able to foster these new innovations, then thats why you have this completely skewed competitiveness in Europe and we dont say that what they should be doing is for example what the Germans did which was not tightening their belt it was actually spending on the KFW, the state investment bank Fraunhofer Institute which are the science industry links that are fostered in this institutions called the Fraunhofer Institute very well funded, very high R&D to GDP but also directed towards these big missions like green. We dont hear that, thats not the medicine, you know, thats not the analysis the diagnosis and its also not in the medicine and what we have today is countries like Spain having cut their publicly funded R&D spending by 40% since 2009 in order to meet this new fiscal compact criteria. This is not only bad for Europe its of course also bad for the US because this European crisis which will continue as long as you have this very different competitiveness levels will create a crisis. Because you can't have one currency for an area that has such different levels of competitiveness. I really should wrap up and I'll just say, think again. [applause] A. Rose:Have a sit over there. I have a question, is you were talking things sort of historically cause we've looked at US and Europe over the past number of decades and I noticed I was around for some the early ARPA well its ARPA not DARPA advanced research projects agency within the Department of Defence later limited to DARPA Defence blah, blah blah, so it could be completely innovative then and that was outgrowth of first the war, Eisenhower years and all that and then the cold war and space race and all that sort of thing and the information technology sector that they were pushing then, you know, created basically computers, time sharing ARPA which became ARPA net which became internet which became the world, ah there was a far framing there and Herman Conner used to say, the one that we really need a nation for is a war and this is one of the reasons masons kind of like wars because they just fight on stuff, but thats backing off and you know, if cold war die down the peace dividend it sounds like part of what you're describing is the peace dividend. We didnt need the nation to defend us from these creepy scary things anymore so lets just go counting on the private sector to be doing all the fun stuff is that anyway a sense of what you see has happened and if so, assuming we dont want a war, if you crank up the leaf on government again, is that the narrative re-think that you want? M. Mazzucato: I think there is two issues. The first is that looking again, for example, in this space, those countries like Germany and China that are investing massively have actually framed it as a war. We have, you know, climate change as a war, theres a war to be made had also if you read the National Institute of Health website they talk about it as a mission. Now they dont phrase it as a war but, and of course in the US there is an issue also with the healthcare system which is obviously different from the healthcare products, thats a very interesting debate the degree to which those countries that are the most innovative in the healthcare products are or are not also innovative in the system which actually then breaks the drugs to the people but you know, if you read that website, its a very serious. I mean, there is a mission around healthcare so the question is how governments, I mean, I'm thinking of it almost from the other side, think strategically and say, if we want to fund this stuff we actually have to create a narrative around security interest right. You know, we need to invest in energy in order to maintain national security of our energy but if read in between the lines its talked about as a war. But I would say in another words youth unemployment you know, the aging crisis, the demographic crisis today in many countries which is putting at risk, you know, the kind of pension systems that people have relied on, that can be phrased in terms of war in terms of a battle, a big battle. And I think what I was trying to say at the beginning is that these are big missions, big battles which actually require then the government agencies that are investing to see themselves, I dont want to say at war, but part of a big battle and instead the narrative which has occurred which I dont think has been necessarily how you mention, but I think its actually been very ideological. There has been lots of profits been made from this particular narrative right that only some or the innovators and others are just kind of they are the lazy or at best fixing conditions that narrative has made it much difficult for government to present itself as a creator and an investor in these missions. And then question is, why has it become so profitable, you know, whether you talk about deregulation but I again I dont want to steer the conversation too far away from your question but there have been particular policies which have made it easier, sorry, I should look at your eyes, have been making value extraction activities rewarded over value creation activities. I know that sounds really abstract but thats basically what we've had for the last 20 years and that has I think come out of policies which have driven by a very narrow understanding of who the value creators are. And again, the National Metric Capital Association was very explicit they said, we are the value creators, reduced our tax. It wasnt just saying, you know, this is good for the. A. Rose:Where do universities fit in the story? They are not exactly government and they arent businesses but a lot of the R&D of great consequence goes on there, so whats their role here? M. Mazzucato: Well, they have a huge role but its very important to be specific on what that role is. Sorry if I keep talking about Europe, but hey I live there so I also see a lot of mistakes that are made there but in trying to copy the US system, what they are doing in Europe is making universities increasingly like businesses and they dont get that actually what was very successful about the US system was that you had, and I know its also changing here but I think in a less drastic way, you had very high level blue sky properly funded research than in universities, an early stage technology development done in companies. Then this you know, big notion that somehow the problem is commercialization and technology transfer and thats the big thing thats missing has turned lots of universities into this kind of technology transfer offices which in Europe at least is also being specified in terms of also creating spin outs, so Cambridge University is trying to create spin outs. There was no spin out policy in California. Spinouts happen naturally at a very well-funded research system in the universities and so actually better understanding the division of innovative labor between universities, companies and of the course the linkages between them is actually quite difficult and its not enough to say universities are important because in fact you can get a very dysfunctional university system by not actually again you know, talking about it in a very particular way. And again, even though in the US you have lots of private universities, in Europe all universities are public basically, so Cambridge and Oxford are state, they are public universities but in the US many private universities of course like MIT are massively funded by the public sector and so just the notion you know, when you say universities arent really public actually if you look at the sort of big science and places like Harvard, MIT and another important universities in Stanford. A. Rose: Here is an interesting one from David Weckler, it says global business can invest and produce in a way that address international opportunities, you know, international corporations sort of international, governments generally dont do that, you're focusing on government very much. Are there means by which governments might join together especially on global issues like climate change that they can in it sense think and act globally the way some multinational corporations can think and act globally? M. Mazzucato: Well I think I mean again, if you think of the only public lab left in Europe practically CERN, its international, its European wide at least and it came out with html.. You know, the language used by the web, and this public funding agencies in the green area they are national in terms of the actual agencies so the China Development Bank is Chinese but the investments its making are global. So its not just about international organizations collaborating but also particularly active national organizations that see the global climate change problem as a global one. Its very interesting how they are seeing their own investments as global investments. By the way, what is also very interesting is that those few countries because its a handful, its a handful that do this mission oriented stuff its not state. So I'm not talking about government I'm talking about particular countries that have had mission oriented state agencies, its very interesting to see how they also tend to see other countries not as treats but opportunities. So Denmark which is one of the most active in both wind and solar has become the number one provider of high tech services. So they are not just you know, doing the products and also the services to Chinas green economy. And China is spending 1.7 trillion on its green economy. So a small country like Denmark which has sort of been very active and innovative in that green space is benefitting from the Chinese investments. A. Rose:So this is I supposed an advantage there being a lot of nations some nations like Denmark and bare down and specialize and a sort of become the market leader worldwide in that domain, is that you know, part of how the international system plays out here. The nations are essentially competing and each finding their mission and jamming ahead to weave that mesh? M. Mazzucato: Yeah. I mean dont forget that innovation, another sort of aspect of it I mean, I mentioned you know, theres collective, its uncertain its also self-dependant. Its also very, you know, another aspect about dependencies, not just as cumulative aspect but also that you know, let me just give you an example, carpets. There is wonderful story that Paul Krugman tells in a book he wrote called Peddling Prosperity Carpets, when they started to be made, and I dont know anything about carpets I'm just remembering the words he used in a tufted way, dont ask me, it was in the middle of the 18th century and all of a sudden they all started being made in this place called Dalton, Georgia and are still today something like 80% of carpet production is made there, why? Because there was this pool of labor of these young girls who knew how to make tufted bed spreads and during when they would have birthdays they would give each other these bed spreads and when carpets started to be made with this tufted technique because that labor pool, knowledgeable pool of labor was already there, somehow figured it out, the carpet people, and started producing them there and it is still today, it has this niche and thats because there is a very strong sort of dynamic returns to scale. In other words, its started there, then all the innovation ended up happening there. But the same thing you can say about the internal combustion engine it wasnt you know, Exanti the best engine, there was four or five different engines if by chance got a little bit of a head start and then all the innovations started to occur around that particular engine so later it did become better than the other ones but thats because of the dynamics. So its the same thing with countries, Germany almost by chance started to specialize in machine tools and its still today the most competitive in the world in that area. So you have these very strong sort of path dependent dynamics which are both good and bad, I mean, the fact that we still have an internal combustion engine today in our cars its because we also get locked into right, these technologies thats also the example people often give up you know, the keyboard the fact that we're still using today the qwerty keyboard is completely mad, do you people know the story? Okay, so its the same thing with countries the point is that this initial advantages because innovation is so cumulative and path dependent its actually very advantageous to get the first move over advantage. And so the fact that Denmark, Germany you know, made those investments they still are today to the most competitive in these areas even though one of the issues is, it should be a portfolio of investments if you just choose wins, you're gonna be extremely susceptible to changes. A. Rose:Are the scale advantages being a big country versus a small country either way? M. Mazzucato: Well, yeah I mean, Denmark is a very small country, the US obviously is a big country. A. Rose: So they only get six people to agree to take over that nation. M. Mazzucato: I think the biggest difference between countries is not the size, I mean, again, just think of you know, Singapore, or you know, take Finland. Finland was actually a pretty basket case country up until the mid 80s and then it made a very explicit decision to become an innovative country and invest massively increase its investment in education, R&D it developed agencies like Sitra, Israel the same, you know, I dont want to say overnight but these were decisions of you know, we want to be innovative we have to setup these kinds of agencies which will foster. A. Rose:So those are questions from Alex, so there are countries that are doing a great job of this kind of balance you're talking about you mentioned Denmark, Israel, Finland and others in. Are they paying attention to each other the way business is, paying very close attention to each other and watch which actually working is that the case here? M. Mazzucato: I think so. So I mean, for example these state investment banks. I know there are lots of conversations between the Chinese, the Germans and the Brazilians in terms of how they are operating. But I think its A. Rose: Say more about that, how are those conversations occurs, is there conferences or visiting each other you know, R&D labs. M. Mazzucato: Its often joint investment so you know, in this global wind energy report that I've mentioned and in both wind and solar, they often do make joint investments and in different areas. These arent just sort of isolated projects but I was at a conference recently in Brazil where they had the members of all the different state investment banks around the world there, talking you know, there trying to foster learning but I think one of the most interesting learning processes is organizationally. So I know that you know, some of the Scandinavian countries were very interested in how DARPA was setup in terms of this kind of you know, five-year second, I dont know, you dont call it second man here, what do you call it when you leave one job but you hold your place and go work in DARPA for five years, that kind of organization, innovation was done so that you would get people coming in DARPA or ARPA-E today and again welcoming failure because there are time there was gonna for four or five years they werent seeing it as a lifetime job and so they were able to sort of engage and experiment and do the whole trial and error thing in a public sector organization. I know that these types of organizations like Sitra or like the TSB in the UK have looked very closely at the DARPA model beyond just you know, funding innovation. It was an organizational innovation as well and I think thats one of the biggest challenges for this public sector organizations to learn from the organizational aspect so that you dont get commercial into bureaucratic which is just a cartoon image. A. Rose:You mentioned Paul Krugman a minute ago sort of improving, makes me wonder who were the economist that you pay closest attention to out there besides your immediate colleagues. M. Mazzucato: Well, one of the issues and I dont want to pick on sort of Krugman or Stiglitz but I think one of the very interesting thing with these economists that today are very active in the public debate, is they dont have any theory of the state in the boom. So often in the you know, for examples in TV shows when they are, they have may be a journalist who is trying to provoke them they say okay, so you are saying that government should be counter cyclical but when were you in the boom then, you know, telling government to retract. And they have nothing to say. Because they have a purely Keynesian view or at least how they have interpreted Keynes which is that government should be counter cyclical. And yet all the investments that led to the internet were done in the boom. So this issue of directionality, you know, that government is there when its thinking big when its able to think up missions where its not just playing this counter cyclical role but actually making decisions about where these investments should go. Its actually quite important and you know, you should really see this today. I mean, how much quantitative easing did we have. Did that really cause growth? No. Because it actually wasnt, you know, where did it end up? In bank coffers not being lent. So its not just about creation of money or you know, Keynes also had this quote where he says, just dig ditches and fill them up again. Well he said it out of desperation and he was right when he said, you know, just get anything going but it doesnt work actually in the long run. You can't just dig a ditch and fill it up again, you have to decide what kind of roads, what kind of bridges do we actually want. And that directionality is often what we fear. We think that government getting too active picking winners. Let me just say one thing which I think its really important cause when I say green, I'm not just talking about wind and solar and bio fields, I'm also talking about that but I'm actually talking about the transformation of the entire economy and this is really important because mass production or electrification which are also other big general purpose technologies, they took kind of like 40 to 50 years to get fully deployed throughout the entire economy and today if you look at the IT revolution and compare it to electricity, we are just half way there. You know, IT has not been fully deployed and one way that I understand green and I really learned a lot from a colleague of mine called Pablo Perez a very important historian, is that green could be actually a redirection of the entire economy for IT to be fully deployed and what I mean by that is that suburbanization was a way that the mass production revolution got fully deployed and suburbanization didnt just happen out of anywhere its not that people just woke up and said, oh I want to go live in the suburbs. I want a washing machine. It was an outcome of policy, public policy made suburbanization happen and its not that suburbanization was good or bad, the point is, it was a policy to allow mass production to get fully deployed. So the big question today is not state or no state, private or public, its what kind of growth that we want, you know, the whole smart inclusive thing, but also how to steer, you know, IT can go in anyway, you know, is it just another gadget that we want or is it really a transformation of the economy in a direction that we want and like it or not, its only gonna happen with strong public policy guiding it in that direction and green is a pretty good choice. A. Rose:What do you mean by green? M. Mazzucato: Yeah, well, okay this then, the guy who clapped showed response. Okay, I mean everything, I mean things like even thinking about, you know, product of obsolescence you know, how long product lasts. Currently, the way we think of product obsolescence in other words that you buy something and then you throw it away after five years, first of all its not very green, but it also emerge from a notion that markets are limited right that you only have so many middle class people and those are the people buying these gadgets or washing machines and so you know, in order to expand your production you're gonna have to make sure that they kind of fall apart after a while and as you have an expanding middle class all over the world, in fact rapidly expanding and some people also see this as problematic for green and in fact that could potentially change how we even think of product obsolescence its no longer true we have limited markets, markets are expanding and should even affect how we think of that but also I mean, things like recycling its pretty low tech right? I mean, you really could get the whole recycling area much more hi tech and allow IT into that space up and also maintenance or products, I mean, if we did have longer product obselence cycle, the whole maintenance area first of all could become job creating area right. So we dont have the straight off of green versus jobs, but maintenance not just you know, fixing a car when it breaks down but again, you know, really thinking of it in a high tech kind of way. I mean, I'm just saying it actually could affect everything. Of course, green is also I think a portfolio of energy choices and you know, its quite interesting that Fracking and Shell forget what you think about it in terms of the danger all this talk about you know, that produces this potential earthquakes and underground it was 100% state funded, if you're interested in this, the breakthrough institutes come out with the great report on the history of Fracking. But you know, thats I think the danger of Fracking its simply that its limited the portfolio. Energy investments, renewable energy investments by the current administration has completely been reduced since the shell obsession, not so much revolutioning cause in fact thats been going on for many years if you read that report. So this limitation of the portfolio of renewable I think is a huge problem because as soon as shell and you know, that type of gas doesnt happen anymore if we havent been investing in renewable that the right that we were before and precisely because innovation is path depending freezing dynamic returns to scale, we're gonna be in a mess. A. Rose: Policy tends to sort of oscillate overtime, everybody is doing X for a while and then its something else big becomes a big deal and that tapers off and then they are arguing X again, its a new version of X. Is that kind of thing going on in this sort of public investment in R&D so is, you know, what is down now in some important respects like you said the NIH but it basically peaked and now kind of drop off a bit. Does that mean it can just drop off and disappear or since that people sort of know, oops we went too far in this direction now, we're gonna correct it and you're part of that correction? M. Mazzucato: Actually we're in a very unique moment. What we've seen around the world which is complete count pro cyclical government is unique. It actually hasnt happen since World War 2. So you know, whether its because ideology or whatever let just say it actually it what happens, government retreating during recessions which is whats making this public budgets then go down in this particular space is something we havent witnessed. The NIH spending and the spending for the different areas underneath the Department of Defence including DARPA have not undergone sort of big cuts in fact, even you know, Reagan who during the batchelor era was someone who very actively propose that we should have limited smaller government, he didnt reduce the funding of these particular agencies, it actually increased under Reagan. So while there were massive cuts to state spending around, lets just call it the welfare state type area, actually in this innovation space they havent been cut and today they are being cut because you just have this mass sort of austerity mentality where you know, someone like Obama has tried to resist but hasnt been successful in resisting it and you know, dont forget that we didnt have counter cyclical government before World War 2 and the way you see this by the way is a consumer price index. Its a bit complicated I will just tell you quickly because it was fascinating. If you plot prices from 1800 to 1950 so through price indices, you often had deflation so the price of an object was actually lower in nominal terms that it was say the year before. Only once government started to do what Keynes said which was to actually you know, enter the game seriously did you start having two things, one, no more depressions, there was depressions every 10 to 15 years, depressions not recessions, you guys and myself are used to recessions happening kind of 10 to 15 years completely eliminated depressions up until recently this last crisis because we have this worldwide cut back together in government spending but also prices all of a sudden mildly rising and as long as you have a low rate of inflation its okay in fact its a sign of growth of sustainable growth. Its only when you have really unstable growth so depressions happening kind of every 10 to 15 years thats when you have this persistent kind of deflationary periods. But the big point is that actually this Keynesian stuff work in terms of preventing depressions because the reason you get a depression is that when you get a recession thats when consumers are spending less and companies are spending less if on top of that government is also spending less, then you know, it becomes a vicious cycle. So what you need is a counter cyclicality which actually worked. Now whether then you have too much of it etc., thats another problem but the fact that all of a sudden since this particular crisis since 2007 you have governments around the world being pro cyclical has just been a disaster and has affected the spending. A. Rose:And now we learned our lesson and do better next time and thanks to you right. A couple of questions about China, again China has come up a lot, Mary Kay, the Chinese government is putting many billon of dollars and trying to encourage innovation but isnt yet getting results it longs to see, what is the balance do you think is needed between government funding and other factors to encourage innovation. And Kevin Kelly ask, do you think China today is doing a better job with the entrepreneurial state and how did the Chinese respond to your thesis. M. Mazzucato: I recently was in China I gave a presentation that ministry called MOST, Ministry of Science and Technology and I gave them something similar and they said, so I dont get it, so why, so why is the story is not known, I mean, of course the industrial might of the US we know was you know, fundamentality result of this kind of spending how can it be that people dont know that and that then there is you know, not that kind of discussion. You know, thats what they were very interested in. I mean, you know, they even said how it can't it be that people say government meddles in the healthcare area when actually what you are saying is government created the drugs, you know, government is part of the innovation system and so they were very interested in the lack of public knowledge if you want of the role that government has played but whats interesting in China, the challenge in china is that how they are doing it is a very top down, its very much kind of ministry led, its very much you know, again the China Development Bank playing a massive role. So if its true, again big if, that this stuff is more successful when its kind of decentralize network of public and private agencies interacting together in a dynamic well funded way, what is it mean for that ecosystem which currently is still quite top down cause dont forget that you know, spending on R&D is not enough and China has increased it by 170% over the last five years, its the amount of spending in R&D we know lots if you look at Japan and the USSR, the ex Soviet Union, Japan was spending less than the Soviet Union on R&D, they were spending quite a bit but less, much less actually, their R&D to GDP ratio was hovering more around 2% and the Soviet Unions around 3.5 and yet Japan grew much more, why? Because it had this horizontal linkages that has what we call today system of innovation where this new sort of knowledge information science actually could get properly diffused throughout the economy because of the science industry links also because companies themselves had this horizontal kind of teamwork type structures but especially between the institutions. There was lots of dynamic linkages whereas the Soviet Union was a very top down and very defence led and so there was a very little innovation distributed throughout their economy but the fact that they didnt have the science industry linkages that within companies you know, the top guy, never went down to see what was happening on the shop floor hurt the dynamism and their system of innovation and I think thats the big challenge that China has today even though, has. A. Rose:Some sort of mirror image in a sense at least in terms of the advice that you would give the US versus China. In the US you are basically saying acknowledge the government and reward it for being a patient VEC and China you are saying, okay you got the patient VEC covered but you need a whole bloody ecosystem that can take advantage of that and they dont have it yet. M. Mazzucato: Yeah, except that the terminology ecosystem is one thing I was trying to challenge because it is the trendy word today you know, innovation ecosystem and my point is hey be careful if you know anything about biology ecosystem you can be you know, predator or prey and you know, parasitic versus symbiotic and we just dont even have it because we dont engage in this, you know, conversation enough what kind of public, what kind of private, not public versus private then I think and what I'm arguing is that we built very parasitic ecosystems where we have socialize the risk, privatize the reward and this really hurting future innovation but also making our society not very inclusive. A. Rose: Thank you for a better narrative. [music]