Summary The Entrepreneurial State: Debunking Private vs. Public Sector Myths | Mariana Mazzucato - YouTube (Youtube) www.youtube.com
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Speaker 0 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've been calling it the Salon kind of generically, but we finally decided on a name. It is called the interval.
Speaker 0 Basically, the space in between. And we are the construction is just now finishing up. The books shelves are all in, and many of you I assume have been seeing some of the book lists we've been publishing. For the 3000 volume manual for civilization. Book lists have been coming in from people like Maria Papa, Kevin Kelly, Stewart brand, Neil Ga just agreed to do a list of books on storytelling, which ought to be fantastic.
Speaker 0 So those are all coming in and we'll will probably have at least a thousand of those volumes on our shelves. We'll also be soon sending out the the list of the first thousand books that we would really love to get used and donated. So we don't 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 chalkboard is actually a robot.
Speaker 0 And it's now being built by Y glenn in Switzerland who's already built several chalkboard robots we found him kind of at the last minute Thought we'd had invented the idea, but he had. And there's still more up to sponsor a bottle or a shelf, and it will be filled with the gin or whiskey of your choice before we open. And so please please do. We're the last about 75000 dollars with the fundraising that we need to do and then we'll actually be able to pay our contractors as they finish up and open our door. So that will be great.
Speaker 0 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 1 I think is particularly Apr repo for tonight. Basically a 50 year deep space network project that clearly would never have been done with private money.
Speaker 1 Deep space network is basically required to do the kinds of things that we do in space.
Speaker 2 Clearly, if you can't talk to your spacecraft and they can't talk to you. There's no point even sending them out there. A Deep space network, makes everything that we do possible. Imagine landing night, for example, for curiosity without the Deep Space network, there'd be no 1 in there because there'd would be nothing to see. They would hear nothing from this spacecraft.
Speaker 2 No touch touchdown confirm, no cheering, no nothing. The deep space network is what helps us figure out where the spacecraft is. We wouldn't need and get close to mars without it.
Speaker 3 The Deep Space network comprises of 3 complexes around the world placed about hundred and 20 degrees apart. We This ensures us that we are constantly in touch with the spacecraft as the Earth rotate. Were today tracking 33 spacecraft, not only the Us spacecraft, Also spacecraft from other countries. And remember this is not only talking to the spacecraft. We have been able to do radar in radio astronomy, spacecraft And it was the Radar on This montana that actually was used for even the men landing on the moon.
Speaker 3 50 years ago, director of Jp p, Doctor. Picker and Nasa have 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
Speaker 4 We used to use big analog recorders for telemetry signals used a 2 inch wide tape. In the beginning, the first computers we put in, we had 64000 words maximum, And we had to be able to support every mission, nasa missions, other foreign missions, and digital technology interviewers allowed that to happen.
Speaker 1 If you look at the cassini mission, we've got a transmitter about an average of 809 hundred 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 it's a resource to be treasure, but it's a resource that also needs to be nourished.
Speaker 3 We are looking at missions with higher data rate, more complicated missions with more instruments on emissions, who are looking at Optical. Calm and with optical calm. 1 day, we should have streaming videos. You can see real time rather than a simulation,
Speaker 2 seeing our success in, you in almost real time and and knowing right away and seeing those pictures all possible because of the Ds.
Speaker 3 If there was no d deviation, there would be no mission. We always remind the mission. Don't leave the earth without us.
Speaker 5 Don't leave the earth without me. Good evening. I'm Stuart brand from Long Now Foundation. Long term thinking me encourage. And that sounds kinda like, well, that's probably conservative thinking.
Speaker 5 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 ge toward depths here. And innovations usually recur within the 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 at Horizon level.
Speaker 5 That's 1 of the things we hire our government to do. And 1 of the few people who really examined how that hope process works is our speaker, Marian Mats.
Speaker 0 Fran
Speaker 6 Thank you very much, Stuart, 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. Because I think that while we know and while we talk a lot about the private sector, how important it is to drive innovation, to drive growth, to produce the kind of silicon valley type dynamics.
Speaker 6 We have not only underestimated under talked about the role of the state, but actually the words we use. To talk about it, both in economic theory, which I'll talk a little bit about, but also just in common day jargon and the media and also the words that politicians use is extremely problematic and is actually bad not just for the future of innovation, but also for our ability to attack the 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 1 of the worst because we sometimes forget about the previous ones, but worse financial crises, where countries all over the world, the Us, 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 U.
Speaker 6 Us. To rebalance away from speculative finance towards the really economy and so industrial policies we back. It's no longer a bad word. But really, you know, policymakers are also saying that we don't just want smart, innovation led growth, which is extremely important, but we also want that growth to be more inclusive. Less inequality and more sustainable.
Speaker 6 So sustainable over time, 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 act requires massive big creative thinking. And the public sector obviously has a huge role in the policies around that space. Actually and we have a massive crisis. I think today, 1 of the biggest crises is not just the financial crisis, but the crisis in thinking.
Speaker 6 And this is really my objective to, you, nurture at least here, especially later in the question time. Conversation about how we Can actually change The way We talk about the Public Sectors The State's role In this massive transformational process that we need. And just some background, how economists talk about this problem and this is important how it's how economists talk about it, kane, so you probably know John Maynard Cain who was an economist who is known to be probably the most important for actually talking about the role of government. Also had this wonderful quote where he said, you know, practical men and women who think they are completely d devoid of any sort of political. He influence and influence of sort of economic theory are actually the slaves of Debunking economists.
Speaker 6 So economic theory is actually out there determining how policymakers and journalists and also just the common man and woman in the street, often talk about things without them even knowing. What that theory is. And so what I wanna talk to you first here and my first slide is that how economists talk about the role what of the public sector is very, very limited. It's 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.
Speaker 6 And so the government actually has to intervene and fund that. Also when you have different types of positive and network external, when you have again, I'll use the example of basic research, you have very strong positive external. In other words, the spill overs are very high. That's 1 of the reasons why it's also very hard to appropriate the return. So in different areas where you have high spill overs, education, defense spending, clean air, you have not enough private investment and so the government has to come in.
Speaker 6 Okay? Now, there's very little debate about this. Okay? So the reason I speak like, you know, I sound American, but I'm actually Italian and Stuart did a great job in pronouncing my name. Even though when he asked me, how should I pronounce it, I said, pretend on Japanese because then it sounds, you know, which actually means Christmas tree apparently, or something like Christmas during Japanese.
Speaker 6 The reason I sound American is because when I was 5 years old, we came to America because my father is a nuclear a fusion physicist. And that's an area where it's you know, pretty commonly understood that, of course, that's gonna to be government funded because it's you know, once it's actually gonna be discovered, it's gonna to be extremely hard for any private sector organization to appropriate the profits from it, right? Because it's a big discovery, which will be, you known all. Now this is extremely limited view. Okay?
Speaker 6 So market failures of course, they exist. We now know today that they exist more than ever after this massive types of financial market failures that we just had. But it's interesting that in order to actually tackle those problems, know, smart innovation led growth, which is also inclusive, which is also sustainable. It's If you had government that was just fixing different types of market failures, you can imagine it's gonna be quite hard to tackle those challenges. And I have found in my own work, very inspiring this work by Karl Po, he was a soc and sort of historian in between those 2 fields.
Speaker 6 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 decompose it. What he says is that local markets you know, selling kind of fruit and vegetables on the corner of the street and international markets are actually, you know, really pre date capitalism. They've been around for kind of 3000 years.
Speaker 6 But the capitalist market, which is usually what we talk about when we use the word market. It's very recent. It's only about 250 years old. And it's not natural in any way. It was actually in posed by the state, not just by laws, but different types of funding.
Speaker 6 And that book itself. I think is 1 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. 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 it's a very important poker I recommend you read because it just shows that even when we're just talking about the market in general.
Speaker 6 We have to understand that it's actually the outcome of different types of organizations. And this, by the way, it's very important because today, coming back to this problem of short term and long term thinking, we often hear that it's somehow the market which is making particular companies short term and thinking too much about their quarterly profits. But actually, you then look at particular types of sectors, which I'll 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 organizations with types of organizations, government organizations, business organizations and household organizations. So again, 1 of the objectives I have is also to convince you, to 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 to achieve the kind of growth that we want instead of thinking public versus private business versus state?
Speaker 6 So now what's 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's important, but it's only important in this very strict 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, or in fact, these kind of public good areas. Right? So infrastructure, education, research.
Speaker 6 Okay? This was a special issue that was thinking about, you, what's the next big thing after the Internet. They were talking about nano technology, green technology. And they were very explicit. As the economist often is in the editorial section.
Speaker 6 And they said, you know, government... Okay. You you know, of course, we need government. Also just for private property and a proper legal system, but stay in your place because what's gonna, you know lead the revolution or the revolutionaries. And who are the Revolutionaries?
Speaker 6 Well, you are sitting in San Francisco very close to all these revolutionary guys? It's This Steve Jobs is, jobs is, the Zuckerberg, you know, the Facebook, the Amazons, the Twitter, those Steve 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 that went too quickly. What we need government to do is to stay, you know, restricted why because what we want is change. We want d.
Speaker 6 We want the kind of, you hunger and foolish that Steve jobs talked about, but government you know, is not gonna achieve that and if it in fact gets to be too big. It's gonna fact impede that kind of d that we want in order to achieve the smart innovation led growth And so in fact, policymakers, and I talked to policymakers all the time. I live in Europe and london, so I talked to mainly European policymakers, but I find that this... Image is actually pretty international. This image being that you have business, which it's more of been a cage.
Speaker 6 Okay? There's different types of impediments, not allowing it to really kind of roar, Right? So you have a lion in a cage and the role of government besides funding the basics is also to slowly take away these impediments. And so different types of taxes, right, tax incentives, reduction of tax, but also tinkering with whether it's R and D tax or other types of tax incentives, but especially taking away all this red tape, this bureaucracy, this regulation. Okay?
Speaker 6 This view of business as a roaring lion in a cage and government, important for creating the conditions for that lie 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 as something like 14 new types of tax incentives, right? So that's about taking away the impediments and the assumption that then this line is gonna come out. Now, what's very interesting about this quote, which is, again, Kane this quote, John Maynard Kane, who's 1 of the most important.
Speaker 6 Economists who actually thought about the role of government in the economy, right or wrong. It's not the point, but he's 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 a wonderful letter was actually a private letter, no longer as you're all looking at it, that he wrote to Roosevelt adult in 19 38 where I'm not gonna be the whole quote, but he's kinda saying, well, I use this word animal spirits. Right?
Speaker 6 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, have consumption expenditure private business investment, government expenditure, net exports, c plus I plus g, plus x minus n. I, private business investment is the 1 he focused on a lot. He said it's too pros cyclical, and it's also always very volatile. Okay.
Speaker 6 In fact, if you're ever interested in looking at this data, just get a Excel sheet, hopefully, you know how to use it unlike a Reiner in Ro, who we know had a problems with it, but no comment. Was that wasn't very nice. And you actually plot investment, you can get this data from the government bureau Economic analysis website, and you and you just plot it over time, it really is like that whereas consumption expenditure, which is 1 of the biggest components of Gdp is actually quite stable. Okay. It's more or less a mono function of disposable income.
Speaker 6 And what he said is that the reason, you know, well, first of all, that the fact that this eye, is so volatile is the reason you need jeep to come in government expenditure to stabilize aggregate demand. But what was interesting was the word he used to describe I. Right? He said, it's driven by animal spirits. Okay?
Speaker 6 So that's why it's so volatile. So you can't just tinker with tax and interest rates and get it to increase because what animal spirits is or are is the gut instinct about where the future technological and market opportunities are. Okay? And he said, because that's quite uncertain and really uncertain it's not just risky. It's uncertain, So completely unpredictable.
Speaker 6 It's very hard to manage that eye just with tinkering with tax and interest. That's why government has to stand ready. To inject demand in, you know, times of recessions, especially. And in this letter, he's kind of like thinking to himself because this has not been taken up by any of the big can in economists, you know, people like s and k who writes and the media today. I don't think I've thought enough about this question here, which is o dear.
Speaker 6 What if it's not wolves tigers and lions in that cage. But what if it's like a ge or a pussy cat. You know, that's going to be very different in terms of policymakers makers. Now I'm kind of what probably was going on is in his head, because this was obviously a very specific timing in which she's writing, but let me just say what I I'm thinking. You know, what if it is a domesticated animal, they're not a lion in Wolf and Tiger.
Speaker 6 The role of policy is no longer just to take away the impediments and let this lion roar it's actually to get that pussy cat 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...
Speaker 6 There... There's no lack of money. There's just a complete lack of courage to be investing, In the. S, the hoarding rate of the private sector today is close to 2000000000000 dollars in the U. S sorry in Europe it's close to 1000000000000.
Speaker 6 But this isn't just since the crisis. You we have lots of hoarding going on, lack of want to invest. This is a huge problem for policymakers makers, how to unlock it. And if you're just thinking that you have to take away the impediments it's gonna be much harder if in that cage, you have again a durable. Now, Warren Buffett, who is extremely smart man.
Speaker 6 We know because also he's made all sorts of money using this smart. Even though I think often for others, it's been just being at 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 an extremely important quote, which actually supports what kay 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 going to come back to that rate by the way. So remember the year, he actually put up there.
Speaker 6 19 76. Capital gains in the Us was close to 40 percent In in 19 81, It was already 50 percent less than that. And since then has been coming down. I'll come back to this point later. But he says, people invest to make money and potential taxes, so costs of that investment have never scared them off.
Speaker 6 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 spirit. 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 an a very important part of Gdp.
Speaker 6 And where is the revolutionary coming back to that economists, quote, If you want spirit of those investments, Is it true that government is just completely inertial, bureaucratic and only needed to create the conditions for this revolutionary private sector to do their thing. And I think it's 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? That's what a general purpose technology means. A new technology which really radically increases, for example, productivity in sectors beyond the particular area where it emerged.
Speaker 6 And what's absolutely fascinating about all these examples, nano, the Internet, biotech, and I'll give you some data later on the emerging green, if you want space internationally is that what government did and I'll focus mainly on the Us in in these examples, but increasingly it's 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 S. State organizations.
Speaker 6 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. We're not fixing market failures. They were actually creating big missions.
Speaker 6 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 up the Internet before the Internet existed, Debunking Nano the word, nano technology itself came out of scientists who were working within the national Science Foundation, that story. Is very well described in a particular book. And what's also interesting here is that the early stage funds for many of the companies were provided by the public sector. So let me just move on to that particular graph Yeah.
Speaker 6 So, you know, when you think of early stage seed finance is extremely risky in the in the early stage. That's why It's called early stage seed. Finance. And what's striking is that it was often government funding in particular through the small business innovation research program but also the Sb S t, 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 until it was Sb.
Speaker 6 In the case of Apple, it was 500 k, which of the time was a lot. Provided by an Sb grant. Let me just back up here. I'm terrible with slides I go back and forth. But again, coming back to this word revolutionary which that economists start goal used, you know, what makes an iphone a revolutionary phone.
Speaker 6 It's 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 it's, 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 on the new siri voice activated system which on my phone never seems to work. But you know, apparently it's a revolutionary technology. It was all government funded. All of.
Speaker 6 These are the particular state agencies, which you know, it's 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... To the outcome of these technologies. And so of course, someone like Steve jobs was absolutely essential, and there's not enough people like him with a sense of design of simplicity of putting those existing technologies together in a very cool way. That's an extremely important role, absolutely fundamental. We know a lot about that.
Speaker 6 There's that great biography, but not 1 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 gets scared they're like, oh, my gosh. She's talking about the military industrial complex and no we don't like that. Right? And the point is well know.
Speaker 6 You know, that ended up becoming a model, the da type model that actually funded the internet we see that type of organization that type of funding rule actually across different departments today, whether it's health or energy. This is the funding which is absolutely astounding I think in terms of the numbers that goes into... So it's public funding through the National Institutes of health, which nurture a particular area, which is basically life Sciences, biotech and pharma, 32000000000 a year was spent in 2012. Okay. So if we're very worried about our debt to Gdp, well, of course, this does increase debt.
Speaker 6 But if this kind of funding is also fostering growth. Right, which is the denominator of debt to Gdp, this is what's actually needed also to reduce debt 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 percent to 4 percent less than Germany's.
Speaker 6 The problem in Italy is that for 20 years, they have not been spending on these kind of areas like R and D and human capital formation, which means that, you know, the Gdp growth has been almost nil for 14 year or 15 years. And so even with a moderate deficit, the debt to Gdp, if the denominator is growing at 0 the and the numerator is growing even just at 3 percent to 4 percent. That ratio by definition can always almost go to infinity. Now what's interesting also about this Nih funding, again, coming back to the word revolutionary is that different studies including a great book by Marsha Angel 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.
Speaker 6 But instead of just me too drugs, slight variations of existing drugs. So it's been fundamental to fostering change, d, revolutionary innovations within this particular sector. Now I call I called my book, the entrepreneurial state because entrepreneurship is not just about setting up a company. It is. In fact, doing what I've been talking about, which is the ability and willingness to engage with real risk and uncertainty.
Speaker 6 So if you think of any sector in terms of the technology, and market risk. The point is that it's that upper right hand quadrant, which is often completely starved of private finance. And I'll show you later a figure with 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 as in terms of capital intensity on the vertical axis, technological and market risk on the horizontal, the upper right hand quadrant is where we don't see business today entering in the green space. Now 1 of the issues that the economists there was thinking about was, what will be the next big general purpose technology What's going to be the next big change.
Speaker 6 If we think of Silicon Valley, close to this place where we're talking today, some of the big changes are in fact you know, being engineer today by companies like Tesla, Motors. Tesla Motors received a 500000000 guaranteed loan from the Obama administration. It's the same amount that Received. We all know about We don't know much... Well, many people don't know that Tesla also received the exact same amount of money.
Speaker 6 When I say innovation is uncertain. I mean, it's really uncertain. And for every Internet, you have 10 concord. And concorde is actually a bad example for a failure because if you actually look at all this spill overs that happened from that publicly funded experiment. It was actually quite successful, but the plane itself was not a success.
Speaker 6 And it's often used an example of government failing, you know, trying to get too involved, picking winners. And, you know, what I've shown you up until now, you know, Apple was picked of compact was picked, the Intel was picked, The Internet was picked, Gps was picked. It's not about weather government should be picking, but how it does it. And how it also a regulator is able to reap in some reward when it actually succeeds in order precisely to fund losses. So again, looking at green, which many of us are hoping is really going to be the next big thing.
Speaker 6 It's very interesting to ask, you know, who's funding what in that green. And so yes, that's the upper right behind quadrant is completely being starved today. For example, private venture capital. And what's interesting is that it's not a lack of money, In fact, the whole sort of finance debate is interesting because we often think there's sort of a lack of money and I just mentioned before, in the private sector, there's plenty of money is just not being spent. We also have plenty of venture capital.
Speaker 6 It's just, you choosing particular today. It's not actually engaging in some of the more difficult areas. Why is this? Because the venture capital model itself is based on the exit. Okay?
Speaker 6 You want returns in about 3 to 5 years, you want the exit to happen in that time period, and increasingly through an Ipo and initial public offering. Now that's fine for particular areas. It's not fine for the areas like Clean tech, like Nano, like biotech, they take 15 to 20 years. That's the innovation cycle. 15 to 20 years.
Speaker 6 And what's interesting and I will tell you them the capital gains story that warren Buffett was talking about, the reason that capital gains fell, so drastically, 50 percent in 6 years from 19 76, to sort of completely dehydrated because I've been on a plane and very jet lag. By 50 percent in 6 years was actually because the National Venture Capital Association, which formed in 19 76. Lobby government extremely hard in that year started to, saying, you know, where the innovators? Where are the entrepreneurs, reduce our capital gains tax we will invest, and they were very successful. Entrepreneurs I do lots of different studies of innovation at the sector level and also at the industry level and national level.
Speaker 6 I started looking at, you what do studies actually tell us about that relationship between capital gains and an investment in innovation or even investment in general, and there's no relationship. Because precisely because of what Warren Buffett was saying. If you want to invest, you will invest if you think that's a good opportunity. The only effect that capital gains tax has had in in reducing to the level it has, but also within the capital gains tax the particular details is actually has been to fuel inequality. In the Uk, when they try to foster silicon round.
Speaker 6 That's what they call it, in the east of London. They... 1 of the first things they did and this was actually a a labor government that did it. It was Gordon Brown when he was the treasury, the head of Treasury for Tony Blair. They thought we need venture capital.
Speaker 6 Right? This is the the secret to Silicon Valley. And what they did was they reduce the time that private equity has to be invested. In order to be legible for tax reductions from 10 years to 2 years. Okay?
Speaker 6 So when I say that venture capital is short term. It's not that it has to be short term. By h up its role, we have actually in both the. S and the Uk short made it increasingly short term. Okay?
Speaker 6 That particular change in the Uk actually rendered venture capital, more short term. What's interesting is that as private finance has become more short term, 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 increase. Okay? So the Bloomberg new energy finance is a database.
Speaker 6 Where you can actually look at the entire world's public and private types of finance in the green space. And in it's 20 11, I remember the figure. If you took all of private finance in the world. So it's corporate, private equity, venture capital and stock market. It was 11000000000.
Speaker 6 And then just a particular type of public finance, so not like Department of Energy, Arp e type stuff. Just 4 public banks. Okay. So these are state investment banks. It was the German k, the Chinese China development bank, the European investment bank and the Brazilian development bank, it amounted to 80000000000.
Speaker 6 And what's interesting is that this is new, okay? Because it used to be that these banks, this this data here in particular is the k w, it's a German state Investment Bank. These banks used to basically do what Cain said they had to do, where Cain said, you know, the role of the public sector not to do what the private sector does. What is a private sector does? Is it invest too much in the womb too little in the bust, So what the public organization should do is be counter, not pros cyclical.
Speaker 6 So that used to just focus on this counter, 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're increasingly seeing in the next big thing, is the role of these public banks, directing, so picking, directing this counter loans and dis disperse 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 and the German and the European investment banks.
Speaker 6 Of course, other countries do have state investment banks. I'm talking about the mission oriented ones, which Both the German government and the Chinese government have a very specific mission around green, the that China's 20 20 goal in fact is to produce 20 percent energy for the entire economy from renewables. And this China a development bank has been playing you know, a da type role, picking, particular types of innovative companies, including, by the way, Huawei, a which is number 1 today in the telecommunications. It's a number 1 company even without the Us market. It hasn't been allowed to enter the Us market.
Speaker 6 Received a massive loan from the China development bank. But if you look at these figures are absolutely astounding. Particular companies receiving loans and the billions. And this is why it is often accused of being anti competitive. Okay?
Speaker 6 It goes against the competition rules. Which is actually quite difficult because if it's true, and I would argue it is true, and this might be something we debate later. If it's true that private finances is retreating, from the real economy and I'll show you a figure later also proving it. Then you and if innovation takes a long time and doesn't just require any type of finance, but actually requires this long term committed patient finance, then and if innovation is you know, the way that firms actually compete. This was Sc Point, by the way.
Speaker 6 Sc Peter said that all of neo classical mainstream economics is very static and it assumes that you know something like innovation can only be talked about in terms of imperfect competition. This would be a whole other talks. So I'm not going to go there, But the point is if in modern capitalism, firms compete through innovation. If innovation requires as long term patient, committed finance. And if that type of finance is is increasingly not found in the private.
Speaker 6 Sec, which has become to financial or short term a speculative color what you want. Then it's quite natural then that this kind of finance will have to come out of the Da types, the Nih type, the Ns nsf types, the China development type institutions. So what does this mean for competition rules? Know, this is a big question that competition authorities actually have to grapple this. The nd, this 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 with Absolutely fascinating about this bank is that it's actually achieved what Da has achieved in terms of attracting talent.
Speaker 6 Right? We often hear or even just think of the Department of Energy in the U. S. Run by a noble prize winning physicist, Steve Chu up until recently. You know right serious brain guy coming in, bringing a level of vision, d and talent, which often we think is, you know, not normal if you want for a public sector institution run by a bunch of boring bureau.
Speaker 6 Well, in Brazil, if you, you, if you a top economists coming out of 1 of the Brazilian top economics departments or increasingly coming back to Brazil by say, harvard economics This is 1 of the best jobs you can get is actually to go to this bank, and it's a public bank. It's not a goldman Sachs bank. It's very hard to actually do that Now. This I don't have time now to tell you how they've done that, but how to actually bring that kind of talent expertise and d into these public sector institutions is the challenge. When you walk into Arp e, which is you trying to do in energy, what Da did for the Internet.
Speaker 6 It's actually pretty cool. I mean, it does feel at Google. There's a bunch of nerdy geek and know lots of energy writing on Blackboard talking to each other, bringing in tops scientists from places like Norway and Denmark, which by the way are 2 of the countries that are investing a lot in renewables, it is a place of experimentation where failure is welcomed because you know that for, you for every tesla you will have 10 cylinders. And know this again, is the point, I won't read it, but this was a very nice quote from the global wind Energy Council. Where they're very clear that, you know, it's what kind of finance we need and it's increasingly, this was just a study that they performed across the world.
Speaker 6 What kind of institutions are actually financing, the green revolution and they concluded that it was these different types of public sector institutions because the private financial markets were so short. Term. Now, this is important, Right? Because we're saying we need these public private partnerships, but we're often just talking about the public side is Debunking the private side. I mean, how lame is that, Right?
Speaker 6 I mean, is that what I just described there der risking the private side. Now. These are examples in countries that have been successful. And, of course, the Us whole silicon valley type model is 1 of the examples that many countries around the world are trying to copy. You know, this is taking on risk.
Speaker 6 Right? This is being courageous setting these missions, mad on the moon, green economy, Internet, and and taking on that risk. Okay? And attracting because this is fundamentally. Just set it before, but it'll repeat it now, attracting the kind of big thinkers who are willing to engage.
Speaker 6 In those missions. But usually, we talk just about the public and private this in this very static way Now I've already mentioned that 1 Of the problems here is that the Private investments today are falling. We don't have. I mean, another sort of provocative way to Put it We do not hack in the green revolution, the kind of commitment in long term that we had in the It revolution in the private sector because Xerox Park 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.
Speaker 6 This is Bill Gates, you know, who is 1 of the 7 Ceos in this American energy industry council. And you know, Bill Gates is a smart guy. He doesn't say, you know, you he he he doesn't say government get out of the way, you're big medal. He's very specific here. He's saying, hey, government is important.
Speaker 6 In fact, you know what? We follow. He The private sector follows after the government has taken on the big risk. He's very specific here though, notice he's 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 we'll forgive him just for that little.
Speaker 6 Air. But the problem is, you know, as I said then American Energy industry council with 7 companies. And because I sometimes have fun with thinking about these issues. I started doing some calculations with a colleague of mine, Bill on. We calculated how much those 7 companies thinking that are represented in the American Energy Industry Council had 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, saying, no, we shouldn't cut back government.
Speaker 6 We need more government and how much we want government to be doing the Arp eat type projects. And they ask government to spend 60000000000 more a year in clean tech and to give additional 1000000000 to Arp, you know, it was very visionary. But themselves we're not actually c investing. And again, you know, where are the Xerox parks in that space. And why is this a problem?
Speaker 6 And this is the financial I was mentioning before? Because these share buy backs, okay? What they are is is is focusing on boosting stock prices, boosting stock options to boost executive pay. In the end. If you ask companies, In fact, let let me get that to a second for someone to tell you what's on the screen.
Speaker 6 This is a proxy for when people say we are too financial. What do they mean? They mean that the pace at which the financial sector has grown, has completely out pace the real economy. This data here's for the Uk. For the.
Speaker 6 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. I can barely see it. As a percentage of gross value added has out pace the real economy. Which is basically that black line everything, but finance and agriculture. And this is by the way, 1 of the reasons that industrial policies is back, because then policymakers makers say we have to rebalance away from finance away from these terrible derivatives, credit default swaps, hedge funds, towards the real economy.
Speaker 6 Right? So towards life sciences, It, the creative sector. What they don't realize, is just how financial the real economy itself has become. Right? So this is 1 of the points have been making, which is the private part of the public private partnerships has not been investing big time as it used to.
Speaker 6 This you should worry about the black line there, that's showing you the amount of repurchase so buy backs to R and D spending. Okay? So many companies I shouldn't name them, but I have a feeling that my next slide, I do name them. I might have to go quickly because I'm not sure who your sponsors are. Have been spending things you know, well, a particular company have in mind has spent more money in biotech on buy backs in R and D in every single year for the last decade except 2004.
Speaker 6 The total amount of buy backs that the Fortune 500 companies have spent in the last decade, 3000000000000. When you ask these companies? Why you doing that? Why aren't you spending an R and D? Why aren't you spending on human capital formation?
Speaker 6 They say, because there's no opportunities. This is the right thing to do. You know, when there's 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 phenomenon is the worst, are health and oil. There's no opportunities and renewables.
Speaker 6 There's 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 back, guy yeah yeah. I'm saying this is part of the debate that we should be having.
Speaker 6 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 going to try to foster also more of the Xerox park type investments and not allow here. Let me go quickly over that 1. Because I did I did realize I recently gave a talk and I had all the names of the sponsors. And afterwards, they were, like, we're gonna have to take that off of your slides later. And I think this will be easier for you and I'm kidding.
Speaker 6 I'm kidding... I'm kidding. Okay. Let's go back. Okay.
Speaker 6 Good. By the way, Apple is really interesting. Because under Steve Jobs, Apple did no share buy backs. Okay? When you look at particular sectors of what I was getting.
Speaker 6 To be at the beginning when I said markets or outcomes. If you look at telecommunications, as I mentioned before, Huawei number 1, no share buy backs. Eric, number 2, no share buy backs. Cisco, massive, share buy backs. Okay, These are choices that companies have to make.
Speaker 6 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 on my first slide? This whole thing about value creation and value extraction. Well, 1 of my key points is that by completely dismissing and not talking about the role of the public sector.
Speaker 6 And by that, I mean, the tact spares that are in fact funding all these different agencies, the Da, Arp es, Nsf, Sb in the. S. But in these other countries, these 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 socialize the risks, but privatized their rewards. You know, Google's algorithm funded by Nsf, We know how much Google pays back tax to the to the government. Apple.
Speaker 6 It's been in the in in the headlines. Right? Amazon, These are companies that have, you know benefited extremely not just from the roads, not just from the educated workforce, but specifically from government taking on mac. Of risks, in particular technologies that their profits today are arriving. And, of course, these companies themselves have done amazing things as the example I gave of Steve Jobs, But if it's true, if it's true that the government played a pivotal role in fostering these technologies through its ability to think in a long runway, then who's gonna fund the next round.
Speaker 6 Right? Do you know what tax was the marginal income tax was under Eisenhower? Was not a communist. Close to 90. Yeah.
Speaker 6 I mean, this was a Republican general, who Now I'm not, of course, advocating that we should go back advocating that we should go back to that kind of tax rate. But the point is how those tax rates tax rates fell. How capital gains tax fell. It actually c evolved with a discourse, a narrative about who the innovators were, Who the entrepreneurs were. Who was fundamental for the knowledge economy?
Speaker 6 And in fact, those reductions in tax today, and I don't want to talk so much about the rate of the tax, because that's not the point. But this discussion about government way and do things like R and D tax credits is is not evidence driven. I've studied a lot. These R D tax credits There's almost no additional. In other words, they don't make R and D happen that would not have happened anyway.
Speaker 6 They do have an effect in countries like the Us, where you do have these huge public funds which are then driving the investments, so the R and D tax credit is like icing on the cake. But they don't make the R and D happen. Okay? And this is also a big problem in Europe by the way, where we're reducing. We don't have public labs anymore.
Speaker 6 They've all been destroyed. And then we do, know engage with these R and D tax credits and venture capital thinking that big things are going to happen in the scratch our heads and why didn't it. But quickly because I don't want to take up too much time. Yeah. I need to finish in about 5 minutes.
Speaker 6 This whole risk reward thing has become sort of front page, right? Front page also in the streets. This issue about the 1 percent, the 99 percent. This graph here just shows you again, it ain't a finance problem, There's plenty of profits out there, There's 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 chart.
Speaker 6 Especially if you look at her over the last 100 years. Now the explanation that we usually hear about this, in terms of, you, innovation, inequality, some people being left behind, yes, profits are soaring, but that's because, hey, some people have some great ideas and they're making profits from that. And others, yes, workers are, you know, fundamental for the production process, but those who don't have the right skills, are getting left behind and hope so that's fostered very important. In fact, discussion about retraining and how to allow those left behind to catch up However, is that really what's driving, you know that difference? Is it perhaps something else.
Speaker 6 I mean, I would argue that the skills problem, which technically economists talk about this in terms of the skill bias of technical change. Explains sort of the middle problem, Right? So the problems that we have in achieving middle class type jobs that are of of the type that we used to have Don't wanna go into the the skills problem because it is quite complex. But the 1 percent 99 percent problem. The fact that like 50 percent of the gains in the It revolution era have gone to the 1 percent is that because of skills.
Speaker 6 What I would argue is that in fact it's about value extract. And 1 of the really interesting facts about innovation, Right? By people who actually study innovation. So it's a collective process It's very uncertain It's not just risky, but it's also cumulative. Okay?
Speaker 6 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. It's comm cumulative.
Speaker 6 And what we have is in fact, because we haven't had the right story about who is actually contributing to the process. We've actually allowed particular types of agents, including large venture capital companies to enter late sort of thinking, you this is time on the horizontal axis, halfway through, and reap not just their marginal contribution. Okay? The rewards compared to the actual risk they took, but actually reap the entire integral underneath that curve. Now what to do Okay?
Speaker 6 Well, there's all sorts of things 1 could do. And I don't want advocate any 1 particular measure. In fact you need a lot of lawyers in the room to do that. But we haven't even had the debate. Okay?
Speaker 6 I mean, our taxes enough. Forget even just the fact that they've been falling and that we don't have the right. Necessarily I would say political atmosphere today to even talk about tax. So let's just forget tax. Let's just assume that it's...
Speaker 6 It is being collected. Everyone's 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 tens cylinders. That's a massive failure rate Right?
Speaker 6 Venture capital has it also. Venture capital investments, something like 9 out of 10 fail. But the 1 winning investment. Right? So for klein perkins that gene tech investment more than covers the losses and also covers the next round.
Speaker 6 We don't have that for government. Why? Because we haven't admitted that is a venture capitalist. By the way, if you look around the world there some countries where this venture capital role of government is much more obvious and 1 of these is Israel. But in the Us, you know, 1 of the funds has actually come out of the Cia through In Q tel.
Speaker 6 You guys probably know that because you're you're... 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 will, yes. In fact, the touchscreen display investment also before that I mentioned was also funded by the Cia, not through and Q tell. Anyway, you know, why not retain some equity?
Speaker 6 Ct, public funding agency in Finland that invested in early stage note. You did retain equity. And made a lot of money from that investment which then funded the next round. The fact that then Nokia you know, has has has not been too smart and reacting to the smartphone that's... That's a different problem.
Speaker 6 That's not because of, receive that money. But these state investment banks, for example, what's very interesting is they obviously retain, equity because they're investment banks. But we also have a real issue with the patent system, The Ip system. We have the Bay Doll act which was a good, I think policy, which a 19 80 allowed publicly funded research to be patented, which it couldn't be before that. This was a measure that was thought up in order to enable more commercialization, get science out of universities and actually into producing products that in fact foster the whole biotech revolution because many of these patents actually then became spin outs.
Speaker 6 But there's a there's... If you actually read that act. It's a very big act. It actually says in there, But, of course, we have to make sure the taxpayer doesn't pay twice. Right?
Speaker 6 That be kinda of stupid. So 1 way to do that would be actually to allow government to have a say on the prices. It's never executed that right. And I think also the reason is because of this this again, this discourse we have, right? If the role of government is just a foster innovation in the private sector create those 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.
Speaker 6 Well, increasingly in fact, if you go to some of these big conferences at the financial times organizers for the pharmaceutical industry, They are very rightly saying we're going to close down our big R and D labs in our private companies because, in fact, the pharmaceutical open innovation system is allowing us more and more to get the sort of niche radical ideas either out of these small biotech companies or when they're honest out of this big Nih funding. In fact, Pfizer recently closed a plant and sandwich kent and moved to Boston, not because of lower tax or lower regulation, but because of that Nih funding. Anyway, they're saying quite openly that they're gonna to close down these r and 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 and D is so uncertain So 1 question would be as you are outsourcing increasingly that are to the public sector then how much, how much uncertainty do you really have to act actually be still charging these, absolutely very high prices, which make the taxpayers that funded their research, not even be able to afford it.
Speaker 6 Even in countries with a welfare state, it's still the state that then funds the welfare state, so it's still paying twice. Yeah. So income contingent loans, we do it for students, Why not for companies? And, you know, how again to do this it's very complicated, but, hey, if you can send a man or a woman to the moon. We can figure this stuff out.
Speaker 6 You know, Google, again, this grant that was given to the 2 Google guys can who then, that ended up with the... Sorry, the grant resulted in the algorithm behind Google, there still could be something even in those grants. This says, you know, this is just a grant do your thing. But if it results in something that leads to x billion, then over time to something we'll come back to, let's call it an innovation fund. To fund the next round Now Again, I'm putting in a very simplistic way.
Speaker 6 Of course, it'll be easy to find a fault with how we just said set it, but the point is let's have that conversation. And of course, by having 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 to be 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 wasn't expecting it In fact, talked about the huge cuts that are being made to the public research system in the U. S.
Speaker 6 And the name of reducing the deficit and keeping things tight in order to foster growth. Austerity is going to help us overcome the crisis by smelling down government that has actually resulted in a 40000000000 reduction in public R and D funding. So but it's also going to potentially make this growth more inclusive, Okay? Not just smart, not just more sustainable but also inclusive. There's been you lots of talk about the public's school system in Silicon Valley, you, how wrong is that that a place that received so much direct funding both for the companies and the technologies hasn't resulted in a more equitable and inclusive public education system.
Speaker 6 Now When I say it's a disc decisive battle. By the way, there's another great book by Tony Jets. I don't know if you've heard of him. The book was ill the land. He actually says, He says, let's look at the last kind of 40 years of the way we talk about the state and how that's c evolved with kind of, you know, bashing away at the notion of the Welfare state and he talks about this also globally.
Speaker 6 And he says, you know, all of a sudden in the seventies, This word administration pops up. That didn't actually exist before to describe what government does. And he 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?
Speaker 6 Who would want to go work? In the government. If that's all government is doing, regulating, regulating, administering, meddling. Right? So actually how we talk about this state completely then affects the kind of people and talent and d and ability to think big.
Speaker 6 In this missionary way or missionary sounds bad mission way. And and I'm not gonna go into all these words, but you might have heard of some of them. Right? I mean, crowding and, crowding out. We often hear that government when it gets too activist as crowding out private finance.
Speaker 6 But within these pre particular areas I've been looking at, you know, whether it's green or It in the beginning of It. What the government did was not even just crowd in, particular which is a usual ka defense of what government doing, which means that when you have underutilized capacity, if you have government investing, through the multiplier effect that increases Gdp. So what you're actually doing is increasing the amount of total funds both for public and private. Right? That's the usual kain in defense of why you need government to actually invest in times like this in a recession.
Speaker 6 What I've just described 4 in these different areas is government doing much more than just crowding in. It's actually investing in new areas and frontier areas which create a new space which is kinda like, I mean, there's no word for it I just call it d in, but the fact that we don't have a word for it, actually also then affects how we evaluate the, how we measure the performance of these investments. We actually don't have indicators that can describe to us what government did, so it's much easier and 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, that which also gets accused of crowding out, private broadcasting because it has such a big share. The quality of Bbc programs, I don't know if you've ever watched them, which but it's pretty high.
Speaker 6 But what's interesting in lots of these economic analyses of the Bbc and its potential crowding out of the private broadcasters, the the economists writing the in this case an actually economist, not the act economist magazine, they will say, but, of course, you know we're economist. We we can't have it norma or subjective interpretation of the quality of the program. So we're just going to keep quality constant. You Right? And so, you know, Sky, rupert murdoch or whatever.
Speaker 6 You know, we're gonna assume that the quality is just something we can't measure. Now, it that's 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 risk space that the public venture capital in these cases that I'm thinking of these were Scandinavian, public venture capital funds we're investing in a very different risk landscape with much higher uncertainty that should fact compare the returns. If you don't have a measure for that, you're going to bias it from the start against these public investments.
Speaker 6 Der risking, I've already said, let's change that word. You share the risks, and hence you share the rewards. And again, that will affect how we cracked these, 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 market failure. You know, the the more you're actually also affecting the kind of person that wants to go into that particular organization.
Speaker 6 If you are someone who wants to think big and 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, it's gonna be more exciting to go work in Google. And Goldman Sachs than 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're 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?
Speaker 6 The answer has been because they haven't had this sort of analysis of understanding that venture capital ser a wave of state investments. The answer has been we have to increase the market and reduce the state and that is completely what we're witnessing today. It's not just since the crisis. If you look at the innovation discourse in Europe, it's about in order to have the silicon valleys, we need to reduce the size of the public sector, we need to foster 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 what's interesting, I don't know if you know this terrible word pigs, I'm allowed to say because I'm italian, Right?
Speaker 6 If if I was a German, this wouldn't be good. Right? Because, you know, the Italy, Greece, Spain, Portugal, they're are pigs. This is a Goldman sachs accent, it was just literally the words and we actually increased it to Ireland as well, so it's no longer a pigs, which is a bit less politically incorrect, But these are the weak these are the weak eurozone countries. Okay?
Speaker 6 And as you know, we often think, oh, God, you know, they they are, you know, holding things down, the German wallet is going to be financing them during the bailout outs, What we don't say is that, these countries That's 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 and 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 you know, that's why you have this completely skewed competitiveness in Europe and we don't say that what they should be doing is for example, what the Germans did, which was not tightening their belt.
Speaker 6 It was actually spending on the K, this state investment bank. It F offer Institutes, which are these science industry links that are fostered in these institutions called the F Hof Institutes very well funded. Very high R and D to Gdp, but also directed towards these big missions like Green. We don't hear that. That's not the meta and that we're, you know, that's not the analysis.
Speaker 6 The diagnosis, and hence it's also not in the medicine and what we have today is countries like Spain. And having cut their publicly funded R and D spending by 40 percent since 2009 in order to meet these new fiscal compact criteria. This is not only bad for Europe, It's, of course, also bad for the. Us. Because this European crisis will which will continue as long as you have this very different competitive.
Speaker 6 Levels will create of crisis because you can't have 1 currency for an area that has such different levels of competitiveness. I really should wrap up and I'll just say, think again.
Speaker 5 I a question is you were talking things sort historically because you've looked at U. S. And Europe over the past number of decades. And I noticed I was around for some of the early Arp when it was Arp On Da, Advanced research projects agency within Department of Defense, later limited to da defense, blah blah blah. So it could be completely innovative then in that was a outgrow of first the war, the and eisenhower ears and all and then the cold war, and then space rays and all that sort of thing.
Speaker 5 And the information technology, sector that they were the pushing, then, you know, created basically computers, time sharing Arp which Pm, which became Internet, which became the world. There was a war framing there.
Speaker 6 Mh.
Speaker 5 And you... Herman khan used to say, 1 thing you really need a nation for is a war, and this is 1 of the reasons nations kind of like wars because they justify themselves. But that's backing off. And the you know, the cold word died down, the piece dividend, It sounds like part of what you're describing is the piece dividend. We don't need the nation to defend us from these great big scary thing anymore.
Speaker 5 So let's just go count on the private sector doing all the fun stuff. Is that any way the a sense of what you see has happened. And if so, assuming we don't want a war, do you crank up the belief in government again. Is that the narrative rethink that you want?
Speaker 6 I think there's 2 issues. The first is that looking again, for example, in this green space, those countries. Like Germany and China that are investing massively, have actually framed it as a war. We have, you know, climate change is a war, There's a war to be made had. Also, if if you read the National Institute of Health website, they they talk about as a mission, Now they don't phrase it as a war.
Speaker 6 But and, of course, in the U. S, there is an initial also with the healthcare system, which is obviously different from the healthcare products. That's 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 which actually then brings the drugs to the people. But, you know, if you read that website, it's very it's very serious.
Speaker 6 Right? I mean, there's a mission around healthcare care. So the question is how governments, I mean, I'm thinking it almost from the other side, think strategically and say, if we wanna fund this stuff, we actually have to... Create a narrative around security interests. Right.
Speaker 6 We need to invest in energy in order to maintain national security of our energy, But if you read, you know, be in between the lines has talked about as a. But I would say in another words youth unemployment, You know. The aging crisis, the demographic, crisis we have today in many countries, which is putting at risk, you know, the kind of pension systems that people have relied on, that can be phrase. 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 Should be require then the government agencies that are investing to see themselves.
Speaker 6 I don't want wanna say at war, but should part of a a big battle. And instead the narrative, which has occurred, which I don't think has been necessarily how you mentioned, but I think it's actually been very ideological. There's been lots of profits been made from this particular narrative. Right? That only some or the innovators and others are just kind of there other lazy or at best fixing conditions, that narrative has made it much more difficult for government to present itself as a creator and an investor in these missions.
Speaker 6 And then the question is why has it become so profitable, whether we talk about der regulation, but again, I don't want us steer the conversation too far away from your question, but there have been particular policies, which have made it easier. Sorry. Should look at you guys who have been making value extraction activities rewarded. Over value creation activities. I know that sounds really abstract, but that's basically what we've had for the last 20 years And that has I think come out of policies, which have been driven by a very narrow understanding of who the value creators are.
Speaker 6 And again, the National Venture Capital Association was very explicit. They said, we are the value creators reduce our tax. It wasn't just saying, you know. This is good for the...
Speaker 5 Where do universities fit in this story? They're not exactly government and they aren't businesses. But a lot of the R and D of great consequence goes on there. So what's their role here?
Speaker 6 Well, they a huge role, but it's it's very important to be specific on what that role is. So... And sorry, if I keep talking about Europe, but hey, I lived there. So I also see a lots of mistakes that are made there, but in trying to cost be the Us system, what they're doing in Europe is making universities increasingly like businesses. And they don't get that actually what was very successful about the Us system was that you had and I know it's also changing here, but I think in a less drastic way.
Speaker 6 You had very high level blues Sky properly funded research done in universities, and early stage technology development done in companies. Then this big notion that's somehow the problem is commercialization and technology transfer and that's the big thing that's missing. Has turned lots of universities into these kind of technology transfer offices, which in Europe at least is also being... How do you say? Specified in terms of also creating spin outs.
Speaker 6 Right? So Cambridge University is, you know, trying to create spin outs. There was no spin out policy in California. Spin outs happened 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 course, the linkage between them is actually quite difficult and it's not enough to say universities are important because in fact, you can get a very distinct university system by not actually again, talking about it in a very particular way.
Speaker 6 And again, even though in the U. S. You have lots of optional private universities. And in Europe, all universities are public basically. So Cambridge and Oxford are state, they're public universities.
Speaker 6 But in the U. S. Many private universities, of course, like Mit are massively funded by the private sector. Sorry, public sector. And and so just the notion, you know, when you say universities aren't really public, actually, if you look at the sort of big science in places like Harvard, Mit and and other important universities it's stein occurred.
Speaker 5 Here's interesting 1 from David We. So says global global business. Can invest and produce in a way that address international opportunities. They, international corporations or international. Governments generally don't do that?
Speaker 5 You're focusing on governments very much. Are there means by which governments might join together, especially on global issues like climate change that have a... That they can in a sense think and act globally the way some multinational corporations can think and act globally.
Speaker 6 Yeah. Well, I think, I mean, again, if you think of the only public lab left in Europe practically Cern? It's international. It's European wide at least, and it came out with Html. You, the language used by the web.
Speaker 6 And these public funding agencies in the green area they are national in terms of the actual agency, So the China development bank is Chinese, but the investments is making are global. So it's not just about international organizations collaborating, Mh but also particularly active national organizations that's see the global climate change problem as a global 1. It's very interesting how they're seeing their own investments as global investments. By the way, what's also very interesting is that those few countries because it's a handful it's a handful that do this mission oriented stuff. It's not state.
Speaker 6 So I'm not talking about government, talking about particular countries that have had mission oriented state agencies, It's very interesting to see how they also tend to see other countries not as threats, but opportunities. So Denmark, which is 1 of the most act. In both wind and solar has become the number 1 provider of high tech services. So they're not just doing the products. So the services to China's green economy.
Speaker 6 And China's spending 1700000000000.0 on its greedy economy, you So a small country like Denmark, which has sort of been very active and innovative in that green space is benefiting from the Chinese investments.
Speaker 5 So this is a I suppose an advantage of there being a lots of different nations that some nations like Denmark can bear down and specialize and sort of become the market leader worldwide in that domain. Is that part of how the international system plays out here? The nations are essentially competing and each finding their niche and and jamming had to lead that niche?
Speaker 6 Yeah. I mean, don't forget the innovation another sort of asked that. I mean, I mentioned, you know, there's collective it's uncertain. It's also path dependent. It's also very, you know another aspect of the path dependencies, not just as comm cumulative aspect, but also that You know let me just give you an example.
Speaker 6 Carpets. There's this wonderful story that Paul K tells in a book he wrote called pe prosperity. Carpets, when they started to be made, and I don't know anything about carpets, I'm just remembering the words to use in a tu way. Asked me was the in the middle of the eighteenth century. And all of a sudden, they all started being made in this place called Dalton, Georgia and are still today something like 80 percent of carpet production is made there.
Speaker 6 Why? Because there was this started pool of labor of these young girls who knew how to make tu beds spreads and and during when they would have birthdays, they would give each other these That spreads And when Carpet started to be made with this tough technique because that labor pool knowledgeable pool of labor was already there Somehow people figured it out. The carpet people and and started producing them there And it's still today, it it it it has this niche and that's because there's very strong sort of dynamic returns to scale. In other words, because it started there, then all the innovation ended up happening there. But the same thing you can say about the internal combustion engine.
Speaker 6 It wasn't a x ante, the the best engine. There was 4 or 5 different engines. It 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 that's because of the dynamics.
Speaker 6 It's the same thing with countries. Germany, almost by chance started to specialize in machine tools. And it's 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 we still have an internal combustion engine today in our cars is because we also get locked into, right?
Speaker 6 These technologies. That's also the example of people I think give of, the keyboards, the fact that we're still using today The q keyboard is completely mad. Anyway do people know the story. Oh yeah Yeah. Okay.
Speaker 6 So you. But it's the same thing with countries. The point is that these initial advantages because innovation is so cumulative cumulative impact pen. It's actually, very advantageous to get the first mover advantage. And so the fact that Denmark, Germany you know made those investments.
Speaker 6 They still are today. To the most competitive in these areas, even though 1 of the issues is it should be a portfolio of investments. If you just choose wins, you're going to be extremely susceptible to changes.
Speaker 5 Well there's scale advantages being a big country versus a small country? Either way?
Speaker 6 Well, Yeah. I mean Denmark is a very small country. The U. Us. Obviously They
Speaker 5 Only had to get 6 people to agree to take over that niche. And we.
Speaker 6 Yeah. I think the biggest difference between countries is not the size. I mean, again, just think of, you know, Singapore or you take Finland Finland was a actually pretty basket case country up until the mid eighties and then it made a very explicit decision. To become an innovative country and invested massively increased its investments in education R and D, it developed agencies like Ce. Israel the same.
Speaker 6 You, I don't want to say overnight, but these were decisions of we want to be innovative. We have to set up these kinds of agencies which will foster.
Speaker 5 So those are a question for Alex, Are there are countries that are doing a great job of this kind of balance you're talking about. You mentioned Denmark, Israel. And others and are Are they paying attention to each other the way businesses pay very close attention to each other and and, you know, watch what's actually working. Is that the case here?
Speaker 6 I think so. So I mean, with for example, these estate investment banks, I know there's lots of... Conversations between the Chinese, the Germans and the Brazilians in terms of how they are operating, But I think it's See
Speaker 5 more about that. How those conversations occurs? This conferences or visiting each other's are Of
Speaker 6 a joint investments. So in this global wind energy report that I mentioned in both wind and solar, they often do make joint investments in in different areas. Mh These aren't 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 so there is a they're trying to foster learning, But I think 1 of the most interesting learning processes is organizational. So I know that you know, the some of the scandinavian countries we're very interested in how Da was set up in terms of these kind of 5 year I don't you you don't call it succumb here.
Speaker 6 What do you call it? When you leave 1 job, but you hold your place and go work in Da for 5 years, that kind of organization, k innovation if you want was done, so that you would get people coming in to Da or Rp today and again, welcoming failure because their time there was going to be for 4 or 5 years. They weren't seeing it as a lifetime job and so they were able to sort of engage and and experiment and do the whole trial and error thing in a public sector organization. I know that these types organizations like Ce or like the Ts in the Uk have looked very closely at the Da model beyond just, you know, funding innovation. It was an organizational innovation as well.
Speaker 6 And I think that's 1 of the biggest challenges for these public sector organizations to learn from the organizational aspects so that you don't get inertial into bureaucratic, which is just cartoon to an.
Speaker 5 You mentioned Paul K winner to go sort of approving and makes me wonder who are the economists that you pay closest attention to herbicides, your immediate and colleagues.
Speaker 6 Well, 1 of the issues and I don't want to pick on sort of crude or stigma, but I think what... 1 of the very interesting thing with these economists that today are very active in the public debate is they don't have any theory of the state in the boom. So often in the for example in Tv shows, when they have maybe a journalist trying to provoke them. They say okay. So you're saying that government should be counter.
Speaker 6 But where were you in the boom then? You know, telling government to retract. And they have nothing to say. Because they have a purely cane in view or at least hope they have interpreted canes, which is that government should be counter cyclical. And yet all the investments that led to the Internet were done in the boom.
Speaker 6 So this issue of directional you know, that government is there when it's thinking big, when it's able to think up missions where it's not just playing this counter role, But Actually making decisions about where these investments should go is actually quite important and you know, you really see this today? I mean, how much quantitative easing did we have? Actually did that really caused growth? No, because it actually wasn't, you know, where did it end up and bank coffers? Not being left.
Speaker 6 So it's not just about creation of money or, you know, Kain also had this quote where he says, just dig bitches and fill them up again, well, he said it at a desperation because and he was right when he said you know, just get anything going, but it doesn't 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 directional is often what we've fear, We think that's government getting too active picking winners, let let me just say 1 thing which I think is really important.
Speaker 6 Because when I say green I'm not just talking about wind and solar and biofuels. 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.
Speaker 6 And today, if you look at the It revolution and compare it to electricity, We're just halfway there. You know, It has not been fully deployed. And 1 way that I understand green and I really learned a lot from a colleague of mine called. Perez, a very important historian is that green could be actually a redirection of the entire economy so that For It to be fully deployed. And and what I mean by that, what I mean by that is subs suburban urbanization was a way that the mass production revolution got fully deployed.
Speaker 6 And suburban urbanization didn't just happen out of anywhere. It's not that people just woke up and said oh, I'm gonna go live in the suburbs. I want a washing machine. It was an outcome of policy. Mh.
Speaker 6 Policy. Public policy made suburban urbanization happen. And it's not that civilization was good or bad. The point is it was a policy to allow mass production to get fully deployed. So the big question today.
Speaker 6 Is not state or no stay private or public. It's what you, what kind of growth do we want, you know, the whole smart inclusive thing, but also how to steer you, It can go in any way, You, is it just another gadget we want? Or is it really a transformation of the economy in a direction that we want? And like it or not, it's only gonna happen with strong public policy guiding it in that direction. And green is a pretty good choice.
Speaker 5 What you mean by Green?
Speaker 6 Yeah. Well, okay. This then... The guy who clap should respond. Okay.
Speaker 6 I mean everything. I mean things like... Even thinking about, you know, product obsolescence, you know, how long products last. Currently, the way we think of product obsolescence. In other words that you buy something maybe you throw it away after 5 years.
Speaker 6 First of, it's not very green, but it also also it also emerged from a notion that markets are limited it right? That you only have so many middle class people and those are the people buying these gadgets or washing machines. And so in order to expand your production, you're going to have to make sure that they kind of fall apart after a while. 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.
Speaker 6 In fact, that could potentially change how we even think of product obsolescence. It's no longer true. We have limited markets. Markets are expanding. Mh.
Speaker 6 And it should even affect how we think of that. Yeah. But also, I mean, things like recycling, it's pretty low low tech. Right? I mean, you really could get the whole recycling area, much more high tech and allow It into that space, but also maintenance of products, Right?
Speaker 6 I mean, if we did have longer product obsolescence cycle, the whole maintenance area, First of all, could become job creating area. Right? So we don't have this trade 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 the high tech kind of way. I mean, I'm just saying it actually could affect everything.
Speaker 6 Of course, green is also, I think a portfolio of energy choices. And you know, it's quite interesting that fracking and shale forget what you think about it in terms of the danger, all this talk about, you know that it produces these potential earthquakes underground. It was a hundred percent 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, that's I think the danger f is simply that it's limited the portfolio.
Speaker 6 Energy investments, renewable energy investments by the current administration completely been reduced since the shale obsession, not so much revolution because in fact, it's been going on for for many years, if you read that report. So this limitation of the portfolio of renewables, I think is a huge problem because as soon as shale and that type of gas doesn't happen anymore. If we haven't been investing in renewables at the rate that we were before and precisely because innovation is path of penn increasing dynamic returns to scale, we're going to be in a mess.
Speaker 5 Policy tends to sort of os over time of everybody's doing for a while and then it's something else becomes a big deal and that taper off and then they are doing x again against, it's a new version of x. Is that kind of thing going on in this sort of public investment in R and D. So as it's down now in some important respects like you so the Nih budget certainly basically peaked and it not kinda dropped off a bit. Does that means it's can just drop off and disappear or is your sense that people certain of those oops we went too far in this direction now we're gonna correct. And you're part of that correction.
Speaker 6 Actually, we're a very unique moment. You know, what we've seen around the world, which is complete, count pro cyclical government is unique. It's it actually hasn't happened since World War 2. Mh. So, you know, whether it's because of ideology or whatever let's just just say...
Speaker 6 Actually, it's what's happened. So... Governments retreating during recessions, which is what's making these public budgets then go down in this particular space is is something we have a witnessed. The Nih spending and the spending for the different areas underneath the Department of Defense, including Da have not undergone sort of big cuts, in fact, even, you know, Reagan and who during the that. Era was someone who very actively proposed that we should have limited smaller government.
Speaker 6 He didn't reduce the funding of these particular agencies. Actually increased under Reagan. So So while there were massive cuts to state spending around, let's just call it the Welfare state type area. Actually in this innovation space, they haven't been cut. And today they're being cut because you just have this mass sort of austerity mentality where you know, someone like Obama has tried to resist, but hasn't been successful in resisting it.
Speaker 6 And you know don't forget that we didn't have counter government before World war 2. And the way you see this, by the way, the consumer price index, you it's a bit complicated. I'll just tell you quickly because it's fascinating. If you plot prices from 1800 to 19 50, So through price indices, You often had deflation, so the price of, you know, an object was actually lower in nominal terms than it was say the year before. Only once government started to do what Cain said, which was to actually you know, enter the game.
Speaker 6 Seriously, did you start having 2 things. 1, no more depressions, There was depressions every kind of 10 to 15 years, depressions, not recessions. You guys and myself are used start recessions happening kind of 10 to 15 years. Completely eliminated depressions up until recently, this last crisis because you had this worldwide. Cut back together in government spending.
Speaker 6 But also prices all of a sudden, mildly rising. And as long as you have a low rate of inflation. It's okay. In fact, it's a sign of growth of stable growth. It's only when you have really unstable growth.
Speaker 6 So depressions happening kind of every 10 to 15 years, that's when you have this persistent kind of deflation periods. But the big point is that actually this c stuff worked in terms of preventing depressions because the reason you get a depression is that when you get a recession, that's when consumers are spending last 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 that counter clarity, which actually worked. Now whether then you have too much of it, etcetera, that's another problem.
Speaker 6 But the fact that all of a sudden since this particular crisis. Is 2007. You had governments around the world being pro cyclical. Has just been a disaster and has affected the spending.
Speaker 5 And they'll learn their lesson and do better next time and thanks to you. We hope. Right? A couple of questions about China, and gonna in China must come up a lot. Mary key, M status.
Speaker 5 The Chinese government putting many billions of dollars trying encourage innovation, but it isn't yet getting results, it wants to see was the balance you think his need between government funding and other factors to encourage innovation. And Kevin Kelly asked Do you think Trend of today is doing a better job with the entrepreneurial state and how do the Chinese respond to your thesis?
Speaker 6 So when III recently was in China, gave a presentation at ministry called Most ministry of Science and technology. And I gave them something similar. And they said, so I don't get it. You know, why so why is why is the story not known? I mean, of course, the industrial might of the U.
Speaker 6 S. We know was fundamentally a result of this kind of spending, How can it be that people don't know that and that then there's, you know, not that kind of discussion. And you, that's what they was they were very interested in. I mean, you know, They've even said how can It be that people say government metals in the healthcare area when actually what you're saying is government created the drugs, you know, government. As part of the innovation system.
Speaker 6 And so they were very interested in the lack of public knowledge if you want of of the role that government has played But what's interesting in China, the challenge in China is that how they're doing it is very top down. It's very much kind of ministry led. It's very much, you know, again, the China development bank playing a massive role. So if it's true, again, bigger, that this stuff is more successful when it's kind of this decentralized network of public and private agencies interacting together in a dynamic well funded way. What does it mean for that ecosystem, which currently is still quite top down.
Speaker 6 Because don't forget that know, spending on R D is not enough. In China has increased it by 170 percent over the last 5 years. It's amount of spending in R and D We know lots, if you look at Japan and the Ussr or sorry, the ex Soviet union. Japan was spending less than the Soviet Union on R and D. They were spending quite a bit, but less or much less actually.
Speaker 6 Their R and D to Gdp ratio was hovering more around 2 percent and the Soviet unions around 3.5, and yet Japan grew much more? Why? Because it had these horizontal linkage. It has what we call today's system of innovation where this new sort of knowledge information, science actually could get properly defuse. Throughout the economy because of the science industry links also because companies themselves had these horizontal kind of teamwork type structures, but especially between the institutions.
Speaker 6 There is lots of of dynamic linkage whereas the Soviet union was very top down and very defense led. So there was very little innovation distributed throughout their economy. But the fact that they didn't have the science industry linkage that within companies, the the top guy never went down to see what was happening on the shop floor, hurt this, d ism in their system of innovation. I think that's the big challenge that China has today. Even that's very different
Speaker 5 It's sort of a mirror image in a sense leads in terms of the advice that you would give the U. S. Versus China the u. You're basically saying, Acknowledge the government and reward it for being a patient Vc in China, you're saying, okay, you got the patient B park covered, but you need a whole bloody ecosystem that can take advantage of that and you don't have it yet.
Speaker 6 Yeah. Except that the terminology ecosystem 1 thing I was trying to challenge because it is the trend word today, you know, innovation ecosystem and my point is, hey, be careful. You know if you know anything about biology ecosystem. And can be you know predator prey and know parasitic versus s and we just don't even have it because we don't engage in this in this, you know, conversation enough about what kind of public what kind of private, not public versus private, than I think. And what I'm arguing is that we've built very parasitic ecosystems where we have socialize the risk, privatized reward and this is really hurting future innovation, but also making our society not very inclusive,
Speaker 5