It is hard not to be impressed by the success of Mariana Mazzucato. In a few years, Mazzucato became a point of reference for the world left and her views are having a significant impact in the post-pandemic world, perhaps (perhaps?) because they reinforce the instincts and assuage the thirst for grandeur of the world’s politicians. Jim Dorn comments here on a recent article in which Mazzucato sings the praises of a “Cornwall Consensus” to take the place of the “Washington Consensus”.
She writes:
Whereas the Washington Consensus minimized the state’s role in the economy and pushed an aggressive free-market agenda of deregulation, privatization, and trade liberalization, the Cornwall Consensus (reflecting commitments voiced at the G7 summit in Cornwall last June) would invert these imperatives.
Dorn reminds us that the so-called Washington Consensus “was not meant to be an exhaustive list or a blueprint for development. Nor was it a recipe for minimum government or neoliberalism”. But he also does something much more important. He compares the views of Mazzucato, a world famous economist, with those of Peter Bauer, a largely neglected figure when he was alive and an almost totally forgotten one now. Bauer was known as a critic of development economics (one of the very first). Bauer’s criticisms of foreign aid were grounded in his understanding of development, according to which, as Dorn aptly remarks, “It is more meaningful to say that capital is created in the process of development, rather than that development is a function of capital”. Mazzucato’s work can be read as suggesting instead that we ought to throw money at all possible research projects, hence the “entrepreneurial state” can do it better, since it commands more resources, than any private investors, who is pressed at a certain point (perhaps just a couple of billion ahead of a possible breakthrough) to exit and draw a line between profitable and unprofitable ventures.
READER COMMENTS
Knut P. Heen
Nov 1 2021 at 12:33pm
It is hard to be impressed. She is worse than Piketty, the economics professor who cannot understand that the cost of capital must be higher than the growth rate of the economy.
If we throw money at all research projects, there is nothing to eat. This is Mao all over again.
Matthias
Nov 1 2021 at 11:48pm
I thought Piketty’s failing was not accounting for land separate from capital we can produce more of?
Not sure I buy your cost of capital criticism. Could you please explain? What assumptions are you making?
Knut P. Heen
Nov 2 2021 at 7:30am
The present value of a growing perpetuity approaches infinity if the cost of capital approaches the growth rate (PV = div/(r-g)); hence, the cost of capital must be significantly higher than the growth rate in a world of scarcity (there is no scarcity if asset values approach infinity). The formula is usually applied to individual stocks, but may also be applied to the entire economy in which case the “dividend” is the annual consumption (r is the cost of capital and g is growth rate of the economy).
The underlying economic point is that the return on the investment must finance both the investment in growth and the dividend. If you reinvest everything, the growth rate will equal the return on investment. If you take out some dividend, the growth rate will be lower than the return on investment. In equilibrium, the return on investment equals the cost of capital. Hence, r > g, unless you want starvation. It is a simple budget constraint.
Piketty is arguing that r > g leads to inequality because capital is growing faster than the economy which is imprecise because r goes to the people who save/invest. After all, some rich people waste their money on consumption while some poorer people save their money to take advantage of the exponential growth of capital. Obviously, you may redistribute to reduce inequality, but that reduces the incentive to save/invest which subsequently reduces growth and increases the cost of capital due to less savings. My impression is that Piketty is arguing for r = g through redistribution.
Unfortunately, many/most people do not understand the power of exponential growth. Some people do however invest in land, typically a house in a city, because you “ought to own your home”. The unintended consequence of this nonsense is that they save/invest and that the value of their homes grow exponentially. Often it may be better to rent an apartment and invest in the stock market instead.
Monte
Nov 1 2021 at 2:02pm
As impressive of an intellectual as she is, Mazzucato’s policy prescriptions strike me as a rehashing of Third Way politics developed and promulgated by Anthony Giddens and written extensively about by economist Lester Thurow in his book, “The Zero-Sum Society” and it’s sequel, “The Zero-Sum Solution.” Nothing new under the sun here.
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