What role should industrial policy play in how we address climate change?


Capitalism Behaving Badly

It’s time to rethink the role that government plays in shaping and supporting policies to solve big problems like climate change and income inequality.

Despite healthy corporate earnings, an employment rate that has slowly rebounded since the financial crisis of 2008, and the outpouring of high-tech distractions from Silicon Valley, many people have an aching sense that there is something deeply wrong with the economy. Slow productivity growth is stunting their financial opportunities; high levels of income inequality in the United States and Europe are fueling public outrage and frustration in those left behind, leading to unprecedentedly angry politics; and yet despite the obvious symptoms, economists and other policy makers have been largely befuddled in explaining the causes and, even more important, the cures for these problems.

That’s the starting point for Rethinking Capitalism. A series of essays by authors including Joseph Stiglitz, an economist at Columbia University who won a Nobel Prize in 2001, and Mariana Mazzucato, a professor of the economics of innovation at the University of Sussex and a rising voice in British politics, the book attempts to provide, as explained in its introduction, “a much better understanding of how modern capitalism works—and why in key ways it now doesn’t.” Together, the essays provide a compelling argument that we need more coherent and deliberate strategic planning in tackling our economic problems, especially in finding more effective ways to reduce greenhouse-gas emissions.

Things reviewed
  • Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth Edited by Michael Jacobs and Mariana Mazzucato Wiley-Blackwell
  • “Green Industrial Policy” Dani Rodrik Oxford Review of Economic Policy
    Vol. 30, No. 3, 2014
  • “‘Green’ Growth and the New Industrial Revolution” Alex Bowen, Chris Duffy, and Sam Fankhauser Grantham Research Institute
    January 2016
  • American Recovery and Reinvestment Act February 2009

In particular, Mazzucato, who also co-edited the book and co-wrote an introduction with Michael Jacobs, wants to counter the view that free markets inevitably lead to desirable outcomes and that freer markets are always better: the faith that “the ‘invisible hand’ of the market knows best.” In fact, she argues, we should admit that markets are created and shaped by government policies, including government support of innovation.

There is nothing too contentious in that statement, but she extends the argument in a way that is controversial. Not only is it the responsibility of governments to facilitate innovation, which she calls “the driving force behind economic growth and development,” but the state should also set its direction; the trajectory of innovation needs to be guided by policies to solve specific problems, whether the aim is increasing productivity or creating a green-energy transition. Mazzucato writes that innovation needs both “well-funded public research and development institutions and strong industrial policies.”

Industrial policies—or what ­Mazzucato sometimes calls mission-­oriented public policies—have a long and divisive history. Economists define industrial policy in a very specific way: it’s when governments set out to play a deliberate role in directing innovation and growth to achieve a desired objective. Her call for the revival of such policies counters the idea that has held sway for decades among many politicians, particularly in the United States and the U.K., that government is better off not trying to assert a role in steering innovation. She writes that governments should not only try to “level the playing field, as orthodox view would allow.” Rather, “they can help tilt the playing field towards the achievement of publicly chosen goals.”

For them to do so, ­Mazzucato said in a recent interview, “the whole framework needs to change.” The belief that the government should only intervene to “fix” the market in extreme circumstances, rather than acting as a partner in creating and shaping markets, means we’re constantly putting “bandages” on problems and “nothing changes.” The intractability of today’s slow growth and widening inequality can be traced, she says, to the fact that governments in the U.S. and Europe have increasingly shied away from their responsibilities. “We have to admit that policy steers innovation and growth, and so the question is where do we want to steer them?”

One of Mazzucato’s more controversial claims is that the private sector gets too much credit—and too many riches—for some of today’s most popular technologies. The iPhone, she contends, relied on advances, including the touch screen, Siri, GPS, and the Internet, that were all developed by state-funded research. Maybe. At times, she clearly takes this argument too far. Take, for example, her assertion that nanotechnology was initially funded by government initiatives and that the private sector jumped in later. In fact, key early inventions were made by IBM at its Zurich lab; these allowed researchers to image and manipulate single atoms for the first time.

Regardless, Mazzucato’s argument has resonated among many of today’s policy makers. After Theresa May took over as the U.K.’s prime minister this summer, Mazzucato was summoned to Downing Street. Change was clearly in the air. A few weeks earlier, May had announced a newly formed Department for Business, Energy and Industrial Strategy. More than 30 years after Margaret Thatcher effectively killed off industrial policy in the country, another conservative prime minister was hinting at its revival. While it’s too early to know the outcome, ­Mazzucato says, “It seems superficially encouraging.”

Flying white elephants

The debate over industrial policies played out in the United States and the U.K. in the early 1980s as President Reagan and Prime Minister Thatcher preached the power of free markets and the dangers of government meddling. And for at least the next few decades, the free-market rhetoric clearly won out, as popular wisdom held that such interventions are tantamount to governments picking winners and losers.

Even advocates of industrial policies acknowledge that they have had a checkered history. In “Green Industrial Policy,” Dani Rodrik, an economist at Harvard’s John F. Kennedy School of Government, argues that such a strategy is needed to make the sweeping changes required to slow climate change. But he notes that executing industrial policies fairly has been a challenge. While such policies have “undoubtedly worked” in Japan, South Korea, China, and other countries, Rodrik writes, they have a reputation for being gamed in many countries by both businesses and political leaders. And industrial policies to support desirable sectors have given birth to such white elephants as the Concorde, a plane meant to bolster the aerospace industry in the U.K. and France.

Because of this history, he writes, “economists traditionally exhibit scepticism—if not outright hostility—towards industrial policies.” But despite the challenge of making them work, he argues, industrial policies “have an indispensable role in putting the global economy on a green growth path,” because markets have failed to properly account for the social cost of carbon dioxide emissions and the true technological benefits of risky energy R&D.

Rodrik said in an interview that while “unfortunately” we’re stuck with the label “industrial policy,” today’s versions are very different from ones conceived decades ago. Rather than singling out a specific sector—say, aerospace or steel manufacturing—for support with large investments and tax incentives, new thinking suggests working across sectors to achieve a desired goal such as addressing climate change, using tools such as carbon pricing. “It’s really just pushing markets in a direction they wouldn’t otherwise go,” he says. “The idea is to get government working closely with businesses to achieve more rapid and appropriate growth.”

“Markets are created and shaped by government policies, including government support of innovation.”

In that sense, says Rodrik, it is something that governments have been doing all along, even as industrial policy fell out of fashion in the 1980s. However, one consequence of attempting to “fly under the radar” is that governments are often not explicit about their objectives, he says. “If the goal is to spawn new technologies in clean energy, let’s say that.” And, he says, “being more self-­conscious and open provides a big advantage in designing better policies.” Included in such designs should be well-defined rules and procedures, insulating decision making from political whims and interests.

Take, for example, the failure of the solar company Solyndra. It is often held up as the kind of thing that occurs when government picks winners. But, writes Rodrik, Solyndra failed largely because competing technologies got much cheaper. Such outcomes are not necessarily an indictment of industrial policies. The real problem, Rodrik argues: the U.S. Department of Energy loan guarantee program that supported the solar company had a mixed set of goals, from creating jobs to competing with China to helping fund new energy technologies. What’s more, it did not properly define procedures for evaluating the progress of potential loan recipients and, importantly, terminating support to those companies when appropriate. Instead, according to Rodrik, in the absence of such rules, money was lent to Solyndra for political reasons—President Obama and his administration used the company as a high-profile way to highlight its green-energy initiatives. Having singled out the solar company for praise, the administration was then reluctant to end its commitment.

Pork-barrel politics

President Obama’s eight years in office will be judged in part on the $787 billion stimulus bill that passed in 2009 and included some $60 billion for energy projects and research. In some ways its results, both positive and negative, present a valuable lesson on just how difficult it is to put economic theory about industrial policy into practice.

The stimulus bill was well-­intentioned, and the instinct to use government spending for a specific social goal, supporting the development of green energy, was laudable. The investment in energy was badly needed. But from the start, the energy spending was headed for trouble because it tried to serve multiple purposes: provide a monetary boost, create jobs, and seed the beginning of a green-energy infrastructure. As a leading economist warned in these pages: “It’s very much like pork-barrel politics.” (See “Can Technology Save the Economy?”)

The problem was that those objectives often conflicted. Stimulating the economy meant spending money as quickly as possible, while investing wisely in energy projects required deliberate decisions and rigorous due diligence, both of which take time. What’s more, investments were made to help economically stressed regions even if they weren’t the wisest choices for building an energy sector. Government investments were made in a number of large battery production facilities in Michigan, each one coming with a promise to boost the local economy, even though there was not yet nearly enough demand for the batteries. Among the outcomes of the stimulus investments, not surprisingly, were the bankruptcies of Solyndra and other solar and battery startups.

The stimulus energy investments were “a bit of a disaster,” says Josh Lerner, a professor at Harvard Business School. “A lot of the problem was in the ways they were implemented. They violated all the rules of how these things should be done.” Not only did the government make large bets on a few companies, in effect picking winners, but it did so without clear rules and criteria for the choices. And, says Lerner, “the selection of the battery and solar companies was extremely opaque. A lot of it seemingly came down to if you had a former assistant secretary of energy doing the lobbying for you.”

Still, Lerner is not dismissive of government interventions to support green-energy innovation. “You can make the case that the need is greater than ever. A well-designed program would potentially make a lot of sense at this point.” But, he says, “experience tells us there are more misses than hits” with such government interventions. And he suggests that such programs often fail because their creators are not familiar enough with any given technology and its business. “The decisions might seem plausible, but they turn out to be unproductive. The devil is in the details.”

Even some of the stimulus’s greatest apparent successes now seem to be less effective than originally hoped. ­Steven Chu, a Nobel Prize–­winning physicist, was named secretary of the Department of Energy in early 2009 and implemented many of the bill’s most ambitious efforts to boost energy R&D. It funded large increases in energy research, and Chu created a series of well-conceived centers and initiatives, including the Joint Center for Artificial Photosynthesis and ARPA-E, a program to support early-stage energy technologies. But in subsequent years, budget cutbacks and political pressure took their toll on these projects, which needed patience and consistent funding. As a result, ambitious research and technology initiatives are now ghosts of their once high-profile selves.

The outcome makes one wonder just how such policy initiatives, which include investments in research and engineering projects that require years to bear fruit, will ever survive the constantly changing political moods and government leadership. Creating a rigorous industrial policy to encourage green technologies is no doubt a worthwhile objective. Economists and the lessons from efforts like the stimulus bill can teach us how to design such policies to be robust and effective.

But won’t wise industrial policies also require wise politicians?

David Rotman

David Rotman Editor

As the editor of MIT Technology Review, I spend much of my time thinking about the types of stories and journalism that will be most valuable to our readers. What do curious, well-informed readers need to know about emerging technologies? As aMore writer, I am particularly interested these days in the intersection of chemistry, materials science, energy, manufacturing, and economics.

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