Rethinking the role of government as co-creators.


I’ve mentioned the book called The Value of Everything before and think that it is a good time to revisit it now.


New taxes are starting to be levied on businesses and more changes to the tax code are likely ahead. Leaders need to get curious and listen to the rational. That’s why I think revisiting Professor Maria Mazzucato’s book now is important.


She is challenging us to rethink our economic beliefs and reimagine the role of government as co-creators in the innovation process rather than mere fixers of market failures.


I’d like to share a few insights from the book that are the cornerstone of her work.


The Role of Government


The resentment of the 2008 financial crisis lingers because government resources were largely used to shore up the banking system. Small businesses and individuals were left to suffer the consequences of the crisis and many are still trying to fully recover.


Professional economists have publicly stated that they “won the war, but lost the battle”. The battle being the recovery of Main Street. Governments have done more to win the Covid battle but even still, there have been a lot of pandemic related casualties. People who didn’t receive sufficient financial support are angry. For those impacted by multiple market events, the challenge of recovery may feel insurmountable.


The financial impact of Covid will linger which is why leaders now have the opportunity to rethink the role of government and redesign how it functions.


Competence and Effectiveness


As a society, many of us have been conditioned to think governments are ineffective and public servants are incompetent. That’s why some political parties try to shrink the size and role of government. In theory, if the government is smaller than we all pay less tax.


Sounds good but that theory doesn’t tell the whole story. It assumes either the services are non-essential or if essential, the market will provide the services at a better price. The problem with that logic is that it deduces economic theory to value based pricing when in reality there is more than one way to think about value.


Space travel has surfaced in public debates recently, because many people are questioning whether space travel is necessary given the number of significant challenges we’re facing on earth. NASA responded with a list of 20 things that wouldn’t exist without space travel. The list includes: camera phones, scratch resistant lenses, CAT scans, athletic shoes and much more.


It’s a good example of government working as co-creators without ever getting the credit or reward for the innovation. The question Professional Economists including Maria Mazzucato are pondering is whether or not governments could do more to help advance society if the public sector had the same types of incentives, resources and training as the private sector.


Resources and Rewards


In the book, Net Positive, the former Unilever CEO talked about the importance of making their tax rate public. For them it was an opportunity to communicate how much they were paying for the natural resources and contributing to the public resources consumed in the making and distribution of their goods. Their tax rate serves as a badge of honor.


On the other hand, some of the largest companies are running tax avoidance strategies to maximize growth and shareholder returns. The problem with those tax strategies is that they reward a relatively small population of people at the expense of the health and wellbeing of the broader society.


The tax strategies add insult to injury because much of the underlying innovations within those large organizations were funded with public money. Consumers often pay an exorbitant premium for those innovations and then don’t realize the benefits that should be bestowed from tax revenue.


The private sector is not filling the gap. There are very few private investors or Venture Capitalists who will fund a researcher or entrepreneur with an idea. They fund people who have done enough work on their idea to de-risk it and commercialize it. Most of the rewards are realized in the commercialization process and later growth of the company.


That’s why solutions to societies biggest and most pressing problems require the public and private sector to work collaboratively. It’s also why governments at all levels are evaluating new ways to participate in both the risk and rewards.


Cost of Pharmaceuticals + Medical Innovation


The risk and reward debate applies to pharmaceuticals too. Public money has funded the majority of the research used to create most of the existing pharmaceuticals.


Pharmaceutical companies continue to lobby for protections based on flawed economic theory. Companies have reportedly been using economic theory to support a desired outcome rather than looking at the problem and using economic theory to solve it.


The problem with that approach is that it undermines public trust and establishes financial barriers that limit access for those who need medical intervention the most. Forget the morality aspect of the issue and think about the cost of lobbying and the complex systems needed to administer drug programs. Could that money be better spent if the industry was focused on innovation rather than value extraction?


Value Creation vs. Value Extraction


Many leaders have been focused on value extraction through financial engineering rather than value creation. Value creation results from innovation that manifests in novel and transformative solutions. That’s why economists are challenging leaders to rethink the role of government as co-creators.