
We have socialised the risk of innovation but privatised the rewards - dil8
http://blogs.lse.ac.uk/politicsandpolicy/5-minutes-with-mariana-mazzucato/
======
brandonmenc
> When Google received funding for its algorithm from the National Science
> Foundation (NSF), is it right that after it earned billions nothing went
> back to the NSF

Serious mental gymnastics.

Page and Brin doing research with NSF grants isn't even remotely the same
thing as Google, their future company, getting a check directly from the
government.

Page and Brin produced publicly available research with NSF money. They
started a company based on that public research. That company created untold
billions of dollars of value out of thin air. Taxes are paid out of those new
dollars, some of which go to fund the NSF.

This is exactly how it's supposed to work.

~~~
frownie
>> Taxes are paid out of those new dollars

Interestingly, here in Belgium, the press often states that Google pay his
taxes as requested by the law. And that Google have some very expert
accountant who read the law in suach a way that those taxes are close to zero.

I'm afraid Google doesn't pay his taxes like we, the tax payers, think it
should...

Of course, that's totally proof-less, but well, I've heard that quite often
(cf. intérêts notionnels)...

~~~
ErikBjare
Since when is Google a he? Perhaps it is some quirk of your language that
makes the direct translation take masculine form?

Edit: Sorry if this came off as rude, was not intended.

~~~
tomp
Instead of just criticising, maybe you could suggest how parent should
improve? I'm always very confused about what personal pronoun to use for
organisations or companies.

~~~
masklinn
The singular impersonal "it" when talking about Google as a corporate entity
(its component personnel would likely be "Googlers"). So "Google pays its
taxes" and "Google doesn't pay its taxes".

~~~
tomp
Isn't "they" used sometimes as well? At least it's frequently used for
"police"...

~~~
Symmetry
You would use "they" to refer to the class of people who are police but "it"
to refer to organizations like a police department.

------
Quanticles
"Economists think this will happen via tax (from the jobs created, and from
the profits of the companies), yet so many of the companies that receive such
benefits from state funding, bring their jobs elsewhere, and of course we know
they also pay very little tax."

He makes it sound like the USA would be just as well off if big tech companies
weren't here.

The US government is basically a ~15% shareholder in all US companies due to
salary and other taxes. If they can invest in technology research and build
more US companies, then the US government earns a net profit.

I would like to see a breakdown for a major technology company to see what
percentage of their revenue goes to income tax withholding, and then see how
much government funding went into helping that company come to life.

Edits:

1\. Number adjustment

2\. By "income tax witholding" I mean the income tax that the employees pay.
If 50% of revenue goes to salaries, and 20% of salaries go to income tax
witholding, then 10% of a company's revenue goes to income tax.

~~~
rtpg
remember that time GE paid basically 0% in taxes? the 30% number is only in
theory (there is the salary breakdown but I don't think 30% is the number that
ends up hitting)

~~~
arjunnarayan
GE paid 0% tax because the US govt decided to subsidize certain things that it
wanted (mostly green energy related things), and implement that subsidy
through the tax code via tax deductions and tax credits (because direct
subsidies are politically unpalatable). GE promptly went and did exactly what
the government wanted, which was invest in those nice expensive things, up to
the point where all their taxes were wiped out.

If your beef is that the US govt shouldn't subsidize things via the tax code,
then that's a separate issue. If your beef is that GE should pay nonzero
taxes, then you should view it as "GE paid X% taxes, and then did things it
did not want to do unsubsidized in order to earn back -X% taxes as a reward."
In which case, GE did pay taxes. They just then took advantage of an
opportunity to earn back those taxes in exchange for investing in green energy
related things.

------
nl
The title of this piece is terrible, and detracts from what is actually a
thoughtful discussion.

Mazzucato points out how the government is actually good at funding very high
risk work, with a low chance of pay off (think DARPA research in the US).

She does say the sentence used in the title, but the context is very
important:

 _What this means is that we have socialized the risk of innovation but
privatised the rewards. This dynamic is one of the key drivers of increasing
inequality. Because innovation today builds on innovation tomorrow, the
‘capture’ can be very large. This would not be the case if innovation were
just a random walk. Policy makers must think very hard how to make value
creation activities (done by all the collective actors in the innovation game)
rewarded above value extraction activities (in this sense capital gains taxes
are way too low). And since the booty from the latter can be very large,
redirecting incentives and rewards towards the value creators is essential.
The problem is that some of the ‘extractors’ like to sell themselves as the
creators._

Her argument appears to be that public funds need to be directed into areas
that have a chance of "industry transformation", which may create job or new
(tax paying) industries in the country that funded them.

Here argument about public funding of Google and Apple is this:

 _For every Internet there are many Concordes or Solyndras. Yet this is also
true for private venture capital (VC). But while private VC is then able to
use the profits from the 1 out of 10 successes to fund the 9 losses, the state
has not been allowed to reap a return. Economists think this will happen via
tax (from the jobs created, and from the profits of the companies), yet so
many of the companies that receive such benefits from state funding, bring
their jobs elsewhere, and of course we know they also pay very little tax._

There is possibly a valid point here. Corporate tax minimisation by offshoring
profits is a real challenge to the tax system.

I don't think she makes any real suggestion for how to solve the problem,
though (Retaining a share of IP rights won't work, because companies can
easily disassociate profits from the IP that generated them, meaning that any
return-on-profits-generated scheme will fail. See Hollywood Accounting,[1]
which does a similar thing in the film world)

[1]
[http://en.wikipedia.org/wiki/Hollywood_accounting](http://en.wikipedia.org/wiki/Hollywood_accounting)

~~~
spikels
Mazzucato provides no real evidence the government is good at funding
commercially viable innovation. If you look into the details the two examples
she offers were more blind luck than thoughtful investment.

While it's easier to make the case for basic research the governments attempts
to sponsor commercial innovation have almost always ended in failure or turned
into subsidies for politically connected companies and industries. A good case
study was the $600 Flat Panel Display Initative in the 1990s. It's a good bet
something similar is currently happening in the various green initiatives.

She is actually correct about these programs socializing risk and privatizing
reward. Stanford got the Google shares from research funded by NSF and
Continental Illinois got the Apple shares from the SBIC investment guaranteed
by SBA.*

However this is the one role government has a unique advantage. And this is a
good thing - think NIH, NASA, NSF, etc but also pretty much every social
safety net program. Of course she (being quite left) is actually making the
case for increase government ownership of public companies or at least greater
taxation and license fees.

*-You could argue the U.S. got some this back when that bank failed a few year later in the largest bank failure in US history - until WaMu surpassed it in 2008. Although the $44 million from Apple shares was insignificant compared to the billions in bankruptcy costs. BTW-The Continental Illinois failure is where "too big to fail" was coined.

~~~
EliRivers
_Mazzucato provides no real evidence the government is good at funding
commercially viable innovation._

She does. Just not here. The piece _is_ called "Five minutes with..."; her
arguments that government funds commercially viable innovation are easily
found.

I suppose the most obvious commercially viable innovation funded by
governments (both directly and through various defence department funds) was
computing.

------
copsarebastards
I think the author is pointing to a problem but not correctly identifying what
the problem is. The problem is deeper.

If the problem were that we have socialized risk of innovation but privatized
the rewards, that wouldn't really be a problem. It's a good thing to
incentivize innovation.

The real problem is that we _don 't_ incentivize innovation.

Instead, we incentivize investment. People who already have money to invest
take on small calculated percentages of risk to make back large amounts of
money. Frequently the money investors are investing isn't even their own, and
they are paid a significant salary to do so, meaning they actually take on
_none_ of the risk.

The negative results of this are twofold:

1\. Often investors don't invest in innovation. It's equally profitable to
invest in number-twiddling schemes that provide no benefit to anyone except
the investor, and often that's easier.

2\. We speak of companies as if they are single entities. But the reality is
that executives and shareholders and of a company are the beneficiaries of any
innovation within a company, while innovation typically comes from workers
with technical expertise who are typically paid a relatively limited salary
perhaps with some minimal stock options.

The way around this problem is typically to get into a company early enough
that the line between technical worker and executive is blurred. But that
avoids only the problems with lack of reward--it actually exacerbates the risk
problem because early commitment to a company is a high-risk endeavor.

In the end, I think that a lot of innovators don't innovate for money anyway--
I personally would rather see something I make change the world than make a
lot of money off an idea that doesn't make any difference (or makes things
worse!). As long as I have enough to live I'm okay. But it would be nice if we
stopped pretending that our distribution of wealth is at all meritocratic.

~~~
ddingus
This!

I sure got that as the takeaway. Public investments targeted at innovation
we've identified as important, or worth it, whatever should be increased.

There is another aspect to this as well. Check out this history of PDX area
Tektronix:
[http://www.opb.org/television/programs/oregonexperience/segm...](http://www.opb.org/television/programs/oregonexperience/segment/the-
spirit-of-tek-/)

Between Tek, Intel, and a couple others, the area was transformed into
something we call "silicon forest" and it spawned a ton of great companies,
many of which are in business today.

It was a very interesting mix of private and public investments in education
and investment support. Spin offs, not competitive with Tek, got Tek support
while ramping up. Colleges offered targeted programs for people to get
educated, companies did the same.

The founders got very wealthy, but so did a lot of other people.

We need more of this kind of thing.

------
timtas
We've all seen quite clearly in recent years that governments regularly
socialize risk with bailouts of supporters and favorites. The worst part is
the way they tip their hand in advance (e.g., The Greenspan Put [1])
incentivizing the the most reckless and morally hazardous behavior.

But the article does not aim at this real problem. Rather it's just a basket
of plausible sounding but totally unsubstantiated claims and deliberate
ignorance of inconvenient facts. For example, we're supposed to view China's
giant investments "environmentally friendly technologies" as destined for
success. We won't question the competence of the government that has so
recently built several cities (yes whole cities, yes plural) which are
completely empty while peasants subsist in garbage heaps on their outskirts.

Polemicals like this equate corporatism and cronyism with capitalism and free
markets. Then with the straw man destroyed, it's not hard to guess what the
solution will be.

[1]
[http://en.wikipedia.org/wiki/Greenspan_put](http://en.wikipedia.org/wiki/Greenspan_put)

------
tessierashpool
Best quote in the piece:

 _Because innovation today builds on innovation tomorrow... Policy makers must
think very hard how to make value creation activities (done by all the
collective actors in the innovation game) rewarded above value extraction
activities (in this sense capital gains taxes are way too low)._

Peter Thiel's book talks about this, and on the one hand it is of course very
good strategy, yet it's also quite sad and pathetic, because the principle he
advocates is that you should focus on _capturing a market, rather than
creating value._

OP is saying, if this is a logical choice for entrepreneurs to make, then
policy makers have done a very bad job at structuring incentives. It would
make more sense if policy set up incentives which encouraged _creating_ value
over _capturing_ it.

------
UhUhUhUh
This also seems to be a child of a wider process by which losses tend to be
socialized and profits tend to be privatized. Apparently, the system "works"
because nearly all the wealth of the planet is in the hands of something like
1% of the population, while the debt, well...

Another aspect is the speed at which profit is made. At one end there is
education, for example, which is an exceedingly bad investment in financial
terms because it is very slow and very uncertain. At the other end there is
pure trading and seed/startup investment, with profit goals of, what, 25% per
year.

Who would finance education? Certainly not a financial investor in his right
mind.

------
kristopolous
Another political theorist, Albena Azmanova calls this aggregative capitalism.
An interview here:
[http://www.againstthegrain.org/program/1099/tues-22415-post-...](http://www.againstthegrain.org/program/1099/tues-22415-post-
neoliberal-capitalism) and an essay here :
[http://www.academia.edu/11034347/The_Crisis_of_the_Crisis_of...](http://www.academia.edu/11034347/The_Crisis_of_the_Crisis_of_Capitalism)

A summary from
[http://events.newschool.edu/event/politics_talk_albena_azman...](http://events.newschool.edu/event/politics_talk_albena_azmanova_the_crisis_of_capitalism_and_the_state-
_more_powerful_less_responsible_invariably_legitimate#.VP0_MZQ2f0M)

> A key feature of the new modality is the renewal of the state's
> redistributive function, with an altered logic of distribution, and a
> simultaneous increase in the state's administrative power and a decrease in
> its authority - a process that has failed to trigger a legitimacy crisis of
> the socio-political system, despite the recent confluence of financial,
> economic, and social crises. And no wonder society accepts the pain with
> equanimity, Professor Azmanova will argue, as the very social contract in
> Western democracies has been recast, thus breathing new life into
> capitalism.

------
DodgyEggplant
Better title would be when the "modern capitalism is rewarding value
extraction over value creation" argument. Think twitter, starting with "do
good" argument attracting devs when they need them, then shutting them out
later. Who benefits the value of the IPOS? the public?

------
dools
Socialised risk and privatised reward is how government should work. Universal
health care is a good example: I am the most obvious benefactor of my own good
health, but society also benefits from having healthy citizens.

Revenue generation is only the goal of government so that it can support its
citizens.

~~~
EliRivers
_Socialised risk and privatised reward is how government should work._

Banks take (less than they used to, since some legislation was brought back)
insane risks because they know Joe public will cover disastrous losses when it
goes wrong, and the bankers can keep the massive profits when they get lucky.
Socialised risk, private profit.

------
jonathansizz
The author's argument is presented better and in more detail here:
[https://news.ycombinator.com/item?id=9168693](https://news.ycombinator.com/item?id=9168693)

------
MichaelMoser123
> Where are Xerox Park and Bell Labs today?

Bell labs was financed because AT&T had a monopoly status on landlines;
whatever the costs, AT&T could just raise fees for a cent and cover all
expenses. AT&T lost its monopoly so it could no longer pay for Bell labs.

so this monopoly status was good for Bell Labs, but it also covered up the
many gross inefficiencies of a monopoly body and it did limit competition -
and growth.

> I believe the green economy merits much more funding than it is currently
> receiving by government

I suspect that this is a value based judgment.

Who is to know if the next growth period will rather be based on nano
technology, or maybe will be based of artificial intelligence? I guess that
civil servants are in a bad position to make such judgments, because they bear
little personal responsibility for their decisions.

If one looks at the internet boom, then one can discern many stages here:

\- first was the fundamental research that explored the subject of packet
switching networks; this was funded by the US military \- next was the gradual
development of networking technology, which took some ten-fifteen years. Here
there were many actors, part of them from research and part from industry \-
next came the first boom-bust cycle of the nineteens; whatever one thinks of
it, it helped to build the required networking infrastructure for wider
adoption and it helped to create many technologies that were important for the
next stage. \- next came the present growth based on targeted advertising /
private sector surveillance based on social networks.

No one actor could have directed this process; public sector did facilitate
basic research, it created the prerequisites for growth, but actual growth was
still several steps away from that; at any of these stages it could have been
stopped by some misguided policy decision.

Prof. Mazzucato seems to underestimate the risks that entrepreneurs had to
take during this process; Research financed by the public sector is a
prerequisite for growth, but state dirigims would not have led to it either;

Dirigism in France created the minitel network, but that is not quite the
internet of today.

------
venomsnake
There is way to socialize the rewards of innovation. It is called taxation.
Why US allows such wide tax evasion is whole other qustion.

~~~
dnautics
The us has some of the highest tax compliance rates in the world.

------
andyjohnson0
Mazzucato gave an interesting talk [1] about this to the Long Now Foundation
back in March 2014.

[1] [http://longnow.org/seminars/02014/mar/24/entrepreneurial-
sta...](http://longnow.org/seminars/02014/mar/24/entrepreneurial-state-
debunking-private-vs-public-sector-myths/)

~~~
justincormack
She also has a book, "The Entrepreneurial State".

------
zo1
She just described one of the main benefits of having a state. It allows
people to flourish. Of course, excluding obvious scenarios of nefarious uses
of public money for personal profit.

The state creates an environment that allows individuals to make profit in a
safe way (contracts, violence, laws, etc). An underlying bit of information
that is ignored is that the individual profiting means that we all profit, in
small and not necessarily measurable ways. And sure why not, why can't the
public be the one to bear the risk in the examples stated? It does for
everything else. Isn't this the "collective" way?

And I have seen this line of thinking elsewhere, particularly when discussing
the merits of having a state at all. The idea that somehow we "owe" the state
for all these nice things it gives us _beyond_ what we already pay in personal
taxes.

"Go live in Somalia", they would tell me, if you don't like paying taxes.

------
roymurdock
Do subsidized projects such as Tesla earn any returns for the government?

~~~
reagan83
Yes, but with low margins. The $465m DOE loan extended to Tesla was repaid,
almost a decade before the maturity date, with an effective interest rate of
2.6% (approx $12m).

~~~
philwelch
Presumably, there is also the public good of having more electric vehicles,
which was the rationale for such subsidies in the first place.

------
anaolykarpov
I so very much hate socialism. The state, with the money it took from all of
us through taxes is presented as a benefactor because it gives small amounts
of those money back to research. And she wants the state to have more share
from successful research.

The state, any state, is a very bad administrator of funds, because the so
called state are basically a bunch of people spending other peoples money on
things that they dont understand and they dont really care about. What they
care about is building their own public image with those money in order to be
reelected.

I'd feel much more confortable in having to pay lower taxes and let the
private investors do the investment, because VCS actually care about how their
money are spent.

~~~
robotresearcher
I'd feel less comfortable without NASA, NIH, and DARPA, since I have
benefitted a great deal from the work they sponsored. I doubt very much I
would have had those benefits so soon without these grossly inefficient
agencies that have no idea what they are doing carelessly spending other
people's money on creating the space age, the Internet age, and the age of
genomics respectively.

I don't believe for a second that private investment would have done these
earlier or better if the greedy government had stolen less tax money from you.

edit: downvotes yay! Please enjoy using the Internet to show your distain for
giving credit for revolutionary federally-funded technology projects.

~~~
dnautics
>I'd feel less comfortable without NASA, NIH, and DARPA, since I have
benefitted a great deal from the work they sponsored. I doubt very much I
would have had those benefits so soon without these grossly inefficient
agencies... I don't believe for a second that private investment would have
done these earlier.

“It is difficult to get a man to understand something, when his salary depends
on his not understanding it.” -Upton Sinclair

Interestingly, one of your examples, genomics, is exactly contradicted by
Celera. At the time of inception the human genome project was slated to take
20 years! (We'd only be halfway done with it now). Say what you want about
their idiotic and immoral business model - patenting and licensing human genes
- the "private arm" of the human genomics project pushed for shotgun
sequencing and got the genome sequenced in 3 years; and the hapmap shortly
thereafter.

~~~
nmrm2
> “It is difficult to get a man to understand something, when his salary
> depends on his not understanding it.” -Upton Sinclair

The author met that they've benefited in the sense that we _all_ have
benefited.

I very much doubt that there are many people in the world who have directly
benefited (i.e., received grants from) all of NASA, the NIH, and DARPA.

~~~
dnautics
Even if the benefit is indirect, it's still hard to see how alternatives are
possible, even when the evidence is right there in front of you. Did you even
know we eradicated two diseases without the NIH (Smallpox, eliminated in the
US by 1897, long before the NIH existed) - and Polio, eliminated through the
private nonprofit March of Dimes.

------
dschiptsov
Are we re-inventing "Tragedy of the commons" principle, which is as old as
social inequality itself?

------
gustavodemari
The state needs to do only one thing, don't disturb private initiatives

------
logicallee
The article is a lot better than the title! (I only skimmed, rather than read
it though.) People should read it. I agree with a ton there.

But the article's author has a huge blind spot - if you search the article for
"tax", you will see just a couple of occurrences, and the author basically
dismisses the mechanism. It's almost as though the author had no idea how the
state even gets money - the author just thinks the state's role in innovation
is underplayed.

That may be true, but the size of the state depends (obviously) on the size of
the economy. It's obvious that if the state invests in innovation that causes
a 1000x rise in productivity, hugely increasing the size of the economy, then
the state also becomes larger, through the usual mechanisms.

Taxes are how anything is socialized - the author almost behaves as though the
state's money comes out of nowhere.

Another good example of applying the title incorrectly would be public
education. People generally go to elementary and high school for free. They
can then go off to work, sometimes even founding companies, which they could
never do if they're illiterate. You could consider education a "risk" on these
entrepreneurs: not everyone who becomes literate can create a ton of value in
private enterprise, either as a founder or someone working for a good salary
at a company; but nobody needed to take a risk on these people in elementary
school (with 10 years+ until payoff), the state does it. In fact it's
mandatory.[1]

So could we say, "We have socialized the risks of education but privatized the
rewards?" (in that you're a free person who is now educated.) Well, yes. But
who pays for all that public schooling - everyone does. The author perhaps
fails to see the relationship between a state causing an increase in society's
private benefits - and the fact that that the state is in a position to do so
due to the latter.

All the state is, is a percentage of the economy, which is public. It has a
good and important role - but that role comes from being a percentage. The
Thatcher quote is appropriate: "The problem with socialism is that eventually
you run out of other people's money to spend." That never happens if the state
remains 20%-30% of the economy. The size of the economy can simply increase
indefinitely.

It's not possible (which may surprise the author) for this to happen in a way
that doesn't cause the state to also increase in size. So while I agree with
the main contention, it bears pointing out that it is a two-way street:
private enterprise (and private citizens) get 'free' public goods from state
spending, that they don't have to pay for. But the state gets a 'free'
percentage of all private enterprise (and private earnings) - in fact, set at
whatever it wants. The state can literally tax whatever level it wants and in
whatever ways it wants.

So it is, in fact, a two-way street.

[1] see compulsory education - since the 1800's, "Fines were imposed on
parents who did not send their children to school and the government took the
power to take children away from their parents and apprentice them to others
if government officials decided that the parents were "unfit to have the
children educated properly"."

~~~
crpatino
On compulsory education:

If you agree with John Taylor Gatto, you could argue that the purpose of
universal education was never to provide children with opportunities to learn
how to make a living (apprenticeships rules date from the middle ages, and
every other human society solves this problem somehow), but to condition them
to blind obedience and dullness... for the direct benefit of the government
(in the age of Napoleonic Wars, you needed lots and lots of idiot sheep that
would literally march towards the enemy lines and shoot each other at point
blank range) and indirectly to the nascent class of industrialist who needed a
new kind of workers who would perform the same micro task over and over again
with no regard for the total process.

------
Rumford
Please don't tell me this central planning fad is coming back. The last time
people were infatuated with the planned society 200 million people died.

------
gcb0
i use that exact same phrase every time anyone tries to include me on a
discussion about tipping. (and then promptly leave said discussion)

~~~
jordonwii
Care to elaborate? I don't quite follow.

~~~
gcb0
restaurant owner pass the same risk of failure to the servers (no client, no
sales, no food on your plate end of month) in exchange of no extra benefit (if
restaurant goes really well, they will probably have to add more servers,
keeping the larger profit for owner, but cutting your tips in half, hence,
server has no benefit if restaurant is an overnight success)

