THE MISSION ECONOMY: TAKE OFF OR FAILURE TO LAUNCH?PART 1: THE CASE FOR CHANGE
The bookshelves of many government members in the Australian Parliament apparently include a short book by influential economist Marianna Mazzucato. Its title: Mission Economy: A Moonshot Guide to Changing Capitalism
Mazzucato is one of a number of leading western thinkers who argue that free-market capitalism is in crisis. Rebecca Henderson is another. Indeed, Henderson sees reimaging capitalism as “the world’s most important conversation”.
Common concerns sit behind these views. Looming especially large is the failure of the world to tackle climate change and other environmental problems. But also prominent are the falling share of income flowing to workers, deepening inequalities within nations, business and finance market short-termism, and the inability of capitalism to measure (and therefore value) what is really important to people.
Not everyone is convinced that ‘crisis’ is the right frame. Branko Milanovic, for one, sees a dark side to capitalism but views the alternatives as worse – some much worse. He argues that, in terms of generating global well-being, capitalism “stands alone”. The questions for Milanovic are what form of capitalism should prevail (democratic or authoritarian) and how can it be improved.
Milanovic’s aim - to improve capitalism, not replace it entirely – is generally shared, even by those who think it is in crisis. Views differ significantly, however, on the degree of change needed. Milanovic suggests modest adjustments. Henderson is more radical. Mazzucato seeks nothing less than a “new political economy”, albeit one that sits within a broadly capitalist construct.
The case for change
Advocates for change point to failures in the ‘pure’ free-market model promoted by economists like Frederick Hayek and Milton Freidman, and reflected most famously in the policies of US President Ronald Reagan and UK Prime Minister Margaret Thatcher. In this model, markets based on rational self-interest and individual freedom dominate economic activity and the allocation of societal resources. Business’ sole role is to maximise returns for shareholders. Government is presumed to be inefficient and a detractor of value. Its role is at the margins, acting only when markets manifestly fail.
Critiques of this model are not new. Economist Richard Nelson argued in 1977 that the view that economic problems were concentrated in the non-market (ie government) sector was “empirically false”. He described simple questions about the merits of regulation as “silly” and felt that prevailing thinking gave insufficient attention to encouraging economic dynamism. Nelson was not alone, but the economic zeitgeist was elsewhere.
A more modern criticism of the free-market model flows from the work of psychologists like Daniel Kahneman and Amos Tversky. This work questions the notion of humans as rational actors who are well placed to make decisions in their own best interest. The apparent extent of this non-rationality eats at a key technical assumption of the free market model, if not its deeper philosophical core.
Mazzucato’s concerns are more expansive. She argues that free-market thinking is based on five “myths”. Myth 1 is that only business creates value. Myth 2 is that markets obviate the need for government action. Third is that government should act as a business. Fourth is that outsourcing saves money. Myth 5 is that government is unable to pick winners.
Underpinning Mazzucato’s thinking is a carefully formed view that the current economic model preferences value extraction (often manipulated by vested interests) over value creation. Echoing Nelson, she believes this results in society underinvesting in the dynamic drivers of growth. Henderson, one suspects, would agree.
A point of reflection
Milanovic would likely call for some reflection at this point. His reminder would be to focus on the benefits (well-ordered) free-markets have delivered globally. Yes there have been problems, but this should not cause us to lose sight of the upsides.
It is perhaps also worth noting that lived reality of free-market capitalism has also never quite matched the theoretical construct of ‘small’ government, unfettered markets and self-centred rationality – even at the peak of its influence. Over Reagan’s term as US President, for example, general government spending was more than one-third of US GDP – much lower than in Nordic nations, but economically significant nonetheless.
The impact of free-market thinking was, however, a trend towards smaller governments which provided fewer services and regulated less. In the UK, final government consumption (a measure which excludes welfare and other redistributive payments) fell from 22 per cent in 1975 to 16 per cent in 1997 – a period dominated by the policies of Prime Minister Thatcher. The change in Australia was much smaller, and occurred later. Here, final government consumption was more constant, peaking at 19 per cent in 1992 before falling to 17 per cent in 2008 (in 2021, the figure was a pandemic-inflated 21 per cent).
Government is, of course, much more than the sum of its spending. Possibly the biggest impact of free-market thinking was not on spending or asset sales, but on regulatory stewardship. It is arguable, for example, that some of the problems identified by recent Royal Commissions are rooted in the hands-off attitudes of free-market thinking.
Arguments about the past and future role of free-market thinking will continue, as they should. In pursuing change, care needs to be taken not to unthinkingly lose the advantages of the model in place today. But evidence of a ‘dark side’ of the ‘pure’ free-market model is growing, and the economic zeitgeist is shifting. Governments are right to respond. The big question is not whether there is a case for change, but how much change and what an obtainable better model might look like.
A moonshot economy?
While thinkers differ on the extent and nature of change needed to the ‘pure’ free-market model, commonalities exist. Both Henderson and Mazzucato, for example, see a need for: government and business (and society) to work more inclusively to define areas of “shared value”; for business to become more purpose driven, including by shifting focus from maximising short-term shareholder value to maximising long term “stakeholder” value; and for the finance system to (in Henderson’s words) be “rewired” to focus on long term value.
It is on the vision for government where Mazzucato and Henderson diverge. Mazzucato’s call is for government to think big and act big. Far from being a residual player, government’s role should be to set ambitious societal ‘missions’ (moonshots) and ‘shape’ markets towards achieving them. Henderson is more cautious, seeing a bigger autonomous role for business in setting and pursuing a purpose driven agenda.
Mazzucato uses the Apollo project to demonstrate what a ‘mission’ could involve and achieve. Commissioned by US President Kennedy in 1961 in response to early Soviet successes in space, the Apollo project achieved its ambitious aim of putting a ‘man’ on the moon and returning ‘him’ safely by the end of the decade. NASA was given substantial freedom (and budget) to pursue its mission and was able to evolve public-purpose partnerships between government and business – a feature Mazzucato is keen to replicate.
Apollo’s success is a fact of history. An ambitious, clear and time-bounded mission was achieved. It was an extraordinary technical achievement, which provided a spring board for a raft of innovation. The more difficult question, however, is whether it provides a replicable mechanism for achieving other policy goals.
Mazzucato is convinced the answer is yes. But there are caveats. A major caveat is that missions are risky and that society needs to back government to take bigger risks and accept that some missions will fail. Another is that technical missions (like Apollo) are much easier to achieve than social ones (like ending child poverty). A third is that pursuing multiple objectives is problematic (Mazzucato offers the pursuit of energy that is both non-nuclear and low-carbon as an example) and that capturing desirable secondary benefits should be left to serendipity.
For those of the government benches, it must be an attractive vision. An activist government working closely and inclusively with business and citizens to define and pursue long-term missions which create real long-term public value. The vision is clear. However, key questions remain: can it be achieved; will it deliver the outcomes promised; and at what cost.
Part 2 will explore what a mission economy looks like and how Australia’s economy measures up today.
First published in The Mandarin.
Sean Innis is Principal of Damala St Consulting. He is a Fellow of the Australian National University and Chair of Public Policy and Senior Fellow at ADC Forum.