HomeGreening the economyWhat should be the state’s role in developing a green economy?

What should be the state’s role in developing a green economy?

Wind Turbine and sun from belowMany of us believe that the development of a vibrant green economy is vital to Britain’s economic as well as environmental future. But how should we best foster the green economy and is there a role for government intervention? Should the state try to actively stimulate green innovation and industrial development? Or should the ‘bumbling bureaucrats’ simply get out of the way and leave it to the dynamic venture capitalists and entrepreneurs? 

The role of the state in innovation and industrial development was the topic of the second in a series of six economic seminars being run by Green Alliance in 2014.

For this seminar, I was delighted to be joined by Mariana Mazzucato, Phillips professor in the Economics of Innovation at SPRU, University of Sussex . Mariana is one of the leading lights in this field, particularly since the publication of her book The Entrepreneurial State. And her advice on these questions is now sought by governments around the world.

These seminars are intended to help build understanding of the economic orthodoxies that underpin green policy and the arguments used to support or challenge them.

We recorded the seminar and below is a brief flavour of our fascinating discussion, together with the relevant audio links (approximately five minutes each).

You can listen to the full discussion (approximately 50 minutes) via a link on our website.

What is meant by innovation?
I began by asking Mariana to spell out what economists mean by innovation and why it is so important to economics and economic growth. In her response she emphasised that although innovation is one of the defining characteristics of capitalism, neo-classical economics has great difficulties in explaining it.

But can we really measure the pace of innovation and how we might best go about it? Mariana outlined some of the alternatives available and the limitations of approaches based on using patent data.

What is the state’s role?
We discussed the key concepts around the state’s role in promoting innovation and industrial development. I asked Mariana to explain the role of concepts such as market failures, public goods and externalities. She explained why such notions are insufficient to describe the state’s role.

We turned to the idea that the development of a green economy will need to be supported by the right forms of innovation accompanied by a well focused industrial policy. Mariana emphasised how the state had a vital role to not only to correct market failures, but to create and shape markets if a dynamic green sector is to develop.

The role of the private sector
In response to questions from the audience, Mariana discussed the role of SMEs, and other actors such as venture capitalists, in innovation. She stressed that she was not trying to diminish the role of the private sector in innovation, but was simply trying to rebalance the narrative that has typically ignored the state’s role. She also discussed the role of monopolies and the behaviour of large corporations in promoting innovation. Mariana highlighted the importance of the state’s role being driven by some clear purpose, or mission, such as eliminating CO2 emissions and the need to accept risks and the inevitability of some failures along the way.

Can a state be entrepreneurial?
I then asked about the title of her book, The Entrepreneurial State. I wondered whether even if one could accept that the state had a role to play in innovation, it might be much harder to see it as an ‘entrepreneur’. So I asked her to explain what she meant by this and she emphasised the need for the state to be willing to engage with the huge uncertainty and risk associated with entrepreneurship.

Many of the examples Mariana uses in her work relate to spin offs from government led military and security R&D. I wondered whether this could really be generalised to other areas of innovation. While recognising the importance of this type of R&D, eg for the development of the iPhone, she did not see the state’s role being limited in this way. For instance, she cited the important role the state has played in the area of healthcare R&D.

I put it to her that critics often see the notion of an expanded government role in innovation as a ‘statist’ solution. I wondered whether the failings of capitalism could be better addressed through corporate reform, rather than enhancing the state’s role. In response she said she saw corporate reform as a key element, complementing the need for a mission driven industrial policy.

Engaging the Treasury and valuing the public sector
In response to a question from the audience, Mariana explained how she saw the importance of engaging finance ministries – such as the UK Treasury – in developing an innovation strategy. This needs to be part of a broader vision which recognises the government’s role in determining not only the pace of innovation, but also its direction.

Mariana rounded off the evening with a discussion of industrial policy and the need to recognise the importance of the public servants who work in this area. She felt that if we continually denigrate the government’s role, we will make it hard to attract the right people into the public sector.

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Julian worked for the Green Alliance as Chief Economist from April 2013 to March 2015

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