The inclusive entrepreneurial state: collective wealth creation and distribution

Abstract

This commentary explores how a new theory of value creation has implications for the distribution of that value. It argues that different theories of value creation lead to different resource allocations and different justifications for them. Thus, to achieve a more equitable distribution of value, a new theory of how that value is created in the first place is needed. This new theory should recognize that value is created collectively, not only by business but also by government and civil society. The state, while predominantly portrayed in traditional economics as a market fixer, has instead often been responsible for actively shaping and creating markets, not just fixing them. Indeed, the most successful capitalist economies have had proactive states that made risky investments, many of which led to technological revolutions. A better understanding of the state's role as a lead risk-taker and innovator (the ‘entrepreneurial state’) can thus also enable a more socially equitable distribution of value.

Introduction

The distribution of wealth generated within an economy raises both moral and economic questions. Arguments around the question of which actors are entitled to what often link the distribution of rewards to the initial contributions, justified by fairness and efficiency. However, the assessment and measurement of these contributions hinge on the underlying theories of value deployed to define them. Thus, different theories of value creation can lead to significantly different arguments about how income and wealth should be distributed across society (Mazzucato 2018a).

In this commentary, which accompanies the article by De Loecker et al. (2024), I contend that the state's role in creating value has been inadequately theorized. The underestimation of the state's role in creating value has led to an exaggerated emphasis on the contributions of other economic actors, skewing the overall distribution of income and wealth. Consequently, the state's capacity to catalyse innovation-led growth that is also inclusive and sustainable has not been fully leveraged.

The key to this problem is that in economic theory, the state is, at best, seen as facilitating the process of wealth creation but not as an important driver of the process itself. It is seen as fixing markets, not creating them. It is seen as de-risking the value creators, not taking risks to create value. It is seen as a lender of last resort, not an investor of first resort.

This narrow definition of the state’s role in income and wealth generation has led to significant challenges. It has restricted policy practitioners' understanding of the tools they have at their disposal for catalysing growth, often leading them to adopt a passive role focused on ‘levelling’ rather than ‘tilting’ the playing field. This tendency has diminished the public sector’s confidence, leaving it more susceptible to capture by vested interests and ‘rent-seeking’ behaviour. This view has also intensified inequality by enabling certain players to claim a disproportionate share of the wealth—exceeding their actual contribution (Mazzucato 2018b).

This commentary suggests that a more comprehensive recognition of the state’s current and potential value creation is essential for developing policy solutions that can foster not only the rate but also the direction of growth. This approach involves discouraging rent-seeking behaviour while encouraging sustainable practices and ensuring a more equitable distribution of co-created wealth. Addressing inequality necessitates shifting from a purely redistributive state to one that is more entrepreneurial (Mazzucato 2013)—one where pre-distributive structures are in place. Pre-distribution involves the state proactively establishing structures through which risks and rewards are equitably shared from the outset, reducing the need for extensive ex post redistribution. This allows the government to be less in the position of having to pick up the mess afterwards and more in the position of directing growth to achieve the right outcomes in the first place (Palma 2019).

In the following sections, this commentary reviews ‘market failure theory’ (MFT), which has promoted the depiction of the state as a market fixer to then examine how the issue of government failure has been deemed more significant than market failure. Further, it offers an alternative perspective of the state as a market maker, foregrounding the role of public investment in driving, rather than merely enabling, innovation. The commentary explores how mission-oriented policies can play an important role in shifting the dynamic of fixing market failures towards shaping co-created markets. Moreover, it examines how recognizing value creation as a collaborative effort, involving significant taxpayer contribution, can lead to more equitable value distribution. Finally, the commentary introduces examples of direct and indirect measures to share risks and rewards and provides a conclusion.

MFT: the state as a fixer

The understanding that the state can at best fix market failure and correct market imperfections is grounded in MFT. This literature posits that public intervention in the economy is justifiable only when it aims to address instances where markets fail to efficiently allocate resources (Arrow 1951). According to MFT, government intervention is confined to addressing market imbalances in areas marked by positive or negative externalities. For instance, positive externalities occur when the benefits of public goods extend beyond direct consumers to others in society. The challenge of appropriating private returns often leads to underinvestment, which provides a justification for state intervention. Conversely, overinvestment in areas that lead to negative externalities, like pollution, necessitates public intervention to compel the private sector to internalize these external costs through measures like carbon taxation.

Market failures often stem from negative externalities generated by goods and services without a corresponding market and ‘equilibrium’ price, such as climate change, traffic congestion or antibiotic resistance. For example, climate change can be conceptualized as a negative externality that results from carbon-heavy industrial activities and fossil fuel combustion. Applying such an economic lens to climate change, Stern (2006, p. 1) described climate change as ‘a unique challenge for economics’ and ‘the greatest example of market failure we have ever seen’. To address this, economists often propose market-based solutions, such as carbon pricing or tax incentives. Such strategies aim to correct market failures while allowing the market to guide the direction of change.

In essence, MFT is applicable to scenarios where public policy acts as a supplement to existing market trajectories, effectively providing corrective measures to ‘level the playing field’. Taken to its extreme, public choice theorists go as far as advocating for minimal governmental intervention, arguing that excessive involvement can lead to government failures, including corruption and the crowding out of businesses. As a result, MFT is less useful—and can even be an active barrier—in situations where the objective of policy is to transform the economy by shaping and creating new markets. Its limitations become particularly evident in addressing today’s grand challenges, where MFT fails to account for the needed transformative and catalytic public investments. Indeed, such investments have historically been critical in generating new technologies and sectors (Nelson 1977; Foray et al., 2012; Mazzucato 2018b).

The economics of transformation: the state as market maker

Markets are outcomes of the interactions between government, business, workers and civil society—viewing markets as pre-existing entities is limited. In his influential work, Karl Polanyi (1944) argues that it is the state that brings markets into existence. He writes, ‘The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism’ (p. 144). Polanyi’s examination extends beyond the formation of markets throughout economic history. It is equally relevant to comprehending contemporary market structures, especially those propelled by innovation. Key general-purpose technologies, ranging from aerospace to communications, to information technology, were initially financed by the public sector (Ruttan 2006; Block and Keller 2011). In this context, Polanyi's work challenges the idea of government activity as mere ‘interventions’, proposing instead that markets are inextricably embedded in social and political institutions (Evans 1995). This interpretation aligns even with Adam Smith's (1776) concept of a free market, which he did not perceive as an inherent natural state devoid of government action. For Smith, a ‘free’ market meant ‘free from rent’—a state that requires much policymaking. In economic theory, there is a notable lack of terminology addressing the role of public institutions in creating value through their vision, investment and regulation (Mazzucato 2018b).

Market-creating investments stand out because they go beyond just funding upstream basic research, which is traditionally seen as a public good. Investments that have sparked technological revolutions span the entire innovation chain. This includes basic research funded by agencies like the National Science Foundation (NSF), applied research funded by the Defence Advanced Research Projects Agency (DARPA) and early-stage financing of the private sector through programmes like Small Business Innovation Research (SBIR). SBIR leverages government procurement as a tool to nurture small companies by enabling them to provide goods and services to the public sector (Block and Keller 2011; Mazzucato 2013). While these agencies might not function in a coordinated manner, their innovation instruments are distributed across a decentralized network, encompassing the entire innovation chain. Significantly, their efforts are often driven by an ambition to create new markets rather than just fixing existing failures. For instance, the development of the Internet, initially aimed at facilitating satellite communication, was a project funded by DARPA—an agency with a clear, mission-oriented focus within the government. Other notable examples include the GPS system and advancements in sectors such as nanotechnology, biotechnology and clean technology, all of which underline the transformative impact of such agencies (Block and Keller 2011; Sampat 2012). Similarly, the BBC—a dynamic public broadcaster funded by the UK government—has achieved the success it has due to its willingness not only to do what the private sector does not do (e.g. quality news and documentaries) but also to transform the landscape of commercial areas such as soap operas (Mazzucato et al., 2020a). Capturing this activity has required measures of public value inside the organization that are not well understood in economics (Mazzucato and Ryan-Collins 2022).

Mission-oriented investments have played a crucial role in fostering symbiotic public and private partnerships, forging new networks and driving the techno-economic landscape, leading to the emergence of new markets (Mazzucato 2021). This approach differs significantly from the traditional view that the private sector only requires incentives to adjust its investment within an existing space. Indeed, it is the space itself that is created and shaped by public policy, with the private sector typically only joining at later stages. The essence of mission-oriented policy is not just to minimize risk but to proactively engage in risk-taking, underpinned by innovative thinking and visionary planning. It moves beyond the understanding of public investment as extending only to fundamental aspects like infrastructure without which businesses would struggle to transport goods, or the protection of private property.

From fear of picking winners to picking the willing

A mission-oriented approach is not about government ‘picking winners’, such as a particular firm or sector, but about setting ambitious goals, such as a green transition, that require cross-sectoral investment and innovation. Mission-oriented policies should be leveraged to develop projects that draw out contributions from willing actors. While a de-risking strategy tends to be conservative, focusing on minimizing the chances of selecting failing projects, it does not inherently increase the likelihood of choosing successful ones. The latter necessitates employing a portfolio approach to balance the selection process effectively (Rodrik 2013). In this way, successful projects have the potential to compensate for the losses incurred from unsuccessful ones while also enabling public institutions to learn from the latter (Mazzucato 2013).

The point is not that the private sector is unimportant, or that government investment will always lead to successes; but that in new sectors, such as biotechnology, nanotechnology and the emerging green economy, private businesses have tended to invest only after returns were in clear sight. In other words, the animal spirits of business investors are inextricably linked to public investment, often provoked only after public investments have laid the groundwork in areas that are capital-intensive and high risk. Indeed, it is when government investments are bold, strategic and mission-oriented that the most crowding in has happened. And the key here is the need for government not to put all eggs in one basket, but rather picking a direction that requires many organizations to innovate and invest, and designing instruments (procurement, grants, loans) to crowd in all those organizations that are willing to help achieve a problem—whether this is going to the moon or fighting climate change. In this sense, government support should not be about picking winners—blanket support to a firm or technology—but rather picking the willing.

Once the state's role as a lead investor and market-creator is acknowledged, the next question is how to create a policy framework that can foster symbiotic public–private relationship and to mobilize its energy towards addressing societal challenges and facilitating more sustainable growth. In the next section, I discuss mission-oriented innovation policies as a possible framework—one that is not about levelling but tilting the playing field, not about picking winners but picking the willing and not about lending as a last resort but investing as a first resort—in areas that can create a more inclusive and sustainable economy.

From fixing markets to actively co-shaping

Mission-oriented policies are strategic public initiatives that utilize cutting-edge knowledge to achieve specific goals, akin to ‘big science tackling major issues’ (Ergas 1987). These missions mark a paradigmatic shift from a reactive policy framework, which primarily focuses on addressing existing problems, to a proactive approach that shapes and influences outcomes (Mazzucato 2016). This necessitates a role for public organizations that extends beyond the mere redistribution of wealth to include active wealth creation.

Contrasting with the market failure framework, which predominantly relies on static cost–benefit analyses, a mission-oriented approach calls for a dynamic and continuous evaluation process throughout the entire innovation cycle. In this vein, a broader focus on public value, rather than public goods, recognizes that missions have the potential to instigate transformative changes across the entire innovation chain. Such transformative impacts may not be fully encapsulated by the conventional economic notions of positive and negative externalities, necessitating a more nuanced and expansive understanding of public contributions and their broader societal and economic spillovers.

The Apollo Program shows how a clear outcome—sending a man to the moon and back—drove consequential organizational change (intense state and business collaboration across multiple sectors), well-designed procurement contracts (fostering of bottom-up solutions) and the willingness to innovate and experiment (dynamic capabilities). The Apollo Moonshot required many different sectors to innovate, leading to ‘spillovers’ from software to camera phones to baby formula. Such dynamic outcomes demonstrate the far-reaching impact of mission-oriented policies, highlighting their potential to drive significant advancements and innovations across multiple sectors in an economy (Mazzucato 2021).

Examples below as discussed in Mazzucato (2018c) from three classic mission-oriented agencies exemplify the point: the organizations are not about fixing existing markets but creating new landscapes.

• National Aeronautics and Space Administration (NASA): to ‘[d]rive advances in science, technology, aeronautics, and space exploration to enhance knowledge, education, innovation, economic vitality, and stewardship of Earth’ (NASA 2014 Strategic Plan).

• DARPA: ‘[c]reating breakthrough technologies for national security is the mission of the Defense Advanced Research Projects Agency’.

• National Institutes of Health (NIH): to ‘seek fundamental knowledge about the nature and behaviour of living systems and the application of that knowledge to enhance health, lengthen life and reduce illness and disability’.

By breaking new frontiers and bringing together different actors, these organizations are better placed to attract top talent as working for them is both, considered an honour and intellectually engaging. While NASA putting a man on the moon exemplifies the archetypical mission, modern missions extend beyond technological feats to address multifaceted social, economic and political challenges that demand sustained, long-term commitments (Foray et al., 2012; Mazzucato 2021).

Mission in focus: a green transition

Governments and international organizations are proactively developing strategies to address the major challenges we are facing today. Approaching the green transition through a mission-oriented lens is one example. Indeed, climate change, spanning environmental, demographic and social issues, has become central in shaping innovation policies, serving as a key justification for action, providing strategic direction for funding policies and innovation efforts.

The 17 Sustainable Development Goals (SDGs) are tangible starting points for initiating cross-sectoral missions, akin to how the Apollo Program fuelled advancements in aeronautics, nutrition, materials, electronics and software. Each SDG presents an opportunity to catalyse bottom-up innovation, transforming these goals into actionable and collaborative missions. This approach has the potential to reshape business expectations, signalling promising areas for growth and investment. In other words, rather than displacing private sector activity, these mission-oriented initiatives can effectively crowd in business investment and participation (Mazzucato 2021).

For example, SDG 12 on responsible consumption and production can be broken down into city-level targets to achieve carbon neutrality. Doing so successful will involve diverse sectors from energy, to construction, to food, to real estate. The emphasis should shift from a sector-specific to a challenge-driven approach, encouraging multiple sectors to invest and innovate. It is key to incentivize transformation through tools, such as procurement, grants and loans, which can be designed to foster bottom-up innovation.

Transforming the economy to be sustainable and inclusive is an endeavour as significant as the moon-shot. Doing so is not about choosing outcomes that benefit only certain market players while disadvantaging others. Tackling climate change and achieving the SDGs requires the entire economy to transform. Business, government and society will have to work in ways that centre long-term competitiveness, with a particular focus on financial stability and the risk associated with climate change. Figure 1 illustrates the movement from broad challenges to specific missions.

Green growth presents a more complex challenge than the purely technological accomplishment of the lunar exploration. Asking why we have been successful to get a man to the moon but have not solved inequality or poverty, Nelson (1977) points out how such ‘super wicked’ problems require focus on the interaction between the social, political, economic and technological spheres. Such challenges require not only innovation but also behavioural and regulatory changes across the entire economy.

In recent years, missions have permeated various national and transnational policy landscapes. For example, five mission areas related to climate change, cancer, water, cities and soil are at the heart of the European Union’s €94 billion Horizon Europe programme (Mazzucato 2018d, 2019). The UK’s ‘challenge-led’ industrial strategy, developed between 2017 and 2019, also demonstrates the possibilities of cross-sectoral rather than vertical or horizontal approaches, which missions around ‘Clean Mobility’ and ‘Healthy Ageing’ (UCL Commission for Mission-Oriented Innovation and Industrial Strategy 2019). This strategy actively aims to link national policy with a raft of regional industrial strategies from devolved regions, including the city regions of Greater Manchester and Liverpool (Mazzucato et al., 2019). Indeed, the recent COVID-19 pandemic has highlighted the link between economic resilience and health, illustrating that strategies for promoting economic growth are inextricably linked to social, environmental and political considerations.

Tax policy can be designed to shift private investment towards activities that matter to people and planet. For example, in the independent region of Biscay in Spain, the local government is using a new type of tax policy to reward firms that are making contributions towards Biscay’s priority SDGs. Actions are tallied in a manner that allows for participating companies to be compared and they receive, where eligible, a different tax treatment. Such measures are crucial so that SDGs can help clarify what type of economy, society and environment we want and so that tax policy can be used to incentivize action towards these goals (Mazzucato et al., 2021).

Ultimately, the recognition of the entrepreneurial role of the state as lead investor and risk-taker and the potential of the mission-oriented approach to shape public–private partnerships means that the public sector must actively ensure the socialization of rewards. An improved alignment of risks and rewards among business, government and civil society can serve as a tangible method to ensure that growth is driven by smart and innovative strategies that are also inclusive and sustainable.

Socializing risks and rewards

Orthodox economics typically foregrounds the state's role as setting background conditions, underestimating its entrepreneurial role as a leading investor. This perspective neglects how risk-sharing should be accompanied by a shared distribution of benefits. The more downstream the public sector's investment in specific technologies and enterprises, the higher the risk the state takes on in making such investments. This reality, well understood by venture capitalists, acknowledges that multiple failures often precede a success. The most prosperous capitalist societies have benefited from proactive states willing to engage in high-risk investments which have then spurred technological revolutions. This observation leads to a pivotal question: How can the state, akin to private venture capital, garner returns from its successful ventures to offset inevitable losses and fund future investments? This is particularly pertinent considering the path-dependent and cumulative nature of innovation, where initial negative returns eventually yield substantial benefits, as evidenced in sectors like ICT, biotech and nanotechnology.

The conventional argument is that the public sector benefits from knowledge spillovers and increased tax revenues due to job creation and corporate taxation. However, this assumption is challenged by the evolving patent system which increasingly allows patents on upstream research that can hinder knowledge dissemination and automatic spillovers. Furthermore, the dynamic nature of innovation and returns of scale implies significant gains for early adopters of new technologies (Nelson and Winter 1982). Yet, with the global movement of capital, the investing country or region is not guaranteed to reap all economic benefits, such as employment and taxation. This is compounded by the global decline in corporate tax rates and the rise in tax avoidance and evasion, with some major technology firms, beneficiaries of public support, accused of tax evasion.

Crucially, the benefits that arise from foundational investments like education and research, often termed ‘upstream’ investments, should not be viewed as requiring immediate financial returns for the state. However, the nature of ‘downstream’ investments, those directed at specific companies and technologies, is distinctly different. Given that a portion of these targeted investments are likely to fail, it is critical for the state to manage these as a diversified portfolio. This approach allows the successes to offset the failures, balancing the overall risk and reward. Aligning failures with corresponding successes is less critical than establishing an institutional framework that ensures successful policies yield sufficient returns to offset losses, and losses inform and enhance future policy development. Ambitious goals are most effectively met through decentralized networks that allow organizations to remain flexible (Block and Keller 2011; Breznitz and Ornston 2013). This perspective can be enriched by examining the formation of public–private partnerships, particularly in the collaborative development of new products and services, including vaccines (Chataway et al., 2007).

It can be argued that when public investment has led to technological breakthrough, the state (and taxpayers) deserves to reap the benefits by retaining a small share of the intellectual property of the innovation it helped create. This does not imply that governments should have exclusive rights or own a substantial share as it is not the state's role to run commercial businesses. However, by holding a portion of the value it contributed to creating, which could significantly appreciate over time, the state can accumulate funds for investing in future innovative ventures.

By sharing risks and rewards, it is inevitable that those rewards going to the top 1% will be lower. The large digital companies for example (sometimes referred to as FAANG: Facebook, Amazon, Apple, Netflix and Google) have received a large share of income produced by a collective value creation process. For instance, Google's revenue in 2021 was $185 527 billion but it employed only 139 995 staff, while Apple's revenue was $274 515 billion with only 147 000—both corporations relying largely on the collective value created by the billions of users of its platform and products worldwide.¹ Meanwhile, Facebook has received $785 491 326 in disclosed state subsidies, mostly for data centres, including a $355 million deal with the state of Georgia, $150 million packages from Utah and Texas and $41 million from Oregon.² Thus, not only must they be paying their fair share of tax, often avoided through tax gimmicks (Mazzucato et al., 2020b), but also they should be capturing a lower share in the first place. For example, it was the NSF that funded the Google algorithm. Grant agreements could include a provision stating that if the grant fails to yield commercial success, the company is not obligated to repay anything. However, if the company achieves profits of X billions as a result of a public grant, a portion of these profits could go to a public wealth fund, enabling the development of more successful ventures like Google.

Similarly, the guaranteed loans from the US Department of Energy that went to both Tesla and Solyndra could be structured as a proper public portfolio where the government does not only cover the losses when things go bad (e.g. Solyndra) but also gets an upside when things go well (e.g. Tesla). Indeed, the Obama Administration gave nearly the same amount to the two companies during the 2009 post-financial recovery period (Tesla received $465 million in a guaranteed loan, and Solyndra received $500 million). Strangely, the agreement was that if Tesla did not pay back the loan, the government would get three million shares in Tesla—an odd deal given that usually when a company does not pay back a loan it is because things are not going well. The idea of a public stake in a bad company is not what taxpayers want. Had the agreement been that the government would get three million shares if the loan was paid back, it would have been a good deal. As the share price increased from $9 in 2009 to $90 in 2013, the difference multiplied by $3 million could have gone back to a public fund, covering both the Solyndra loss and a next investment round. The problem is that by not admitting that the state in that case acted like a public venture capitalist—and has the potential to do so in other instances—it ends up socializing risks and privatizing rewards.

Another way to socialize rewards in a way can involve making sure that companies benefiting from public support operate in a manner that serves the public. To steer public investment in the desired direction and maximize public value, governments can attach conditions to the public support provided to the private sector, making these investments conditional upon recipients adhering to requirements aligned with these objectives, such as those promoting a just green transition. Conditions can be stipulated in contracts and funding criteria, defining the terms under which support is granted. Essentially, industrial strategy should embody a ‘deal’ that ensures the maximization of public benefits from such investments (Mazzucato 2022a, 2022b; Mazzucato and, Rodrik 2023). For example, the trend of extracting value from the real economy through buying back shares (Lazonick 2014) can be countered by imposing contractual conditions that mandate companies to reinvest profits derived from collective wealth creation back into the real economy, such as in worker training or research and development (R&D; Mazzucato and Rodrik 2023). The specific direction of such reinvestment can also be stipulated. Energy companies can be required to transition towards renewables. A notable case is a loan to the German steel industry by KfW which was made conditional on the recipients to reduce the material content of steel by recycling, repurposing and reusing material throughout the value chain (Vogl, Åhman and Nilsson 2021). During the COVID-19 pandemic, several examples emerged, particularly in the context of industry bailouts. Austria, for example, has tied its financial support to the airline industry to meeting specific environmental goals. Similarly, France has imposed 5-year objectives to reduce domestic carbon emissions, while together with Denmark denying state assistance to companies registered in tax havens.

Indeed, the pandemic has also underscored the importance of directing innovation towards the common good by harnessing collective intelligence (Mazzucato 2023). Success in scientific and medical innovation is enhanced when researchers share and exchange knowledge, collaboratively building upon each other's achievements and setbacks in real time. Recognizing this, the World Health Organization initiated the mRNA Vaccine Technology Transfer Programme to address the unequal access to COVID-19 vaccines in 2021. This program, centred around a hub in South Africa, aims to establish mRNA vaccine production sites in low- and middle-income countries (LMICs) to decentralize and enhance vaccine manufacturing, fostering local capacity in mRNA technology. The success of the Transfer Programme hinges on its ability to foster a collective approach towards knowledge sharing, emphasizing the development of an R&D pipeline tailored to local health needs and equitable access, rather than prioritizing the individual market success of each producer (WHO Council on the Economics of Health for All 2023).

Further, COVID-19 has highlighted the potential for governments to use equity stakes, by converting loans (like those from the UK’s Future Fund), as a means to mitigate the supply shock particularly felt by small- and medium-sized enterprises, thereby safeguarding the entrepreneurial backbone of society. Also, the crisis reveals the need for developing a ‘public option’ for the production of affordable and quality-assured key resources that are prone to shortages and supply chain disruptions, and to ensure their availability and accessibility especially at times of emergency. Furthermore, the idea of structuring recovery funds and bailouts to be conditional on private sector investment in areas needed for a green transition has found foot in some countries, including France and Austria.

Examples of direct and indirect public ‘returns’ for public investments

Numerous public organizations have adopted strategies to effectively distribute risks and rewards. For example, they have issued licenses to private companies that are prepared to upgrade technologies owned by the public sector. NASA has occasionally reaped benefits from its technological innovations while allowing private entities to profit from the added value in successful commercialization efforts (Kempf 1995). During the Apollo Program, NASA also placed a ‘no excess profits’ clause in its procurement contracts to ensure that public investments led to a more equitable division of returns (Mazzucato 2021). Further, there are examples of state-owned venture capital activity generating royalties from public investments (e.g. in Israel; see Avnimelech 2009) or equity (e.g. in Finland via SITRA, the Finnish Innovation Fund) and the more pervasive use of equity by state development banks (e.g. in Brazil, China and Germany; see Mazzucato and Penna 2016; Mazzucato and Macfarlane 2023). Policy mechanisms aimed at addressing issues of risk and reward encompass both supply- and demand-side approaches oriented towards fostering public value creation through mutually beneficial public–private partnerships (‘active’) and preventing value extraction (‘passive’) (Lazonick and Mazzucato 2013). There are various ways in which rewards may be distributed—such as through direct measures like profit sharing or through indirect measures like conditionalities. I review both below.

Direct measures to secure ‘upside’ for the state

• (a)

  Revenues beyond taxation. Governments may opt to acquire a portion of the financial benefits derived from public investments, which they can use to not only cover potential losses but also fund future ventures. Direct profit sharing, as opposed to indirect measures, can more effectively guide the direction of innovation and promote greater flexibility in managing recovered funds. The specific design of a profit-sharing model and the intended form of public return should be tailored to the financial instruments used to bolster innovation (Laplane and Mazzucato 2020). Some examples are summarized in Table 1.

• (b)

  Equity stakes. Governments can, as in the Tesla and Solyndra cases described above, take equity stakes in companies that they help to finance. This has been done in countries with public venture capital funds (e.g. Yozma in Israel) or by public banks (e.g. European Investment Bank, KfW Bank in Germany, SITRA in Finland). The idea is that a public fund is rewarded for its high-risk investments through shares in successful ventures. Such shares can be used to replenish the fund so that it can cover losses and invest in future rounds. Interestingly, such policies have become more popular now with the COVID-19 recovery funds, where it has been argued that the government should be taking equity stakes in the companies it helps to bail out (Hockett 2020). But rather than seeing this only as an issue during a crisis-related bailout, the bigger issue is how a public investor of first resort, necessary to innovation-led growth, gets back its reward for the risk taken. Equity stakes are one possible answer.

Indirect measures to ensure benefits in the public interest

• (c)

  Pricing capping schemes. To prevent taxpayers from bearing the costs twice, the government can consider pricing-capping schemes rather than relying on the market to naturally set fair prices. The potential to do so exists under Section 203 of the Bayh–Dole Act, which grants the US government the right to ‘march-in’ over pharmaceuticals. The right is applicable if patent holders who have benefited from public funding fail to meet the ‘health and safety needs’ of consumers (Sampat and Lichtenberg 2011). While there have been extensive discussions of enacting this right in recent years, it has not been implemented (Davis and Arno 2001; Korn and Heinig 2004). Another strategy to ensure competitive pricing involves the enforcement of competition and antitrust policies, which can adopt a stricter stance against monopoly pricing than what has been observed in the USA over the past four decades (Stiglitz 2017).

• (d)

  Conditions on reinvestments. An alternative approach involves setting conditions for reinvesting in the real economy, achievable through regulatory means or as part of a contractual agreement (Mazzucato 2022a, 2022b; Mazzucato and Rodrik 2023). For example, Bell Labs was established as a consequence of the US Department of Justice’s antitrust laws (Brumfiel 2008): for AT&T to maintain its phone system monopoly, the company was required to reinvest a portion of its profits into research. Conditions that mandate specific commercial, industrial or technological benefits in defence-related procurement (‘offset agreements’) are widespread. A notable example is Sweden, where such agreements have been deliberately used to bolster the military aircraft industry (Eliasson 2017).

• (e)

  Knowledge governance. To promote the creation and diffusion of knowledge needed to address issues like climate change and poverty, several strategies can be employed. Reforming intellectual property rights (IPR) is crucial, aligning it with the broader institutional needs related to access and knowledge sharing (Henry and Stiglitz 2010). Such a reform can be aimed at more flexible IPR that is used for productive rather than financialization (Mazzoleni and Nelson 1998; Frischmann and Lemley 2007). Additionally, strategic management of IPR could involve leveraging certain flexibilities within the World Trade Organization's TRIPS agreement. Governments might use compulsory licenses to access knowledge or negotiate lower prices on proprietary goods. This tactic has been previously employed to enhance access to medicines and genetic diagnostic tests in countries like Brazil, India, Indonesia, South Africa and France, as well as for procuring antibiotics for defence in the USA (Reichman 2009).³ When IPR obstructs the creation and dissemination of critical knowledge, competition and antitrust policies, as implemented by European authorities (Motta 2004), can be effective. These policies could be further bolstered by alternative incentives like ‘open source’ models and prize systems. Being a lead investor grants public organizations more control to decide on the ownership of resulting inventions and negotiate licensing conditions. This role can foster spillovers both within industries and across economies, as evidenced by defence-related R&D spending in the USA (Mowery 2009).

• (f)

  Tax reforms. Addressing current tax evasion, avoidance and unproductive incentives like the patent box—which boosts profits without increasing business investment—or lower tax rates on capital compared to corporate earnings can increase government revenue and its ability to redistribute wealth (Lazonick and Mazzucato 2013). Alternatively, tax policies could be more strategically crafted to promote productive entrepreneurship, such as by lowering taxes on labour and increasing taxes on financial transactions. Furthermore, to directly benefit from the profits of strategic investments, the state might consider implementing a tax-based mechanism (Enke 1967). However, given the complexities of distributive tensions, governments need to be innovative in their tax reform strategies to better mirror their role in the economy, which involves not only ‘fixing’ markets but also actively ‘creating’ them.

Conclusion

This commentary contends that viewing the state not merely as a market fixer but more significantly as a market shaper offers an alternative rationale for its role in fostering economic growth and a more equitable distribution of rewards between all economic actors. A mission-oriented strategy can foster a more symbiotic social contract between business and government—one that is aimed at addressing societal and environmental challenges more effectively. I have argued that considering the state as not only a market fixer but also—and especially—a lead risk-taker, market maker and market shaper provides a different justification for its contribution to economic growth and hence to a just division of rewards between public and private actors. This shift in thinking opens avenues for pursuing growth that is not only innovation-driven but also more inclusive and sustainable. Implementing mechanisms that distribute both risks and rewards equitably can significantly impact inequality by promoting a ‘pre-distributive’ strategy. When the state retains a portion of the profits generated from its investments, these can be reinvested in sectors promoting a sustainable and inclusive economy. This enables governments to be strategic and proactive rather than focusing primarily on redistributive measures to counteract the inequality caused by skewed income distributions, which predominantly enrich the few. It also foregrounds stakeholder value (Schwab and Vanham 2021; Mazzucato 2022b), placed however not just as the centre of corporate governance reform, but at the centre of where value is created in the first place: at the interface between different actors in the economy. When value is created collectively, it should be shared collectively. If one does not buy into the former, with the faulty assumption that wealth creation happens only inside business and the state can, at best, fix market failures along the way, then the latter will continue to prove futile.

FUNDING

This commentary was written for the IFS Deaton Review of Inequalities, funded by the Nuffield Foundation (grant reference WEL/43603). The views expressed are those of the authors and not necessarily the Foundation. I am grateful to the Open Society Foundation (OR2020-71523) for funding support.

CONFLICT OF INTEREST

None declared.

DATA AVAILABILITY

No new data were generated or analysed in support of this research.

Footnotes

REFERENCES