Capitalism in the Time of Trump?

By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

Mariana Mazzucato, Professor of the Economics of Innovation at the Science Policy Research Unit of the University of Sussex and author of The Entrepreneurial State: debunking public vs. private sector myths, has made a passionate case for the government’s active role in the economy  —sending the old laissez faire notion that markets can run themselves into the dustbin where it belongs. In a new book co-edited with Michael Jacobs, Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth, she offers a bold new vision for contemporary capitalism that works for the people and the planet. What chance does this vision have in the age of Trump and Brexit? Mazzucato shares her view.

Lynn Parramore: The new book is called “Rethinking Capitalism.” What aspects of capitalism do you think were most responsible for recent political shifts, like Brexit and the election of Donald Trump?

Mariana Mazzucato: In the book, we set out various failures in the model of capitalism that has dominated the last three decades — from instability of growth to increasing inequality to the threats of climate change. We argue that these failures are connected to failures of economic thinking.

Effects of these failures on the electorates of the U.S. and the U.K. are fairly well documented, and some – such as the inability to deliver growth that includes everyone – have now become electorally significant. Growth in productivity has diverged from growth in the share that working people can expect right across advanced economies, but this trend started earlier and has been more pronounced in the U.S.

To give you some stats, real median household incomes in the U.S. were basically the same in 1989 as in 2014. But we are also seeing similar challenges in the U.K. in the stagnation of real wages. Recent analysis from the U.K. Institute for Fiscal Studies suggests that wages will still be below 2008 levels in 2021. People work hard and companies make big profits, but employees don’t see that they share in the wealth they help to create.

For too long, these problems have been ignored. And the results of the U.S. election and the EU referendum showed that people were no longer willing to vote for the status quo.

Where there is less agreement is on the reasons why. It would be a mistake to overstate the similarities between the Brexit vote and Trump’s win – but there are common themes, not least in the rallying cries that the winning campaigns used. They focused on a supposed economic threat posed by outsiders – as immigrants or as trade partners. This fuelling of anxieties underpinned a narrative centered on the need to “regain control,” whether of borders or of economic forces. Unfortunately, simplistic framing of the problems leads to simplistic answers.

Another similarity of Brexit and Trump’s campaigns was an attack on so-called ‘elites.’ This is not so much a failure of capitalism as of its high priests in the economic profession – for which we must all take some responsibility.

LP: So what’s the real story of what’s not working for so many?

MM: If we look at the complexity of the challenges facing western societies today, we see that the problems are not really about outsiders, but have their roots much closer to home.

Our current model of capitalism and the dominant ideas in policy making have led to a failure of investment by both the public and the private sector in the things that drive productivity, and which affect its distribution. Shareholder value theory — the destructive idea that companies should be run solely for the benefit of shareholders — has led to financialized businesses that do not invest in the areas that will lead to future growth or the invention of useful new products. Companies prefer to put money in the pockets of shareholders or to hoard cash rather than to raise wages or invest.

But it is not just how these ideas have affected the private sector.  They have also had a detrimental impact on our understanding of the role government can play in raising both the rate of growth and shaping its direction. Mainstream economic theories popular in the last several decades have tended to downplay the government’s role in markets and to increase skepticism about even that more limited role. Austerity, particularly in Europe, has added to the problem. It has not worked, even on its own terms.

LP: In your earlier book, The Entrepreneurial State, you describe a model of capitalism that would address many of these problems. How does it work?

MM: My work has shown how a different understanding of the role of the state in growth can unlock private investment. Markets are not static entities that are ‘intervened’ in (for good or bad) but are outcomes of public and private interactions. In my view, the state should be active and work in cooperation with private businesses to spur growth that’s sustainable and inclusive. The policy process is about co-creating and co-shaping of markets, creating new opportunities for business investment —and negotiating a better deal for the public too.

Historically, it has been an entrepreneurial state that stimulates and gives direction to new technological opportunities. It is those opportunities that  stir the animal spirits of business to invest—and we can do that again. The examples I give in my book show that public investments are not only important for affecting the rate of growth but also its direction. And that these investments were most successful when mission driven, rather than aimed at single sectors. The venture capital industry entered biotechnology only decades after the National Institutes of Health led the way. Similarly, Apple’s i-products were only made possible due to the hefty public financing of all the technologies that make those products smart and not stupid: internet, GPS, touchscreen and SIRI. Today there are opportunities in green: indeed Germany is using its Energiewende policy as a way of envisioning a green transformation and innovation across many sectors.

If we want growth today to be more innovation-driven, more inclusive and more sustainable, then we need a more active state — not a less active one. Yet we still hear the dogma that we should just fix market failure by focusing on science and infrastructure, and to ‘level the playing field.’

Fixing markets isn’t enough. We have to actively shape and create them and ‘tilt’ the playing field in the direction of the growth we want.

LP: What’s your impression of the possibilities to get things moving in a better direction in the wake of recent political shifts?

MM: Brexit and Trump have brought the problems of capitalism into sharp relief, but both are only making things worse. Take the investment challenge – businesses invest where there they see technological or market opportunity.  Brexit has shrunk the market opportunities.  Exiting trade deals will do the same for the U.S.  Those deals must be actively shaped and governed to make growth more inclusive.

But – to look on the bright side – because the problems are now in greater focus and can no longer be pushed aside, maybe policy makers will be more creative in trying to address them.

I see signs of that, for example, in Theresa May’s explicit embrace of industrial strategy, with a seeming interest in focusing this on missions that help make a better society, which I’ve discussed recently with various people in the government. There is a lot of flesh to be put on the bones – but there is at least an opening for a more pragmatic, less ideological debate about how to build economies that work for people, within the limits of our planet.

With a Trump administration we don’t know enough yet to make predictions, but if past behavior is any indication, I am not encouraged.  As I wrote in an article for the Guardian, as a businessman, Trump has been associated with some of the worst excesses of a particular style of value-extracting and asset stripping capitalism: set up businesses, let them fail, avoid paying suppliers, use bankruptcy laws to avoid taxes for decades, then set up another business somewhere else. It is this model that is the cause of many problems we see today.

LP: Trump seems to be rethinking fiscal policy with his proposal for an infrastructure program, which is interestingly a focus he shares with former candidate Bernie Sanders. What is your opinion of that focus?

MM: Too many politicians seem to reach for ‘infrastructure’ as the default answer to investment, as if roads and bridges were the answer to everything. Even the IMF and the World Bank seem to mainly offer infrastructure spending as an alternative to austerity, although they are right to focus on the need for investment.

While infrastructure is of course important, it must be part of a bigger vision. The point is not to simply dig ditches but to steer those investments towards transformational growth. We should be investing where the public returns are greatest – that is in innovation. If we look at Germany’s infrastructure policy, it has been driven by its mission-oriented focus on green infrastructure.  This affects both innovation and infrastructure, old industries and new. The German steel industry, for example, has adapted to the policy by lowering its material content through a ‘repurpose, reuse and recycle’ strategy.

Added to this, my specific concerns with Trump’s plans are that they are likely to investments in infrastructure where the private returns are highest (for example toll roads and bridges) rather than where the public gains are greatest.

LP: Speaking of green, how have the stakes of rethinking the economics of climate change shifted with Brexit and Trump?

MM: Green is not just about renewable energy. It’s also about creating a new direction for the whole economy. This requires government to step up, not step back, creating the kinds of mission-oriented public organizations that will enable us to tackle climate change — as ambitious as those that got us to the moon. It also requires the financial sector to be less short-term since we know that short-term finance has distorted incentives and directions in areas like biotechnology.

A new study we are doing with data produced by Bloomberg New Energy Finance looks at the role of public banks and other public entities in providing the strategic, patient finance for the green revolution. An interesting attribute of public banks is that they don’t only de-risk the downside, but also get a share of the upside. This brings us to John Maynard Keynes’ idea of the ‘socialization of investment,’ which could provide new thinking on the types of public and private deals that the 21st century requires.

Brexit and Trump’s election are forcing countries to come up with new radical ideas. In this context, rethinking capitalism means rethinking the role of the public sector, the role of the private sector, the role of finance, and the relationship between them all. What is needed is both  a New Deal in terms of mission-oriented investments but also a new deal in terms of a modern social compact—one that allows the state to socialize not only risks but also rewards. Maybe then innovation-led growth will also become growth that includes all of us. 

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  1. cripes

    Forty years of bashing and smashing and looting the commons has taken a toll. Somebody please catapult the propaganda.

  2. Salty

    The jobs aren’t coming back.

    It doesn’t matter who invests in what, or how: the jobs aren’t coming back. If they do, there will be fewer jobs every year. We will discover better, cleaner energy sources, and put that energy to work replacing human labor. With each year, we have gotten better at it, and we will reduce the number of hours that need to be worked. It is not if, it is when. We already live in a world where most of us are unnecessary.

    The jobs aren’t coming back.

    What we really need is to restructure how we think about work, and create an alternative to the current system that can function in a world where only 20% of the public need to work. We need to do this because:

    The jobs are not coming back.

    1. Benedict@Large

      The idea of jobs coming back is a red herring. We don’t need “the jobs” to come back; we needs jobs; period.

      The idea of good paying factory jobs is another red herring. We don’t need “good paying factory jobs”; we need good paying jobs.

      And the idea that technology is going to run us out of our need for human labor is yet another red herring. I’ve been hearing this same thing since I got into computers back in the 1960s, and my own research clearly shows this claim going all the way back to the beginning of the British industrial revolution. If we need jobs, and especially if we need good paying jobs, we know quite well how to create them: Deficit Spending. The problem is that deficit spending also creates pressure on wages and a redistribution of profits from capital back to labor, and this is something that has been an anathema since Alan Greenspan started licking Ayn Rand’s toes.

      1. pietro gori

        Benedict has a point.

        I would add that that specific redistributive problem in capitalism has entered the public
        domain at least as long ago as 1943, with the publication of Kalecki “Political Aspects of Full Employment”

        Capitalism needs unemployment as Popeye does his daily intake of spinach

        And if and when “the people” dare to raise a peep, the State (Capital’s State) will be all to
        happy to provide the big stick

        The rest, like Mrs. Mazzucato thoughtful cogitations, is so much hot air

    2. tegnost

      “We will discover better, cleaner energy sources, and put that energy to work replacing human labor.”
      you’re dreaming electric sheep
      “With each year, we have gotten better at it, and we will reduce the number of hours that need to be worked. It is not if, it is when. We already live in a world where most of us are unnecessary.”
      your policy prescription (we will is in the future along with all those self driving trucks, but you have no plan for motorcycles…uber is a loser…there won’t be empty cities with a very neat and tidy grid of futury cars with 2 or 3 of your necessary class workers…ain’t gonna happen, and yes I know that right now there are some self driving trucks so spare me) ignores the fact that every silly con valley app writer wants all the money for themselves so they can hire a plebe to sort their skittles. The dems lost because of your perspective, and it’s a loser that if they don’t change will render them to the dustbin of history.
      On an somewhat unrelated note mish is upset he’s not on “the list” but since he parrots your party line he is one of your good guys who understands your losing position and is going to be losing with you. I like and read mish but that’s a blind spot for him and for you. People are going to do things, if you create a future in your mind where they won’t do things then your future won’t happen

    3. marym

      Some types of jobs may be gone, through predatory off-shoring or automation, but there’s plenty of work that needs to be done.

      In my comfortably middle class suburb and the business, shopping, and gentrified parts of Chicago where I’m likely to go, there’s tons of work to be done. That would no doubt increase when looking at depressed urban and rural areas; or looking with technical expertise at infrastructure at all levels; or talking to people in greater depth.

      How about jobs for housing, social services, medical care, child care, elder care, reinstating school programs cancelled for budget reasons. The New Deal created every kind of job from simple labor tasks for teens to help their families, to major infrastructure and everything in between, jobs for scientists, engineers, and seamstresses.

      The WPA built traditional infrastructure of the New Deal such as roads, bridges, schools, courthouses, hospitals, sidewalks, waterworks, and post-offices, but also constructed museums, swimming pools, parks, community centers, playgrounds, coliseums, markets, fairgrounds, tennis courts, zoos, botanical gardens, auditoriums, waterfronts, city halls, gyms, and university unions. Most of these are still in use today.[7]:226 The amount of infrastructure projects of the WPA included 40,000 new and 85,000 improved buildings. These new buildings included 5,900 new schools; 9,300 new auditoriums, gyms, and recreational buildings; 1,000 new libraries; 7,000 new dormitories; and 900 new armories. In addition, infrastructure projects included 2,302 stadiums, grandstands, and bleachers; 52 fairgrounds and rodeo grounds; 1,686 parks covering 75,152 acres; 3,185 playgrounds; 3,026 athletic fields; 805 swimming pools; 1,817 handball courts; 10,070 tennis courts; 2,261 horseshoe pits; 1,101 ice-skating areas; 138 outdoor theatres; 254 golf courses; and 65 ski jumps.[7]:227 Total expenditures on WPA projects through June 1941 totaled approximately $11.4 billion—the equivalent of $184 billion today.[23] Over $4 billion was spent on highway, road, and street projects; more than $1 billion on public buildings, including the iconic Dock Street Theatre in Charleston, the Griffith Observatory in Los Angeles, and Timberline Lodge in Oregon’s Mount Hood National Forest.[27]:252–253

      More than $1 billion—$16.1 billion today[23]—was spent on publicly owned or operated utilities; and another $1 billion on welfare projects, including sewing projects for women, the distribution of surplus commodities, and school lunch projects.[24]:129 One construction project was the Merritt Parkway in Connecticut, the bridges of which were each designed as architecturally unique.[28] In its eight-year run, the WPA built 325 firehouses and renovated 2,384 of them across the United States. The 20,000 miles of water mains, installed by their hand as well, contributed to increased fire protection across the country.[6]:69

      Update that list for changes in technology and local needs, and there’s plenty of work to be done. Flint alone is an example of the total lack of any lack of potential jobs.

      1. JEHR

        There have been plenty of studies on how to organize and run a Job Guarantee program that would give anyone who wants to work a job. See here. We don’t have to reinvent “the job guarantee wheel” each time someone says that jobs aren’t coming back. There are many, many ways to create jobs that do the work that has to be done.

      2. rd

        Infrastructure jobs for building, operating, and maintaining roads, bridges, airports, mass transit systems, water pipes, ports, clean energy, etc.look a lot like the jobs that coal miners and manufacturing plant employees do.

        The manufacturing jobs aren’t coming back because they are gone forever, in the same way that horse-drawn carts and ploughs went away along with their jobs. A 20 years infrastructure building program similar to the 50s and 60s would provide that economic bridge, similar to what the WPA and CCR provided in the 1930s.

    4. Harris

      the Puritan work ethic will not allow this to happen. Anyone not working is thought to suffer from some morale failure.

      1. BecauseTradition

        I work but don’t have a job so let’s not conflate wage slavery with work, please.

        Speaking of the Puritans they need to read the entire Bible – including the parts about usury.

      2. Massinissa

        Unfortunately under capitalism ‘work’ is only counted if it has a paycheck. Caring for children and elderly relatives is a lot of work but doesn’t factor into GDP. Same with housework. And probably other kinds of work I’m forgetting.

  3. Benedict@Large

    “It would be a mistake to overstate the similarities between the Brexit vote and Trump’s win …”

    No, it would not. In every single case, we’ve seen the collapse of deficit spending. Reagan, Thatcher, the Euro; all of these represent a belief that smaller government is better economically, and yet what exactly is “smaller government” except for smaller spending (= lower deficits or surpluses). This suppresses the economy’s jobs engine, which leads to lower (insufficient) job creation, and in turn, lower (to non-existent) pressure on wage (and wage share) growth.

    People tend to blame all of this on cutting taxes (on the wealthy), but that is only because they have lost the ability to conceive of spending without tax collection preceding it. Sure, to the extent that we could raise taxes (again, on the wealth) without lowering aggregate demand, increased taxation to increase spending would work, but in this political moment, raising taxes on the wealthy is a pipe dream; there is no political force for it, and it’s just not going to happen.

    Which means in turn that we cannot increase spending; we cannot finance to social state unless we enter into a period of sustained deficit spending on the social state. And we do it without entering the (currently) unwinnable battles of higher taxation and/or a smaller military state.

  4. jackiebass

    With a government controlled by republicans I don’t see the slightest chance that any of his suggestions will be adopted. In fact I think just the opposite will happen. Unfortunately the democrat party is still controlled by Wall Street democrats. The democrats are still too much like republicans. The Sanders Warren wing of the party needs to have a bigger part in policy making in the democrat party. There has been progress in this direction but still too slow.

  5. oho

    ‘ – for which we must all take some responsibility.’

    the Institute for New Economic Thinking. Co-founder, seed money provider = George Soros.

    Blame financialization.

    If Trump burns the 2/20 barn with Soros inside. Good for us. (i’m not holding my breath. but Hillary was no better)

    SJWs are feel free to flame me. :)

  6. Carla

    It seems to me free birth control and abortion could be a big help over the long run, if we get a long run…

  7. Norb

    Radical ideas are are born on having a radical vision for the future, but having a vision is only the first step, overcoming the resistance of entrenched orthodoxy is the second, and biggest hurdle. Unless the orthodoxy is brought down by some catastrophe, little headway will be made implementing any new radical ideas. This certainly pertains to maintaining the ideas pure intended form. Any new, radical form will be hijacked by those wielding power, incorporating benefits that don’t compromise the status quo while rejecting those that do. That is what counter revolutionaries do, subversion.

    At this point, rethinking capitalism requires rethinking the whole governing structure. A true revolution. What we see today, is the effort to equate the questioning of capitalism with treason. The mechanisms needed to enforce this program are already in place, and the only thing left is for the public to see their wide spread implementation- openly and unequivocally. Social pressures are used to brand critics of capitalism and its programs as communists and dreaded socialists, loosing in the hysteria, the inspirational founding principles of the nation, namely those of freedom and equality of opportunity.

    Only a bold reassertion of politics in America can hope to bring about any form of needed change. America has already produced the likes of Thomas Paine. Paine has been marginalized for good reason. His passion and authentic concern for the common man can be subverted to allow the likes of a Trump, a charlatan, to rise to lead the nation. We no longer need clever men and women whose greatest gifts are spreading deceit. We don’t need better branding and marketing. We need to reintroduce politics into everyday life.

    1. cnchal

      . . . having a vision is only the first step, overcoming the resistance of entrenched orthodoxy is the second, and biggest hurdle.

      The “capitalist” system has become a cult followed by practitioners worldwide, and when I raise doubts and questions about it, pointing out the unsustainable nature of it, the absurdity of exponential growth, the invariable response after pressing for some type of recognition of these issues is “I will be dead by the time any of it matters”.

      I tease my neighbor a bit, and when I broached this topic, he MBAsplained it to me, and I quote, “there are markets”. After some discussion, he rationalized it by who cares if we pollute a little more or less today, and society disintegrates and the planet becomes inhabitable in one hundred or five hundred years years, since in three billion years the sun will swallow the orbit of earth, and none of what we do or are matters in the least. Perhaps he was teasing me back, but your point of “entrenched orthodoxy” is true.

      My sense is that people are perfectly OK with polluting the stream of time, because the future is defenseless and can’t fight back, unlike for example, polluting a stream of water running through your area, where the ones downstream have a perfectly good reason to fight back.

      Even the word capitalism doesn’t mean what we think it does. If it did, Goldman Sachs would be history. Now, one of their past employees is up for Trump’s treasury secretary. Will he gut the US like he did Sears?

  8. Gaylord

    What economic values could stop the massive extraction in the oceans and on land and the consumption and pollution that are destroying the living planet? Once we have ruined it, we are done along with most other species. Tweaking capitalism will not affect the outcome.

    1. pathman

      Spot on. This goes along with the myth of infinite “growth.” This is never discussed here at NC. We can’t have infinite growth on a finite planet. We are witnessing what happens when you attempt to do that. It’s leading to the sixth mass extinction event. We aren’t exempt from this event either. But “technology” will save us, right? That’s another funny story for another day.

      1. Massinissa

        It is sometimes discussed at NC, and in that context it is called ‘groaf’. But I agree that I havnt seen much talk about Groaf in at least the last few months, maybe because of the election and Trump.

    2. Adam Eran

      ?… We’re pretty far out to sea on this particular ocean liner to say “OK, start swimming, people!”

      There are real solutions, too. I doubt they’ll turn out neatly, but they’ll be embraced or swimming is what we’ll get. Biomimetic manufacturing comes to mind, along with the usual green energy solutions. A plutocracy is necessarily blinded to the (better) possibilities by the kind of brutal stupidity it needs to continue suppressing the bulk of the population. That last is more of a problem than the lack of good solutions, IMHO.

      Yep, kindness is a revolutionary act.

  9. susan the other

    I’m not sure what Mazzucato means when she talks about “public banks” because there are public banks and then there are public banks. The bank we should be talking about is the sovereign bank of the USA. A bank invested with the power to do some real good. Mazzucato says “Public banks de-risk the downside and get a share of the upside.” But here’s what I don’t like: public private partnerships that in reality do very little to change the way we live and simply function to keep corporate America on life support much like the Fed – in that in any PPP the risk to the public is that the corporation benefiting from government largesse is still going to practice shareholder value gains whether or not any improvements to the way we live and work as a nation are achieved. That leaves us worse than where we started because we don’t have time to mess around with grift and graft anymore.

    1. financial matters

      The public-private point is a good one and I don’t think we want to confuse Mazzucato with privatization. This is where the public hands something over like roads or water to the private sector and lets them manage the infrastructure and then charge tolls. This I think is worrisome as to the way Trump may go which is crony capitalism.

      Mazzucato wants to see the public retain more control over these revenue streams. This is where she wants to see the public participate in the upside instead of always doing the funding and development and letting private companies run with the products while the public is only there to bail our any downside.

  10. LA Mike

    I know Yves doesn’t like for commenters to repeat their ideas too regularly. But what I have to say is directly related to this article.

    In all of human history, business owners and execs at most made 20-30 times average salary. If you were a sultan or something, it was a different story. But in business, that’s been the max.

    Why do we accept an environment wherein the norm is now 200-1,000 times average salary? (For major corporations)

    What if our economy isn’t that crippled, but rather, all of the gains are just going disproportionately to the top? What’s wrong with capping this? For example, the most the highest salary/dividends/stock recipient can get in one year is 50 times average salary?

    Who opposes this and why?

    Mark Cuban will tell you that a cap like this wouldn’t stop a single entrepreneur from trying to become rich.

    1. integer

      It’s just a ridiculously incomplete proposal, as the real problem is political. It actually seems like the sort of bs that a political group whose reputation is in complete tatters would come up with to divert public discourse away from the real issues, in a desperate move to try to save their own asses. Imo, of course.

      Won’t be responding to any of your replies as my feeling is that you are putting forward this idea disingenuously. Later!

      1. LA Mike

        Thanks for the biting, substantive takedown. Why does this concept trouble you so much? I’m being sincere.


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