Mazzucato versus Worstall and Westlake

Marianna Mazzucato’s 2013 The Entrepreneurial State is the most influential book on innovation. Although Mazzucato’s arguments in the book and beyond are many and varied – for example, I’m particularly sympathetic to her scepticism of the uncritical financial support for small businesses – the arguments gaining the most traction are the least convincing and potentially most damaging.

In short, Mazzucato’s thesis is that the state has been the key driver of “innovation” and should therefore take a more active role than they currently do. Central to this, is the policy suggestion that government agencies that fund this innovation should take a cut of the profits from the inventions. Two writers have convincingly unpicked this – the Adam Smith Institute’s Tim Worstall and Nesta’s Stian Westlake.

First, on the point about states driving innovation, Worstall cites William Baumol, who makes the crucial distinction between innovation and inventions. In reference to Mazzucato’s observation that the key technologies that went into making the iPhone were state funded Worstall explains: “Baumol’s point is that the private sector could have come up with these technologies, even though it was the state that did. But only the private, or market, sector could have come up with the iPhone.”

To put it another way, the iPhone is more than the sum of its parts. In an excellent article (worth reading in full), Westlake cites the work of Jonathan Haskel, which “suggests that for every £1 that British businesses spend on R&D, they spend £8 on other intangible investments of the sort that Apple used to make the iPod a success: design, new business models, marketing and software development.”

But perhaps Mazzucato’s biggest mistake is one of policy. As Westlake explains elsewhere, in The Entrepreneurial State Mazzucato suggests that “the state should find ways to share directly in the profits of companies that benefit from government innovation spending. A repayment system needs to ‘reward [the government for] the wins when they happen so that the returns can cover the losses from the inevitable failures.’”

Westlake outline three convincing reasons why this wouldn’t work: “it would be nightmarish to administer; it imposes costs on exactly the wrong businesses, creating both a presentational and a practical problem; and it’s worse than an already existing option – funding innovation from general taxation.” Westlake’s last point cuts to heart of the problem. As Worstall has pointed out in a response to Mazzucato’s response to his criticism of her work:

That governments sometimes produce public goods should not be a surprise. That’s what governments are for in fact. To provide collectively those things that cannot be provided through voluntary cooperation. To then complain that government doesn’t get extra rewards for doing the very thing we institute it for seems most odd. That’s why we pay our taxes in the first place: in order to get those public goods. Why should there then be some extra appropriation when all government is doing is what we asked it to and paid for it to do in the first place?

Philip Salter is director of The Entrepreneurs Network.

Five myths about ISIS

For my money, the very best foreign policy blogger on the internet is anonmugwump. One thing he is particularly good at is skewering popular myths. His latest post is one of the best I’ve read on his blog—an extremely well-sourced and detailed look at five popular myths about ISIS. He shows, in detail, that:

  1. Military intervention probably won’t make things worse
  2. The issue isn’t predominantly political
  3. ISIS is likely a threat to the West
  4. Intervening isn’t a trap
  5. Cutting off ISIS’s funding from gulf states isn’t the best way to deal with it.

To some extent, the following myths are all interlinked. The typical anti-war activist believes that the current crisis is mainly political and financial and so military means are not addressing the primary cause of the rise of ISIS. The idea that we’re going to make it worse through military intervention isn’t just because its failing to address the key causes but because it reinforces what went wrong: Maliki alienated Sunnis and bombs will alienate Sunnis. And somewhat linked but not entirely, they think because ISIS is a response to local conditions, ISIS is not concerned with attacking the West. This post is addressed to these people – their premises are false and so their conclusions and prescriptions are also flawed.

Read the whole thing, as they say.

A very clever way of proving Lord Stern wrong

The particularly controversial part, from an economic point of view, of the Stern Review into climate change was the use of a very low (near zero) discount rate. The discount rate you use of course being vitally important as you try to translate possible future damages into current numbers so that you can compare them with hte current costs of trying to avoid those damages.

The argument was and is that we know that humans are subject to hyperbolic discounting. Given our lifespans we tend not to think about the far future as much as we perhaps should. Thus market interest rates are fine as a guide to events in coming decades but not to things in centuries.

There’s now been a very clever piece of new research which measures how we do actually discount for events in that far future. English property law allows for both freehold land and leasehold: and those leases can be from a century to near a millennium long. Looking at the price difference between the two it is possible to work out that discount rate that we actually do apply:

We use these estimated price discounts to back out the implied discount rate that households use to value cash flows to housing that arise more than 100 years from now. We find the discount rate for very long-run housing cash flows to be about 2.6% per year. Interestingly, we find similar implied discount rates in both the UK and in Singapore – two countries with very different institutional settings.

This discount rate is rather higher than the one Stern used in his report. And the implication of that is that if we use this new and improved discount rate then our proposed carbon tax should be lower, we should be expending less effort in attempting to avert future climate change.

We could, of course, stamp our pretty little feet and insist that humans should not value the future in this manner. That all of us should value things as Stern says we should. But the fact is that we do not: and it’s rather better to try to run the world taking account of the way we all are rather than as certain dreamers would have us be. And the simple truth seems to be that we value damages to people in a century or two rather less than the costs of averting them. So, we should do less to avert them.

UKTI—overseas or drowning?

Other blogs and reports on UKTI have mainly focused on the UK but what about UKTI operations overseas?  The National Audit Office reported, with its customary discretion, that our diplomatic posts were not commercially oriented and the linkages with the UKTI personnel embedded within them were poor.  Roles were confused and, by inference, the UK was not getting value for the “£420M spent by the FCO and UKTI on supporting UK business overseas 2012-13”.  The FCO promised to reform but they have been promising that for nigh on 100 years.

Visit the UKTI overseas websites and part of the problem becomes clear.  They are mostly the standard bromides about the role of UKTI.  The events to which they refer are not in the country in question but back in the UK, mostly foreign language courses.  The overall message in each one is about helping the nationals of that country export TO the UK.  “Business partnerships” is a term much used but they have it the wrong way round: UKTI is supposed to be building the UK economy through, inter alia, exports, not weakening our balance of payments through encouraging imports, still less weakening our manufacturers through increased competition.

The Morocco and Algeria UKTI websites make an interesting comparison.  The Morocco one names three UKTI representatives, with contact details and their specialist areas of expertise.  Exemplary.  The Algeria one just has the details of the British Embassy.  Maybe the switchboard there will find someone to take your call, maybe not.  My source in Algeria tells me that our last two ambassadors there found no one from UKTI up to the job and had to bring in two of their own FCO people to cover trade matters.  Obviously the ambassadors would be too diplomatic to confirm that.

So Morocco is well UKTI staffed and, given the size of its economy, possibly overstaffed, whereas Algeria, whose economy is twice the size of Morocco’s and has far more opportunities for British business, is barely staffed at all.

The coalition government has decided more exports would be good and therefore more money should be awarded to UKTI.  This is simplistic.  UKTI is drowning in its own bureaucracy.  They need to learn how to swim.

Economic Counter-Terrorism: Legalising the export of pharmaceutical-grade opium from Afghanistan

Vishal is the winner of the Adam Smith Institute’s ‘Young Writer on Liberty’ competition. The subject of the competition was ‘3 Policy Choices to make the UK a Freer Country’, and below is one of Vishal’s three submissions.

Although only 12% of Afghanistan’s land is arable, 70% of the population rely on agriculture for their subsistence and the country is the world’s largest producer of illicit opium (~90% of total global output). There has been discussion of granting farmers licenses to cultivate opium but we should also consider it as a potential method of covert, economic counter-insurgency. This would reduce the need for troops on the ground, alleviate poverty and deal with the NHS’ shortage of opioid drugs (this shortage has meant that people are literally dying of pain).

Many corporations (such as GlaxoSmithKline, Mallinckrodt, Abbott Laboratories and Johnson & Johnson) already legally import from India, Turkey and New Zealand. Why not add Afghanistan to the list and kill several birds with one stone?

Prior to the 2001 invasion, the Taliban declared opium ‘haram’ (sinful) and they sharply reduced opium output in Afghanistan during this crackdown. However, in a hypocritical move intended to help fund its insurgency, they have been earning money from opium farmers, smugglers, etc. – being the ‘middleman’ generates some serious revenue for the Taliban.

Legalisation would eliminate the need for middlemen by allowing farmers to directly supply to pharmaceutical companies instead. Farmers receive a fraction (<25%) of the profits. The rest goes to kingpins and warlords. One can easily see why the opium farmers would subsequently have a disincentive to fund any operations by the Taliban against those who are responsible for their livelihood and newfound wealth. How many producers could seriously be interested in killing off their customers?

Many young men have benefitted from the opium trade (becoming the ‘new rich’). So, supposing that the Taliban were to try to wrest control of cultivation or extort from the cultivating communities, they would be causing discontent amongst the same people whom they physically require to fight.

The Taliban pay up to $200/month for men to fight for them (versus the $70/month offered to join the national police force) – legalisation would give those youth some alternative, lucrative sources of employment. Fewer able, young Afghans willing to fight means that we wouldn’t require as many troops to be stationed there and that the Taliban’s grip over certain provinces would naturally loosen.

These self-reinforcing socioeconomic mechanisms, amongst others, would naturally undermine the Taliban both socially and financially.

 Legalisation can be a means of economic counter-terrorism that enables double-sided welfare gains and getting troops out sooner rather than later.