Ideology and Reality in the Industrial Policy

The “entrepreneurial role” of the State in Mariana Mazzucato’s new book, and the regrettable case of Italy.

A new mythology has dominated the political culture of Western democracies over the last thirty years. In short, the inefficiency of the State in promoting economic development and the greater market efficiency.

"Across the globe - writes Mariana Mazzucato in her new book* - we are hearing that the State has to be cut back in order to foster a post- crisis recover ... The message is repeated so much that it is accepted by many as a "common sense" truth". Less State and more market: This mantra has found an inexorable evidence in the course of Italian industrial policy. The doctrine of the withdrawal of the State has a long history in Italy.The repudiation of industrial policy, which yet was central to the economic development of the first thirty years post-war, was one of the reasons for the fate of decline of Italy from the fifth industrial power on the world to the condition of a peripheral sick component of the European Union.

Let's give a look to the current events. The auto industry has been substantially demolished due to the choices of Mr. Marchionne, now CEO of Fiat –Chrysler. The steel industry is in agony after 15 years of privatization. Now the State is bound to give up Telecom, Alitalia, and Ansaldo, which would be sold to foreign companies. In any normal country the government would be on red alert. But the Prime Minister Enrico Letta, with regard to Telecom, the Italian main telecommunication company, has limited himself to a laconic and reckless comment: Telecom is a private enterprise, so the market decides. Moreover, Telefonica, the Spanish company, which is set to take control - he says - comes from a member country of the European Union: So, where is the problem? Ultimately, we play at home.

In the early 90s the (mistaken) idea grew that we had entered the post-industrial era, and that services were the new horizon of development. Italy dismantled the public industry that, even with all his faults, was a model discussed and appreciated around the world. Now, we witness the disintegration of the last remaining survivors of big industry – steel (Ilva), car (Fiat) and  electro mechanical (Ansaldo-Finmeccanica), and at the same time the liquidation of two core areas of services: that is, telecommunications (Telecom) as well as airlines (Alitalia) . Services which no advanced country worthy of the name would give up.

The strategy of cutting the role of the State has deep roots. It's been over thirty years since Ronald Reagan summed up the essence of neoliberal doctrine with the famous statement: “government is not the solution; government is the problem”. It was the reversal of the line that had presided over the development of the capitalist countries in the thirty years that followed the post-war period. According to the new mantra, the State had to withdraw, leaving all the power to markets. Margaret Thatcher moved in the same direction in Britain, ushering in the era of neo-liberalism.

Italy came late, but in the early 90s began a run that made the process of disengagement of the state and mass privatization much faster and deeper than that implemented by Margaret Thatcher. The mastermind was Mario Draghi, then Director General of the Treasury. The process went on during all the 90s sponsored by several governments, including the centre-left ones headed by Romano Prodi and Massimo D' Alema. Now, the process of de-industrialization is headed to the end with the dismantling of what remains of the largest manufacturing and services industry.

Over the years, Industrial policy has re-emerged silently from the shadows. The Western States practice it more and more, even though often proclaiming the contrary. Barack Obama did not have doubts about the rescue of General Motors and Chrysler with a government commitment of $ 25 billion, aimed to save the industry along with employment. To give some examples, it is worth remembering that Germany saved Volkswagen in the mid-90s, today at the top of the world auto-industry. As well as that, at the beginning of the current decade Nicolas Sarkozy, then finance minister of France, despite the accusation of protectionism and attempts to stop the intervention of the state by the European Commission, decided to rescue Alstom, a company famous, beyond the energy sector, for the construction of high-speed trains worldwide, from Europe to China.

And still with regard to France, Stuart Holland recently wrote: "Public ownership was  crucial to its state-owned Électricité de France achieving the target of gaining four fifths of national energy through nuclear power, without a Three Mile Island meltdown. It was through the state-owned SNCF that it gained its TGV national rail system, now in its second generation. Without long-term public finance in sustaining Concorde, despite it never covering its development costs, France would not have retained the advanced engineering capacity in aircraft that made Airbus possible" (The Guardian, Thursday 26 September 2013).

There are historical examples, such as either the Manhattan Project  at the dawn of the nuclear age, the legacy of which is still present in the Los Alamos National Laboratory, which, apart nuclear research, was an important participant in the Human Genome Project; or, under the Kennedy administration, the space programme to respond to the launch of Sputnik, at the origin of huge  achievements in a wide array of technological progress.
In her recent book (The Entrepreneurial State) Mariana Mazzucato stresses the absolute centrality of the public intervention in the field of scientific and technological progress, as well as of the industrial policy in developing innovation and new technology sectors. The author falsifies the story that attributes the technological progress to the “animal spirits” and risk taking by private sector big business. Mazzucato - economist and professor of science and technology at the University of Sussex - argues that the State not only can create the conditions for markets to function but create entirely new markets. From internet, to biotechnology, nanotechnology and renewable energies, the introduction of new products, new production processes and the emergence of markets that would not have seen the light, and would not have changed the world in which we live, without a broad, deep and determining commitment of the State.

Mazzucato highlights as the American research institutes, together with university scientific departments have enjoyed immense resources to develop basic and applied researches on the basis of plans drawn up by public institutions. Contrary to current opinion, which claims the role of the State as only apt to stimulate private initiative and to regulate markets, the state took an actual "entrepreneurial” role in the fields where innovation was more subject to uncertainty and risk.

Steve Jobs has indeed achieved a huge success for Apple products, applying his talents to product innovation. But this successful outcome - writes Mazzucato - would not have been obtained without the possibility of developing and interning the technological innovations due to the “prior collective and cumulative efforts driven by the State”. Similarly, the algorithm devised by Google was enabled by federal sponsored research programme.

Likewise, the progress in the field of biotechnology is the result of research networks of the National Institutes of Health, which drives US medical research. It is a matter of fact that without the development and implementation of challenging public programs, the new frontiers of biotechnology could hardly have seen the light.

The examples can be extended from nanotechnology as well as to renewable energy, where, beyond the hardware, it is critical the role of government in order to develop new markets, alternative to traditional energy sources - a field where not accidentally, Germany and China excel, on the basis of their substantive commitment to industrial policy.

The conclusion of  Mazzucato’s analysis is that the State does not just encourage private initiative and regulate markets, once they exist, neither it limits its task to fund basic research. This is a "hypocritical” view, writes the author. The reality is that of a true industrial policy that unlike in the past, it is today an “hidden” industrial policy, not to come into conflict with the rhetoric of the withdraw of the State, in compliance with the dogma of efficiency and self-regulation of markets.

The ideology of the end of the economic role of the State is part of the neo-liberal rhetoric. But behind the rhetoric of the retreat of the State and of the market efficiency, governments have been obliged to maintain their programmatic and financial commitment in order to ensure the development of scientific research and new technologies in the field of  “traditional” industry as well as of the new services. But – and unfortunately, as we have seen this is the case of Italy, - the rhetoric of the retreat has become the reference model of public action. The neo-conservative rhetoric has taken the place of strategy.

• Mariana Mazzucato, The Entrepreneural State – Debunking Public vs. Private Sector Myths, Demos, 2013.