Mariana Mazzucato, is there no beginning to her knowledge of economics?

It is, of course, becoming increasingly irritating to see Mariana Mazzucato being lauded for her stunning finding that the only reason we have nice things is because of government. Especially when one considers that this finding came from a research program funded by government. Biting the hand that feeds is really very terrible economics after all. The latest irritant is this, in her acceptance speech for an award:

The point is not to belittle the work of Jobs and his team, which was both essential and transformational. But we must be more balanced in the historiography of Apple and its founders, where not a word is mentioned of the collective effort behind Silicon Valley. The question is this: who benefits from such a narrow description of the wealth-creation process in the hi-tech sector today?

...

If policymakers want to get serious about tackling inequality, they need to rethink not only areas such as the wealth tax that Thomas Piketty is calling for but the received wisdom on how to generate value and wealth creation in the first place. When we have a narrow theory of who creates value and wealth, we allow a greater share of that value to be captured by a small group of actors who call themselves wealth creators. This is our current predicament and the reason why progressive parties on both sides of the Atlantic are struggling to provide a clear story of what has gone wrong in recent decades and what to do about it.

She seems entirely unaware of the basic paper on this subject. Those "wealth creators", those "entrepreneurs", how much do they get from their innovations?

The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

The answer is a little under 3% of the total value created by the innovations. Almost all of the rest ends up as consumer surplus being enjoyed by the great unwashed citizenry out there. Which is great, as it should be perhaps, the aim and point of this whole having an economy game is to make the average Smith and Jones as rich as they can possibly be without bursting with the pleasure of it all.

The complaint is that Professor Mazzucato seems to be entirely ignorant of all of this. Sure, Steve Jobs ended up with a pile of money that Scrooge McDuck would blush to surf down. But we don't actually care because Jobs ended up with a trivial amount of the value created. It is quite seriously being said that another 10% of the people in a developing country with a smartphone adds 0.5% to GDP growth (and no, not 0.5% of extant growth, an entire 0.5% of GDP more) in said developing economy. Whether Jobs ended up with $5 or $50 billion for sparking that amount of value creation is an entire irrelevance compared to that value creation.

And no, we don't insist that Jobs "earned it", nor "deserved it". It's a purely utilitarian calculation. If someone who innovates (for Mazzucato would insist Apple and Jobs did not "invent") something that adds entire percentage points of growth to the developing economies of the world then gets to have hot and cold running private jets for the rest of his life, well, that's just fine. Because we think that would be a pretty good incentive for the next person who is going to make the poor of the world richer to buckle down and get on with it.

The first point of economics is that incentives matter. So it would appear that there is no beginning to Professor Mazzucato's understanding of the subject.

Yes, of course Mariana Mazzucato is wrong, why do you ask?

Mariana Mazzucato is on a mission to persuade us all that as government provides all the lovely new technology and shiny shiny gadgetry we so enjoy then therefore we should all be coughing up a fee to said government for said shiny tech. There's a number of problems with this idea: one being the boring detail that government hasn't in fact been the source of all of that lovely research into tech:

I don't know about the CADC, but Tim Jackson's excellent book "Inside Intel" is very clear that the 4004 was a joint Intel-Busicom innovation, DARPA wasn't anywhere to be seen, TI's TMS 1000 was similarly an internal evolutionary development targeted at a range of industry products.

Looking at a preview of Mazzucato's book via Amazon, it seems that her claims about state money being behind the microprocessor are because the US government funded the SEMATECH semiconductor technology consortium with $100 million per year. Note that SEMATECH was founded in 1986 by which point we already had the early 68000 microprocessors, and the first ARM designs (from the UK!) appeared in 1985. Both of these were recognisable predecessors of the various CPUs that have appeared in the iPhone - indeed up to the late iPhone 4 models they used an ARM design.

However, there's two logical errors with her claim which are much more important than the technical details of what she's claiming.

The first is that she doesn't seem to understand the economics of government spending on research very well. There's certain things that the markets, entirely unadorned, don't do very well. While much too much of this is made in general it's at least arguable that the provision of the public good of basic research is one of these things. And given that one of the reasons we have government in the first place is to provide those things, like public goods, that markets don't deal with well then her argument falls into something of a trap. For she's arguing that government should get a slice of the returns (through ownership of patents, of shares in companies that use government funded research) from the provision of that research.

But why? The very idea of government doing this work is that without government intervention we'll not get this public good. We pay our taxes, government provides the public good and we're done. There's nothing extra that should be done about it: assuming that government has done the research, the research is indeed valuable, we've now got here an example of government doing what it has already been paid to do. Hurrah, celebrations and bring out the marching bands etc. There is no logic at all to the idea that government should get two bites of the same cherry.

The second logical problem is that she's arguing that (and this is the real point of her work) the EU research budgets should end up owning a chunk of whatever it is that turns up of value from EU funded research. There must be commercial arrangements for Brussels to recoup some of the profits from the use of the results. And her clinching argument is that Darpa, the US military research budget, produces huge value from the research that it funds. Therefore we should do as they do.

The problem with this is that Darpa deliberately doesn't try to retain an ownership interest in technology derived from research that it funds. On the grounds that it just wants to produce the public goods of the results of that research and when it's done that its job is done. And it's also a great deal easier and more productive to give scientists grants to do research than it is to have arguments with them over ownership, in advance of any actual findings, of whatever the results might be.

That is, we're being advised to a) do as Darpa and b) not do as Darpa in the same sentence.

It's nonsense sadly, but influential nonsense.