Noah Roberts

To an extent, almost every American values, or is at least told to value, the free market society. We often hear references to Adam Smith and his proclamation for a free market and automatically pair it to the idea of no government interference in corporations. Many will often argue, “Let the government deal with the issues of the government, and businesses deal with the issues in business.” But, what if we shift our perspective on the relationship between innovative corporations and the government? We often look at the relationship as a black and white issue; government regulation or no government regulation. However, we should be focusing on the degree to which the government helps innovate, not regulate.

On her Freakenomics podcast “Is the Government More Entrepreneurial Than You Think?”, Mariana Mazzucato, a professor in the economics of innovation and public value at University College London, further explains this relationship. At the very start of the Podcast, Mazzucato completely flips the argument that Adam Smith wanted a free market separate from the state. She mentions how he actually wanted a free market from rent-seeking, which were activities that would extract value. This sets the foundation for the rest of the podcast where Mazzucato shows how the government is actually very involved in the innovation and investment of new companies. The state has been involved in many startup companies and industries. They are often the first to invest in the innovation of risky and uncertain technologies that private firms don’t want to invest in. This fuels her stance that the state shouldn’t be thought of as a last resort, but as a “first resort investor”. They have had plenty of successful investments, as well as plenty of failures. She brings to light, however, that the failures are always talked about and not the successes. This led to Mazzucatos’s point that the government has done a poor job of making returns on their successful investments, and that the private companies are benefiting the most of these tax funded loans given to them from the government.

The big idea most evident throughout this podcast, is the relationship between business, state, and society. Mazzucato mentions how many people think that to be more innovative we need less government. However, she disagrees. One of the most innovative parts of the U.S. economy is Silicon Valley. Most would assume that this is because of the private companies’ own research and advancement. What most fail to realize is that the government was deeply involved in investing in innovative research with programs like DARPA and ARPA-E. The government was also a leader in the exploration of fracking in the late 1920s, spending more than $130 million on extraction techniques. This point alone shows how essential the governments involvement with business innovation is. Other private companies didn’t want to take the risk of investing that much money into a business that may fail, but the government’s leadership into that field led to a very essential part of our economy. The government has also loaned money to, and invested in, multiple outside corporations. A successful company that most of the public fails to realize was given state funding is Tesla, which was given a $465 million loan. On the other hand, when the state funded company Solyndra failed after receiving a $500 million loan, every taxpayer was told about it on the news and as a result, angry with the government. The question is why was the success drowned out and the failure brought to the attention of everyone? The answer lies within the governments poor marketing of themselves. They don’t publicize their affiliation with companies like Tesla enough, which results in heavier criticism when they invest in a failing company.

The government also makes the unacknowledged assumption that having businesses give them stock when they can’t pay off the loan will cover the debt of the money given. Mazzucato mentions that the government will ask for 3 million shares of stock when a company does not completely pay off its loan. This policy doesn’t make much sense to enforce, however, when the stock is most likely not going to be worth very much. The government actually needs to be doing the exact opposite. Every time the company is able to pay off their loan, they need to give the government 3 million shares of stock. If we revisit Tesla, their stock was worth 9 dollars in 2009 and increased to 90 dollars by 2013. Mazzucato noted that this increase multiplied by 3 million would be able to pay off the debts of other loans that were not paid back in full, like Solyndra. Instead, Elon Musk has made a profit of $5 billion, while the government is left with the debts of their unreceived money.

Lastly if we revisit the relationship between business, state, and society and the capitalist nature of corporations, we can see why industries like the pharmaceutical industry are able to charge such high prices. Like the companies mentioned earlier, the state is loaning money to pharmaceutical companies for research. These loans of course come from the tax payer. Then, in the capitalist ideal of maximizing profit, the company will charge outrageous prices for new pharmaceuticals. People then have the choice to either let themselves or a family member stay ill or pay the price set before them. Essentially, this results in the customer paying for the drug twice. Once through the tax funded loan, and again on the overpriced market. The most frustrating part about the high prices may be that even though the government has the right to set a price cap for publicly funded products, they choose not to in fear of pushback saying they are anti-free market.

Overall, these points are not trying to prove that we need more government investments in the business world. What they do prove though is that the government needs be recognized as more than a by-stander waiting for things to go awry. As Mazzucato put it, “it is to be an active co-creator and co-shaper.”

(Picture found on politicalcartoons.com)