In praise of public investment
It is the height of misunderstanding to fear that public investment distorts markets and crowds private investment out; the reality is one of highly distorted markets that are clearly incapable of fostering adequate levels of private investment. By Yanis Varoufakis.
Two are the greatest untruths that have inflicted major damage upon our understanding of how social economies work; and, by extension, upon our societies. First, there is the pseudo-‘law’ of ‘crowding out’; i.e. the illusory belief that when public investment increases private investment suffers. Secondly, there is a widespread misconception that, under capitalism, value is created privately and then collectivised via the state (when, in truth, all value is produced collectively before it is privatised). In this post, taking my cue from Mariana Mazzucato’s excellent piece in today’s Guardian, I shall be posting some strong words against the first illusion.
The illusion of ‘crowding out’ is so well entrenched in the majority’s minds that it seems almost indelicate to remind people that the Internet was invented by a government agency. Similarly, even those working for public investment outfits, like Brazil’s BNDES or Europe’s own European Investment Bank, are almost coy when it comes to telling the world that their state-owned banking operations return profit margins that private investment banks can only dream of. Such is the success of neoliberal ideology in persuading people across the world that public investment is a ‘bad thing’ that no facts are allowed to spoil this splendid error.
Meanwhile, countries like China and Brazil are making great strides in generating the jobs and green products of the future, at the West’s expense, simply by doing that which the West used to be so good at doing: using public investment in order to stimulate private investment in the realms of high-end education, R&D and, crucially, in the stage during which a developed scientific concept is turned into a fully fledged product.
Mazzucato’s article explains all this. What I wish to add to her argument is, first, that public investment, while always indispensible as a bulwark against stagnation and money market failure, becomes crucial at a time of crisis – like the current moment in Europe’s history. The point is not to stimulate the formation of new bubbles. Our task is to invest into smarter technologies that solve humanity’s major problems and, in so doing, generate the jobs that will yield the income that will repay our mountain of debts. Secondly, that along with this mountain of debts, our economies feature also an equally tall mountain of idle savings.
How many people know that global savings are now at 27% of global income, the highest saving ratio in humanity’s economic history? Left to their own devices, and at a time of global crisis, markets cannot, and will not, put these savings into productive uses; into the uses that can simultaneously solve our energy/global warming crisis and help us deal with our debt crisis.
It is the height of misunderstanding to fear that public investment distorts markets and crowds private investment out; when our reality is one of highly distorted markets that are clearly incapable of fostering adequate levels of private investment. Indeed, Policy 3 of our Modest Proposal is all about fostering the public investment that, as Mazzucato suggests, is uniquely placed not only to produce urgently needed technologies but also to address the serious imbalances that threaten to destroy Europe today.
Image top - European Investment Bank, Luxembourg.