Innovative success from sharing risks and rewards amongst public and private research


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02-02-2019 12:07 PM


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02-02-2019 12:07 PM



02-02-2019 01:09 PM

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Innovative success from sharing risks and rewards amongst public and private research -

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Robyn Williams: So what is the role of the public sector in R&D and innovation? A partnership? Well, it should be, but Professor Mariana Mazzucato thinks we've forgotten about one half, the public side. The importance of CSIRO and campuses, with university scientists like Liz Dennis and many others in favour of the corporate stars.

I'm Steve Jobs. I might not look like him and it is posthumously, I'm holding the iPhone and waving it around and being the hero of innovation. Could you tell me how many of the technologies, the seven technologies upon which this firm is based, came from Steve Jobs and private enterprise?

Mariana Mazzucato: So my point is not that Steve Jobs or Apple weren't important, but what makes that phone a smart phone and not a stupid dumb phone are all the technologies within it. But then Steve and his colleagues designed in a wonderful way, especially through his calligraphy class kind of skills, but the actual technologies, the internet, GPS, touchscreen and Siri were all financed from the public sector, and not just throwing public money out there in the wind, but actually often to solve certain types of goals. The internet itself was a solution to a problem, getting satellites to communicate. So one of the questions is today have we lost the capacity for governments and in particular government institutions to dream big, to have missions which were so critical in the past for allowing these technologies to come about as spill-overs from that ambition.

Robyn Williams: Well, many people don't necessarily think about the fact that without airports, roads and all the other infrastructure you simply cannot do business. Why have they forgotten that?

Mariana Mazzucato: Well, what's interesting is that's not a hard point to remind people about. In fact I think Obama even had a 'we built that' speech where he precisely said the roads, the infrastructure, et cetera that are so critical for business to do business were publicly financed and we have to remember that both in terms of the narratives but also in terms of the tax revenue that is required for it. But what I think is a much harder sell because it really is completely lacking in the public understanding is that it's also the technologies. So it's not just that Google uses the roads and an educated workforce which has been publicly financed, but the algorithm, the Google algorithm was actually financed by the National Science Foundation. And again, a particular agency within the Department of Defence invested in the internet. And one thing that that means is we shouldn't forget that for each of these technologies there was many failures. For every internet there was lots of failures. And any venture capitalists in the private sector will almost brag about that. They'll say 'we take risks and we don't mind when we fail, we just get up again and get on the horse and achieve new things later'. Whereas the public sector, when they fail they're on the front page of the newspaper and told they're stupid, bureaucratic, get out of the way.

So I think there's several points. One is if we want the state through its capacity to continue playing the role that it has played in the history of capitalism which was actually to invest before the private sector came in, to be mission oriented, to take on the high risk, high capital intensity, then we have to ask some difficult questions that are not being asked today, besides just reminding people literally the storytelling because there's a whole book on Steve Jobs and not one page, not one paragraph, not one sentence, not one little word on any of the public investments that went into making his smart phones smart. But the next step is should the government then also, for example. get a public return for its public investment? Now, sometimes that could even be monetary.

I often remind people that Tesla, the car, got as a guaranteed loan from the US taxpayer an amount of money that was similar to what Solyndra however failed, it was a solar company that got $500 million as a guaranteed loan by the Department of Energy. Should Obama have thought about it as a portfolio so that maybe retaining some equity in the Tesla investment that could have paid back the Solyndra loss, he curiously did the opposite. He told Tesla if you don't pay back the loan we get 3 million shares in your company. And I have no idea who was advising him given he had all these Goldman Sachs guys in his government. At least in that case you would have hoped they would have come through.

So what he should have said is if you do pay back the loan and you're successful we get 3 million shares. And the price per share when they got the loan in 2009 and when they paid it back in 2013 went from 9 to 90. Multiply that by 3 million, that would have definitely more than paid back the Solyndra loss in the next round. So seeing government as investor, not just facilitator, not just enabler, not just fixer of market failures, starts to make one think also, hey, why are we just socialising risks and not rewards. I don't think that argument holds if we are talking about R&D. The upstream basic research and development, when government finances that it shouldn't worry about the return, the return is the spill-over of knowledge that happens.

But increasingly what we've seen, and this is a very interesting, is that as the financial sector is becoming increasingly short-termist, increasingly speculative, and in the meantime creates a global financial crisis, this role of government also playing it as downstream investor and helping companies like Tesla come about because they require patient and long-term finance, not speculative short-term finance, that has actually increased, but I don't think it's fair to ask citizens just to bail out the failures and not to get a share of the successes. And another way that could happen besides the equity example would be to make sure that the prices of the medicines, for example, that are publicly financed remain low, and that you don't have this crazy speculative value based pricing. That's what they call it in the pharmaceutical industry where overnight the prices of antibiotics are going up by 400% to please the shareholders for companies that have been overly financialised.

We could also restructure intellectual property rights, so the patent system, which we've seen to become increasingly deformed. It used to be that patents only occurred downstream in innovation cycle for the real novelty area. We are increasingly seeing the tools for research being patented. That's bad for science, so that's a bad public return for what the state is giving companies which is a 20-year monopoly when you get a patent, that's a 20-year monopoly that the state gives you, but the return should be that once that monopoly is up there is more diffusion and deployment of that knowledge because it has been written down, unlike in the Middle Ages where it was all secret. Or it could also happen through some sort of an investment fund. The grant that was given to Google could have been written in a way that said if all fails, don't worry. You know, Sergey Brin, the State kind of takes on that risk, but if you succeed and make $X billion, perhaps 1% of your profits should go into some sort of innovation fund so that the future Googles can come about.

Robyn Williams: Going to those drug industries. That's one of the famous examples that keeps coming up, suggesting that no Communist country really made a drug of any consequence, and it's only the free enterprise in Switzerland and the United States and to some extent in Britain that made it all happen. How do you argue with that?

Mariana Mazzucato: Well, that's fake news if I ever heard it. We should distinguish fake news from lies, so I'd call that just a lie. So something like 75% of new molecular entities with priority rating, in other words the really revolutionary drugs, trace their research to different types of public funds. In the US this is the National Institutes of Health, which every year spend over $30 billion in the really high-risk, uncertain, capital intensive part of the research process, at least to these drugs. So it's not that the big pharmaceutical companies aren't important, but actually the return that they are receiving for the actual risk that they put in is just completely exaggerated.

So this is the other thing, this isn't about bashing one particular player and saying the State is great and the private industry isn't. Of course we need private industry and of course they were important, both in ICT formation, communication technology, and in pharmaceuticals, but if we don't really understand the division of innovative labour, what the public sector did, what's the private sector did, and increasingly, by the way, with the third sector, so foundations and philanthropies are actually playing a very important role, like the Gates Foundation around vaccines. If we better understand who is doing what, what actual risk is being taken on by which actor, that should actually also translate into an understanding of the reward structure.

And so really what's happening is the pharmaceutical companies are making very high level profits from a system that, yes, they had a role in but definitely they weren't the biggest risk takers, and that's a very bad deal. In fact sometimes it's a crime because the taxpayer ends up paying two or three times for the drug, given the research, the taxes they paid to the welfare state and then in some cases also having to pay these very high prices, and it just makes no sense.

Robyn Williams: May I ask you a hypothetical…well, in fact a thought experiment, and it might bounce off your clean oceans project, and that is something we ran in The Science Show a little while ago that was featured in the Economist 175th anniversary magazine about making roads out of plastic instead of asphalt. In other words you've got vast amounts of thin plastic floating in the oceans, in the streets, in your bin, and you can use it to make cheaper roads that last longer. That would involve government at all sorts of levels, local government, the federal government, as well as private enterprise. What sort of mechanisms do you need to keep people like that working together?

Mariana Mazzucato: That's a great question and it's something that I've had the opportunity to work on very concretely. So I'm what's called the special adviser to Carlos Moedas, who is currently the research commissioner for the European Commission, and the New Horizon program, which is the way that Europe funds its innovation, it has €100 billion in it, and I kind of argued to them; make sure you don't disperse it and waste it, why do you have a moonshot approach? So getting to the Moon required lots of different sectors, not just aeronautics, it also required nutrition, it required textiles. So you couldn't get to the Moon in jeans and a T-shirt eating a hamburger, particular things had to be in place. And also there was lots of different projects, like 200 projects, of which many of the successes, again, are those things that ended up in our iPhones.

So what would a mission oriented approach look like to clean up the oceans? If you say let's get the plastic out, that would require lots of different sectors as different as chemicals, marine, AI, social innovation, design, biotech, waste management, human health, and that's really interesting because it means that you also unlock hoarded investment. We have huge hoarding rates around the world right now, including also financialisation. Lots of these companies in these sectors are spending more on share buybacks to boost their share prices and stock options than on R&D. So if you have a clear public goal which then rewards those actors across many different sectors to find different solutions for it, but then using the full power of government instruments, from procurement policy, price schemes, grants to really crowd in multiple bottom-up solutions, that's that project level. So challenges, turn them into moonshots which are concrete and targeted which require lots of different sectors and actors to innovate and invest, and then at the instrument level really rethinking how we can use procurement to drive through those bottom-up solutions.

And I wrote a report which I'm glad to say has actually become part of the legal framework for the Horizon Program, and that's going to be used to really frame these kinds of…exactly what your question was; how can we really stimulate and catalyse different actors in the economy to solve problems together? And the first thing we need to do is abandon ideology, because this kind of public-versus-private thing doesn't help us get there and it shouldn't be the public sector just de-risking and enabling it, it has to be co-investing, sharing risks but also sharing the rewards in the process.

Robyn Williams: The problem is these days that the attacks on the public service have been so extreme and sustained that there is a kind of demoralisation as well as a defence mechanism called process. And the kind of process that goes on can be made worse by the new technology because you can send emails all over the place and really bring public service to a standstill. Do you think the government agencies and suchlike are demoralised like that?

Mariana Mazzucato: Definitely, but I often say that I walk into meetings with governments worldwide and I walk in as an economist and I walk out as a life coach because I do think civil servants are depressed for exactly the reasons you mention. And, by the way, this is very serious, it actually means that the capacities, the capabilities, the knowledge structures, the learning abilities of the public sector are also being diminished in the meantime. So not only is there an ideological push sometimes to have privatisation and outsourcing that it also becomes an inevitable consequence of not having invested in the public sector as being a proper value-creating agency alongside the private sector. And again, the outsourcing and privatisation trend unfortunately is spreading like oil.

And the reason I set up at University College London this Institute for Innovation and Public Purpose was both…you know, we have this great research program looking at precisely the kind of issues that we were just talking about but also a new training we really want to develop, and it's starting in September, a new masters in public administration which actually provides new tools to civil servants. Also, to be mission oriented, to be welcoming of uncertainty, not to fear it, but what would it actually look like in terms of the toolkit if the first thing you did was not have to identify the market failure that you're going to fix, which is unfortunately the way that public servants are trained to think now. You first have to say where the market goes wrong and then that gives you the permission to do something but actually start with the ambition. What kind of healthcare system do we want? What kind of sustainable cities should we build? How can we co-shape the future of AI and the data society and to the digital economy to be really ambitious and then to ask what are the kind of investments we will have to make but also partnerships with the private sector, with their sector institutions?

And how can we also get our treasuries, the ministries of finance which unfortunately around the world tend to be part of this depression problem to actually also have different evaluation metrics. Instead of static cost benefit analysis and net present value and asking the ABC or the BBC what is your economic value, to actually really be able to also capture the great spill-overs that happen when you have an ambitious ABC in terms of…even the BBC in the 1980s they had a learning program where they wanted all the kids to code, they invested actually in the technology, the BBC microcomputer. They had to procure the parts that allowed some of the start-ups to scale up, which later became the big high-tech companies in the UK, ARM and Acorn. So even at that level having ambition really matters in terms of also helping the business community. But neither NASA nor the BBC nor ABC would have produced anything had they worried about economic value in the beginning. And this is the irony; you produce more economic value by not worrying about it.

Robyn Williams: The remarkable Professor Mariana Mazzucato from the University College in London where she directs the Institute for Innovation and Public Purpose. She was in Australia as a guest of the University of Technology in Sydney.