Fixing the economy by rewarding long-term investment in innovation
The world's economy has yet to fully recover from the global financial crisis, now a half-decade since it began. Economists are not finished debating its causes and solutions, and they likely will continue for years to come.
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Challenging times call for challenging ideas and solutions. An EU-funded research project attributes part of the crisis’ cause to an economic value system that rewarded short-term gain over sustainable growth. Accordingly, this deprived the economy of important investments in innovation, green technologies and other new-economy industries envisioned to drive growth into the 21st century.
Most important to recognise, say the researchers, is the fact that many of the proceeds from major public investments in these new industries have not been returned to government coffers. Rather, they were lost to financial dealings and speculation.
These are among the incisive conclusions of FINNOV, or “Finance, Innovation and Growth: Changing Patterns and Policy Implications.” This initiative brought together economics experts from seven high profile European research institutions to examine the relationship between financial markets and investment in innovation.
The FINNOV team analysed the critical question of how well the financial system has stimulated growth in high-tech and science-based industries and companies. The conclusion: not as well as it could or should.
“The economy is unbalanced. We need a new framework,” says FINNOV coordinator Mariana Mazzucato, a professor of science and technology policy at the UK’s University of Sussex. “There is an overemphasis on the financial industry. This has allowed economic resources to be extracted at the expense of industrial growth and actual value creation,” explains Mazzucato.
“Investment in productive activity has been undermined,” she says, “and the economy has been destabilised.”
Mazzucato, a visible and influential economic analyst, says the world’s economy has become overly “financialised.” This means the balance of risks and rewards has been warped by dysfunctional incentives that have undermined productive investment.
“The financial sector tended to focus on value-extraction aimed at quick but unsustainable, short-term gains,” she says, “rather than on value-creation that could contribute to long-term, sustainable and equitable economic growth.”
As a result, Mazzucato holds, substantial financial gains have been privatised - held onto by the private sector - while the risks have been socialised - shouldered by governments and, by extension, the taxpayers. “What we have now is an inequitable, unstable economic system that is obstructing innovation, and increasing the size and frequency of financial crises that are becoming more difficult for policymakers to understand and control,” she notes.
“What we need,” Mazzucato explains, “is finance for innovation, not innovation for finance.” Indeed, governments have the capacity and the role to spark innovation, she says. But because of tightening budgets, governments’ innovation funds should be regularly replenished with the profits from publicly funded successes.
“Governments should get a reward for investing in high-risks technologies and industries. They should retain a ‘golden share’ of royalties,” according to Mazzucato. “Had the US government thought ahead and kept even 0.05 percent of future proceeds from the Internet, think about how much of that money could have been invested in green technology,” she concludes.
In addition to this, the FINNOV team released many other recommendations for public- and private-sector leaders. For example, tax rules should be written to reward innovators who create lasting value, not those who extract short-term gains. Indicators used to measure financial performance should reflect companies’ investments in innovation, research and development, and productivity. Financial support for small- and medium-sized companies should help job creation and high-quality products.
Moreover, the practice of “share buyback,” by which companies repurchase their own stock in order to boost share prices (and executives’ bonuses) at the expense of research and development investment should be strictly regulated. Last, but not least, the green economy should be recognised as the “next big thing” after the Internet, which is likely to produce high returns.
- Project acronym: FINNOV
- Participants: United Kingdom (Coordinator), Czech Republic, France, Italy
- Project FP7 217466
- Total costs: €1 900 000
- EU contribution: €1 493 870
- Duration: March 2009 - February 2012
Project web site