15 ms·

We have socialised the risk of innovation but privatised the rewards

212 points by dil8 12y ago

gcb0 12y ago
i use that exact same phrase every time anyone tries to include me on a discussion about tipping. (and then promptly leave said discussion)
- jordonwii 12y ago
  Care to elaborate? I don't quite follow.
  - gcb0 12y ago
    restaurant owner pass the same risk of failure to the servers (no client, no sales, no food on your plate end of month) in exchange of no extra benefit (if restaurant goes really well, they will probably have to add more servers, keeping the larger profit for owner, but cutting your tips in half, hence, server has no benefit if restaurant is an overnight success)
- cwyers 12y ago
  It seems... far less obvious to me what that means in the context of tipping than it does when the author uses it.
deleted 12y ago
[deleted]
deleted 12y ago
[deleted]
brandonmenc 12y ago
> When Google received funding for its algorithm from the National Science Foundation (NSF), is it right that after it earned billions nothing went back to the NSF Serious mental gymnastics. Page and Brin doing research with NSF grants isn't even remotely the same thing as Google, their future company, getting a check directly from the government. Page and Brin produced publicly available research with NSF money. They started a company based on that public research. That company created untold billions of dollars of value out of thin air. Taxes are paid out of those new dollars, some of which go to fund the NSF. This is exactly how it's supposed to work.
- spikels 12y ago
  The NSF grant played a minor role but the OP is exagerating it's importance to support her political viewpoint of how the world should be run. More background here: http://www.politifact.com/georgia/statements/2012/jul/09/barack-obama/obamas-google-claim/ http://www.politifact.com/georgia/statements/2012/jul/09/bar... Also the $504,000 SBIC investment in Apple actually returned $44 million apparently to it's sponsoring bank. In fact the program is exactly what the author is against as the frequent losses end up being covered by the government. More here: http://articles.latimes.com/1990-09-25/business/fi-1303_1_small-businesses/2 http://articles.latimes.com/1990-09-25/business/fi-1303_1_sm...
  - nmridul 12y ago
    What if Apple had failed ? This is what she is trying to say. The risk is taken by the public. And the rewards mainly goes to the private entities.
    - zo1 12y ago
      The risk is taken by the public and all the other investors. The loss/reward is proportional, which is something that's being glossed over. From the look of it, the author is trying to make it seem like the public funds it, and the private people reap all the benefits. Weird scenarios aside (such as the NSF research grant stuff), we should see the "public" in the same light as all the other investors.
    - bsbechtel 12y ago
      >>What if Apple had failed? What if the Federal Government subsidizes mortgages causing a housing bubble and subsequently making our entire financial system to collapse costing hundreds of thousands of jobs? What if California spends $6B+ on a high speed rail system and no one uses it? I understand what you (and by extension, she) are trying to say, but remember that every government action has risk and reward, just like every action taken by the private sector. It would be nice if we could keep the risks/rewards of the two sectors completely separate, but that would entail moving to either a completely communist or completely anarcho-capitalist model of society, which might be nice to think about in theory, but will never happen. It's important to note that even if Apple and Google send all their profits and jobs overseas, their investors still have had to pay out $100B+ in capital gains taxes over the years. This has more than paid back any investments the gov has made in them.
deleted 12y ago
[deleted]
nl 12y ago
The title of this piece is terrible, and detracts from what is actually a thoughtful discussion. Mazzucato points out how the government is actually good at funding very high risk work, with a low chance of pay off (think DARPA research in the US). She does say the sentence used in the title, but the context is very important: What this means is that we have socialized the risk of innovation but privatised the rewards. This dynamic is one of the key drivers of increasing inequality. Because innovation today builds on innovation tomorrow, the ‘capture’ can be very large. This would not be the case if innovation were just a random walk. Policy makers must think very hard how to make value creation activities (done by all the collective actors in the innovation game) rewarded above value extraction activities (in this sense capital gains taxes are way too low). And since the booty from the latter can be very large, redirecting incentives and rewards towards the value creators is essential. The problem is that some of the ‘extractors’ like to sell themselves as the creators. Her argument appears to be that public funds need to be directed into areas that have a chance of "industry transformation", which may create job or new (tax paying) industries in the country that funded them. Here argument about public funding of Google and Apple is this: For every Internet there are many Concordes or Solyndras. Yet this is also true for private venture capital (VC). But while private VC is then able to use the profits from the 1 out of 10 successes to fund the 9 losses, the state has not been allowed to reap a return. Economists think this will happen via tax (from the jobs created, and from the profits of the companies), yet so many of the companies that receive such benefits from state funding, bring their jobs elsewhere, and of course we know they also pay very little tax. There is possibly a valid point here. Corporate tax minimisation by offshoring profits is a real challenge to the tax system. I don't think she makes any real suggestion for how to solve the problem, though (Retaining a share of IP rights won't work, because companies can easily disassociate profits from the IP that generated them, meaning that any return-on-profits-generated scheme will fail. See Hollywood Accounting,[1] which does a similar thing in the film world) [1] http://en.wikipedia.org/wiki/Hollywood_accounting http://en.wikipedia.org/wiki/Hollywood_accounting
- dmfdmf 12y ago
  > The title of this piece is terrible... I agree but not for the same reasons I am sure. This title is an old saw from the socialists and has been around for decades. The implicit conclusion is that to make things "fair" we should socialize risk AND reward. How convenient for the socialists. No. The discussion we should be having is; What is the proper function of government? What is your standard? > Her argument appears to be that public funds need to be directed into areas that have a chance of "industry transformation", which may create job or new (tax paying) industries in the country that funded them. The end of this road is fascism or communism, take your pick but it doesn't really matter if you value freedom.
Quanticles 12y ago
"Economists think this will happen via tax (from the jobs created, and from the profits of the companies), yet so many of the companies that receive such benefits from state funding, bring their jobs elsewhere, and of course we know they also pay very little tax." He makes it sound like the USA would be just as well off if big tech companies weren't here. The US government is basically a ~15% shareholder in all US companies due to salary and other taxes. If they can invest in technology research and build more US companies, then the US government earns a net profit. I would like to see a breakdown for a major technology company to see what percentage of their revenue goes to income tax withholding, and then see how much government funding went into helping that company come to life. Edits: 1. Number adjustment 2. By "income tax witholding" I mean the income tax that the employees pay. If 50% of revenue goes to salaries, and 20% of salaries go to income tax witholding, then 10% of a company's revenue goes to income tax.
- rtpg 12y ago
  remember that time GE paid basically 0% in taxes? the 30% number is only in theory (there is the salary breakdown but I don't think 30% is the number that ends up hitting)
  - swatow 12y ago
    I'm not an expert in taxation, but corporate taxes are just one piece of the pie. There is no way for employees to avoid income tax, and as far as I know, no way for US based shareholders to avoid paying capital gains/dividends taxes.
    - philwelch 12y ago
      In fact, some economists argue that corporate taxes are fundamentally inefficient, because corporations are just a mechanism for producing either individual income or capital gains for their shareholders, so it would be better and fairer to tax the actual humans profiting from the business rather than the corporate straw man itself.
      - 12y ago
roymurdock 12y ago
Do subsidized projects such as Tesla earn any returns for the government?
- reagan83 12y ago
  Yes, but with low margins. The $465m DOE loan extended to Tesla was repaid, almost a decade before the maturity date, with an effective interest rate of 2.6% (approx $12m).
  - philwelch 12y ago
    Presumably, there is also the public good of having more electric vehicles, which was the rationale for such subsidies in the first place.
DodgyEggplant 12y ago
Better title would be when the "modern capitalism is rewarding value extraction over value creation" argument. Think twitter, starting with "do good" argument attracting devs when they need them, then shutting them out later. Who benefits the value of the IPOS? the public?
anaolykarpov 12y ago
I so very much hate socialism. The state, with the money it took from all of us through taxes is presented as a benefactor because it gives small amounts of those money back to research. And she wants the state to have more share from successful research. The state, any state, is a very bad administrator of funds, because the so called state are basically a bunch of people spending other peoples money on things that they dont understand and they dont really care about. What they care about is building their own public image with those money in order to be reelected. I'd feel much more confortable in having to pay lower taxes and let the private investors do the investment, because VCS actually care about how their money are spent.
- justicezyx 12y ago
  The state, any state, is a very bad administrator of funds Can you explain how China managed to accelerate its development speed through "state-managed funding" on all and everything?
- robotresearcher 12y ago
  I'd feel less comfortable without NASA, NIH, and DARPA, since I have benefitted a great deal from the work they sponsored. I doubt very much I would have had those benefits so soon without these grossly inefficient agencies that have no idea what they are doing carelessly spending other people's money on creating the space age, the Internet age, and the age of genomics respectively. I don't believe for a second that private investment would have done these earlier or better if the greedy government had stolen less tax money from you. edit: downvotes yay! Please enjoy using the Internet to show your distain for giving credit for revolutionary federally-funded technology projects.
  - tsotha 12y ago
    Of the three, I think private investment would have done better than the first two. Even DARPA is notable for a handful of home runs that may have been just luck.
    - 12y ago
jonathansizz 12y ago
The author's argument is presented better and in more detail here: https://news.ycombinator.com/item?id=9168693 https://news.ycombinator.com/item?id=9168693
timtas 12y ago
We've all seen quite clearly in recent years that governments regularly socialize risk with bailouts of supporters and favorites. The worst part is the way they tip their hand in advance (e.g., The Greenspan Put [1]) incentivizing the the most reckless and morally hazardous behavior. But the article does not aim at this real problem. Rather it's just a basket of plausible sounding but totally unsubstantiated claims and deliberate ignorance of inconvenient facts. For example, we're supposed to view China's giant investments "environmentally friendly technologies" as destined for success. We won't question the competence of the government that has so recently built several cities (yes whole cities, yes plural) which are completely empty while peasants subsist in garbage heaps on their outskirts. Polemicals like this equate corporatism and cronyism with capitalism and free markets. Then with the straw man destroyed, it's not hard to guess what the solution will be. [1] http://en.wikipedia.org/wiki/Greenspan_put http://en.wikipedia.org/wiki/Greenspan_put
kristopolous 12y ago
Another political theorist, Albena Azmanova calls this aggregative capitalism. An interview here: http://www.againstthegrain.org/program/1099/tues-22415-post-neoliberal-capitalism http://www.againstthegrain.org/program/1099/tues-22415-post-... and an essay here : http://www.academia.edu/11034347/The_Crisis_of_the_Crisis_of_Capitalism http://www.academia.edu/11034347/The_Crisis_of_the_Crisis_of... A summary from http://events.newschool.edu/event/politics_talk_albena_azmanova_the_crisis_of_capitalism_and_the_state-_more_powerful_less_responsible_invariably_legitimate#.VP0_MZQ2f0M http://events.newschool.edu/event/politics_talk_albena_azman... > A key feature of the new modality is the renewal of the state's redistributive function, with an altered logic of distribution, and a simultaneous increase in the state's administrative power and a decrease in its authority - a process that has failed to trigger a legitimacy crisis of the socio-political system, despite the recent confluence of financial, economic, and social crises. And no wonder society accepts the pain with equanimity, Professor Azmanova will argue, as the very social contract in Western democracies has been recast, thus breathing new life into capitalism.
venomsnake 12y ago
There is way to socialize the rewards of innovation. It is called taxation. Why US allows such wide tax evasion is whole other qustion.
- dnautics 12y ago
  The us has some of the highest tax compliance rates in the world.
dools 12y ago
Socialised risk and privatised reward is how government should work. Universal health care is a good example: I am the most obvious benefactor of my own good health, but society also benefits from having healthy citizens. Revenue generation is only the goal of government so that it can support its citizens.
- EliRivers 12y ago
  Socialised risk and privatised reward is how government should work. Banks take (less than they used to, since some legislation was brought back) insane risks because they know Joe public will cover disastrous losses when it goes wrong, and the bankers can keep the massive profits when they get lucky. Socialised risk, private profit.
dschiptsov 12y ago
Are we re-inventing "Tragedy of the commons" principle, which is as old as social inequality itself?
logicallee 12y ago
The article is a lot better than the title! (I only skimmed, rather than read it though.) People should read it. I agree with a ton there. But the article's author has a huge blind spot - if you search the article for "tax", you will see just a couple of occurrences, and the author basically dismisses the mechanism. It's almost as though the author had no idea how the state even gets money - the author just thinks the state's role in innovation is underplayed. That may be true, but the size of the state depends (obviously) on the size of the economy. It's obvious that if the state invests in innovation that causes a 1000x rise in productivity, hugely increasing the size of the economy, then the state also becomes larger, through the usual mechanisms. Taxes are how anything is socialized - the author almost behaves as though the state's money comes out of nowhere. Another good example of applying the title incorrectly would be public education. People generally go to elementary and high school for free. They can then go off to work, sometimes even founding companies, which they could never do if they're illiterate. You could consider education a "risk" on these entrepreneurs: not everyone who becomes literate can create a ton of value in private enterprise, either as a founder or someone working for a good salary at a company; but nobody needed to take a risk on these people in elementary school (with 10 years+ until payoff), the state does it. In fact it's mandatory.[1] So could we say, "We have socialized the risks of education but privatized the rewards?" (in that you're a free person who is now educated.) Well, yes. But who pays for all that public schooling - everyone does. The author perhaps fails to see the relationship between a state causing an increase in society's private benefits - and the fact that that the state is in a position to do so due to the latter. All the state is, is a percentage of the economy, which is public. It has a good and important role - but that role comes from being a percentage. The Thatcher quote is appropriate: "The problem with socialism is that eventually you run out of other people's money to spend." That never happens if the state remains 20%-30% of the economy. The size of the economy can simply increase indefinitely. It's not possible (which may surprise the author) for this to happen in a way that doesn't cause the state to also increase in size. So while I agree with the main contention, it bears pointing out that it is a two-way street: private enterprise (and private citizens) get 'free' public goods from state spending, that they don't have to pay for. But the state gets a 'free' percentage of all private enterprise (and private earnings) - in fact, set at whatever it wants. The state can literally tax whatever level it wants and in whatever ways it wants. So it is, in fact, a two-way street. [1] see compulsory education - since the 1800's, "Fines were imposed on parents who did not send their children to school and the government took the power to take children away from their parents and apprentice them to others if government officials decided that the parents were "unfit to have the children educated properly"."
andyjohnson0 12y ago
Mazzucato gave an interesting talk [1] about this to the Long Now Foundation back in March 2014. [1] http://longnow.org/seminars/02014/mar/24/entrepreneurial-state-debunking-private-vs-public-sector-myths/ http://longnow.org/seminars/02014/mar/24/entrepreneurial-sta...
- justincormack 12y ago
  She also has a book, "The Entrepreneurial State".
Rumford 12y ago
Please don't tell me this central planning fad is coming back. The last time people were infatuated with the planned society 200 million people died.
zo1 12y ago
She just described one of the main benefits of having a state. It allows people to flourish. Of course, excluding obvious scenarios of nefarious uses of public money for personal profit. The state creates an environment that allows individuals to make profit in a safe way (contracts, violence, laws, etc). An underlying bit of information that is ignored is that the individual profiting means that we all profit, in small and not necessarily measurable ways. And sure why not, why can't the public be the one to bear the risk in the examples stated? It does for everything else. Isn't this the "collective" way? And I have seen this line of thinking elsewhere, particularly when discussing the merits of having a state at all. The idea that somehow we "owe" the state for all these nice things it gives us beyond what we already pay in personal taxes. "Go live in Somalia", they would tell me, if you don't like paying taxes.
tessierashpool 12y ago
Best quote in the piece: Because innovation today builds on innovation tomorrow... Policy makers must think very hard how to make value creation activities (done by all the collective actors in the innovation game) rewarded above value extraction activities (in this sense capital gains taxes are way too low). Peter Thiel's book talks about this, and on the one hand it is of course very good strategy, yet it's also quite sad and pathetic, because the principle he advocates is that you should focus on capturing a market, rather than creating value. OP is saying, if this is a logical choice for entrepreneurs to make, then policy makers have done a very bad job at structuring incentives. It would make more sense if policy set up incentives which encouraged creating value over capturing it.
copsarebastards 12y ago
I think the author is pointing to a problem but not correctly identifying what the problem is. The problem is deeper. If the problem were that we have socialized risk of innovation but privatized the rewards, that wouldn't really be a problem. It's a good thing to incentivize innovation. The real problem is that we don't incentivize innovation. Instead, we incentivize investment. People who already have money to invest take on small calculated percentages of risk to make back large amounts of money. Frequently the money investors are investing isn't even their own, and they are paid a significant salary to do so, meaning they actually take on none of the risk. The negative results of this are twofold: 1. Often investors don't invest in innovation. It's equally profitable to invest in number-twiddling schemes that provide no benefit to anyone except the investor, and often that's easier. 2. We speak of companies as if they are single entities. But the reality is that executives and shareholders and of a company are the beneficiaries of any innovation within a company, while innovation typically comes from workers with technical expertise who are typically paid a relatively limited salary perhaps with some minimal stock options. The way around this problem is typically to get into a company early enough that the line between technical worker and executive is blurred. But that avoids only the problems with lack of reward--it actually exacerbates the risk problem because early commitment to a company is a high-risk endeavor. In the end, I think that a lot of innovators don't innovate for money anyway--I personally would rather see something I make change the world than make a lot of money off an idea that doesn't make any difference (or makes things worse!). As long as I have enough to live I'm okay. But it would be nice if we stopped pretending that our distribution of wealth is at all meritocratic.
- ddingus 12y ago
  This! I sure got that as the takeaway. Public investments targeted at innovation we've identified as important, or worth it, whatever should be increased. There is another aspect to this as well. Check out this history of PDX area Tektronix: http://www.opb.org/television/programs/oregonexperience/segment/the-spirit-of-tek-/ http://www.opb.org/television/programs/oregonexperience/segm... Between Tek, Intel, and a couple others, the area was transformed into something we call "silicon forest" and it spawned a ton of great companies, many of which are in business today. It was a very interesting mix of private and public investments in education and investment support. Spin offs, not competitive with Tek, got Tek support while ramping up. Colleges offered targeted programs for people to get educated, companies did the same. The founders got very wealthy, but so did a lot of other people. We need more of this kind of thing.
UhUhUhUh 12y ago
This also seems to be a child of a wider process by which losses tend to be socialized and profits tend to be privatized. Apparently, the system "works" because nearly all the wealth of the planet is in the hands of something like 1% of the population, while the debt, well... Another aspect is the speed at which profit is made. At one end there is education, for example, which is an exceedingly bad investment in financial terms because it is very slow and very uncertain. At the other end there is pure trading and seed/startup investment, with profit goals of, what, 25% per year. Who would finance education? Certainly not a financial investor in his right mind.
gustavodemari 12y ago
The state needs to do only one thing, don't disturb private initiatives
MichaelMoser123 12y ago
> Where are Xerox Park and Bell Labs today? Bell labs was financed because AT&T had a monopoly status on landlines; whatever the costs, AT&T could just raise fees for a cent and cover all expenses. AT&T lost its monopoly so it could no longer pay for Bell labs. so this monopoly status was good for Bell Labs, but it also covered up the many gross inefficiencies of a monopoly body and it did limit competition - and growth. > I believe the green economy merits much more funding than it is currently receiving by government I suspect that this is a value based judgment. Who is to know if the next growth period will rather be based on nano technology, or maybe will be based of artificial intelligence? I guess that civil servants are in a bad position to make such judgments, because they bear little personal responsibility for their decisions. If one looks at the internet boom, then one can discern many stages here: - first was the fundamental research that explored the subject of packet switching networks; this was funded by the US military - next was the gradual development of networking technology, which took some ten-fifteen years. Here there were many actors, part of them from research and part from industry - next came the first boom-bust cycle of the nineteens; whatever one thinks of it, it helped to build the required networking infrastructure for wider adoption and it helped to create many technologies that were important for the next stage. - next came the present growth based on targeted advertising / private sector surveillance based on social networks. No one actor could have directed this process; public sector did facilitate basic research, it created the prerequisites for growth, but actual growth was still several steps away from that; at any of these stages it could have been stopped by some misguided policy decision. Prof. Mazzucato seems to underestimate the risks that entrepreneurs had to take during this process; Research financed by the public sector is a prerequisite for growth, but state dirigims would not have led to it either; Dirigism in France created the minitel network, but that is not quite the internet of today.

212 points by dil8 12y ago

gcb0 12y ago

i use that exact same phrase every time anyone tries to include me on a discussion about tipping. (and then promptly leave said discussion)

jordonwii 12y ago
Care to elaborate? I don't quite follow.
- gcb0 12y ago
  restaurant owner pass the same risk of failure to the servers (no client, no sales, no food on your plate end of month) in exchange of no extra benefit (if restaurant goes really well, they will probably have to add more servers, keeping the larger profit for owner, but cutting your tips in half, hence, server has no benefit if restaurant is an overnight success)
cwyers 12y ago
It seems... far less obvious to me what that means in the context of tipping than it does when the author uses it.

deleted 12y ago

[deleted]

deleted 12y ago

[deleted]

brandonmenc 12y ago

> When Google received funding for its algorithm from the National Science Foundation (NSF), is it right that after it earned billions nothing went back to the NSF Serious mental gymnastics. Page and Brin doing research with NSF grants isn't even remotely the same thing as Google, their future company, getting a check directly from the government. Page and Brin produced publicly available research with NSF money. They started a company based on that public research. That company created untold billions of dollars of value out of thin air. Taxes are paid out of those new dollars, some of which go to fund the NSF. This is exactly how it's supposed to work.

spikels 12y ago
The NSF grant played a minor role but the OP is exagerating it's importance to support her political viewpoint of how the world should be run. More background here: http://www.politifact.com/georgia/statements/2012/jul/09/barack-obama/obamas-google-claim/ http://www.politifact.com/georgia/statements/2012/jul/09/bar... Also the $504,000 SBIC investment in Apple actually returned $44 million apparently to it's sponsoring bank. In fact the program is exactly what the author is against as the frequent losses end up being covered by the government. More here: http://articles.latimes.com/1990-09-25/business/fi-1303_1_small-businesses/2 http://articles.latimes.com/1990-09-25/business/fi-1303_1_sm...
- nmridul 12y ago
  What if Apple had failed ? This is what she is trying to say. The risk is taken by the public. And the rewards mainly goes to the private entities.
  - zo1 12y ago
    The risk is taken by the public and all the other investors. The loss/reward is proportional, which is something that's being glossed over. From the look of it, the author is trying to make it seem like the public funds it, and the private people reap all the benefits. Weird scenarios aside (such as the NSF research grant stuff), we should see the "public" in the same light as all the other investors.
  - bsbechtel 12y ago
    >>What if Apple had failed? What if the Federal Government subsidizes mortgages causing a housing bubble and subsequently making our entire financial system to collapse costing hundreds of thousands of jobs? What if California spends $6B+ on a high speed rail system and no one uses it? I understand what you (and by extension, she) are trying to say, but remember that every government action has risk and reward, just like every action taken by the private sector. It would be nice if we could keep the risks/rewards of the two sectors completely separate, but that would entail moving to either a completely communist or completely anarcho-capitalist model of society, which might be nice to think about in theory, but will never happen. It's important to note that even if Apple and Google send all their profits and jobs overseas, their investors still have had to pay out $100B+ in capital gains taxes over the years. This has more than paid back any investments the gov has made in them.

deleted 12y ago

[deleted]

nl 12y ago

The title of this piece is terrible, and detracts from what is actually a thoughtful discussion. Mazzucato points out how the government is actually good at funding very high risk work, with a low chance of pay off (think DARPA research in the US). She does say the sentence used in the title, but the context is very important: What this means is that we have socialized the risk of innovation but privatised the rewards. This dynamic is one of the key drivers of increasing inequality. Because innovation today builds on innovation tomorrow, the ‘capture’ can be very large. This would not be the case if innovation were just a random walk. Policy makers must think very hard how to make value creation activities (done by all the collective actors in the innovation game) rewarded above value extraction activities (in this sense capital gains taxes are way too low). And since the booty from the latter can be very large, redirecting incentives and rewards towards the value creators is essential. The problem is that some of the ‘extractors’ like to sell themselves as the creators. Her argument appears to be that public funds need to be directed into areas that have a chance of "industry transformation", which may create job or new (tax paying) industries in the country that funded them. Here argument about public funding of Google and Apple is this: For every Internet there are many Concordes or Solyndras. Yet this is also true for private venture capital (VC). But while private VC is then able to use the profits from the 1 out of 10 successes to fund the 9 losses, the state has not been allowed to reap a return. Economists think this will happen via tax (from the jobs created, and from the profits of the companies), yet so many of the companies that receive such benefits from state funding, bring their jobs elsewhere, and of course we know they also pay very little tax. There is possibly a valid point here. Corporate tax minimisation by offshoring profits is a real challenge to the tax system. I don't think she makes any real suggestion for how to solve the problem, though (Retaining a share of IP rights won't work, because companies can easily disassociate profits from the IP that generated them, meaning that any return-on-profits-generated scheme will fail. See Hollywood Accounting,[1] which does a similar thing in the film world) [1] http://en.wikipedia.org/wiki/Hollywood_accounting http://en.wikipedia.org/wiki/Hollywood_accounting

dmfdmf 12y ago
> The title of this piece is terrible... I agree but not for the same reasons I am sure. This title is an old saw from the socialists and has been around for decades. The implicit conclusion is that to make things "fair" we should socialize risk AND reward. How convenient for the socialists. No. The discussion we should be having is; What is the proper function of government? What is your standard? > Her argument appears to be that public funds need to be directed into areas that have a chance of "industry transformation", which may create job or new (tax paying) industries in the country that funded them. The end of this road is fascism or communism, take your pick but it doesn't really matter if you value freedom.

Quanticles 12y ago

"Economists think this will happen via tax (from the jobs created, and from the profits of the companies), yet so many of the companies that receive such benefits from state funding, bring their jobs elsewhere, and of course we know they also pay very little tax." He makes it sound like the USA would be just as well off if big tech companies weren't here. The US government is basically a ~15% shareholder in all US companies due to salary and other taxes. If they can invest in technology research and build more US companies, then the US government earns a net profit. I would like to see a breakdown for a major technology company to see what percentage of their revenue goes to income tax withholding, and then see how much government funding went into helping that company come to life. Edits: 1. Number adjustment 2. By "income tax witholding" I mean the income tax that the employees pay. If 50% of revenue goes to salaries, and 20% of salaries go to income tax witholding, then 10% of a company's revenue goes to income tax.

rtpg 12y ago
remember that time GE paid basically 0% in taxes? the 30% number is only in theory (there is the salary breakdown but I don't think 30% is the number that ends up hitting)
- swatow 12y ago
  I'm not an expert in taxation, but corporate taxes are just one piece of the pie. There is no way for employees to avoid income tax, and as far as I know, no way for US based shareholders to avoid paying capital gains/dividends taxes.
  - philwelch 12y ago
    In fact, some economists argue that corporate taxes are fundamentally inefficient, because corporations are just a mechanism for producing either individual income or capital gains for their shareholders, so it would be better and fairer to tax the actual humans profiting from the business rather than the corporate straw man itself.
    - 12y ago

roymurdock 12y ago

Do subsidized projects such as Tesla earn any returns for the government?

reagan83 12y ago
Yes, but with low margins. The $465m DOE loan extended to Tesla was repaid, almost a decade before the maturity date, with an effective interest rate of 2.6% (approx $12m).
- philwelch 12y ago
  Presumably, there is also the public good of having more electric vehicles, which was the rationale for such subsidies in the first place.

DodgyEggplant 12y ago

Better title would be when the "modern capitalism is rewarding value extraction over value creation" argument. Think twitter, starting with "do good" argument attracting devs when they need them, then shutting them out later. Who benefits the value of the IPOS? the public?

anaolykarpov 12y ago

I so very much hate socialism. The state, with the money it took from all of us through taxes is presented as a benefactor because it gives small amounts of those money back to research. And she wants the state to have more share from successful research. The state, any state, is a very bad administrator of funds, because the so called state are basically a bunch of people spending other peoples money on things that they dont understand and they dont really care about. What they care about is building their own public image with those money in order to be reelected. I'd feel much more confortable in having to pay lower taxes and let the private investors do the investment, because VCS actually care about how their money are spent.

justicezyx 12y ago
The state, any state, is a very bad administrator of funds Can you explain how China managed to accelerate its development speed through "state-managed funding" on all and everything?
robotresearcher 12y ago
I'd feel less comfortable without NASA, NIH, and DARPA, since I have benefitted a great deal from the work they sponsored. I doubt very much I would have had those benefits so soon without these grossly inefficient agencies that have no idea what they are doing carelessly spending other people's money on creating the space age, the Internet age, and the age of genomics respectively. I don't believe for a second that private investment would have done these earlier or better if the greedy government had stolen less tax money from you. edit: downvotes yay! Please enjoy using the Internet to show your distain for giving credit for revolutionary federally-funded technology projects.
- tsotha 12y ago
  Of the three, I think private investment would have done better than the first two. Even DARPA is notable for a handful of home runs that may have been just luck.
  - 12y ago

jonathansizz 12y ago

The author's argument is presented better and in more detail here: https://news.ycombinator.com/item?id=9168693 https://news.ycombinator.com/item?id=9168693

timtas 12y ago

We've all seen quite clearly in recent years that governments regularly socialize risk with bailouts of supporters and favorites. The worst part is the way they tip their hand in advance (e.g., The Greenspan Put [1]) incentivizing the the most reckless and morally hazardous behavior. But the article does not aim at this real problem. Rather it's just a basket of plausible sounding but totally unsubstantiated claims and deliberate ignorance of inconvenient facts. For example, we're supposed to view China's giant investments "environmentally friendly technologies" as destined for success. We won't question the competence of the government that has so recently built several cities (yes whole cities, yes plural) which are completely empty while peasants subsist in garbage heaps on their outskirts. Polemicals like this equate corporatism and cronyism with capitalism and free markets. Then with the straw man destroyed, it's not hard to guess what the solution will be. [1] http://en.wikipedia.org/wiki/Greenspan_put http://en.wikipedia.org/wiki/Greenspan_put

kristopolous 12y ago

Another political theorist, Albena Azmanova calls this aggregative capitalism. An interview here: http://www.againstthegrain.org/program/1099/tues-22415-post-neoliberal-capitalism http://www.againstthegrain.org/program/1099/tues-22415-post-... and an essay here : http://www.academia.edu/11034347/The_Crisis_of_the_Crisis_of_Capitalism http://www.academia.edu/11034347/The_Crisis_of_the_Crisis_of... A summary from http://events.newschool.edu/event/politics_talk_albena_azmanova_the_crisis_of_capitalism_and_the_state-_more_powerful_less_responsible_invariably_legitimate#.VP0_MZQ2f0M http://events.newschool.edu/event/politics_talk_albena_azman... > A key feature of the new modality is the renewal of the state's redistributive function, with an altered logic of distribution, and a simultaneous increase in the state's administrative power and a decrease in its authority - a process that has failed to trigger a legitimacy crisis of the socio-political system, despite the recent confluence of financial, economic, and social crises. And no wonder society accepts the pain with equanimity, Professor Azmanova will argue, as the very social contract in Western democracies has been recast, thus breathing new life into capitalism.

venomsnake 12y ago

There is way to socialize the rewards of innovation. It is called taxation. Why US allows such wide tax evasion is whole other qustion.

dnautics 12y ago
The us has some of the highest tax compliance rates in the world.

dools 12y ago

Socialised risk and privatised reward is how government should work. Universal health care is a good example: I am the most obvious benefactor of my own good health, but society also benefits from having healthy citizens. Revenue generation is only the goal of government so that it can support its citizens.

EliRivers 12y ago
Socialised risk and privatised reward is how government should work. Banks take (less than they used to, since some legislation was brought back) insane risks because they know Joe public will cover disastrous losses when it goes wrong, and the bankers can keep the massive profits when they get lucky. Socialised risk, private profit.

dschiptsov 12y ago

Are we re-inventing "Tragedy of the commons" principle, which is as old as social inequality itself?

logicallee 12y ago

The article is a lot better than the title! (I only skimmed, rather than read it though.) People should read it. I agree with a ton there. But the article's author has a huge blind spot - if you search the article for "tax", you will see just a couple of occurrences, and the author basically dismisses the mechanism. It's almost as though the author had no idea how the state even gets money - the author just thinks the state's role in innovation is underplayed. That may be true, but the size of the state depends (obviously) on the size of the economy. It's obvious that if the state invests in innovation that causes a 1000x rise in productivity, hugely increasing the size of the economy, then the state also becomes larger, through the usual mechanisms. Taxes are how anything is socialized - the author almost behaves as though the state's money comes out of nowhere. Another good example of applying the title incorrectly would be public education. People generally go to elementary and high school for free. They can then go off to work, sometimes even founding companies, which they could never do if they're illiterate. You could consider education a "risk" on these entrepreneurs: not everyone who becomes literate can create a ton of value in private enterprise, either as a founder or someone working for a good salary at a company; but nobody needed to take a risk on these people in elementary school (with 10 years+ until payoff), the state does it. In fact it's mandatory.[1] So could we say, "We have socialized the risks of education but privatized the rewards?" (in that you're a free person who is now educated.) Well, yes. But who pays for all that public schooling - everyone does. The author perhaps fails to see the relationship between a state causing an increase in society's private benefits - and the fact that that the state is in a position to do so due to the latter. All the state is, is a percentage of the economy, which is public. It has a good and important role - but that role comes from being a percentage. The Thatcher quote is appropriate: "The problem with socialism is that eventually you run out of other people's money to spend." That never happens if the state remains 20%-30% of the economy. The size of the economy can simply increase indefinitely. It's not possible (which may surprise the author) for this to happen in a way that doesn't cause the state to also increase in size. So while I agree with the main contention, it bears pointing out that it is a two-way street: private enterprise (and private citizens) get 'free' public goods from state spending, that they don't have to pay for. But the state gets a 'free' percentage of all private enterprise (and private earnings) - in fact, set at whatever it wants. The state can literally tax whatever level it wants and in whatever ways it wants. So it is, in fact, a two-way street. [1] see compulsory education - since the 1800's, "Fines were imposed on parents who did not send their children to school and the government took the power to take children away from their parents and apprentice them to others if government officials decided that the parents were "unfit to have the children educated properly"."

andyjohnson0 12y ago

Mazzucato gave an interesting talk [1] about this to the Long Now Foundation back in March 2014. [1] http://longnow.org/seminars/02014/mar/24/entrepreneurial-state-debunking-private-vs-public-sector-myths/ http://longnow.org/seminars/02014/mar/24/entrepreneurial-sta...

justincormack 12y ago
She also has a book, "The Entrepreneurial State".

Rumford 12y ago

Please don't tell me this central planning fad is coming back. The last time people were infatuated with the planned society 200 million people died.

zo1 12y ago

She just described one of the main benefits of having a state. It allows people to flourish. Of course, excluding obvious scenarios of nefarious uses of public money for personal profit. The state creates an environment that allows individuals to make profit in a safe way (contracts, violence, laws, etc). An underlying bit of information that is ignored is that the individual profiting means that we all profit, in small and not necessarily measurable ways. And sure why not, why can't the public be the one to bear the risk in the examples stated? It does for everything else. Isn't this the "collective" way? And I have seen this line of thinking elsewhere, particularly when discussing the merits of having a state at all. The idea that somehow we "owe" the state for all these nice things it gives us beyond what we already pay in personal taxes. "Go live in Somalia", they would tell me, if you don't like paying taxes.

tessierashpool 12y ago

Best quote in the piece: Because innovation today builds on innovation tomorrow... Policy makers must think very hard how to make value creation activities (done by all the collective actors in the innovation game) rewarded above value extraction activities (in this sense capital gains taxes are way too low). Peter Thiel's book talks about this, and on the one hand it is of course very good strategy, yet it's also quite sad and pathetic, because the principle he advocates is that you should focus on capturing a market, rather than creating value. OP is saying, if this is a logical choice for entrepreneurs to make, then policy makers have done a very bad job at structuring incentives. It would make more sense if policy set up incentives which encouraged creating value over capturing it.

copsarebastards 12y ago

I think the author is pointing to a problem but not correctly identifying what the problem is. The problem is deeper. If the problem were that we have socialized risk of innovation but privatized the rewards, that wouldn't really be a problem. It's a good thing to incentivize innovation. The real problem is that we don't incentivize innovation. Instead, we incentivize investment. People who already have money to invest take on small calculated percentages of risk to make back large amounts of money. Frequently the money investors are investing isn't even their own, and they are paid a significant salary to do so, meaning they actually take on none of the risk. The negative results of this are twofold: 1. Often investors don't invest in innovation. It's equally profitable to invest in number-twiddling schemes that provide no benefit to anyone except the investor, and often that's easier. 2. We speak of companies as if they are single entities. But the reality is that executives and shareholders and of a company are the beneficiaries of any innovation within a company, while innovation typically comes from workers with technical expertise who are typically paid a relatively limited salary perhaps with some minimal stock options. The way around this problem is typically to get into a company early enough that the line between technical worker and executive is blurred. But that avoids only the problems with lack of reward--it actually exacerbates the risk problem because early commitment to a company is a high-risk endeavor. In the end, I think that a lot of innovators don't innovate for money anyway--I personally would rather see something I make change the world than make a lot of money off an idea that doesn't make any difference (or makes things worse!). As long as I have enough to live I'm okay. But it would be nice if we stopped pretending that our distribution of wealth is at all meritocratic.

ddingus 12y ago
This! I sure got that as the takeaway. Public investments targeted at innovation we've identified as important, or worth it, whatever should be increased. There is another aspect to this as well. Check out this history of PDX area Tektronix: http://www.opb.org/television/programs/oregonexperience/segment/the-spirit-of-tek-/ http://www.opb.org/television/programs/oregonexperience/segm... Between Tek, Intel, and a couple others, the area was transformed into something we call "silicon forest" and it spawned a ton of great companies, many of which are in business today. It was a very interesting mix of private and public investments in education and investment support. Spin offs, not competitive with Tek, got Tek support while ramping up. Colleges offered targeted programs for people to get educated, companies did the same. The founders got very wealthy, but so did a lot of other people. We need more of this kind of thing.

UhUhUhUh 12y ago

This also seems to be a child of a wider process by which losses tend to be socialized and profits tend to be privatized. Apparently, the system "works" because nearly all the wealth of the planet is in the hands of something like 1% of the population, while the debt, well... Another aspect is the speed at which profit is made. At one end there is education, for example, which is an exceedingly bad investment in financial terms because it is very slow and very uncertain. At the other end there is pure trading and seed/startup investment, with profit goals of, what, 25% per year. Who would finance education? Certainly not a financial investor in his right mind.

gustavodemari 12y ago

The state needs to do only one thing, don't disturb private initiatives

MichaelMoser123 12y ago

> Where are Xerox Park and Bell Labs today? Bell labs was financed because AT&T had a monopoly status on landlines; whatever the costs, AT&T could just raise fees for a cent and cover all expenses. AT&T lost its monopoly so it could no longer pay for Bell labs. so this monopoly status was good for Bell Labs, but it also covered up the many gross inefficiencies of a monopoly body and it did limit competition - and growth. > I believe the green economy merits much more funding than it is currently receiving by government I suspect that this is a value based judgment. Who is to know if the next growth period will rather be based on nano technology, or maybe will be based of artificial intelligence? I guess that civil servants are in a bad position to make such judgments, because they bear little personal responsibility for their decisions. If one looks at the internet boom, then one can discern many stages here: - first was the fundamental research that explored the subject of packet switching networks; this was funded by the US military - next was the gradual development of networking technology, which took some ten-fifteen years. Here there were many actors, part of them from research and part from industry - next came the first boom-bust cycle of the nineteens; whatever one thinks of it, it helped to build the required networking infrastructure for wider adoption and it helped to create many technologies that were important for the next stage. - next came the present growth based on targeted advertising / private sector surveillance based on social networks. No one actor could have directed this process; public sector did facilitate basic research, it created the prerequisites for growth, but actual growth was still several steps away from that; at any of these stages it could have been stopped by some misguided policy decision. Prof. Mazzucato seems to underestimate the risks that entrepreneurs had to take during this process; Research financed by the public sector is a prerequisite for growth, but state dirigims would not have led to it either; Dirigism in France created the minitel network, but that is not quite the internet of today.