Economics is a peculiar science. On the one hand, it is the queen of the social sciences and offers a powerful logic for understanding the world. On the other, as Henry Hazlitt put it, it is haunted by more fallacies than any other study known to man. People simply love to misunderstand economics.
Ironically, this presents a profit opportunity to those who choose to exploit people’s willing ignorance…especially if they are economists. Then they can present popular fallacies as seemingly insightful critiques or even novel takes. Because they are from the inside — one of “them” — people are willing to take their word for it.
University College London economist Mariana Mazzucato is a case in point. She has made a name for herself writing books and consulting policymakers on how the State can be used to produce “free lunches.” Books like The Entrepreneurial State and Mission Economy argue that the State can be an effective low- or no-cost shortcut to prosperity and that it should therefore be used liberally by policymakers.
Any economist worth his salt would naturally object that there are no “free lunches.” Nothing is without opportunity cost, which is why we must economize. But this “dismal” view, albeit true, is often rejected by those who wish to believe in a mystical world in which money trees exist and scarcity does not. Unfortunately, Mazzucato and others are happy to provide rationalizations for those who don’t understand basic economics.
In her new book The Common Good Economy, to be released this fall, Mazzucato, per the blurb, “builds on her visionary ideas of the entrepreneurial state and mission-oriented policies to establish a new theory of the common good, one which allows governments and businesses to develop purposeful economic relationships, creating value and building spaces where human flourishing can happen.” In other words, it is more of the same. The State, assumed glorious, both can and should actively interfere in the economy and beyond because businesses cannot be trusted to produce what people actually want.
It is a curious argument, especially when considering the nature of voluntary exchange and market entrepreneurship. In markets, entrepreneurs can only earn profits by satisfying their customers — on the customers’ terms. They compete by creating as much value as possible, but must bear the uncertainty of their speculation because there is no way of knowing what consumers appreciate until after the goods are already produced and available for sale.
The State, in contrast, is not subject to such approval. It does not need to produce value and does not even need to economize on resources. It has the power to take and need not ask permission. This creates serious incentive problems and leaves the State operating in the dark, unable to know — or even reliably estimate — how resources are best used. Lacking a conception of actual value, which in the market is determined for and by consumers, and not needing to economize, what are the odds that the State will produce something good? And what are the odds that it will be effectively produced?
The answer is that we cannot expect the State to do anything effectively — other than waste resources. Any reasonable analysis of opportunity costs of the State’s undertakings should find that they are higher than the supposed value they create. Even relying only on the “seen” as captured in official statistics, the State’s investments have dubious returns. And despite Mazzucato’s claims, there is certainly no lack of public “investments.” As McCloskey and Mingardi note in The Myth of the Entrepreneurial State, which illuminates the limitations of Mazzucato’s claims, “in the past century government expenditure as a percentage of GDP has drifted up towards 50 percent.”
Basic economic understanding and research are of no relevance to Mazzucato. She has already attempted to redefine the very concept of value to serve her political purposes in the highly confused The Value of Everything. And she keeps finding ways to argue that politically directed investments not only outperform private ones but conjure value from nothing.
Many more grounded economists have pushed back on the claims by Mazzucato and others. The Entrepreneurial State was debunked. And so was Mission Economy. Perhaps this is why the profiteers keep inventing new terms for the same basic fallacy. The Common Good Economy will be no different in this regard. It will probably sell well, however — and further undermine economic understanding in the process.
