If we want growth today to be more innovation-driven, more inclusive and more sustainable, then we need a more active state, not a less active one. Yet we still hear the dogma that we should just fix market failure by focusing on science and infrastructure, and to "level the playing field."
I often use the iPhone as an example of how governments shape markets, because what makes the iPhone ‘smart’ and not stupid is what you can do with it. And yes, everything you can do with an iPhone was government-funded. From the Internet that allows you to surf the Web, to GPS that lets you use Google Maps, to touch screen display and even the SIRI voice activated system - all of these things were funded by Uncle Sam through the Defense Advanced Research Projects Agency (DARPA), NASA, the Navy, and even the CIA!
Fixing markets isn't enough. We have to actively shape and create them and tilt the playing field in the direction of the growth we want.
In my view, the state should be active and work in cooperation with private businesses to spur growth that's sustainable and inclusive. The policy process is about co-creating and co-shaping of markets, creating new opportunities for business investment - and negotiating a better deal for the public too.
Rethinking capitalism means rethinking the role of the public sector, the role of the private sector, the role of finance, and the relationship between them all.
Unfortunately, simplistic framing of problems leads to simplistic answers.
Green is not just about renewable energy. It's also about creating a new direction for the whole economy. This requires government to step up, not step back, creating the kinds of mission-oriented public organizations that will enable us to tackle climate change - as ambitious as those that got us to the moon. It also requires the financial sector to be less short-term since we know that short-term finance has distorted incentives and directions in areas like biotechnology.
We should be investing where the public returns are greatest - that is in innovation.
What is needed is both a New Deal in terms of mission-oriented investments but also a new deal in terms of a modern social compact - one that allows the state to socialize not only risks but also rewards. Maybe then innovation-led growth will also become growth that includes all of us.
Markets are not static entities that are 'intervened' in (for good or bad) but are outcomes of public and private interactions.
People work hard and companies make big profits, but employees don't see that they share in the wealth they help to create.
Shareholder value theory - the destructive idea that companies should be run solely for the benefit of shareholders - has led to financialized businesses that do not invest in the areas that will lead to future growth or the invention of useful new products.
Once we admit that the public sector takes an immense amount of risk along the entire innovation chain, it becomes crucial to find ways to share both risks and rewards.
Our current model of capitalism and the dominant ideas in policy making have led to a failure of investment by both the public and the private sector in the things that drive productivity, and which affect its distribution.
Government support is not only investing in upstream areas like basic research, but also in downstream areas like applied research and early-stage financing for the companies themselves. This means there are great risks.
The globalized nature of production and innovation means that the benefits don't necessarily stay in the country where the investments are made.
If we look at Germany's infrastructure policy, it has been driven by its mission-oriented focus on green infrastructure. This affects both innovation and infrastructure, old industries and new. The German steel industry, for example, has adapted to the policy by lowering its material content through a 'repurpose, reuse and recycle' strategy.
There is a lot of flesh to be put on the bones - but there is at least an opening for a more pragmatic, less ideological debate about how to build economies that work for people, within the limits of our planet.
Most venture capital funds are too short-termist and exit-driven to deal with the highly uncertain and lengthy innovation process.
It's important that public funds be spent in research directions that are pushing market frontiers rather than working in existing areas. This means funding research not only on drugs but also on areas like life-style changes, even if the profit potential is lower for Big Pharma as you cannot sell that change as you can sell a medicine.
It would be a mistake to overstate the similarities between the Brexit vote and Trump's win - but there are common themes, not least in the rallying cries that the winning campaigns used. They focused on a supposed economic threat posed by outsiders, as immigrants or as trade partners. This fuelling of anxieties underpinned a narrative centered on the need to "regain control," whether of borders or of economic forces.
While infrastructure is of course important, it must be part of a bigger vision. The point is not to simply dig ditches but to steer those investments towards transformational growth.
Mainstream economic theories popular in the last several decades have tended to downplay the government's role in markets and to increase skepticism about even that more limited role. Austerity, particularly in Europe, has added to the problem. It has not worked, even on its own terms.
As a businessman, Donald Trump has been associated with some of the worst excesses of a particular style of value-extracting and asset stripping capitalism: set up businesses, let them fail, avoid paying suppliers, use bankruptcy laws to avoid taxes for decades, then set up another business somewhere else. It is this model that is the cause of many problems we see today.
If we look at the complexity of the challenges facing western societies today, we see that the problems are not really about outsiders, but have their roots much closer to home.
