Newsnight’s Size of the State Debate. Or Mazzucato’s Genius and Hannan’s Baked Beans.

I hate getting cross. It makes me feel weak. Especially when it comes to matters of economic analysis.

Simon Wren-Lewis’ post today warns against partisan economists focussing on the bad things and ignoring the good, so I will try. 

But there are some people who are extremely good at riling me up! These people are usually very good at sounding convincing but actually have very little understanding of the subject other than enough knowledge to bolster their existing prejudices.

One of these people is Daniel Hannan MEP, one of the guests on BBC Newsnight’s debate about the appropriate size of the state. (At 29 mins 35.)

Hannan is so aggravating because of his contempt for the arguments of two great economists Will Hutton and Mariana Mazzucato.  His reponse to their thoughts on the role of the state is some patronising remarks about capitalism, so naive that they probably weren’t even relevant back in 18th century when Adam Smith briefly mentioned the invisible hand. Here’s what he had to say:

“I want to come back to the basic point that Will [Hutton] was implying that if you believe in human cooperation you believe in more state… You won’t find anyone arguing against human cooperation… I can’t believe I’m having to say that… No one is arguing for a completely atomised society where no one talks to anyone else. Think of the incredible collaboration that happens all around us in the free market… Think of the collaboration that goes into the can of baked beans you buy. The melting and smelting, the label, all the flavours. And you can buy that for 67p. What a miracle that is –  if we only open our eyes. You find me one state measure, one minimum wage, one tax that has done more for people on low incomes than the 67p baked beans that you can buy.”

OK, firstly, here’s Hutton’s face in response to this tirade! hutton aghast Secondly, the example that Hannan makes is valid. He is summing up an idea with which no one disagrees. The intricacy of the market allows for incredible activity – and to some extent free market competition facilitiates low prices. This is best summed up in the economics fable, “I Pencil”.

But the example that Hannan uses does not make his point.

Aside from the basic issues of market failure and state capture, the baked beans analogy only works in the context of creating things that venture capitalists would promote. This failure is crisply analysed in Mazzucato’s book, “The Entrepreneurial State”.

Hannan’s narrow, archaic and unworldly definition of capitalism as something that allows us to produce cheap baked beans is qualitatively  opposite to Mazzucato’s well-researched and detailed analysis of the strict criteria under which the state has provided the impetus for the great technological advances of recent decades.

Hannan’s argument is a bit like saying that we don’t need public education because private schools produce enough great minds. Or that we don’t need iPhones because everyone in Britain has a house and some food. Or because we have invented sandals we don’t need trainers.

Flippancy aside, the iPhones example is a reality. Mazzucato’s book describes how many of the key technologies in the iPhone have come about solely as a result of state support. (I use the word “support” advisedly, as effective state investment, R&D and funding are not quite the straightforward propositions they may seem.)

Hannan’s baked beans example deserves more derision.

The technology used to make a tin of beans has been available for decades (centuries?!) so the miracle of modern free market economics to facilitate a low price is hardly relevant compared to the potential for outcomes of state support for nanotechnology, pharmaceuticals and renewable energy.

One of the core issues of the Mazzucato book is the fact that venture capitalists are averse to high risk. And the technologies that are at the forefront today are so sophisticated that no private individual or business is likely to want to or even be able to bear the size of the necessary financial risk.

“If we could only open our eyes!” froths Hannan. Yes, good advice.

Baked beans indeed.

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