Beyond Market Failures: The Market Creating and Shaping Roles of State Investment Banks

Levy Economics Institute of Bard College Working Paper No. 831

60 Pages Posted: 3 Feb 2015

Date Written: February 3, 2015

Abstract

Recent decades witnessed a trend whereby private markets retreated from financing the real economy, while, simultaneously, the real economy itself became increasingly financialized. This trend resulted in public finance becoming more important for investments in capital development, technical change, and innovation. Within this context, this paper focuses on the roles played by a particular source of public finance: state investment banks (SIBs). It develops a conceptual typology of the different roles that SIBs play in the economy, which together show the market creation/shaping process of SIBs rather than their mere “market fixing” roles. This paper discusses four types of investments, both theoretically and empirically: countercyclical, developmental, venture capitalist, and challenge led. To develop the typology, we first discuss how standard market failure theory justifies the roles of SIBs, the diagnostics and evaluation toolbox associated with it, and resulting criticisms centered on notions of “government failures.” We then show the limitations of this approach based on insights from Keynes, Schumpeter, Minsky, and Polanyi, as well as other authors from the evolutionary economics tradition, which help us move toward a framework for public investments that is more about market creating/shaping than market fixing. As frameworks lead to evaluation tools, we use this new lens to discuss the increasingly targeted investments that SIBs are making, and to shed new light on the usual criticisms that are made about such directed activity (e.g., crowding out and picking winners). The paper ends with a proposal of directions for future research.

Keywords: Development Banking, Market Failure, Mission-oriented Finance, Public Finance, State Investment Banks

JEL Classification: G20, L52, O16, O38, P16

Suggested Citation

Mazzucato, Mariana and Penna, Caetano CR, Beyond Market Failures: The Market Creating and Shaping Roles of State Investment Banks (February 3, 2015). Levy Economics Institute of Bard College Working Paper No. 831. Available at SSRN: https://ssrn.com/abstract=2559873 or http://dx.doi.org/10.2139/ssrn.2559873

Mariana Mazzucato (Contact Author)

The Open University ( email )

Walton Hall
Milton Keynes, MK7 6AA
United Kingdom
+44 1908 659191 (Phone)
+44 1908 654488 (Fax)

HOME PAGE: http://www.open.ac.uk/socialsciences/staff/people-profile.php?name=Mariana_Mazzucato

Caetano CR Penna

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

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