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

43 Pages Posted: 29 Mar 2015

See all articles by Mariana Mazzucato

Mariana Mazzucato

University of York - Social Policy Research Unit (SPRU); University of Sussex

Caetano Penna

University of Sussex

Date Written: 2014

Abstract

Recent work has highlighted the need for innovation investments to be understood through a mission oriented approach rather than a market failure one (Foray et al. 2012). However, this work has only focused on state agencies, such as DARPA, overlooking the role of public financial institutions such as state investment banks. Indeed, with the increasingly short-term nature of private financial markets, the role of public financial institutions has become increasingly important, and yet they continue to be analysed and evaluated through the market failure framework. Beginning with the importance of SIBs today in the emerging green economy, the paper 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. The paper discusses four types of investments, both theoretically and empirically: countercyclical; developmental; venture capitalist role; and challenge-led. To develop the typology, we first discuss how standard market failure theory (MFT) justifies the roles of SIBs, the diagnostics and evaluation toolbox associated with it, and resulting criticisms centred on notions of ‘government failures’. We then show the limitations of this approach based on insights from Keynes, Schumpeter, Minsky and Polanyi, and other authors from the evolutionary economics tradition, which help us move towards a framework for public investments that is more about market creating/shaping rather than market fixing. As frameworks lead to evaluation tools, we use this new lens to both discuss the increasingly targeted investments that SIBs are making, and to provide a new light on the usual criticisms that are made about such directed activity (e.g. crowding out and picking winners).

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

Suggested Citation

Mazzucato, Mariana and Penna, Caetano, Beyond Market Failures: The Market Creating and Shaping Roles of State Investment Banks (2014). Institute for New Economic Thinking Working Paper Series No. 7, Available at SSRN: https://ssrn.com/abstract=2586246 or http://dx.doi.org/10.2139/ssrn.2586246

Mariana Mazzucato (Contact Author)

University of York - Social Policy Research Unit (SPRU) ( email )

United Kingdom

HOME PAGE: http://www.sussex.ac.uk/spru/people/peoplelists/person/111262

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

Caetano Penna

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

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