Public Value and Public Purpose Summary
This is my summary of the course Public Value and Public Purpose, one of the core classes at the UCL Institute for Innovation and Public Purpose’s MPA in Innovation, Public Policy and Public Value.
Summary
- The state has played an important role throughout history in creating and shaping new markets by supporting early-stage, risky R&D to increase the supply of innovation, and using government procurement or missions to increase the demand for innovation.
- The state should continue to use a missions-oriented approach to solve grand challenges, which spur innovation but also provide it with direction. This approach brings together actors from across the innovation ecosystem to shape new markets.
- Because of its important role in driving innovation, the state should receive returns on its risky investments to help support its investments in the future.
- Evaluation is an important tool to demonstrate the important role of the state in the innovation system to the public. Even if the goal of a policy or a ‘mission’ is not reached, proper evaluation will show the positive spillovers that state investment creates.
- Firms are short-termist because they are no longer owned by people who understand how to manage the business. They focus too much on boosting share prices and executive pay, without investing in innovation. Public policy should look at how to address this.
Public value
Value creation by the public sector has been absent in economic theory and instead economists see the role of the state as correcting market failure. Nothing has intrinsic value; value is defined by the ecosystem it is in. Therefore, the public sector must work with stakeholders to identify public value and work together towards achieving broad, societal goals. This requires working in collaboration with the private sector to put more effort towards developing technology to achieve socially desirable outcomes, and creating ecosystems that are symbiotic for the public and private sector.
Market shaping
The conventional assumption is that less public sector intervention will bring more innovation. A market failure approach sees the government’s role to be taxing bad things and subsidizing good ones. However, firms base their investments on ability to profit so stay away from high risk and high cost investments, which is why venture capitalists neither invest very much at a company’s early stage nor in a nascent industry. Tackling market failures works for fine-tuning but cannot help in achieving drastic, big change — like creating new markets.
Growth has a rate and a trajectory. To change this trajectory requires co-shaping markets with stakeholders. Historically, the state has played a visionary role in areas with high risk and high capital demands to create and shape markets — e.g. biotech, nanotech and the internet. Innovation, and capitalism, have been guided towards new markets that create public value by government investment but also challenge prizes, government procurement, regulation, skills and other tools.
Returning public investment to society
Governments continue to perform some of the most cutting edge, risky research but the public sector, and society as a whole, do not benefit from it. To make sure the public sector can reap the fruits of its labour, policies should look at new forms of taxation, ownership stakes in IP and firms, and how to increase consumer surplus (e.g. the price of drugs should be dependent on the level of public support used to create them). This new revenue could be paid into an innovation fund to support more firms and R&D. Returns to the public sector should be coupled with a focus on knowledge diffusion across the economy, by rallying innovation networks or developing new ones. To further increase innovation, fewer follow-on patents should be granted after the initial invention. In addition, patents on research tools should be limited, since it prevents the developing world from replicating studies and catching up.
Missions
Mission oriented policies work best when there is a clear problem to solve. They bring together cross-sectoral investments, bottom-up solutions, and experimentation — allowing and learning from failure. They also provide directionality to the development of new technologies. Mission oriented policies need new capabilities from the public sector, including leadership across silos, mission-selection processes, new forms of citizen engagement, and new evaluation techniques.
Systems-change
A system consists of interconnected and interdependent patterns of action involving many institutions. Changing one part of a system affects the others. Systems-change is more important than ever because of the growing complexity and interdependence of modern societies and economies.
Two types of power exist: old, which is guarded, closed, and benefits the few; and new, which is open, peer-driven and distributes the benefits widely. To create systems-change using new power requires large scale participation. New niches from social movements can influence broader societal norms, which then change system infrastructure, institutions, and policies. For firms, the power to mobilize this new power is a competitive advantage. For policymakers, they have to decide when it is appropriate to use top down policy interventions, and when to look for broad support and many bottom up solutions. Social movements are also key for missions — as they help shape, organize, and connect across to achieve system-wide change.
Evaluation
Evaluation is important so that people understand the full benefits of public sector investment. Unfortunately we don’t have the right metrics since public investment is riskier and has no/lower returns than private sector investment, and results happen long after the initial policy begins. Despite these challenges, the state needs to promote its successes more, showcasing spillovers and the benefits of its risk taking. In addition to measuring a broader mission, evaluation must include individual projects, to help policymakers learn from failure, scale-up success, and redirect resources.
Cost benefit analysis is not suited to evaluating innovation and mission-oriented policymaking because the results are not always quantifiable. Evaluation can be done from behind a desk but can also be more hands-on with control trials and participatory appraisals. Although random control trials are better at showing the effects of a policy intervention, this raises moral questions.
Animal spirits
Keynes coined the term ‘animal spirits’, the idea that firms need to be optimistic to invest and take risks. Animal spirits drive innovation because if firms were rational they’d be scared away from the high failure rates of startups, and not enter nascent industries. In response, policymakers should provide certainty to encourage risk taking.
At the same time, these animal spirits can bring about more negative random behaviour. Firms now rely on external financing to grow, rather than retained earnings, which has separated management and ownership, and means decisions are not always rooted in reason. Money making capitalism is short-termist, focusing on accumulating capital, not running good firms. This is why companies are spending less on R&D and more on share buybacks and raising dividends. To make corporations more long-term focused, short-term, speculative stock trading and executive pay should be taxed differently.
Laws
A predictable legal system is necessary for capitalists so that they have confidence to invest knowing that no one is going to take away their property and their gains. Many capitalists today have more power over law than politicians because firms do not have country loyalty, so countries are racing to the bottom line to accommodate firms. Countries need to look at how their laws can empower the future they want to see instead of maintaining the status quo.
Law is also foundational for the public service because it gives it legitimacy and defines how it makes public goods — giving permission but binding it to a direction.
Creative destruction
Schumpeter sees innovation at the core of capitalism. Innovation isn’t just about R&D but includes new ways of doing things, entering new markets, and new marketing. Creative destruction is an incessant sweeping out of old products, processes, and organizational forms by new ones, as competitors overtake their rivals. Creative destruction can also be applied to institutions, as societies evolve and their needs change. This creative destruction is cyclical, with times of stagnation, creation and destruction.
Growth
Innovation brings about growth, as labour and capital cause movements along the production function but innovation shifts it. Current models of growth only look at labour and capital so need to be thrown out. Innovation is also important for welfare, since it is productivity enhancing investments that will pay for it — “inequality can hurt growth but equality doesn’t foster it”.
The Government should focus on supporting broad sectors of the economy, and high-growth firms, as they are responsible for a disproportionate share of growth. Procurement contracts should favour firms with ambitions to grow. Public research should focus on frontier technology research and then firms on the development side. A visible hand approach could share information and provide wide ranging custom support to a constellation of national champions.
Public sector
To achieve missions you need money/capacity and people/capability. Unfortunately, the public service is being dismantled in many countries by not increasing resources as a country grows. The size of government has to do with development, as a more developed country has more wages to pay — e.g. teachers, doctors, and people to deliver other public services. What’s more, contracting key tasks out to consultants means internal policy capabilities are being lost, making it harder for the government to make intelligent decisions. We need to look at how to bring in more experts to the public service — potentially having a public service entrance exam. This has shown to influence the success of programs — US-SBIR works better than UK-SBRI because SBIR is full of scientists while SBRI is full of civil servants.
Public administration and politicians are separate but the public admin side still needs norms to rationally discuss directionality. Without this, it is hard to balance ethics of conviction with ethics of responsibility. Weber says the bureaucracy is full of moral self-denial, where people think they can just leave their politics at the door.
