In Praise of Public Investment: On the importance of Mariana Mazzucato’s article in The Guardian

Two are the greatest untruths that have inflicted major damage upon our understanding of how social economies work; and, by extension, upon our societies. First, there is the pseudo-‘law’ of ‘crowding out’; i.e. the illusory belief that when public investment increases private investment suffers. Secondly, there is a widespread misconception that, under capitalism, value is created privately and then collectivised via the state (when, in truth, all value is produced collectively before it is privatised). In this post, taking my cue from Mariana Mazzucato’s excellent piece in today’s The Guardian, I shall be posting some strong words against the first illusion.

The illusion of ‘crowding out’ is so well entrenched in the majority’s minds that it seems almost indelicate to remind people that the Internet was invented by a government agency. Similarly, even those working for public investment outfits, like Brazil’s BNDES or Europe’s own European Investment Bank, are almost coy when it comes to telling the world that their state-owned banking operations return profit margins that private investment banks can only dream of. Such is the success of neo-liberal ideology in persuading people across the world that public investment is a ‘bad thing’ that no facts are allowed to spoil this splendid error.

Meanwhile, countries like China and Brazil are making great strides in generating the jobs and green products of the future, at the West’s expense, simply by doing that which the West used to be so good at doing: using public investment in order to stimulate private investment in the realms of high-end education, R&D and, crucially, in the stage during which a developed scientific concept is turned into a fully fledged product.

Mazzucato’s article explains all this. What I wish to add to her argument is, first, that public investment, while always indispensible as a bulwark against stagnation and money market failure, becomes crucial at a time of Crisis – like the current moment in Europe’s history. The point is not to stimulate the formation of new bubbles. Our task is to invest into smarter technologies that solve humanity’s major problems and, in so doing, generate the jobs that will yield the income that will repay our mountain of debts. Secondly, that along with this mountain of debts, our economies feature also an equally tall mountain of idle savings.

How many people know that global savings are now at 27% of global income, the highest saving ratio in humanity’s economic history? Left to their own devices, and at a time of global Crisis, markets cannot, and will not, put these savings into productive uses; into the uses that can simultaneously solve our energy-global warming crisis and help us deal with our debt crisis.

It is the height of misunderstanding to fear that public investment distorts markets and crowds private investment out; when our reality is one of highly distorted markets that are clearly incapable of fostering adequate levels of private investment. Indeed, Policy 3 of our Modest Proposal is all about fostering the public investment that, as Mazzucato suggests, is uniquely placed not only to produce urgently needed technologies but also to address the serious imbalances that threaten to destroy Europe today.

41 thoughts on “In Praise of Public Investment: On the importance of Mariana Mazzucato’s article in The Guardian

  1. Keynesian view:
    There are market failures which must be corrected through regulation; there are public goods which must be provided by the government; there are times when savings are high and investment is low so the government should step in and use the excess savings to invest in public goods or goods with limited private returns but greater social returns. theoretically central bank should be able to set interest rates such that savings equal investments but in crisis times this unlikely.

    Austrian View:
    government can distort incentives (through improper regulation); government can create booms which must be followed by busts (cheap credit etc); government can crowd out private investment (by providing goods which can be provided by the private sector).

    Isnt everyone right in the end? or am i seeing something different?

  2. Yanis, you are taking examples from developing countries’ economies (China, Brazil) and trying to apply it to developed countries’ economies. I’ve spent a lot of time in China and the China model is not something that would work Europe for a varieties of reasons. Frankly, I think I would be insulting your intelligence to even begin describing (1) all the reasons that what works in China would not work in Europe and (2) all the seen and most-likely-yet-to-be-seen failures of China’s state-managed investment. Bear in mind that China is almost certainly entering the middle income trap and is only a couple years away from reaching its demographic zenith.

  3. Greek oil balance
    jan -june
    y2010 : -4,442 million euros
    Y2011 :-5,591 million euros
    Y2012 :-5,661 millin euros
    meanwhile its trade balance in goods excluding oil and ships is down down
    2010 : -8,890 million euros
    2011 :- 6,742
    2012 : – 4,756
    http://www.youtube.com/watch?v=8ovuKjLBc2w

    Meanwhile top of the line Swiss Stadler DMUs go almost empty

  4. PS …the Greek oil balance jan – June figures are astounding…..and not in a good way – the monetary system withen Greece & ireland is preventing good substitution in particular withen the transport sector with irish private private car oil consumption not down much but road freight has collapsed….

    want to know what a greek stimulus package looks like ?
    http://www.youtube.com/watch?v=-VkiQdocDTw

    OK its pretty close to the newer station but why not a tram ? – are trams only good enough for the richer eastern section of the suburbs ?
    If europe was serious about defecit reduction they would allow the Greek and irish to print but they are not -they want us to buy German cars with what littlee money we have and sell our public utilites

    money to subsidise their rail tickets to almost zero prices

  5. The now mainly French / EIB Tram / tram train & TER regional train track upgrades is undoubtedly a great success with one of the Dijon Tram lines coming on line ahead of schedule.

    But I have my doubts about the tours bordeaux LGV….7.8 billion ? ….its construction is much like a highway system – it is sucking in Diesel which could be used best for medium scale projects.

  6. Pingback: Central Banks Are Not The Only Game In Town « independence4wales.com

  7. Pingback: Does public “investment” crowd out the private sector? OF COURSE IT DOES!

  8. Yianis – I think you are being deliberately provocative with this post.

    You say “Our task is to invest into smarter technologies that solve humanity’s major problems and, in so doing, generate the jobs that will yield the income that will repay our mountain of debts.”

    How can you asses what technologies solves people problems if there is no profit motive?

    For example, you think wind technology is the way forward, so the government pumps money into wind technology by subsidising the retail price of wind products. But at the same time you do this you are destroying other “eco” industries that may be more sustainable because you are tipping the playing field in the favour of wind.

    For example wind may cost 20cents per kwh and solar maybe 18cents per kwh. But the government subsidising wind means wind cost is now 10kwh wiping out solar development. And not only solar development but any renewable technology that costs more than the subsidised rate of wind power but less than the market rate of wind power.

    You see what I mean? The profit motive may not be perfect but it is the best method we have. It is the only fair measurement of the effectiveness of something in “solving” humanity’s” problems.

    Without the profit motive how do you judge what is the “smartest” choice? I am genuinely interested in your response

    • Who said that there is no profit motive? Have you not noticed that Brazil’s, China’s and the EIB’s investments return hugh profit margins? Their investments are profit-seeking and succeed in generating huge profits because of the failures of the private banks to avert their own illiquidity/insolvency/idiocy. Or has the private sector debacle of 2008 escaped you?

    • Yanis –

      I’ve been following you for a few months and appreciating what you have to say until I saw this post, and especially your response to the last comment. The “private” sector debacle of 2008? Oh, what a grave error. It is always government, the public sector, that forces the private sector to make irresponsible loans by pushing interest rates below market rates. I knew you were a Keynesian, but these economic errors of yours which totally ignore Mises, Rothbard, and the Austrian School, are the greatest threat to individual freedom that the world faces. When the entire system goes bust in default or hyperinflation (it has to be one of the two) you will be among those that only propose more and more “public investment” when there simply will not be any value left to spend.

      I urge you to read Rothbard’s pamphlet “America’s Great Depression” and see the other side.

      Adieu

    • What utter rubbish. Do you seriously believe that it was government that caused Wall Street and the City of London to go ferral? That Wall Street and the City managed to usurp government, and to bend it to their will, is clear. But to say that it was government that ‘coerced’ or even encouraged banks to go crazy is to lose sight of our post-1971 history.

    • Yanis –

      I absolutely believe that. I cannot for the life of me understand why, or how, you don’t see it. When government, or one of its agencies, sets the price of money, banks must react in some way. When government subsidizes mortgages and backs them with guarantees, banks are encouraged to lend out like crazy because they know the government will back every loan. And the government will back every loan because they know the Federal Reserve will print the money to finance it. I ask you this question in all seriousness, because I do not know the answer you will give me:

      Are you even aware of the Austrian School of Economics? Have you read any Mises, Hayek, or Rothbard? Most importantly, have you read Henry Hazlitt’s book “Economics in One Lesson”? If so, what did you think of it, and if not, why not?

    • Yanis, for what it is worth I have to agree with Rafi ” it was government that caused Wall Street and the City of London to go ferral” – to say anything else is to say the banks deliberately took massive risks that only had a small chance of paying off and a huge chance of going south, ie they were suicidal.. The fact that the government bailed them out only further proves the point that government created the mess.

      Why?

      No sane person would have done what they did if they did not think they were going to get bailed out. The Greenspan Put and Freddie and Fannie back stopping mortgages proves this was the case.

      The fact that government came in and bailed them out post 2008 again proves it was government involvement that caused the mess.

      If what you say is correct, then the banks would have been allowed to go bankrupt regardless of the cost. The precedent of bailing out banks for bad investment is totally wrong and can only lead to further bailouts in one form or another.

      There is a reason why it is not recommended to negotiate with terrorists much less give in to their demands. You may say the banks are not terrorists but the underlying principle is the same.

    • Yanis – About the profit motive. The EIB is funded by taxpayers so immediately the profit motive has gone out of the window ie revenue is completely detached from spending. Getting passed that, in 2011 it lost 10million Euros, on disbursements of 59 billion Euros. Given the fact that it is funded by taxpayers the 10million loss is completely unacceptable. It is running with a budget deficit, I’m not sure where you get massive profit from? http://www.eib.org/about/key_figures/index.htm

      About Brazil, I am pretty sure that is funded by the natural resources of the country, ie something which the government gets for free. But if you have some links to government investments examples in Brazil I would not mind checking it out.

      About China, their GDP figures are highly dubious so any other figures coming out of China I would take with a pinch of salt. http://www.bloomberg.com/news/2012-07-13/china-economic-data-questioned-as-electricity-use-slows.html

      My point is, if there was money to be made in something (ie there is something a lot of people want) you can bet that a private business would have got in there already. The private sector would not leave massive demand unserviced, if it did it would be much easier to create a successful business than it is.

      And this leads on to bank bailouts. If the private banks were worth saving and there was a possibility of coming out on top at the end of it there would be no need for government involvement, banks and investors would be in there snapping up banks at rock bottom prices and making out like bandits. The fact that no one wants to touch banks in Spain, Greece, France, Italy, UK, USA etc etc with a 10 foot barge pole shows even the banking industry itself sees no hope for these institutions.

      To repeat, if there was any hope for these troubled banks, the investment community would not let governments near them. That is the fact of the matter.

    • You write: “My point is, if there was money to be made in something (ie there is something a lot of people want) you can bet that a private business would have got in there already.” This is so Panglossian it defies criticism! It reminds me of the standard joke amongst economists: “Two economists are walking down the street. One says: Look, here, there is a $20 note on the pavement. The other refuses to look, responding: If there was a $20 note, someone would have picked it up.” Something similar applies to the idea that if money could be made out of some investment then the private sector would have invested in it. Only it is much worse: at a time of universal deleveraging, the private sector goes on an investment strike and, at that point, potentially profitable investments simply never happen. It is called the fallacy of composition.

      PS. This is my last response to your continued attempts to lecture me on things that you are deeply ignorant of. Excuse my impatience but I am getting the impression that you are pretending not to understand simple economics, constantly returning to a touching faith in markets that no sensible person can possibly retain – especially after 2008.

    • “My point is, if there was money to be made in something (ie there is something a lot of people want) you can bet that a private business would have got in there already. The private sector would not leave massive demand unserviced, if it did it would be much easier to create a successful business than it is.”

      Then please explan why the Greek government is forced to de-nationalise several enterpises instead of dismantling them?After all the private sector owns anything that can make a profit already doesnt it? Thank you…

    • Hello Yanis – That is a very funny joke! Incidentally there are people in Thessaloniki throwing bundles of 50Euro notes in the street hoping people will pick them up. Apparently this an advertising ploy of companies who want to buy people’s gold and silver. But I digress

      About investment, I agree with you, apparently businesses in the US have more cash on their books than any time in history yet they are not spending. Why?

      The president of the Federal Reserve Bank in Dallas hits the nail on the head in my opinion
      http://www.bloomberg.com/video/fed-s-fisher-on-monetary-policy-stimulus-risks-2gzk4LSSTRu_mTGqA1L7oQ.html

      He has the solution and I believe it is the same as mine. The crisis is down to governments not the currency (he is talking about Texas in relation to other states in the USA with the same currency)

      Sorry if you believe I am ignorant but unless you can show that the Fannie and Freddie and government policies and Greenspan and central banks did not, and are not, destroying economies with their policies, I am with the Fed President in Dallas. “The central banks are not the only game in town”

  9. Very interesting post. The subject of not just investment but of productive investment is crucial in our times. I would like to point something out regarding the high savings rate that you reported in relation to global income. Is it not true as well that the debt ratio in relation to global income is the highest in history as well? What does that imply about the availability of said deposits for investment? My guess is that due to the mountains of debt these deposits are simply irrelevant. Also even though public debt is making the news it is private debt that dominates the global economy. I can give an example from Greece: It was reported by the Bank of Greece that the credit rate in the country is negative by around -5% on a yearly basis so far. With simple calculations this means that the private sector in Greece will pay back around 12-13 billion euros of debt in 2012 alone. This will come from incomes and deposits. The central bank is also reporting that private investment is at record low levels. My point is that the deleveraging process of the private sector and the insolvent state of the banking sector are keeping deposits from being used in any productive investment process. Leaving Greece aside I think the same burden of debt is keeping deposits in other countries from spurring new investment.

    • @ Yanis V,

      Governments never learn, only people learn. This preposition can have however and different meaning. Some comments are beyond the real understanding of human nature. People as members of a government let banks, some strange business ventures to become gigantic,with poor regulations without trying even to force rules for real estimation of eg risk management practices, plus to redifine the functioning of monstrous investment schemes which many probably should split in many autonomous parts etc.
      However the real point is that public investment even if utilized -turn to a very profitable account – does not only that participation differentiate a developed country from a country which is in a different level of development seen especially in education and sciences.
      There are many examples where government and business efficiency, (public and private investment) working with the same cretibility.
      The truth probably lies somewhere in the middle.

  10. It is at times like this that I really feel like a UFO. First, I am greatly embarrassed to admit that after much reading – up on it and many attempts at understanding it, I still have no idea what ‘neo – liberalism’ means (pls do not attempt to explain: t’ will prove futile, believe me).
    Then, I appear not to be, and not to have ever been, under the illusion that public investment crowds out private investment – at least, not in principle: mathematically, this illusion does not make sense. In practice, however, I guess it would depend on the country and its investors (ahem, hem).
    Finally, as the greatest testament to my cluelessness, I have no idea whether ‘all value is produced collectively before it is privatised’ is true in principle. I DO HOWEVER KNOW WITHOUT THE SHADOW OF A DOUBT that I am living in a country where this principle clearly does not apply, since much value produced privately is robbed blind by the State, in order to support many non-value producing, shall we say, ‘endeavours’.
    In comments that I have posted at various blogs I have recoiled in horror at the option of recapitalising banks by privatising them. I have been savagely accused as ‘neo-liberal’ for that, though, as explained above, this (apparent) insult is lost on me. It now dawns on me that perhaps I should clarify that it is not the thought of a privatised bank that upsets me, but the thought of a GREEK privatised bank.
    I have no doubt that a successful private bank is humanly possible, but judging from experience, not in Greece. Everyone knows what happens in Greece when companies are privatised. You have to look at the history and learn from it. States evolve in small steps, as does all of Humanity at that, and observation of past events leads to the conclusion that the Greek State is not ready to handle some things, neither in terms of capability nor in those of honesty. Not ready. Yet.

    • Ooops! The last paragraph should read:
      “In comments that I have posted at various blogs I have recoiled in horror at the option of recapitalising banks by nationalising them. I have been savagely accused as ‘neo-liberal’ for that, though, as explained above, this (apparent) insult is lost on me. It now dawns on me that perhaps I should clarify that it is not the thought of a nationalised bank that upsets me, but the thought of a GREEK nationalised bank.
      I have no doubt that a successful State bank is humanly possible, but judging from experience, not in Greece. Everyone knows what happens in Greece when companies are nationalised. You have to look at the history and learn from it. States evolve in small steps, as does all of Humanity at that, and observation of past events leads to the conclusion that the Greek State is not ready to handle some things, neither in terms of capability nor in those of honesty. Not ready. Yet.”

      Sorry…Bad day.
      Though now that I look at it, “I have no doubt that a successful private bank is humanly possible…” stands too! Freudian slip…

  11. About the EZ

    Bulgaria has abandoned plans to adopt the single currency in response to deteriorating economic conditions and rising uncertainty over the prospects of the European Union, Finance Minister Simeon Djankov said in a newspaper interview.

    The EU’s poorest member yesterday (3 September) became the latest country to cool its enthusiasm for joining the eurozone – a longtime strategic aim of successive governments in the Balkan state.

    Also on Monday, Radosław Sikorski, Poland’s foreign minister, told the daily Frankfurter Allgemeine Zeitung that his country would hold off on joining the single currency until the eurozone resolves its debt crisis. Poland is one of the few EU countries to avoided recession since the global financial crisis broke in 2008.

    Sikorski said that while the country was committed to adopting the euro, but not until the currency union’s broader fiscal problems were worked out.

    Czech officials have also expressed concerns about swapping its crown for the euro despite the country’s commitments made under its 2004 accession agreement.

    Bulgaria is one of EU’s least indebted members and is trying to stick to tight fiscal discipline to avoid risks to the lev currency, which is pegged to the euro.

    “Right now, I don’t see any benefits of entering the euro zone, only costs,” Djankov said in an interview with the Wall Street Journal.

    “It’s too risky for us and it’s also not certain what the rules are and what are they likely to be in one year or two.”

    Djankov added that he still expects Bulgaria’s economy to expand by around 1.5% in 2012.

    However, he warned that the eurozone could face up to five years with “zero growth” if the European countries’ leaders continue to mull policy responses to the crisis instead of fully backing Germany’s call to continue strict fiscal consolidation.

    Bulgaria’s finance ministry was not immediately available for comment.

    http://www.euractiv.com/euro-finance/bulgarian-polish-ministers-cast-news-514585
    _______

    another good one

    Enlargement Commissioner Štefan Füle says the date for launching accession talks between Serbia and the EU depends on whether and when Serbia would meet the criteria set by European Council. BETA, the EurActiv partner agency in Serbia reports.

    Füle’s comment came yesterday (30 August) in response to a question about whether the European Parliament rapporteur for Serbia, Jelko Kacin (ALDE, Slovenia), had rightly stated that Belgrade could not obtain a date for the talks before mid next year.

    The commissioner spoke following a meeting in Brussels with Suzana Grubješić, the Serbian minister in charge of EU integration.

    Kacin said in the Serbian city of Novi Sad on 27 August that Serbia would not get a date for starting the accession talks with the EU by the end of the year, stressing that before the launch of the talks, Serbia must demonstrate results in fighting organised crime and corruption, and in rule of law.

    Grubješić pledged that Serbia would do everything in its power to have the talks scheduled as soon as possible, and stressed that Füle has said that the European Commission was committed to assisting Serbia by dispensing “advice and support through close cooperation.”

    Kosovo remains an issue

    The key condition for obtaining a date for talks with the EU, he stressed, is the tangible and steady improvement of relations with Kosovo and implementation of the agreements reached with Pristina in “letter and spirit,” which will “enable us to move forward.” The 28 February Council Conclusions also provide that Serbia should respect the right of minorities on its territory.

    Füle added that he and EU foreign policy chief Catherine Ashton would be meeting Prime Minister Ivica Dačić in Brussels next week to discuss modalities for resuming the Belgrade-Pristina dialogue.

    Füle also warned Serbia that it cannot expect to progress towards EU membership unless it revokes a newly-passed law curtailing the independence of its central bank.

    “One of those issues that we discussed today was certain elements of the amendment to the law of the central bank, which limits the independence of the central bank and thus goes against the alignment with EU acquis,” the commissioner said.

    Last week, the International Monetary Fund said it would not negotiate a new loan deal over concerns the government is eating into the independence of the National Bank.

    Füle also said that his meeting with Grubješić had touched on Serbia’s financial and economic problems, stressing that the EC was ready to allocate some funds from the EU’s aid program for countries in the process of gaining membership in the EU, and direct budget support to the Belgrade government to help it overcome its financing problems.

    http://www.euractiv.com/enlargement/fuele-date-talks-depends-solely-news-514545

  12. I am not going to comment personally as this comment placed by iruka on the Guardian against the article in question says it better than I ever could:
    http://www.guardian.co.uk/commentisfree/2012/sep/02/state-spending-digging-ditches-transform-economy?commentpage=3#comment-18042569
    Surely the last 30 years have demonstrated that winning “the global economic race” and spending the “profits” on “welfare programmes” is a royal road to just the sort of listless, caste-ridden society that we see re-establishing itself more and more tenaciously in the Anglosphere, creating the social and economic conditions that write off tens of millions of lives, generation after generation, as unproductive and hence irrelevant.

    I don’t think all the people who’re vaguely agreeing with the author quite realise: she isn’t talking about socialism or even social democracy. She’s talking about the state as factotum of corporate rule. She’s making an ideological pitch for a thoroughly modern alternative to trickle-down economies — in which wealth doesn’t seep downwards by virtue of the benevolent magic of markets, but gets tossed down from the table like bones to the dogs. She’s trying to make the costs of capitalist modernity out to be its rewards — trying to claim that a society that’s rich enough can ignore the emptiness at its core forever.

    We need an inclusive economy, not a gold medal economy. We need an education system that cares more about the literacy and numeracy and engagement of the bottom third than about the dreary, ritualistic celebration of winners. We need a culture that isn’t shaped by the interests of profit, and the inane and sorry imitations of lives-well-lived that it tries to foist on us as the reward for playing the game. We need public institutions that respond to public needs, not the conspiratorial interests of the chancers who make it to the top in politics, business and administration.

    It really is time for Labour-minded folk to recognise that the welfare state doesn’t serve the people, and was never meant to; it placates the people in the interests of capital and the smooth running of the state machinery that serves capital. The only way to insure that an institution serves the general interest is to democratise it.

  13. There is one concept that is touched upon and that I have never really gotten my head around: the fact that we have such high savings globally. Where do these savings come from or who is generating them? Reading your materials I have learnt that the current crisis has a lot to do with too much private sector debt (in the US at least, and in Europe there is that plus the euro\’s structural flaws). However, I have also learnt that private sector banks can create loans without necessarily having to rely on their deposits/savings of customers, i.e., they can create money out of thin air. If this is so, then the loanable funds theory is flawed in that banks look for customers first, then debit and credit bank accounts to create the loans, and only afterwards do they seek to obtain the needed reserves. Considering this, then high levels of private sector debt are not necessarily a reflection of high levels of savings. Is this logic flawed, and if not, where are the savings coming from? Is it from surplus nations like China?

  14. There is one concept that is touched upon and that I have never really gotten my head around: the fact that we have such high savings globally. Where do these savings come from or who is generating them? Reading your materials I have learnt that the current crisis has a lot to do with too much private sector debt (in the US at least, and in Europe there is that plus the euro’s structural flaws). However, I have also learnt that private sector banks can create loans without necessarily having to rely on their deposits/savings of customers, i.e., they can create money out of thin air. If this is so, then the loanable funds theory is flawed in that banks look for customers first, then debit and credit bank accounts to create the loans, and only afterwards do they seek to obtain the needed reserves. Considering this, then high levels of private sector debt are not necessarily a reflection of high levels of savings. Is this logic flawed, and if not, where are the savings coming from? Is it from surplus nations like China?

    • You are precisely on point in recognizing that “banks look for customers first, then debit and credit bank accounts to create the loans, and only afterwards do they seek to obtain the needed reserves.”.
      I would disagree though on whether “then high levels of private sector debt are not necessarily a reflection of high levels of savings” or not.
      Since you understand that loans create deposits and not vice versa as mainstream economics imply,then its obvious that a large part of this private sector debt is reflected as savings ie. idle money doing nothing.

      If i borrow 100 from a bank to acquire your services and you decide to keep the money in your account instead of investing it etc then my debt of 100 equals your savings of 100.But if you think about it, even if you decide to invest 50 and save the remaining 50,still the invested 50 may be reflected as (someone else’s) savings.

    • “But if you think about it, even if you decide to invest 50 and save the remaining 50,still the invested 50 may be reflected as (someone else’s) savings.”

      Thank you Crossover for the response. We are in agreement that deposits do not create loans, so an original loan of 100, will create a debit and a credit initially on the bank’s balance sheet, and to the extent that the 100 is not invested, we will have 100 in savings. However, consider this. If the original 100 was used to build houses, then I am not so sure that there will be savings of 100, or even 50 for that matter. To the extent the housing industry had minimal profits in its value chain, then the 100 spent will have gone to cover the costs of labor and materials. If I am a construction worker, the part of the 100 due to me (again, assuming that profit margins are minimal) will go to cover my food and other expenses. The food producer will have spent his share of the 100 to also cover costs. Put differently, in some cases (when profit margins are thin) the 100 loan will not have a symmetrical 100 amount sitting in someone’s savings account waiting to be spent. Therefore, I still do not understand where the savings that Yanis refers to come from.

    • Crossover – All money in the bank is invested! It does not sit in your bank account doing nothing. You deposit money in the bank and you get interest. This is your reward for giving the money to the bank to use as it pleases.

      If you want to make your money “idle” you have to take it out of circulation ie under the mattress, bury it in the garden, burn it etc etc. Putting your money in a bank account does not take it out of circulation.

      Let me break it down further. If you got to your bank and deposit 10 20 pound notes. You do not get back the same exact notes when you withdraw them. ie the original notes have been circulated.

    • @Richard

      Deposits dont create loans. P E R I O D
      The only reason banks need your deposits is because its a cheaper form of reserves.It would certainly not be as profitable if a bank tried to cover all its reserve needs by borrowing from the interbank market or the CB.
      But thats not to say that your money is loaned out or invested.Banks dont lend reserves to their clients.Reserves never enter circulation,they always stay within the banking system.Their role is to help the CB keep the overnight interest rate at the level it desires…nothing to do with loans anyway.

      In this sense whether you burry your money or keep it in the bank it can be thought as saving.

    • @alsefe

      Sorry i just noticed that you replied.
      So you are basically saying that there wont be an equivalent amount sitting idle as savings.Do i understand right ?
      If yes, i dont see how this is extraordinary.In fact its true at least for the first few transactions this money participates in.Nobody really places all of his money in a bank and have it sitting idle etc
      You say that you would spend your part of the 100 for basic needs thus it wouldnt be saved.Although this is true, just by examining growth rates you can come to the conclusion that at some point (it might be the construction worker,or the food producer or the pesticides producer and so on) this money becomes idle savings.
      So theres someone in that “chain” that decides he should save the money because the economic conditions are not looking good and he should use that money later.

  15. “The illusory belief that when public investment increases private investment suffers”

    The historic economic practice and recording confirms in many cases that public investment even if remain stable or increasing as noted Ms. Mazzucato – is an obstacle- and indeed private investment activity-sometimes suffers.
    This does not always happen, because in each case there are specific characteristics associated with the type of investment – where directed -the added value that can produce, if enhance competitive advantages, skills-training for people of a country’s, technological readiness, the size of the domestic market, if there is a friendly investment environment or is structured etc.
    Countries such as Brazil -and China that secondarily mentioned-as examples of countries with highly profitable ROI from public investment are special cases.
    1. Brazil’s success is recorded as a product of the size of the internal market (No. 10 is the best competitive advantage) and not (yet) the quality of public investment and private investment. The external demand for goods ranked No. 1 partner country for exports China and because of the good pricing.
    This does not alter the very good diversification of exports and the fact that there is a surplus , exports>imports in goods and services, plus the effort to develop its own self-sustaining and export based industry.
    2.The domestic demand in Brazil remains high because it is a rapidly growing economy with youthful population, low wage costs, so that public investment even if not targeted and evaluated in the coming years, the degree of success will have a positive effect .
    3. China is a country case with low wages- huge market size – but still needs to investigate statistics variations and the exact degree of expansion plus other fundamentals.
    4. To what extend the high public investment positively influence or deprive critical private investments from a western country among the 30 richest / GDP like Greece, which have a shortage of those?
    Greece has structural weaknesses in internal markets large and small, with low or distorted competition, low-innovation, research – development and technology transfer failure (which private investments probably will bring)
    The previous experience in Greece attests that the public investments directed at very specific areas of our economy with value added if not very high, however, with no guarantee that in times of crisis the businesses created will show stability and durability.
    5. During mid 90’ Sweden made some huge reforms but the only thing decided not to cut were the expenditures for education and R&D funding from private and public companies. But they have plan and feasibility principles.
    6. The example of Cern or Nasa or ESA and many other confirms the point that the government- business efficiency gap in these specific countries tend not exist if compared with most other countries around the world!
    Government and business efficiency are evaluated almost the same about their standards in those countries above!

  16. A popular mistake is the notion of financial “crowding out”. The belief is that government deficits would cause the interest rate to increase. That would “crowd out” private borrowing for investment, since the more expensive loans would make the investment less profitable. This roots in a belief that the government has to borrow to run a deficit (which is incorrect, since the government is not revenue constrained and spends by issuing currency). Presumably, the result of the borrowing and spending is that reserves are removed from the banking system (which would have been incorrect – borrowing would have removed reserves from the banking system, but spending would have added them again). The resulting shortage in reserves would increase the banking system interest rate (which is also incorrect – the interest rate is held constant, as it is a policy variable set by the central bank).
    The reality is that government deficits put downward pressure on interest rates, not upward, since reserves are added to the banking system, not removed. The central bank can counter this pressure using monetary policy to drain excess reserves – or let the interest rate drop to zero. As an example, simply by spending more than borrowing, Japan has had record government deficits for years with zero interest rate – thus without “financial crowding out”
    However, other variants of the government “crowding out” the private sector are legio. Whenever the government competes for real resources that could otherwise have been utilized by the private sector, the latter is crowded out in real terms. Arguably, all taxing “crowds out” private activity.

  17. I believe it was almost two years ago when one of the plans coming out of the EU was that an investment bank should be established in Greece. It was to be modelled after the German KfW and, if I recall, there were joint Greek/German expert groups working on the project. What ever happened to it?

    • There is a simple answer for that ditched plan. Greek banks have no money whatsoever to channel towards investment, the Greek state is insolvent as well. So we are left with absolutely no one domestically to even contribute to a joint international project like that. Unless the liquidity problem is somehow addressed, all investment projects inevitably become academic exercises. The latest news on the investment front is the EIB’s refusal to release funds for Greece unless it receives guarantees for the loans.

    • Tasos – There are only 2 things that can happen that will turn Greece around.

      1. You have Yanis’s solution which is to make Greece a dependent of Germany. This allows the Greek government to treat is people like garbage because they receive money no matter how badly they run the economy.

      Imagine 2 farmers. One keeps his cows in small pens, indoors 24/7. He feeds then crap food and then he wonders why his farm is going down the tubes. The ECB’s answer is that this farmer should be kept in business even if he is cruel to his livestock because if there is no farmer there will be no one to milk the cows (we are all tax livestock at the end of the day, no matter which country).

      2. Germany is the farm where the cows are free to roam in lovely green fields and they get fed good food.

      The ECBs answer is that the cruel farmer should be kept in business and the good farmer should subsidise him.

      Of course the obvious answer would be for the crap farmer to treat his own animals better and be self sufficient. That way the animals are better off, Germany is better off and the farmer has more freedom because he is not being told what to do by Germany.

      In summary,

      either Germany starts subsidizing the abusive farmer through the ECB.

      or

      The farmer in Greece starts treating the people properly.

      These are the 2 solutions.

      At the moment we are seeing a battle of wills between….

      the money printers, the ones who want to subsidise the cruel farmer, ie the EU, ECB, USA, France etc etc.

      &

      the farmer in Germany saying the Greek government should treat its tax livestock with respect (like I said, we are all tax livestock at the end of the day)

    • @Richard
      I cannot see the relevance between your examples and my post concerning the complete lack of liquidity (one could say complete lack of a banking sector..) that has resulted in record low levels of private investment not only in Greece but in most of the eurozone as well. Either this problem is addressed or the eurozone is over.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s