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Europe, Italy

Politics must trump the failed magic of the market

Crisis-hit Europe needs to drop its free-market fetish and pursue public investment programmes focussed on technology, the environment and health, argues Giovanni Dosi

For thirty years, until the crisis of 2008, talk of industrial and technological policies was off limits, including among the moderate left and reformists, and not only in Italy. The mantra was – and largely still is – “the magic of the market”, as described by that great economist, Ronald Reagan, a “magician” who fed the rhetoric of “laissez-faire” and argued “politics should know more about business.”

In fact policies promoting technology were crucial, at least from the second world war, in the generation of most of the innovations we now enjoy (or suffer) and that the technological and industrial policies have always been crucial in the processes industrialization, especially in countries lagging behind – and remember that two centuries ago, the U.S. and Germany were also laggards compared to England.

First of all, what do we mean by industrial and technology policies? I want to give a very broad definition: they are the policies that generate and stimulate technological innovation, which stimulate and encourage learning and production by private companies, and create and sustain public productive economic activity in certain sectors and locations.

Role of public investment

Let’s start by technological innovation. Without the innovations generated in large public research programs (such as the CERN in the field of physics), and military and space programs we would not have the Internet, the microprocessor, the web, iPad and so on. Without the large public programs at the National Institute of Health in the US we would not have the (few) new drugs that large pharmaceutical companies provide us at very high prices. As the late KeithPavitt http://en.wikipedia.org/wiki/Keith_Pavitt  quipped, US technological leadership was fuelled by the paranoia of American Communism and cancer.

Looking to the future, what we need today in Europe are massive public programmes that are focused, mission-oriented, ie aimed at specific technological objectives – in the past they put a man on the moon or developed a cluster of inter-continental missiles aimed at the Soviet Union – especially in the fields of green technologies and environmental sustainability, and more generally in medicine and in socialised health. Instead, much of the political discourse mythologises the garage of Steve Jobs and Bill Gates without considering the (public) sources of technology that these entrepreneurs drew upon. On the other hand, we fund the objectives of others, such as the F-35 fighter-bombers, which are in any case a failure, as detailed in a report by the Rand Corporation a few years ago.

Why an industrial policy? 

So why do we need industrial policies? The answer is that in many circumstances, particularly in the laggards – or those, such as Italy today, losing ground to the more advanced countries – private companies have neither the organizational capacity nor the profit incentives to operate even in very promising areas from the point of view of the potential for innovation and markets, but in which they have a comparative and absolute disadvantage with respect to international competition.

If two economies, a high-tech and a stone-age, begin to trade, certainly in the latter economy there will be an incentive to produce and trade goods with a high stone content. But society as a whole would progress much faster if it developed a high tech sector, even if it is less efficient than the other country.

Industrial policies include all appropriate measures to accumulate knowledge and capacity in the most dynamic and promising technologies. At the end of the nineteenth century it was the chemistry and electrical engineering. Today it is information technology, bioengineering and environmental technology. In fact, industrial policies have been a key ingredient in the industrialization of the United States, Germany, Japan, Korea and China. Incidentally, the US is the country with the most active industrial policy, without talking about it.

Italy’s record

What is being done today in Europe, and particularly in Italy? For a long time, what can only be described as anti-industrial policies were pursued. It’s an old story, which begins at least by the refusal of the Italian Government to support the development of  Olivetti  computers (almost certainly under pressure from the US) in the early sixties. It continued with the senseless politicization and financialization of Montedison, and then with its dissolution, which also led to the liquidation of a small jewel in the pharmaceutical industry called Farmitalia.

And then the sell off of state-owned enterprises to get over the crisis of 1993, which generated small sums, but which created an immediate income for the state coffers. With what result? One of the first things the new private owners did was to close research and development activities (such as that of telco Telecom Italia), or even liquidate production (Italtel). All this was accompanied by almost thirty years of the mythology of “small is beautiful”, with the result of an almost zero Italian participation in the international oligopolies in the chemical, steel, pharmaceutical, electronics, telecommunications, software and other sectors.

What is to be done? 

What is to be done? In Italy, many things are difficult to do because now the horse has bolted, but you can still foster the emergence of technologically strong players, Italian or at least European. And to do so, it is often necessary for the direct intervention of the state, for example by using the Cassa Depositi e Prestiti (CDP), a publicly-controlled joint-stock company holding a large share of Italy’s savings that already dabbles in these things, but without a serious industrial strategy, almost afraid to disturb the “magic” of the market.

So many things can be done at a European level, provided the free-market frenzy is abandoned. A recent example for all: is there anyone who believes that the US government would stand by and watch if Alstom and Siemens got together and attempted to acquire General Electric, instead of the latter attempting to take over Alstom?

Then there are some things that should not be done. Among these, the transatlantic free trade agreement, which is essentially a mad transfer of sovereignty, in politics, at a national and European level, to private investors, regardless of the social utility of their investments.


* Professor of Economics and Director of the Institute of Economics at the Scuola Superiore Sant’Anna in Pisa

Translation/edit by Revolting Europe

About revoltingeurope

Writer on Europe's Left, trade union and social movements @tomgilltweets or @revoltingeurope


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