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Università di Pisa
Dipartimento di Economia e Management
Corso di Laurea Magistrale in Economics
Tesi di Laurea Magistrale
The relevance of Federico Caffè in a comparison with Mariana Mazzucato
Relatore:
Prof. Simone D’Alessandro
Candidata:
Maria Chiara Cabiddu
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The relevance of Federico Caffè in a comparison with Mariana Mazzucato
Introduction 1
1) The state role in modern capitalist economy - 1.1 The role of the state 3
- 1.2 State and market failures 8
- 1.3 From last resort employer to the entrepreneurial state 12
2) Oligopolies and monopolies - 2.1 The gap between economic theory and historical capitalism 15
- 2.2 Monopoly power and private/social benefit gap 19
3) Financial markets - 3.1 Speculation and instability 22
- 3.2 Theories of socialization of investments 25
4) Inequalities - 4.1 The trickle down effect 27
- 4.2 The end of the efficiency/ equity trade off 30
Conclusion 32
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Introduction
Federico Caffè was born in Pescara in 1914 and studied at the La Sapienza University in Rome. He worked at the Study Service of the Bank of Italy and in the after war he was consultant for the Italian Government. In 1954 he became a university professor of Economic Policy at La Sapienza (Visco, 2015). He was both an academic and a scientific popularizer, writing for various newspapers (“L'Ora”, “Il Messagero”, “Il Manifesto”) (Ramazotti, 2014). He gathered contributions from different schools of thought and used an eclectic approach to analyse problems and find solutions (Ramazotti, 2012). He gave a great contribution to the founding of economic policy as a discipline and was a popularizer of Keynes in Italy (Caffè, 1978). He was an advocate of public intervention to correct market failures and to rule the technological and social transformation in order to build a fair and equitable society (Visco, 2015).
Mariana Mazzucato is Professor in the Economics of Innovation and Public Value at University College London1. She received her Bachelor from Tufts University and her Master degree and PhD
in Economics from the Graduate Faculty of the New School for Social Research, in 1999. She is consultant in many national and international institutions, on state investment and innovation, sustainable and inclusive growth, green transition and industrial strategy2.
Caffè and Mazzucato share the idea that economics is a tool to reach a desirable state of the world. Both want to propose a project of an economic and social infrastructure where market economy can be complemented by state intervention, in a way that is sustainable over time and socially optimal. Obviously, the concept of “social optimality” evolved in its meaning in the span of time between the research of Caffè and that of Mazzucato, but the direction of change is the same set by Caffè. They develop their proposals starting from the same streams of economic thought and investigate the same issues, in the same western economies but in different time periods. They share as reference points Keynes, Minsky and in a certain degree Schumpeter, that in Mazzucato gains a more central role than in Caffè.
A comparison between them allows for the understanding of how the heterodox framework of thought evolved in the last decades to face societal and economic problems. The comparison is expected to show the similarities or discontinuities identified by the two economists in the imperfections in the working of advanced economies and in the tools/actions aimed at solving them. The aim is to show as Caffè has been a forerunner in the focus and the analysis of economic problems and how through the analysis of Mazzucato the problems have been brought head, adapting to the new historical framework and exploiting the advancements made in knowledge and disposable tools. To recognize the present usefulness of a heterodox economist as Caffè, whose advises, for his how acknowledgement, weren’t followed at his time (Ramazotti, 2014), provides us a framework of thought to look to our socio-economic organization with a different perspective and to find hidden ways to improve it.
The comparison is brought head analysing the main publications of the authors, i.e., “Lessons of political economy” by Caffè and “The entrepreneurial state”, “The value of everything” and “Rethinking Capitalism” by Mazzucato, sided by their wide body of publications and policy
1 https://marianamazzucato.com/about, accessed in 07/02/2021 2 Ibid.
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prescriptions and by the writings of Caffè’s interpreters. The work is divided in four sections, each of them dealing with a relevant issue in the actual political and economic debate, as in their research program.
The first chapter deals with the role and features of state intervention in the economic system. Both the authors start from the Keynesian proposal of public intervention in the economic sphere and attribute to the state the role to plan, coordinate and set a direction to the market, proposing also models of organizations apt to perform these tasks. Then, it is analysed the evolution of the concept of “state failures” in the last 40 years. In the last section, it is discussed the way in which the economic policy focus shifted from the demand to the supply side policies and how this lead to leave behind the Keynesian thought. The aim of the authors is to renew attention on Keynesian policies adapting them to the new economic environment. It will be showed how under this stream of reasoning the role of the state will shift from the “last resort employer” to the “entrepreneurial” one.
The second chapter analyses/focuses on the shortcomings of the “perfect competition theory” to deal with a market of monopolies and oligopolies and on how the solution proposed by Mazzucato is compatible with the methodology used by Caffè to choose the more proper body of thought to deal with a concrete economic issue. According to the authors, marginalism applied to an oligopolistic market allows oligopolies to appropriate positive externalities and to reverse negative externalities on society, especially on workers and consumers. The solutions to this asymmetry of power will be considered from the theoretical and empirical point of view.
In the third chapter, the focus is on the working of financial markets. Both the authors analyse the consequences of the diversion of investment from the real economy and of the instability of financial market if not properly regulated. Then it will be analysed the evolution of the institutional proposals apt to overcome these problems.
In the fourth chapter, the discussion is on the trickledown effect and on the equity/efficiency trade-off. It will be analysed the relationship that, according to the authors, there is between economic growth and general welfare. Then it will be discussed the interpretation of the concepts of social optimality and efficiency and how their relationship can affect the process of redistribution and allocation of wealth.
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1. The state role in modern capitalist economy
1.1 The role of the state“The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism” Polanyi, 1944, p. 144
“The important thing for Government is not to do things which individuals are doing already, and to do them a little better or a little worse, but to do those things which at present are not done at all” Keynes, 1926
Despite the faith in Adam Smith’s invisible hand, modern economies often face two kinds of issues that laissez faire can’t deal with: principal-agent problems and coordination failures. For the single agent in the economy, it is difficult to perform actions in conditions of asymmetric information and low bargaining power and for the big non-public actors the risk to exploit their position in order to benefit more themselves than society is always under the corner. The aim of both Caffè and Mazzucato is to propose a project of an economic and social infrastructure where market economy can be complemented by state intervention in a way that is both sustainable over time and socially optimal, overcoming principal agent and coordination problems.
Caffè talked about state intervention, above all, dealing with the Italian situation. So, it is useful to remember that Italy, from the 1950s to 1980s, experienced a constant but uncoordinated and disordered growth. Part of this growth was due to foreign investments and to the import of foreign technology, for the development of whom it didn’t have to pay. For this reason, despite the aggregate indicators showing that the situation improved in an unexpected and fast manner, in the country there were still situations of poverty that didn’t benefit from the general expansion of the economic system (Caffè, 1978, p. 396). This situation showed the damages brought by uncoordinated development, where absolute poverty is sided by relative poverty, making the situation of the poors even worse than before.
Beyond incoordination, he was persuaded that the action of policy in the economic sphere, in Italy in the 1960s was subordinate to private industry, with the main objective to foster its interests. So, despite he, as a Keynesian, was a great assertor of state intervention, deeply criticised the Italian system of public shares. Caffè’s critics to Italian public economic institutions are embodied in his analysis of the working of the Italian Reconstruction Institute3, whose model was applied also to the
petroleum industry (Agip) and the electric energy supply (Enel). According to Caffè, IRI should have played both a counter-cyclical and systematic programming task (1978, p. 406), because public intervention must have specific features with more farsighted ends respect to the private one. Instead, he recognized that public economic institutions performed an imitative role with respect to private industry, instead of an alternative and complementary one (1978, p. 397).
The fact that the public sector wasn’t able to coordinate and lead development was seen by Caffè as an institutional problem. He stated the need of “a political program to lead the evolution of the
country toward an equilibrated development” (1978, p. 396). When he said “lead” he meant two
3 IRI was created after the 1929 crisis in order to fix the economy after the banks failures and to acquire the shares controlled by those banks. Only in 1936 it become a structural component of the economic Italian system, owning shares in industries that the private sector wasn’t interested in, because of the huge sunk costs or the uncertain profitability (Caffè, 1978, p. 399).
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things: that the state should coordinate economic development toward the direction more apt to increase general welfare and that it should have been a guide, but not a substitute to private enterprises, performing actions the private sector won’t do. Caffè was persuaded that the detachment from the private practices passed also through the juridical forms, so that public enterprises should have their own legal form, because private forms weren’t apt to pursue public ends (1978, p. 399).
The international and economic situation where Mazzucato developed her political and economic proposals is different but in continuity with the policies of the decades between the 1960s and 1980s. The neoliberal policies that in the 1980s were at the edge of their consensus, have shown their limits, but they are still the orthodox doctrine. Mazzucato’s critics to public economic institutions are really similar to those of Caffè. She divides the work of IRI in three main phases: the first, when it was public but not politicised, the second when it was occupied by political parties and the third when it was privatised4. According to her the first phase was the most productive one,
when main infrastructures were built5. For Mazzucato, the problems of the economic public sector
were that it was controlled by private interest and this makes of it a follower performing an imitative action, instead of a guide6. Also in the analysis of the current situation the proposals of Mazzucato
are compatible with those of Caffè re-read thorough the more central role of innovation and the development of more sophisticated financial markets. While Caffè talked about programming, Mazzucato talks about market creation (2016). Market creation is about to invest in sectors that do not still exist. It plays a systematic and complementary role in the economic system and let to the state the responsibility to decide the directions toward whom investment should be directed and to coordinate them.
Obviously, as Mazzucato recognizes (2016), the permanent role to create the markets brings to overcome the market fixing paradigm and obliges to rethink the institutions through whom state intervene into the economy. Limiting the role of the state to market fixing following market failures, prevents to provide insights in the type and structure of public sector organizations needed in order to foster investments (Mazzucato, 2016), obliging to use even the same juridical forms, as criticized by Caffè. She delineates the nature of the public-private organizations that have to create new markets for private actors, improving at the same time general welfare. These institutions, according to Mazzucato, must overcome coordination problems and afford wide risks, that the private sector wouldn’t undertake because of the high probability of losses. They should focus on the good unrealized opportunities of investment (Mazzucato, 2016), letting behind the imitative action. The vantage of the state to afford high risk is that it can undertake a wider range of projects than private sector, improving diversification and so probability of success, so it can do something the private sector probably don’t and even do it better.
Differently than Caffè, who performed a clear analysis of the problems and delineated the features that that public economic institutions should have and the role they should play, Mazzucato brings concrete examples of what she considers proper examples to follow. Mazzucato proposes the model of the national investment banks, like the Kfd in Germany, the CBD in China and the BNDES in Brazil,
4 La luna dello stato padrone, Mazzucato, La repubblica, 23/02/2019. 5Ibid.
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whose aim is to provide long term finance to high-risk and high impact projects (2016). They would overcome the limits that Caffè addressed to Italian financial system (short sighting, uncoordinated and imitative action) (1978). According to Mazzucato this is also the role that European Investment Bank should play in Europe, instead to limit itself to short term counter cyclical lending (Mazzucato and Perez, 2016). The role of investment banks is helped by the development of a wider range of financial instruments than those existing until the 1980s, more apt to finance what she considers the main boost of growth: innovation. Anyway, beyond public financial institutions, state can also play (for Mazzucato) a direct role, on the model that for Federico Caffè would have be taken by IRI, for example with agencies focused on a precise purpose and independent from short term political aims, as Darpa in the US (Mazzucato, 2016).
After having stated the need for a central and coordinated action perpetrated by public powers to reach an equilibrate development, there is still another question to be answered, that deals with the directions that the development has to take. According to Caffè there are different possible states of the world and the aim of economic policy is to reach the one that allows a better society (Ramazotti, 2012). Caffè (1973), thought that state intervention does not have a deterministic path to follow and while the ends must be pursued with rational tools, the final result responds to subjective issues, that he called “value judgements”, measured through a welfare function. The rationale behind state intervention is also the one to choose the targets to be pursued among different options mutually excludible. According to Caffè, the market is not always able to choose the better state of the world and maximize the welfare function.
Also Mazzucato states that “public investment, in order to address societal challenges, must pay
particular attention to the types of vision and orientation they embody”, implying that development
can take different paths and that it is public responsibility to choose the more socially desirable one (2018). Markets can’t perform this task, because they are considered as “blind” (Nelson, Winter, 1982) and the orientation of change they provided often represents sub-optimal results from a social point of view (Mazzucato, 2013). For this reason, the state has to lead "new techno-economic paradigms" to deal with societal problems (Perez, 2002; Mazzucato, 2013), which do not manifest themselves spontaneously starting from market forces. So the role of the state can’t be the passive one to remove the obstacles toward a deterministic or market determined demand, but it has to be an active player also from a qualitative point of view.
This is an advancement they share with respect to Keynesian theory, where to “dig the dishes and fill them again” was enough to put the economy at work, without any care for the direction the new production would have taken. Instead, for Caffè the “socially relevant content of production” is as important as the economic quantitative indicators (1978, p. 143). For example, Caffè declared that, even with an almost full employment, a higher level of unemployment among women or racial minorities is an issue that should be addressed through economic policy instruments (Caffè, 1973). The same reasons pressed Mazzucato that the interventions of economic policy intervention must be “smart and inclusive” with a “smart state” to set the direction (Perez and Mazzucato, 2014). The main difference between Caffè and Mazzucato is that, while Caffè attributed to decision makers and scholars the paternalistic role to state the content of value judgements (Ramazotti, 2012), Mazzucato says that “it is important the involvement of civil society in the debate regarding these
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The main difference between Caffè and Mazzucato is that in Mazzucato the issue of innovation gains a more central role, as the main tool to solve socio-economic problems and an engine of growth, at both the company and at the macroeconomic level (Freeman, 1995). Obviously, innovation in itself can be a double-edged sword. This is confirmed, for example, in Bowles (2012, p. 14), who describes the case in which an innovation apt to substitute workers is used to bargain with them lower wages, in order to be still more convenient than the new technology. To deal with innovation makes the advices of Caffè toward value judgements even more necessary than they were in the 1960s. Infact, public intervention become fundamental also to be sure that it takes the best direction. About innovation, Mazzucato (2018) subscribes a declaration of Stirling (2014, p. 2) stating that "It is not a question of betting on the winning horse. Instead, it is a question of carrying
out a great involvement of society, in order to build the most favourable conditions for deciding even what it means to win". For “winning horses” she means projects that have an high probability to
succeed (Mazzucato, 2018). This is about to be a guide, instead of a follower, also in the model of society to be pursued through innovation.
From the fundamental role of planning and directionality derives also the diffidence toward monetary policies of both the authors. When Caffè developed his economic theories, monetarist policies ended in uncontrolled inflation, with a weak and short-term effect on unemployment. So that he proposed monetary policy to be substituted or at least sided by fiscal policies. For example, he thought, in a period when inflation was due also to the power of unions to bargain regular increasing of wages, to use the powers of unions to advance structural reforms, as the direction of investments (1978, p. 241). Caffè also criticized the rationing of credit aimed at improving the macroeconomic indicators. The credit crunch operated by banks and other financial institutions cut an important share of lenders outside the credit market and banks would have the power to choose who is worth and who is not worth credit (Caffè, 1978, p. 130). The sectors and the actors to whom investment are directed will be chosen in order to foster short-term profitability and in an imperfect information environment. Mazzucato’s critics toward monetary policy start from the measures taken by BCE after the 2008 crisis. The actions undertaken by the Central Bank were aimed at decreasing interest rates to foster bank lending, but without positive expectations about future opportunities, investments won’t take place (Mazzucato and Deleidi, 2018). According to her, future opportunities can be shaped through strategic government investment that set the direction of a long run growth. Anyway, monetary policy is not demonized, but are complemented with other tools of economic policy, that perform the actions the public sector is demanded for.
In Caffè and Mazzucato market and state are interpreted as two complementary institutions with the duty to perform different tasks. In particular, the public sector should pave the way to free market, as was asserted by Polanyi (1944), shaping the environment into whom production and business take place. For this reason, state activity must come first and also assume the role to set the direction. The specificity of state role was already present in the Keynesian body of thought (Keynes, 1926). In Caffè and Mazzucato this proposal has been internalized and reinterpreted with a “social meaning” and state role become permanent and physiological into the economic system. If the market pursues the aim to maximize private profits, the state should side its action allowing, at the same time, society to maximize the welfare function. In order to make state intervention effective, they propose models of organizations that can successfully perform the actions of planning, coordination and directionality. In fact, as it will be further investigated in the next section, the organizations through whom market and state perform their action are subjected to failures
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that must be recognized and corrected. Anyway the failures of the organizations through whom market and state perform their action should not led to assess the inadequacy of the institution as a whole.
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1.2 State and market failures
“Which of these systems [central planning or competition] is likely to be more efficient depends on the question under which of them can we expect that fuller use will be made of the existing knowledge. And this, in turn, depends on whether we are more likely to succeed in putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional information as they need in order to enable them to fit their plans in with those of others” F. A. Hayek, 1945
Ideally a structure of governance is a means of avoiding or attenuating a coordination failure, but there is nothing in the process determining the evolution of governance structures that ensures this result. Governance structures may endure because they are fostered by powerful groups for whom they secure a large slice of a given pie, not because these structures promote the growth of the pie itself (Bowles, 2012). As Adam Smith had already taught, the state has often been used by individuals to obtain advantages to the detriment of the entire community. This phenomenon has been theorised by the Public choice school (Buchanan, Tullok). It highlights the personal reasons that led the decisions of economic policy, as ideology, clientelism, power, electoral needs (Caffè, 1978, p. 50).
Another stream of critics to state intervention comes from the inefficiencies deriving from the excess of rules and the weight of bureaucracy, brought head by Coase, among the others. Coase theorem stated that, if the agents in the economy are put in a situation where they can efficiently bargain, they will obtain the best allocation of resources by their own, so the best thing that the state can do is to retreat from the economic sphere. Paradoxically the Coase theorem recognizes that in the market there are situations of coordination failure, but asserted that they must be solved with less public intervention, in order to let negative externalities to be compensated in a private bargaining between the parties. Public choice theory and Coase theorem provide a theoretical framework for the retreat of the state from the direct intervention in economics and a rationale for deregulation. They appear to be confirmed by the examples of “state failures”, but on the other side there are also examples that show how state interventions have been favourable to the whole economy.
Caffè agreed that public intervention could be as detrimental as laissez faire to general welfare. He brought as an example the reconstruction of the merchant navy, when non-repayable public contributions to shipowners have prevented a rationalization of the sector (Caffè, 1960) so that there were those who have gained (the shipowners and workers in the sector) and those who have lost (the community) (Faucci, 2002); or the interventions of the state in the south of Italy, that failed in the creation of external economies, because it was performed too slowly and it didn’t take properly into account the surrounding environment (1978, p. 56). The first is an application of Public Choice Theory, the second an example of inefficiency of the state due to organizational and capability lacks. But Caffè, stated that, even if some public interventions are detrimental, it doesn’t mean that every public intervention is damaging for the community. Coase statement was opposed by Caffè with a set of arguments, among whom there was the asymmetric bargaining power among the actors (1978, p. 49). He was aware that it could happen that bureaucracy instead to follow general interest, is self-interested, and works to increase its prestige or power and perpetuate itself, becoming an obstacle to reforms, but he believed that from the failure of much public regulation it
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should not be inferred that any public regulation is harmful to the community (Faucci, 2002). So, he polemized towards those who draw pretext from inefficiency to propose models of free management of public affairs.
Also Mazzucato recognizes that public funds can be used to foster private or short-term political interests (Public choice theory) (Mazzucato and Penna, 2014). For example, in many cases public R&D and innovation projects would be attempts to solve interest group conflicts. She is also aware of the fact that public structures, as the state investment banks, can be charged of inefficiency, but, according to her, the problem is not state intervention, but the infrastructures that are responsible to lead it. Mazzucato highlights how government has created a network of decentralized public and private actors (Block, Keller, 2011), where decentralization is also a mean to avoid control by short-term political interest or established special tax exemptions that have favoured some activities rather than others (Mazzucato, 2013), exploiting regulation to foster general welfare. State, as market, is an institution and as any institution is subject to failure. So, the question is not which is most efficient, but which can be assigned to what task and how their failures can be prevented. She thinks that the structure and capabilities of the state must be enhanced in order to increase the probability of success of its action. As Caffè and in contrast to Coase, her answer to real or hypothetical state failure is to improve the role of the state, instead to retreat it.
It must also be considered that the idea of state inefficiency can come from a wrong account of cost and benefits of state intervention: often the cost benefit analysis doesn’t take into account all the positive externalities of the public sector and all the negative externalities of the private one. The current framework allows us to interpret static situations and takes as reference the system of prices, that often fails to internalize the benefit and costs deriving from a given productive system. So, the public rationale in state intervention finds another obstacle beyond its real ineffectiveness: the prejudice that misleads the cost benefit analysis of its actions. Neoclassical theory holds that the value comes from the price. This concept brings to consider as productive income from rent, affects the measurement of gross domestic product and consequently the consideration of the role of the state in the economy.
Caffè asserted that the development economics has thought us that if we want to foster growth, we have to deal with a dynamic framework affected by coordination problems (1978, p. 40). Caffè moved from the analysis of “profits” and “losses”, that is a static evaluation, to “costs” and “benefits” that includes also indirect and future effects (1978, p. 60). He reversed the Coase statement, that says that state intervention can be more costly than its benefits, making preferable to not intervene at all. If, as Coase demanded, all the direct, indirect and future effects on the whole economy are taken into account, the total cost reversed on society by the private sector exceeds the benefits reversed on society by the public one (Caffè, 1978, p. 48). Mazzucato states that nowadays the need to afford measurement issues is more urgent than in the past, because of the dematerialization and digitalization of the economy, that doesn’t produce value satisfactorily measurable with tools pioneered in industry or agriculture (Mazzucato and Shipman, 2013).
Caffè built his proposal starting from other economist of the 20th century, that already highlighted the critical issues of cost benefit analysis, as Mishan and Perroux (1978, p. 57). With Mishan he shared the idea that the evaluation of public intervention should not lay only on the effects reflected in the system of prices (Mishan, 1967, p. 171), because it conditions the way we think about the economic system and the way we intervene to modify it. This issue will be deeply investigated by
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Mazzucato, dealing with the process of value production and value extraction. According to her, the public sector makes productive investments, for whom the private sector is held responsible. For example, R&D is a value, but it became a profit only when the value is extracted and sold at a given price. The first step is often performed by the state, while the second is performed by the corporate sector. This lead to see the state as unproductive and the private sector as efficient and justifies the retreat of the state from public investments, with a loss in the creation of potential value. Her proposal is to account not only for value extraction but also for value creation, a task that the current price system doesn’t perform well (Mazzucato and Shipman, 2013). Mazzucato also shares with Mishan the criticism toward another failure of accounting due to price system: the internalization by the state of actions to remedy to external cost, but the exclusion of the external benefits (1969, in Mazzucato and Shipman, 2013), criticism developed for physical production, but that today fit well the behaviour of the financial market.
The third issue to be taken into account is that private sector has not proven to be more efficient than public one. It is noted that privatizations, both through the sale of assets and through outsourcing, have often resulted in a damage to citizens, as some examples demonstrate to the National Health Service in Great Britain (Mazzucato, 2018). This allow Mazzucato to do a step forward, with respect to Caffè, in defence of state failures. She stated that, if the private sector can fail in the search for the winning option, so does the state. The evaluation must be done taking into account not a single investment, but the whole range of publicly funded projects. The most important thing is that, in the final assessment of cost and benefit, the gains from the winners are equal or higher than the loss from the losers. For example, she highlights that Darpa, before to develop Arpanet7, failed in some projects. But without such failures there wouldn’t been Internet,
whose benefits from the social and economic point of view are greater than past costs (Mazzucato, 2018). This is in line with the will of Caffè to apply cost benefit analysis in a dynamic framework, she only extends it explicitly to a wide portfolio of investment into the innovation system. The discriminant in the evaluation of state failures is their root: when they come from the high degree of uncertainty undertaken in order to solve a societal problem is legitimate; when they come from the inability of the state to use public funds to pursue social ends it highlights a weakness in the organization of the public intervention infrastructure.
But if we agree that some state failures are avoidable and market are not perfectly efficient, in what situations state should intervene? We can so highlight three situations that bring from Keynes to Caffè and from Caffè to Mazzucato. The first is about temporary market failures, that require the public sector to intervene in countercyclical action. They can be represented as coordination dilemmas, where none of the private actors has the interests or the means to intervene to rescue the economy. After its intervention, the system is back to an equilibrium that is also Pareto optimum and the state can retreat.
The second is about a systematic failure that can be still categorized as a market failure: the state have to intervene permanently to modify the system, that without its intervention will set to an equilibrium that is suboptimal. In fact, at the Pareto optimum there are some actors with an interest
7ARPANet, Abbreviation for Advanced Research Projects Agency Network, which indicates a packet switching network,
created starting from 1969 by the DARPA (Defense Advanced Research Projetcs Agency) to connect computer centers and terminals of universities, research laboratories and military entities. ARPANet formed the backbone of the nascent global Internet network: https://treccandi.it/enciclopedia/arpanet/, accessed 06/02/2021
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to cheat or free ride, in order to increase private benefits, so the optimum is not a Nash equilibrium. This is exampled in Caffè by regulation against pollution (1978, p. 52) or in his claim for an anti-monopolistic legislation in Italy (1978, p. 107) and in Mazzucato in the intervention of State investment banks for the production of public goods or to the fostering of competition in situations of monopoly or monopsony (Mazzucato and Penna, 2014). State intervention will solve coordination (pollution and public goods) and imperfect competition problems (monopolistic or dominant position situations). Mazzucato adds also the venture led role, derived from the necessity to solve information asymmetries that enterprises face in obtaining funding from the financial system (Mazzucato and Penna, 2014). This problem stressed by Mazzucato is highlighted also by Caffè, when he recognized the high degree of concentration of financial markets and the consequent asymmetry of bargaining power with respect to little and small enterprises. It is more evident dealing with high-risk projects, as the ones regarding innovation, so it is potentially more damaging in contemporary economy than it was until the 1980s.
The third reason of intervention is anticipated by Caffè, but it is fully developed by Mazzucato. It cannot be configured as a market failure, because it deals with something that still doesn’t exist and this is the reason for whom it is named by Mazzucato “market shaping”. In this case the state seeks to address negative externalities arising from the production or use of goods and services through the creation of new markets. From a market failure perspective, most societal challenges are seen as negative externalities, a source of market failure that works at the system level, which would justify a challenge-led (or systemic) role (Mazzucato and Penna, 2014). Mazzucato suggests that if we reject the Public choice school, we have to advance from the classical rationale of state intervention justified by market failures, because market do not solve the problem of allocative efficiency in a dynamic framework. It is necessary to build a new environment to reach a social situation that still doesn’t exist and the rationale for public intervention should lay on a different theoretical framework, that derives from the recognition that state interventions create external economies from whom also the private sector benefits, the so called “crowding in”. However, this view has been opposed, by the claims of Public choices school and state inefficiencies discussed above. In the recognition of both the merits and the guilts of market and state emerges the need to shift the focus from the nature of these institutions to coordination, information and competition problems and to find ways to solve them, wherever they come from, performing a methodological but also political shift.
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1.3 From the last resort employer to the entrepreneurial state
“The whole purpose of the economy is the production of goods and services for consumption now or in the future. I think the burden of proof should always be on those who would produce less, rather than more, on those who would leave idle men or machines or land that could be used. It is amazing how many reasons can be found to justify such waste: fear of inflation, balance-of-payments deficits,
unbalanced budgets, excessive national debt, loss of confidence in the dollar” James Tobin, in
Samuels and Nordhaus, 198, p. 75
“It is crucial to understand that economic policy is not scientifically ordained. You can impose austerity and hope the economy grows, even though such a policy deprives it of demand; or you can focus on investing in areas like health, training, education, research and infrastructure with the belief that these areas are critical for long-run growth in GDP. In the end, the choice of policy depends heavily on one’s perspective on the role of government in the economy” Mariana Mazzucato, 2018
Caffè and Mazzucato started their analysis of the real economy with Keynesian basis. Keynes criticised the capitalist system to not be adequate to assure a high level of employment and encouraged the action of the state in order to provide it during unfavourable conjunctures. Caffè shared with Keynes the idea that in depressing situations the state should work as “last resort employer”. He thought that the merit of Keynes was to open the door to a wide literature about public intervention that went far away from his original proposal. The original work of Keynes included a proposal to bring to the full utilization of technology, capital and workers, so its attempt wasn’t about the development of a productive system, but about its full, or at least high degree, of utilization, that could be obtained fostering the demand.
Anyway Caffè says that the Keynesian thought wasn’t incompatible with direct and indirect action on the supply side of the economic system. He thought that, when Keynes developed his proposals, the economic system was so affected by the underutilization of inputs (above all human capital), that to talk about lacks in the supply side would have been inapposite (1978, p. 386); but in the 1970s he stated the need of a policy of “global administration of the offer, whose application doesn’t
mean a deny, but a development of the Keynesian thought” (Caffè, 1978, p. 144). The full
employment target, that is the main objective to be pursued in the short run, can be reached with long run growth policies that shape the productive infrastructure and improve general welfare. The importance, for Caffè, of the role played by the public actors in the expansion of the supply side sectors is recognized also by Franzini (2015). He highlighted, as an interpreter of Caffè, that the focus on the supply side, that started from the 1980s, doesn’t mean a retreat of the state to the role of regulator and administrator, but can be an opportunity to expand the industrial basis. With the evolution of the economic and historical path, there has been, interpreting Caffè, the need to shift from the fostering of demand in order to reach the full utilization of labour force (last resort employer), to the development of the other three elements of the production function: human capital (H), real capital (K) and technology (A), where the latter has a central role in the work of Mazzucato. On Caffè’s path, nowadays Mazzucato recommends that both European founds and Italian public procurement should be subdued to the task to invest and innovate8. So, if during the
1960s the most urgent measure for the state (for economic but also social reasons) was to be a “last
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resort employer” (Caffè, 1978, p. 383), Caffè would agree that the state should play the role of “entrepreneurial state”, as defined by Mazzucato (2018).
Contrary to Caffè and Mazzucato proposals, from the 1970s, with the shift of the focus from the demand to the supply side, Keynesian economics has been judged unfit to solve contemporary economic problems. The best way to foster supply side was found in the progressive retreat of the state from the productive sector, promoting only indirect measures, as tax cuts and macroeconomic stability. About that Caffè wrote that “a fundamental aspect of Keynesian teaching is the adaptation
of policies to historical conditions” (1978, p. 384). The error, according to him, was in the
misinterpretation of Keynes, focusing only on the exegetic problems and letting behind his method, indispensable to adapt his thought to new challenges. The lacks in the interpretation and development of Keynesian thought led to the involution of international institutions born with Keynesian inspiration (Caffè, 1978, p. 385). He criticized institutions, like the International Monetary Fund, that imposed overly restrictive monetary and fiscal stabilization policies on member countries in difficulty (Caffé, 1978b). Caffè thought that the focus on macroeconomic stability represents a step back with respect to Keynes and that it has, as consequences, unemployment and the persistence of scarcity on the offer side (1978, p. 385-387).
Caffè’s merit was to be a forerunner, because his critic to the works of the Monetary Fund are still alive (Milone, 2012, p. 110) and really similar to those of the neokeynesian economists about the policies applied in Europe after the 2008 crisis. In fact, Mazzucato claims that in Europe, the Fiscal Compact9 requires states to carry out spending cuts in sectors, as education and research and
development (2011), depriving the economy of human capital and new technology and highlights that, meanwhile, in countries that continue to grow, there is an opposite trend, as Germany or China (Mazzucato, 2011). She, as Caffè, recognizes that in order to grow, the state should directly invest on the inputs of the production function, without whom macroeconomic stability is unuseful to general growth. In Caffè and Mazzucato the alternative to the “employer of last resort” is not found in the simple role of regulator of laissez faire, letting beyond Keynesian thought, but in an active entrepreneurial role, in order to enhance the production boundary. And the entrepreneurial role of the state is interpreted as a development of Keynesian teaching.
Once stated the need for the state to play the entrepreneurial role it must find innovative ways to remunerate its investment. Caffè believed that in Italy, in the 1960s, avoidance of state reward for its investment was justified by the neoliberal though, carried on by Luigi Einaudi, that a miraculous growth was due to the implementation of liberal economic policies. The historical reconstruction of Caffè doesn’t share with Einaudi the faith in free market: according to him the economy was fostered by state aid, publicly owned and monopoly positions, that allowed growth, but later affected its maintenance, letting huge enrichments for rents (without tax burden) used for consumption instead of investments (Poettinger, 2016). Mazzucato raises the same issue for the economic growth of the last 30 years: the merits are charged to the free market (2018). She recognizes that government is totally missing from the production function and it is assumed that it is only in firms that value is created. Mazzucato asserted the duty for the state to obtain a reward from its investment, because most of the gains in productivity of the first half of the twentieth century are due to the collective effort behind technical change, that has been and must be brought
9 The treaty on stability, coordination and governance in the Economic Union, signed in 2012, imposes to national states to contain the deficit to 3% of GDP and the debt to 60% of GDP.
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head by the state (even more than capital development). Once stated the need for public intervention, the authors claim the theoretical acknowledgement of its results in order to legitimate the appropriation of rewards.
The need for state reward doesn’t mean that the entrepreneurial state must apply the same economic criteria used by the private sector. Caffè criticized the private concept of efficiency acritically applied to the state but agreed on the fact that the alternative shouldn’t be an acritic waste of resources (for this he was also an opponent of welfarism (1982)). He thought that public investment should be sided by an increase in taxes, to allow to finance further investment, without incurring in uncontrolled public debt (1978, p. 206). As Caffè, Mazzucato shares the idea that the efficiency principle in the public sector must be different than that in the private one, allowing rewards to re-invest in a long run perspective. She proposes ways for the state to retain shares of the profits generated by the growth it supports, because companies that significantly benefitted from government investments often manage to avoid taxation (Lazonick and Mazzucato, 2013). The real lack that Mazzucato, as Caffè, highlights is the inadequacy of the fiscal infrastructure to make the public investment structure sustainable over time (Caffè, 1978, p. 104, Mazzucato, 2018, p. 206-208). She thinks that the state should receive a reward for its investment for two reasons: to foster future investments, as it was in Caffè, and also to repay the losses due to the high risk run in developing new technologies, in order to make the cycle of innovation financially independent from the political wills of the moment (Mazzucato, 2011). The latter is due to the fact that the development of technologies is riskier than investments on the other inputs of the production function and in the last decades innovation has become the main engine of growth.
With a learning process the state can also improve its entrepreneurial activity and foster practices useful also in the private sector, especially dealing with innovation. According to Mazzucato, for most of capitalism’s history and today in many countries, firms have not been organised primarily as vehicles for the short-term profit maximisation of shareholders and the remuneration of their senior executives (Jacobs and Mazzucato, 2016, p. 18). These firms invest more in innovation than the ones focused on short-term shareholder value maximisation and the evidence suggests that while their short-term profitability may (in some cases) be lower, over the long term they tend to generate stronger growth (Jacobs and Mazzucato, 2016, p. 18). In this way, given that firms have not absolutely given features, but are shaped by the environment in which they are inscribed (Lazonick, 2000), the state can also be an example of best practice in the private corporate governance. So, the imitative role of the state toward the private sector, criticized by Caffè, can be reversed, becoming the state an entrepreneurial, foresighted model of business.
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2. Monopolies an oligopolies
2.1 The gap between economic theory and historical capitalism
“The difficulty lies not in believing in new ideas but in escaping old ones.” Keynes, 1936
“Pure economic laws describe a particular [behaviour] of economic agents, whose goal is to reach a static equilibrium and to re-establish such a state after each disturbance. […] It is true that this way of thinking corresponds to the fundamental principles of static economics. It allows for the precise formulation of static laws… Yet we maintain that the conception described is not sufficient to explain the real development of the economy” Schumpeter, 2002 [1912], p. 96–97
When Federico Caffè developed his proposals of economic policy he was already aware of the inadequacy of the mainstream economic thought to face the crisis of the 1970s. Caffè was persuaded that the perfect competition theorized by the classical theory was an abstraction barely useful to describe the reality and to solve its problems. The tendency toward oligopolies wasn’t a revolutionary idea, given that even Adam Smith admitted it (Caffè, 1978, p. 82), but the objection of Caffè was in the limited usefulness of perfect competition theory to deal with the structural problems of the modern economy.
The technical advancement of the XX century allowed to exploit economies of scale that fostered the concentration of productive systems and then of economic and political power. For this reason, Caffè quoted Sraffa that, among the firsts, admitted the impossibility to close in the same coherent system perfect competition and economies of scale (1978, p. 42). Then, as Caffè recognized, the concentration has gone beyond the needs of economies of scale, to bring to financial concentration, in the interest of managers or owners, without any net efficiency gain (1978, p. 84). Anyway, Caffè’s critics are not against monopolies in themself, neither an apology of little enterprise. The real critic was toward the system of thought used to deal with them and the refuse to change its roots, adding some extensions or exceptions to help it to fit the real world. Caffè has repeated several times that perfect competition is a simplified model, far from reality. He wrote that, when we move away from the limiting case, "the competitive theoretical scheme constitutes a distortion of reality, rather than
an approximation of it" (Chamberlin, in Caffè, 1958), so that it is not only false and unseful, but also
dangerous to analytical and policy ends. Caffè charged the intellectual world of his time to cherry pick the Keynesian system to include the sides more compatible with the liberal views, forgetting to understand and develop his main feature: the adaptations of abstract policies to different historical features (Caffè, 1978, p. 384). In his view, there cannot be an operative scheme without a proper study of the existing conditions, so both the liberal and the Keynesian theory, without the effort to apply them to the existent situation, are a sterile and elegant intellectual exercise.
Even if more than 40 years are spent since when Caffè did this objection, Mazzucato still complains that mainstream economic speech rests on the conception that capitalism is an economic system characterised by competitive markets (2018), while she recognizes that many of the most important markets in modern capitalism are in oligopolistic form, characterised by economies of scale and network effects that lead to concentration and benefit incumbents (Mazzucato and Jacobs, 2018). In competitive markets, instead, privately owned companies, seeking to make profits for their shareholders, compete with one another to supply goods and services to other businesses and freely choosing consumers and such competition maximises welfare, while markets are assumed to tend towards equilibrium.
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The first question to be answered is if perfect competition is desirable and brings to general equilibrium. According to Caffè "it requires a state of tension which, in the long run, ends up tiring
and therefore not everyone can resist” (in Faucci, 2002). He defined perfect competition to be
undesirable and he also seemed to deny that it can lead to a general equilibrium, sustainable in the long run in the real world. Infact, according to Caffè, economic systems are not close and economic relations cannot be independent of the natural and social context in which they are located (Ramazzotti, 2014). This issue is better explained in Mazzucato, according to whom, capitalist economies are not theoretical abstractions, but complex and dynamic systems, embedded in specific societies, formed of multiple relationships between real and heterogeneous economic actors, whose behaviour give rise to dynamic patterns of growth and change (Mazzucato and Jacobs, 2018). According to Mazzucato the Walrasian system despite its internal coherence, is not apt to describe real world dynamics, because it is a-institutional (even if it premises can’t be satisfied without institutions) and a-storical in a world deeply influenced by institutions and path dependency (Mazzucato, 2018). So Caffè and Mazzucato share the belief that perfect competition can’t reach an equilibrium and it can’t determine a path that is equal for everyone without attention for anthropological and social features. To understand how economy really works, and to explain how policy can help them work better, we need a much richer approach.
The second issue is that in the real world perfect competition doesn’t hold. So what will be the consequences for the variables of the economic system? From the open recognition of the monopolistic elements present in concrete market situations Caffè inferred that "even the slightest
monopoly element necessarily reduces the remuneration of all the factors employed in a given firm below the value of their marginal products” (1958). First of all prices in perfect competition are
different than in oligopolistic situations, and consequently supply (affecting consumers) and employment level (affecting workers). Dealing with an imperfect competition world, Caffè proposed to find an aid in the “theory of the second best”. It states that if in a system a condition is introduced that prevents the satisfaction of one of the “paretian conditions”, then the other conditions, even if feasible, are not generally desirable (Caffè 1970, p. 72). This is what happened with the lack of perfect competition in a system where the production factors are remunerated under the laws of marginalism. If marginalism can be a useful and fair remuneration system in perfect competition, it could determine imbalances in a world of oligopolies and monopolies. Nowadays the marginalist theory, more than to solve a distributional problem, promoting allocational efficiency or at least fairness, seems to justify the status quo, giving a value to something because it has a price and a price because it has a value, in a tautological inescapable reasoning. The monopolies and the oligopolies, that are price makers (instead that price takers, as supposed by the perfect competition theory), can set higher prices than the perfect competition ones and appropriate a value that is higher than the one the same product would have under perfect competition. So price, as value (that in marginalist theory are the same) is not an intrinsic feature of the product but depends on the relationships of power into the market in which it is traded. Also according to Mazzucato a theory developed to set prices in a perfect competition market is not apt to the good functioning of an oligopolistic one (2018). To deal with a world of oligopolies and monopolies, it is necessary a theory of wealth distribution that rebalance the government and workers’ asymmetry of power. To find a more proper distributional theory Mazzucato rebuilds the theory of value under history and reinterpret the present economic situation under the past theories, highlighting the consequences that value theories have on distribution. Nowadays,
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according to Mazzucato, linking value to labour, as it was in Adam Smith, and applying the concept of rent to modern enterprises can help to correct the gaps of the mechanisms that rules the economic system. Ricardo defined rent as a transfer of profit to landlords, possible because they had a monopoly of a scarce asset (Mazzucato, 2018). Mazzucato asserts that today rents could mean a patent on a drug, control of a rare mineral such as diamonds, or what a landlord is paid to live in a flat and interpreting it under Marxist theory, defines Amazon a trading capitalist, because it is a means by which productive capitalists sell their goods and realize surplus value (2018, p. 59). According to Mazzucato, under marginalism it is no longer possible to say with certainty who creates value and who extracts it and, consequently, how production can be equally distributed (2018, p. 78), rebalancing asymmetries between the actors of the economic system. This is not only a matter of fairness but also of general welfare and sustainability over time, because, according to her, to understand who really creates wealth and who only extract it is indispensable to foster the right elements of the productive chain.
The method used by Mazzucato is in line with what has been defined the “Babylonish approach” (Dow, 1996) by some Caffè’s interpreters (Ramazotti, 2014), that is to follow different streams of thought in order to find the one that will provide us a useful answer. Infact the value of a theory doesn’t hold in the intrinsic feature of the model but in its aptitude to find correct solutions to our problems. This is the reason for whom, according to Caffè, tools from different theoretical bodies can be used to find answers at different analytical levels (Ramazotti, 2012). Making use of an ideal and a-historical market, as that of marginalist theory, according to the authors, does not provide the cognitive tools capable to address the concrete problems on which action must be taken. Infact, for marginalist economists, rent is determined by imperfections and market impediments will be eliminated through competition; but if perfect competition is not reachable in the present world made by economics of scale, another way to contrast rent is needed. And another way needs another theoretical body of thought.
Anyway, Caffè was persuaded that the classical school, the neoclassical school and the Keynesian school displayed many common points and they must be assembled to reach an understanding of the world. For example, the theory of oligopolies and monopolies doesn’t mean that concentration is an absolute feature of the market, but it is only an historical contingency, to be used until it is useful. It is a method more than a truth. According to Caffè, when faced with a theory that doesn't work, there are two most frequent reactions: to adapt it in the light of the novelties that seems to undermine it or to replace it with a theory more corresponding to the reality under investigation. While recognizing the importance of these two ways of proceeding, Caffè denied that they are obligatory paths (Ramazotti, 2014). He emphasizes the importance of an eclectic approach in the delimitation of the problem and in the combination of lines of reasoning to configure it in relation to the issue to be faced, to study the market only in its concrete reality.
In the same meaning, Mazzucato’s refusal of the marginalist theory doesn’t mean the intrinsic invalidity of the model or its absolute unusefulness, but only that it, if applied to the current market infrastructure, will lead to an unfair and also suboptimal (as we will see) distribution of wealth. Caffè does not consider economic theory as operating laws given once for all and the choice between the attempt to adapt a theory and its abandonment remains open (Ramazotti, 2014). Given that marginalism is done to deal with a world of perfect competition and that we live in an imperfect competition one, we have to change the theory of value to find a more suitable body of thought
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and in doing that we can look to past theories. From the awareness of the actual functioning of capitalism Caffè doesn’t derive the deterministic conclusion of its irreformability, but he preferred a gradualist approach toward improvement (Caffè, 1968). As Mazzucato, he is not an opponent of capitalism, but he is interested in an analysis to correct its failures and to allow him to survive.
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2.2 Monopoly power and the private/social benefit gap
“For all this not to not end only in moral indignation, it is necessary that our frames of reference take it into account in some way. This would not mean abandoning the tools accepted by the profession of economists; but it would require less accommodating and sometimes uncomfortable attitudes” Caffè, 1973, in Amari, Rocchi (edited by), 2007
“Capitalism is an economy of unpaid costs” Kapp, 1950
Once stated the unfitness of marginalism to deal with the distribution of wealth in a capitalist system with a high concentration of power, its consequences on the actors of the productive system must be taken into account in political action. In order to do that economic analysis must be endowed of new concepts. In the analysis of monopolies Caffè added the concept already developed by Baumol of externalities (1968). He thought about externalities above all dealing with the negative side, meaning the socialization of private cost. But in his “Lessons of political economy” we find a reference to the convenience of non-immediately profitable investments developing profitability in a linked sector (1978, p. 207), anticipating the concept of positive externalities. The existence of externalities, both negative and positive, implies that in the price of each product delivered in the economy, efforts/cost non directly linked to the productive process are internalized/excluded. Caffè provided a dynamic view of the economic system, like the concept that will be widely applied by Mazzucato to the innovation industry. Innovation, according to Mazzucato (2018), is cumulative and collective (so it benefits from positive externalities) and to ignore it has led to an unbalanced distribution of its rewards. The analysis of Mazzucato points out that nowadays the economies of scale of many oligopolistic or monopolistic industries are possible thanks to the advancement in technology fostered by the state with tax revenues. Industry appropriates the positive externalities of publicly funded research without paying for the cost. Citizens contributed also as workers (creating the value incorporated in the final product) and as consumers. Bringing as a paradigmatic example the pharmaceutical industry, she claims that citizens pay twice: first for the research (as taxpayers) and second for the premium that pharmaceutical companies charge for their drugs (as consumers) (2018). It must be added also the contribution taken from workers. When they are paid at market prices, their wage reflects only a small part of the value they delivered to the enterprise. In fact, in modern productive systems workers, also because of their weakness as a collective organization, are remunerated in a residual way (Mazzucato, 2018).
The modern economic system in the distribution of wealth uses a mechanism based on the asymmetries of power between the actors, instead of the real contribution to the production process. According to the authors, the appropriation of positive externalities by big monopolistic actors produces negative externalities on the counterparts and on society. The need to reward taxpayers for their investment is linked to the economic sustainability of the entrepreneurial state over time, analysed in the third section (p. 14), so now the analysis is focused on the consequences of marginalism and imperfect competition on workers and consumers. The lacks in the orthodox analysis of the production and distribution process highlighted by Caffè are developed by Mazzucato with a higher level of accuracy about the different actors, allowing to understand how they can be corrected.
Federico Caffè said that technological progress produces wealth that can be appropriated by firms, worsening the position of workers, especially of the less skilled ones (1978, p. 53). For this reason,
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he stated the need of investments in human capital (1978, p. 65), to allow workers to appropriate the wealth they contribute to produce, also indirectly, adapting their set of skills to the general development of the economy. This was a farsighted proposal in the 1970s, that opposing the end to maximize short term profits and the marginalization of human capital, considered workers a fundamental input to be preserved. According to Caffè, the lacked investment in human capital is an actual loss, because it prevents to develop skills that will improve the productive process (1978, p.66).
Also Mazzucato complains the current behaviour of most Western firms, that prefer to remunerate shareholders, than to invest on workers, marginalizing the actors that contributed to their success (Mazzucato and Jacobs, 2016). She brings as models of best practices some northern Europe firms that regularly invest a share of their profits in training programs (Mazzucato and Jacobs, 2016). She claims that workers are cut off from the rewards they deserve, while others, such as venture capitalists, who came in at a later stage, appropriate a large share of a wealth they didn’t contribute to produce, because of their economic power (Mazzucato and Jacobs, 2016). For Mazzucato the lacked investment in human capital takes the feature of actual loss but she, more than Caffè, deeply stressed the fact that workers are deprived from the wealth they contribute to produce, focusing on the issue of fairness.
Combining contribution from Caffè and Mazzucato, the process can be described as follows: workers produce positive externalities, that are appropriated by firms and not reinvested in human capital, with negative externalities on both workers and society. In fact, according to the authors, the undervaluation of human capital in favour of profits is a damage for the whole economy and for society. According to Caffè and Mazzucato, the unfavourable position of workers must be counterbalanced by public policies that allow them to preserve their relative position. They propose the strengthening of workers also through the empowerment of trade unions (Mazzucato and Jacobs, 2016), in order to balance the concentration of business with the concentration of workers. Given that the distribution of wealth follows the concentration of power and that the actual concentration of power is too far from the effective productive contribution of the actors, the best solution is found in a re-equilibration of bargaining power, helped by public policies.
Another issue derived from the concentration of economic power, anticipated by Caffè and shared by Mazzucato, is the damage for consumers. Even if consumers are not exactly a part of the productive process, they are the final beneficiaries, and their position must be preserved and protected as part of the society. Caffè opposed Einaudi when he said that the market is a servant of demand, while large companies can influence demand (Faucci, 2002). If markets in modern economy tend to oligopolies, liberism can’t be the premise of liberalism, so private enterprise can’t be the matrix of pluralism and freedom. Also Mazzucato highlights the narrowing of consumers choice deriving from oligopolies (Mazzucato and Jacobs, 2016). The value subtracted to consumers narrowing their choice options and charging them with higher prices than the production cost can be considered a social loss as well as the one afforded by workers.
Given that economic concentration is due to productive needs, the solution to this problem can’t be found in the return to perfect competition, but in the awareness that monopolies are the rule, rather than the exception and they need a proper regulation. A way to protect consumers from monopoly power is the control of the prices, in order to constrain their supply power. This proposal was already developed in Caffè’s “Lessons of political economy” (1978, p. 407). According to Caffè
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the public intervention to keep under control the prices of essential goods must be strengthened. For to him it should be a measure in the short run, while working on structural features of the supply side (as to increase the number of suppliers). Instead, according to Mazzucato (2018), measures to keep prices under control are directly the way to modify the supply side bottlenecks, for example weakening patents profits that cut off competitors and that allow monopolist to collect a passive rent in fields where the demand is highly inelastic (because we are dealing with essential goods). In this way the control of prices by public authorities will paradoxically allow a liberalization of the market from private monopolies.
The concentration of profits in few hands has another shortcoming: research and investments will be performed only if profitable for the private monopolist/oligopolist and a lot of profits will be diverted toward unproductive ends (Caffè, 1978, p. 55). Mazzucato, starting from Baumol, exploits the concept of “unproductive entrepreneurship” (Baumol, 1990) to highlight the fact the monopolies and oligopolies appropriate wealth they didn’t produce and use profits for unproductive investments. Lack of productive investments can be considered in Mazzucato and Caffè frame of thought another social loss. So the issue that monopolies can be inefficient in the short run, but efficient in the long run (Samuelson, 1948), because that profits will be reinvested in a win-win strategy for both enterprise and society is not a deterministic path for both the authors and can’t be a justification for the expropriation of value from the weakest actors of the productive process to the stronger and concentrated ones.
