Our latest Freakonomics Radio episode is called “Is the Government More Entrepreneurial Than You Think?” (You can subscribe to the podcast at Apple Podcasts, Stitcher, or elsewhere, get the RSS feed, or listen via the media player above.)

We all know the standard story: our economy would be more dynamic if only the government would get out of the way. The economist Mariana Mazzucato says we’ve got that story backward. She argues that the government, by funding so much early-stage research, is hugely responsible for big successes in tech, pharma, energy, and more. But the government also does a terrible job in claiming credit — and, more important, getting a return on its investment.

Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post.

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Mariana MAZZUCATO: So, I wouldn’t say that my path to economics was through Marxism, but it was through reading some very inspirational economists, of which one was definitely Karl Marx.

That’s Mariana Mazzucato.

MAZZUCATO: I’m a professor in the economics of innovation and public value at University College London.

DUBNER: You also advise, as far as I can tell, a number of governments and governmental institutions?

MAZZUCATO: I’m currently on the Council of Economic Advisers for the first minister of Scotland. I’m also the special adviser for Carlos Moedas, who is the research commissioner in the European Union. And I used to be on the advisory board for Jeremy Corbyn. And then I resigned because of Brexit.

DUBNER: It says here: special adviser to the secretary general of the O.E.C.D., is that right?

MAZZUCATO: Yes, so the OECD is currently rethinking its economic narrative. And so they have a group that’s literally called that: the new economic narrative. And I’m one of the people on that group.

DUBNER: Gotcha. And also Sitra’s Advisory Panel in Finland. Is that true?

MAZZUCATO: Oh yeah, sorry — I didn’t realize you wanted the whole list. There’s actually even like 30 more.

How can it be that one university economist has the ear of so many governments and institutions? For a clue, let’s get back to why Mazzucato found such inspiration in Karl Marx.

MAZZUCATO: One thing that’s fascinating about Marx is that he’s known as a critic of capitalism. But actually when you read Capital — Volume 1, 2, and 3 — you end up really admiring and appreciating the dynamic aspect of capitalism, which is technological change. We shouldn’t forget that feudalism was 500 years of inertia. One of the defining features of capitalism is, in fact, the way that innovation has really broken down all sorts of walls, that it’s constantly changing how industries operate; how production, distribution, and consumption work. And Marx really talks about that. It’s quite curious that one of the most famous critics of capitalism actually described it in the most dynamic of all ways. And that’s what got me interested in the economics of technological change.

But it’s not just technological change that interests Mazzucato. She has a relatively radical stance on the value that’s created by technological change. What do I mean by a radical stance? Consider the titles of her books. The first was called The Entrepreneurial State. Those two words — “entrepreneurial” and “state” — typically are not used together. Mazzucato’s latest book is called The Value of Everything: Making and Taking in the Global Economy. When it comes to the relationship between government and economic growth, Mazzucato knows how the popular narrative goes. It goes like this:

MAZZUCATO: “My God! The government, what a basket case. A group of bureaucrats. They don’t know what they’re doing!”

But she sees it differently:

MAZZUCATO: You know, what would Uber be without GPS, publicly financed? What would Google be without the Internet, publicly financed? 

Today on Freakonomics Radio: in the modern economy, are governments the ones who are getting a raw deal?

MAZZUCATO: Today, all the discussion is about getting the state out of the way, completely ignoring the fact that these government investments were critical for innovation to happen.

And, when you look at big, rich sectors of the economy like finance and pharmaceuticals — how much value are they really creating?

MAZZUCATO: We have to make it much more difficult for different actors in the economy to call themselves wealth creators without really being asked, “Well, are you, or are you not?”

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Mariana Mazzucato was born in Rome but grew up in Princeton, N.J., where her father took a job as a research physicist at the university. She studied history and international relations at Tufts, and got her Ph.D. in economics at the New School for Social Research in New York. Now she lives with her family in London.

DUBNER: In an interview with The Financial Times, “Lunch with the F.T.” where you go and have lunch and a glass of wine, you said —

MAZZUCATO: Well, a very expensive glass of wine.

DUBNER: I saw that. The glass of wine you ordered cost £40.

MAZZUCATO: I made an error.

DUBNER: They made an error, or you did?

MAZZUCATO: Well, I didn’t see the price. They trick you. I don’t know if it’s because I was a woman and they didn’t show me the price to be gentlemen, or if it’s what the F.T. does, but there were no prices. I was so involved in the conversation, I just pointed to the first wine I saw, and it turned out to be the most expensive wine, that got anyone who read that article to call me a Sauvignon socialist.

DUBNER: So to someone who says,“Free markets are almost always good, and governments are almost always bad,” you say what?

MAZZUCATO: The first is,“What do you mean by the free market?” And it’s curious, if you read Adam Smith, one of the first economists back in the late 1700’s, he actually meant by the word “free market” not free from the state, but free from rent-seeking, free from those activities that extract value. So what I say to those who say that we need less state in order to be more innovative, more dynamic, I say, “Let’s look at one of the most innovative parts of the U.S. economy, which is Silicon Valley. Did that come from the free market or from an active, visible hand: the state?” My point is, actually, the state was involved in almost everything in Silicon Valley. Not to exclude the role of the private sector, of course — we all know the very important companies in that area. But the role that public actors played was really across the whole innovation chain.

DUBNER: Now we’re talking about agencies like DARPA and NASA and the National Institutes of Health and so on, yes?

MAZZUCATO: Exactly. I’m talking about both agencies that do basic research like the National Science Foundation. But also agencies more downstream, doing applied research like DARPA but also its sister organization, in more recent times, called ARPA-E. The National Institutes of Health, which continue to spend more than $30 billion a year in the most radical, uncertain, high-risk research.

Here’s some evidence of the government funding that Mazzucato’s talking about. DARPA, or the Defense Advanced Research Projects Agency, created during the Cold War to keep American technology ahead of the Soviets, has over the years produced several kinds of missiles and airplanes as well as the first computer mouse, miniature GPS receivers, HD displays, and a digital personal assistant. ARPA-E, or the Advanced Research Projects Agency for Energy, founded under George W. Bush, has funded a variety of energy projects, including battery-storage tech; the Department of Energy, starting in 1978, invested more than $130 million studying the extraction techniques that have come to be known as fracking. And the National Institutes of Health has helped fund the vast majority of all new drugs approved by the FDA.

MAZZUCATO: These public institutions have absolutely co-created value. It’s quite extraordinary that we’ve become very used to these much more passive words to describe the state. You start having to change the vocabulary that one uses. So instead of saying the public sector de-risks the private sector, it’s actually about sharing risks. Instead of talking about just facilitating and enabling business, it’s really about taking on the lead investor role as an investor of first resort.

DUBNER: One of the central arguments you make is that government institutions and quasi-government institutions are involved in the investment, are involved in the risk, and yet, you argue, barely share in the return. How big of a problem is that? 

MAZZUCATO: It’s a huge problem and it comes back to how we talk about things. I often remind people that Plato said that storytellers rule the world. So these stories we tell about who creates value has, in fact, created the stories that justify the extraction of value. Let me give you an example, which I think brings home: The U.S. government after the crisis decided to have a proper fiscal stimulus program of close to $800 billion. And part of that agenda was really also to direct that fiscal stimulus towards the green economy. You might remember that Obama financed some companies like Solyndra through the U.S. Department of Energy, through a guaranteed loan that was for about $500 million. And that company went bust.

Anderson COOPER: There are new questions tonight about a cornerstone of stimulus one. A $535 million loan to a company called Solyndra that makes solar energy panels.

Eric BOLLING: Why does the taxpayer have to be the one footing the bill to try to see if sun power, solar power works?

MAZZUCATO: People said, “My God! The government, what a basket case. A group of bureaucrats. They don’t know what they’re doing. They shouldn’t be picking winners, they should just do this kind of facilitating role, construct some roads, education, infrastructure, and then get out of the way.” Which, first of all, completely misses the point that actually the U.S. government in terms of energy has been the lead financer of areas like solar and wind — alongside other governments — but also nuclear. Fracking itself came out of U.S. government financing early on. But more concretely, at the same time that it was financing Solyndra, it also financed Tesla for a very similar amount of money. So the Tesla S car got a $465 million guaranteed loan. And when I say guaranteed, I’m talking about guaranteed by the U.S. taxpayer. So when Solyndra went bust, the taxpayers were pretty angry that they had to pick up the bill.

But why did the taxpayers not know that they had also financed Tesla? Would it not have changed the narrative and the perception of what these bureaucrats in Washington were doing? They actually had a portfolio, like any venture capitalist, which takes on risk — speak to any venture capitalists, they will tell you that for every success there’s many failures. However, if you really want to be a venture capitalist you have to construct your portfolio in such a way that you also get some of the upside from the wins, precisely to cover that downside. And the U.S. government didn’t do that. So not only had they failed on the marketing side, they hadn’t actually communicated to U.S. citizens of all these successful U.S. investments which include everything in your iPhone or smartphone from the Internet, GPS, touchscreen display, Siri: all government-financed. But in this particular case, people didn’t know that Elon Musk himself had received financing for Tesla. And Elon Musk, by the way, has received a total of $5 billion — that’s billion, that’s nine zeros.

That $5 billion has been spread across Musk’s three companies: Tesla, SpaceX and SolarCity. Mazzucato says that taxpayers should be getting a much better return for investments like these.

MAZZUCATO: What the U.S. government actually did with Tesla was the opposite of what they should do. They said, thinking they were quite wise, “If you fail to pay back the loan, we get three million shares in your company.” And you have to ask yourself why all these Goldman Sachs guys who were in Obama’s government didn’t actually come through when they were needed, because they should have said the opposite: “If you do pay back the loan, we get three million shares.” And the price per share, when the loan was taken out in 2009, was $9 a share. When it was paid back in 2013, it was $90 a share. That difference multiplied by three million would have more than paid back the Solyndra loss and the next round. Then the question becomes: how do you share not only the risks but also the rewards? So we don’t get what we get with the banks, which is that when things go bad the state has to bail them out, and when things go well, the banks take the profits.

DUBNER: So, let me just ask you on this, two specific areas that you talk about: One is information and communication technology, or what we all think of as roughly the digital revolution. And another is pharmaceuticals. You argue that in both cases, there’s been a massive government investment in the U.S. and a relatively terrible return on the investment to the government, at least. Is that still a current argument? Is it still the case that agencies like DARPA and NASA, or parallel versions, are still so strongly involved in the innovation? Or was that a golden era of government investment and research that now needs, in your view, to be rebooted?

MAZZUCATO: The first part of the answer is: business has changed. It’s become increasingly financialized. This is a huge problem. The two sectors where this is the biggest problem is precisely pharmaceuticals, where companies like Pfizer and Amgen are spending over 100 percent of their net income on areas like share buybacks and dividend payouts. And of course energy, with the big possible green-tech revolution. Now in terms of the government investments — on the one hand they continue to be absolutely fundamental. So, in the emerging green economy, it was actually ARPA-E which came out with one of the biggest innovations in battery storage. Again, fracking, which has changed the international landscape around energy, was also financed by government.

DUBNER: To what degree was fracking, for instance, funded by the government?

MAZZUCATO: To what degree? Well, you should remember that the main thing is when. So, when it was still extremely uncertain, extremely risky, where there was no private finance, government was making those early investments. In terms of the actual amount and percentage of the total, that’s not really the issue, it’s who took on the early risk. That’s why we should stop using words like “lender of last resort” for government financing and use more words like “investor of first resort” because that’s, in fact, the role it plays.

Now, in terms of all these organizations like NSF and DARPA and the National Institutes of Health, they’re still spending a lot of money. Especially in the high-risk, high-uncertainty phases, high-capital-investment phases. However, they’ve been under attack. But the real issue shouldn’t just be the budget. It should be the ability of these organizations to continue to really lead the way, to have missions which aren’t asked in the Budget Appropriations Committee, what is that economic value going to be? Because had they thought about net present value and cost benefit and economic value as economists think of it in terms of jobs today and patents etc., then there’s no way we would have done the man-on-moon mission. That actually required a certain level of ambition, of imagination, a willingness to dream.

So any country that’s interested in tackling areas around climate change, or rethinking twenty-first-century healthcare systems, tackling the aging demographic crisis, these are all broad challenges which unless we really frame them as missions then we’re not going to be able to tackle any of these grand challenges. That’s what we should be learning instead of, “Oh, we need more venture capital.” 

DUBNER: So, you’re making an argument that the U.S. government is not getting enough credit for its investment in the past through agencies like DARPA and NASA and in the pharma area and so on. You also argue separately that they’re not getting enough return on the investment — which, that sounds believable. But you also argue that the high return and relatively low tax environment for entrepreneurs and investors is not a big driver. And I want to know what the evidence is for that.

I look at the U.S. as, you know — one question you ask is where are Europe’s Googles? What happens differently in the States than in Europe to produce these companies like Google, Facebook, etc.? There are certainly a lot of people in private equity, in venture capital, in the startup culture who say that because of the capital-gains tax environment, because of the carried-interest loophole, that that helps create the very large incentive to make these companies that turn out to be super rich. And I’m not even saying these handful of companies that turn out to be super rich are necessarily so good for society. I think that’s a bigger discussion for another day. But I just want to know what’s your evidence that that incentive is not really important and is perhaps a key factor in why this is happening in the U.S. and not in Europe?

MAZZUCATO: First of all, what happened in the U.S. is that there was a system of innovation which lacks in many European countries, where you had patient finance but also active mission-oriented agencies which really thought about big problems. So, going to the moon, which required many different sectors to innovate, including clothing, not just aeronautics. And then instruments including prizes and procurement policy which allowed startups to scale up. Startups in and of themselves, who cares? Just because you have a startup? What’s interesting is if you have a system, an entrepreneurial ecosystem — I don’t believe in entrepreneurs, I believe in entrepreneurial ecosystems, which actually allow startups to scale up.

Interestingly, Europe has learned the wrong lessons from Silicon Valley. And this is partly because of how the U.S. talks. The U.S. talks Jefferson but it acts Hamilton. Jefferson talked more about getting the state out of the way and Hamilton, before getting into his duel with Burr — who is buried, by the way, in the town I grew up in: Princeton, N.J. — was very much about an active, industrial strategy. So, Europe, interestingly, I think has learned all the wrong lessons. China, on the other hand — and this is really curious — China has learned the right lessons. China is actually doing for the green economy what the U.S. government did for the I.T. revolution. At the same time that Donald Trump is dismantling what I call the entrepreneurial state.

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Mariana Mazzucato is a professor in the economics of innovation at University College London, and she’s the author of the books The Entrepreneurial State and The Value of Everything. She argues the U.S. government in particular doesn’t get nearly as much credit for or return on its investments in life-changing technology and life-saving medicines.

To be sure, Mazzucato has plenty of critics. They say she doesn’t fully appreciate the risks that private firms take on, and the groundbreaking work they do; they also say she overlooks the waste and corruption and incompetence that plague a lot of government programs.

In any case: she’s arguing for a new and improved relationship between government and industry, starting with a better return on the government’s investment in public-private partnerships. Like the space-travel partnership between NASA and SpaceX.

DUBNER: Here’s something you once said in an interview: “So when Justin Bieber goes into space and unfortunately comes back, part of the price he’s paid to SpaceX, which is the private firm, goes to NASA’s budget.” So, I want to know about the economic setup, the collaboration between SpaceX and NASA, but I first wanted to know are you hoping that Justin Bieber dies in space rather than return, what do you mean, he “unfortunately comes back”?

MAZZUCATO: No, no, no that was a joke. And I have four teenagers who I’m sure would be upset if he didn’t come back. That was a joke. No, the real point was we should not make the same mistakes in space that we’ve made on Earth. And on Earth, we have not gotten these contracts right. So my point is: on the International Space Station, there is Novartis today working for free and patenting. That doesn’t make much sense to me. Either you charge Novartis to have publicly funded astronauts to be doing experiments for them or you don’t allow them to patent.

And patents themselves are deals between public and private and they are bad deals. They used to be downstream, which is a good thing they can incentivize innovation. They have increasingly gone upstream. So, today we are patenting the tools for research. So the irony is that in a world of open innovation and big data, we’re actually going back to the Middle Ages in terms of secrecy, because we’re patenting the really basic science.

But my point in terms of space is SpaceX has massively benefited from NASA investments, also from NASA personnel, by the way. But just the issue, that example of space tourism. Where does the profit go, was my provocative question, given that it’s all on the back of publicly funded infrastructure.

DUBNER: Well, where would you like to see it go? If you could be the czar of designing public-private partnerships for the next 50 years — let’s say you’re going to throw out all the garbage deals that you’ve been describing and set it up so that when governments invest, they get a proper return and proper credit even, let’s say. What would be your choice of either equity payout, financial instrumentation, tax policy, that would give the government a fair return and give us, the citizens, people who actually pay the taxes, a fair return, rather than the return continuing to flow into private and shareholder hands?

MAZZUCATO: There’s different ways. There’s no one way. It would be foolish to think that this is always the same whether it’s across sectors or across different phases of the innovation cycle. So with pharmaceuticals, the obvious way to do this is through the prices. The prices set for the drugs, the medicines, that people have to buy in order to survive when they have these terrible diseases, whether it be diabetes or hepatitis C or cancer, should reflect this public contribution. Over 75 percent of new molecular entities with priority rating have actually been financed by National Institutes of Health. So what we actually have is a taxpayer paying twice, both for very, very high basic research spending, and then for these extremely high prices which are actually set by the pharmaceutical industry.

So the healthcare budget in the U.S., I often say, it’s not really a healthcare budget, it’s a subsidization of the pharmaceutical industry budget. Because these prices are just way too high, and they should actually be reflecting that public contribution. And, by the way, in theory, they should be able to do that, because there’s something called the Bayh-Dole Act in 1980s, which allowed publicly funded research to be patented because before that, the idea was that if it’s publicly funded you can’t patent. And once that changed in the Act itself, it says that the government should retain march-in rights — the ability to cap those prices of those drugs that were publicly financed. But what’s interesting is the government has never exercised its right to do that. And that comes back to the Plato’s storytellers. Because if the narrative is all against you as just an impediment, as just an intervenor, as just a regulator, and not an investor of first resort, you don’t have the confidence, you don’t have the security and the mandate to also affect the price.

DUBNER: And you’re scared of the public blowback.

MAZZUCATO: Exactly. So that’s one example, prices. Another one would be conditions on profits being reinvested in those areas where there have been very large government subsidies or handouts, they shouldn’t be conditionless. I mean, if companies want to go completely free market — fine, go free market, don’t get a penny from the state. But if you are going to get these massive pennies — or pounds or euros — from the state, then there should be conditions attached in order for public value to be achieved, because otherwise it’s just private value.

And I’ve been thinking about this especially around the big data and the kind of new questions around privacy with Facebook, etc. Instead of having a situation where all the data basically gets captured, which is citizens’ data, by companies which then, in some way, we have to pay into in terms of accessing these great new services — whether they’re free or not, we’re still indirectly paying. We should have the data in some sort of public repository because it’s citizens’ data. The technology itself was funded by the citizens. What would Uber be without GPS, publicly financed? What would Google be without the Internet, publicly financed? So, the tech was financed from the state, the citizens; it’s their data. Why not completely reverse the current relationship and have that data in a public repository which companies actually have to pay into to get access to it under certain strict conditions which could be set by an independent advisory council?

These companies call themselves tech companies, but they’re not really tech companies. They’re often other media or advertising companies that had used this publicly financed technology. Even these words “tech companies” and we say have to be “regulated” completely misses the point. We should be actively co-shaping and co-creating this space.

DUBNER: As compelling as your argument is from an economic and political perspective, do you feel that you’re losing the argument? Because from what I see, most big governments and industries are pushing pretty hard in the opposite direction of where you’d like to go. Yeah?

MAZZUCATO: Yeah, so I think it would be good if I ran the world — no. I actually think these ideas are gaining ground. I think it was much harder some years ago, just take the pharmaceutical companies. They can no longer pretend that they charge these high prices because they spend so much on R&D, because myself and others have shown that actually they don’t spend so much on R&D, they spend much more on marketing, much more on share buybacks than R&D. And the R&D they do do is much more downstream than that that the public sector does.

So, they have been forced to come up with other kinds of crazy ideas of why they can charge these very high prices, and one is called value-based pricing. Which actually makes even less sense. It’s basically this idea that because they can no longer pretend that their prices are due to their R&D expenditures, the idea is that the price is basically in the eyes of the beholder.

DUBNER: The value of a life, let’s say. Right? Life extension?

MAZZUCATO: Yeah, the value of basically not getting that drug. And if you have kids, as I do, you’ll pay — it would be infinite. The value of a drug if you don’t have access to it because you want to save your kid’s life.

DUBNER: It’s so striking to me. You make the argument that we — and including economists, really — misdefine what value is. And you’ve talked a lot about the ways in which what is said to be value or wealth creation is really not. I’m just curious what’s the best example of an industry or a realm where value creation is equitable and where the parties share the rewards justly? Can you point to that?

MAZZUCATO: I wouldn’t point to an industry. One could point to companies. There are obviously cooperatives around the world that are very much run in that way. It’s quite interesting to look at the difference between Walmart and Costco. These are two competitors in the same industry where one has always tried to achieve a high profit margin basically through different strategies. But one of the key ones is through exploiting the labor force. If you get a job at Walmart, up until recently at least, you would immediately qualify for welfare benefits because your pay would be low enough to do so, whereas Costco has tried to achieve the same profit margins through innovation, through investment in new ways to deliver high quality goods and services.

DUBNER: Okay, we’ll end with this one obnoxious question. You’re calling for a greater appreciation of government spending and indeed a greater investment in government spending and greater return, but you are also an adviser to many governments and government agencies including the Scottish Government, the European Commission. So when you accuse private industry of being full of rent-seekers, persuade me that you and your government allies aren’t the rent-seekers.

MAZZUCATO: So, first of all, I don’t want to sound defensive because I have no reason to be, but in none of my roles do I receive a penny. Let me just rephrase my point because otherwise it’s very misunderstood. My point is not that government needs to invest more. My point is government needs to better understand what its role is. It is not there just to fix things on the sidelines and wait for things to go wrong, to put a bandage on something. It is to be an active co-creator and co-shaper.

So, my role has been to make sure that the private and the public sector, when they talk to each other, that it’s an exciting conversation. That’s what my role is, and my role is to be a real thorn in the side to the political process, which unfortunately doesn’t get captured quite often, to be a thorn in the side to business, to not make it so easy for them just to say things like, “Oh yes, short-termism is due to market pressures.” And I say, “What do you mean? The market’s an outcome. It’s an outcome also of how you behave. So what is the market?”

And I get attacked all the time because I’m a thorn in the side definitely of both public and private. And when I am an advisor, I’m an advisor in the capacity of trying to change the comfortable-ness that you might have around the table, the smugness in both the business community and the policy community. And I think there’s real difficulties ahead but only by tackling them together can we succeed, and that does mean changing the vocabulary, the narrative, the story, to not one of de-risking but sharing risks and sharing rewards. 

Thank you to the economist Mariana Mazzucato. Her most recent book is called The Value of Everything.

Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Zack Lapinski, with help from Alison Craiglow. Our staff also includes Greg Rosalsky, Greg Rippin, Alvin Melathe, Harry Huggins, and Andy Meisenheimer. The music you hear throughout the episode was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts.