“Innovation as Growth Policy: The Challenge for Europe” (with Mariana Mazzucato)

2015. (Mazzucato Mariana and Carlota Perez) "Innovation as Growth Policy: The Challenge for Europe" in Fagerberg, J., S. Laestadius and B. Martin (eds.) The Triple Challenge for  Europe: Economic Development, Climate Change and Governance. Oxford: Oxford University Press, Ch. 9, pp. 227-262

SPRU Working Paper series, No. 13, 2014

Link: 2014-13_SWPS_Mazzucato-Perez.pdf (1.2mb)


The advanced world is facing a crucial moment of transition. We argue that a successful outcome requires bringing innovation to the centre of government thinking and action and that, in order to do this, we must apply our knowledge of how innovation occurs and how to repair what has gone wrong. We look first at the role that innovation has always played as the driver of economic growth, and at its relationship with finance. Arguing that the challenge today is not to ‘fix’ finance while leaving the economy sick, but rather to change the way that the real economy works, we then identify the solution: a policy direction that is smart, inclusive and takes advantage of ‘green’ as the next big technological and market opportunity. We then explain why the role of the State is key to ensuring that such opportunities are taken, and the importance of direct public investment for promoting the creation of public goods and courageous risk-taking in research and innovation in both the public and private sectors. Paying particular attention to Europe, we then examine the potential of such innovation-oriented policies to promote inclusive growth. We consider concrete steps that could be taken, both at the national and EU levels, to create the ‘smart governance’ necessary to implement such a direction. The chapter closes with suggestions for policies that aim to construct collective competitiveness across the European Union.

Table of Contents:

9.1. Introduction
9.2. History Matters
9.2.1 Great Surges, Technological Paradigms and Bubbles: Understanding the Context
9.3. Innovation and Finance
9.3.1 Uncertain Cumulative Innovation Requires Patient, Long-Term, Committed Capital
9.3.2 Supply of Finance vs. Demand for Finance
9.4. The Green Direction
9.4.1 Innovation Potential, Direction and Deployment
9.4.2 What is Green Growth?
9.4.3 A Political Choice for Growth, Convergence and Synergies
9.5. State as Market-Creating ‘Investors’, Not Market-Fixing ‘Spenders’
9.5.1 Investment for Innovation and Competitiveness in the Eurozone
9.6. Inclusive Growth
9.6.1 Unemployment and the Need for Respecialization
9.7. Smart Innovation Requires Smart Government
9.8. Conclusion: Towards a New European Competitiveness  


The advanced world is facing a crucial moment of transition. The 2008 bubble collapse left behind it the polarisation of incomes, high unemployment, low growth and a fearful financial sector that is steering away from funding the real economy and stays in a casino world, harming the prospects of revival. Indeed, the current emphasis on ‘fixing finance’, while leaving the real economy sick, risks setting the stage for the next bubble.

In this chapter, we argue that the theories underlying current policies are misguided and that the aim of returning to ‘business as usual’ is therefore mired in a fundamental misunderstanding. Current problems are structural and date back to decades before the crisis began. In particular, we take issue with the prevailing beliefs about private and public investment and about the role of the State in such investment. We also provide a different narrative of the State, in which what is needed is not just counter7cyclical spending, but an investment7driven, ‘mission7oriented’ (Foray et al., 2012) and courageous State that can not only guide Europe out of the crisis but also steer and direct growth when it returns (Mazzucato, 2013a). As increasing numbers of policy makers are recognising, dogged subscription to orthodoxy is a dead end: markets alone cannot return us to prosperity. Our work has shown that investment is driven by innovation; specifically by the perception of where new technological opportunities lie (Pavitt, 1984; Perez, 2002). Private investment only kicks in when those opportunities are clear; public investment must be directed towards creating those opportunities across all policy spaces and affecting the entire economy. Furthermore, the State’s role as an investor involves taking risks: win some, lose some. Such risks must be rewarded so that taxpayers not only socialise the risks, but also share in the rewards (Lazonick and Mazzucato, 2013).

We hold that success in the current transition requires bringing innovation to the centre of government thinking and action. Innovation policy must become growth policy and vice versa. In doing so, innovation7growth policy will affect all other policies: financial market reform, labour market policy and especially taxation. A clear understanding of the innovation potential inherent in the current historical moment will inform the direction that such policies take. Naturally, different pathways can be chosen while moving in this direction, but recognising the role of policy in choosing it enables a better understanding of the ‘boundaries’ within which civil society and other forces can operate (Stirling, 2009).

This chapter focuses on applying our knowledge of the ways in which innovation occurs (clustered and wave-like; collective; uncertain; and cumulative²  ) in order to understand what must be done to generate long run growth which is both ‘smart’ and ‘inclusive’. It fundamentally seeks to both understand what has gone wrong and how to repair those failings. We will first look at the role that innovation has played as the driver of economic growth since the start of the Industrial Revolution, using the long-term lens of technological regimes and paradigms (Dosi, 1988; Perez, 2002, 2010) to characterise the current transition period in its historical context. These insights enable us to understand that the challenge today is not to 'fix' finance while leaving the economy sick, but rather to change the way that the real economy works. This change must include de-financialising the economy and redirecting investments towards productive mission-oriented areas.

We argue that the way to get the real economy to operate in the current context is to employ a policy direction that is smart, inclusive and green. 'Green growth' can become the next big technological and market opportunity, stimulating and leading private and public investment. This brings us to a discussion on the that the government plays in ensuring that such opportunities exist, and particularly the importance of being able to invest - welcoming the underlying risk and uncertainty - along the entire innovation chain, not only in areas characterised by positive externalities (such as research and development (R&D)). We then offer some criteria for specific fiscal/tax policies in order to achieve such a reorientation (making it more profitable for productive investments and less profitable for speculative ones), and for creating the 'smart' governance necessary to implement such policies. Without smart government at the organisational level, smart (innovation-led) growth is impossible. We look at the effect that such policies have on steering missions and promoting more inclusive growth, where the State not only socialises risks but also rewards. We argue that such policies are themselves innovation policies and conclude by summarising eight key criteria that we believe can help growth policy be guided by long-run value creation. 


Published 2002

'...the book fills an important gap in the literature on business cycles and innovations. I most strongly commend it to all those attempting to understand the past and future evolution of technology and the economy.'

Christopher Freeman, Emeritus Professor, SPRU,
University of Sussex, UK

'...Carlota Perez shows us that historically technological revolutions arrive with remarkable regularity, and that economies react to them in predictable phases. Her argument provides much needed perspective not just on history, but on our own times. And especially on our own information revolution.'

W. Brian Arthur, Santa Fe Institute, New Mexico

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Technological Revolutions Financial bubbles Installation Period Frenzy Deployment Period Golden Ages Dual strategy Techno‑economic paradigms Neo‑Schumpeterian Respecialization Synergy Turning Point Future markets Knowledge society Green growth Maturity Full global development Globalization Sustainability Socio‑economic development Paradigm shifts Irruption Market hyper‑segmentation