Mariana Mazzucato is a professor in the Economics of Innovation and Public Value at University College London (UCL), and Founder/Director of UCL's Institute for Innovation and Public Purpose. Her work is focused on the relationship between innovation and the direction of growth, with emphasis on building symbiotic partnerships that can create a form of growth that is more innovation-led, inclusive and sustainable.
I wasn’t expecting to be excited when I read the report, but I found myself highlighting things and writing in the margins. It really rings true for so many things even beyond auditing.
This is how the economist Mariana Mazzucato started her keynote speech at the report launch. Mariana is a professor of Economics of Innovation at the University of Sussex and her interests and expertise are in policies for smart growth and the role of the public sector in modern capitalism. We invited Professor Mazzucato to the launch event to reflect on our report and to contribute to our discussions with further questions and challenges for the profession. Here is a summary of her views:
We often think that most social problems are rooted in finance. We think that we have to rebalance the economy, and go away from finance towards a real economy. The truth is that the real economy is just as sick as finance! We need to rebalance the economy but not in an abstract way, which is in some way the idea for the“groundhog day’ term in the report. This is the very important idea, which is at the beginning and end of the report – ‘what kind of society do we want to become and what is the role of auditing in it’? Capitalism is a fundamentally market-based system and yet many economists do not have a clue about how markets work. Unfortunately, most economists are completely bound up with the notion that the best thing that we can do today to fix the system is to sort out the different types of market failures.
Markets are outcomes. They are outcomes of how organisations interact – business, government, the public sector and households – this interaction creates markets and market pressures. My challenge is that if you are just sitting and putting bandages here and there, you will not be able to set up a framework that will allow you to answer the big questions that the report sets out. I see the auditing community as having a role in shaping that interaction. The report asks the brave question: what kind of businesses do we actually want to have?
We often hear that we are governed by short-termism and market pressures. For example, in telecommunications, there is a huge variety of how business organisations react to market pressures. Companies like Cisco are currently spending money not on research and development but on share buybacks to boost stock options and executive pay. Ericsson on the other hand, has done exactly the opposite of that with focussed investment in innovation, research and long-term strategy. Regardless of whether we think share buybacks are good or bad, the point is that these short-term tactics are primarily designed to boost stock options and quarterly returns. The bigger challenge here is how we should enable better options to be made within the firm.
If we want to be able to encourage long-term investments over short-term speculative investments, we actually need to be able to value and audit those kinds of investments in a different way. It is not yet clear to me whether the way audit is done on the ground differs in those countries that have committed long-term finance to investment from audit in places where investment is short-term. Should there be a role for audit in creating the challenges for business – how to face these market pressures and how to be able to justify the level of long-term investments?
Much of the critique on the financial crisis focused on ‘rent seekers’ and ‘value extractors’. What we need to do to transform and reach a different kind of smart growth within a theory of value-creation. I especially liked how the report talks about value-creation. Unfortunately, this word has been completely high-jacked and the real question, which the report also makes, is where does value come from in the first place. This is not just about values but what is this ecosystem, who are the different types of actors that are necessary in order to create value and then how can we make sure that we nurture that process to limit the amount of value-extraction.
What I find today is that things that have led to the financial crisis are actually getting worse. You can make money every time there is turbulence. The fact that so much of the debate has been divorced from value-creation, brings the questions of what we know about wealth creation processes. Can we go back to Adam Smith’s book on wealth creation and use this story to even differentiate profits from rent? It’s about the narrative and the discourse but also to challenge our categories and models. We need to find a language that could be understood by wide stakeholders and engage and secures trust in society more widely. But this is what is missing today in terms of nurturing different types of assumptions to what means to create value.
I was surprised in a positive way how willing people from the auditing community are to actually pause and rethink what kind of capitalism and what kind of businesses we want.
This is a big question that not many politicians, business or people are willing to engage with.
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