Reflections on The Entrepreneurial State, by Mariana Mazzucato

The full title of the book is “The Entrepreneurial State: Debunking Public vs. Private Sector Myths“, and the author is Mariana Mazzucato, 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.

The key point made in the book is that entrepreneurship is not – and should not – the responsibility of the private sector. Indeed, it cannot be the responsibility of the private sector.

Early on in the book, she makes the strongest case there is to be made for her thesis, by arguing that the United States of America has known this, and practiced this, for years on end. The rest of the world, she says, would do well to emulate the USA:

If the rest of the world wants to emulate the US model they should do as the United States actually did, not as it says it did: more State not less.

LOCATION: 372 (Note that the location refers throughout to the Kindle version)

There are a lot of excellent reviews out there already. See this one in the New York Times, for example. It is a mostly favorable review. Or, if you want a slightly more critical one, see this one in The Guardian. Indeed, there are many others out there.

I want to focus on three key points in this essay: horizons, incentives and spillovers. Let’s tackle each in turn.

Horizons

Moonshots is a word that has become increasingly popular over the last two decades, and it refers to projects or even ideas that have a relatively low chance of succeeding. The payoff, if these ideas succeed, is so large that that it may compensate for the relatively low probability of this actually happening. That, of course, is exactly what expectations are all about.

But for a firm, particularly one that may not have the luxury of time and money on its side, placing bets on projects that may not work out – and indeed most of them will not – is a rather risky thing to do. Money is an obvious constraint, but a less obvious one is time.

Firms just do not have the luxury of waiting while a project turns out to be successful… eventually. These kind of moonshots, then, are perhaps best handled, for this specific reason, by the state.

In fact, the point is even more nuanced, because a firm is much more likely to (if at all) invest in a moonshot project based on a specifically desired outcome. The word project itself is an indication of this fact – this is not “blue sky research” that we are talking about.

But blue sky research is important!

A core difference between the US and Europe is the degree to which public R&D spending is for ‘general advancement’ rather than mission-oriented. Market failure theories of R&D are more useful to understand general ‘advancement of knowledge’–type R&D than that which is ‘mission oriented’ (Mazzucato 2015). Mission-oriented R&D investment targets a government agency programme or goal that may be found, for example, in defence, space, agriculture, health, energy or industrial-technology programmes (Mazzucato and Penna 2015).

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Governments need to focus, for the sake of their own economies, their domestic firms and their long term growth, on focusing on moonshot projects, precisely because firms are reluctant to do so. The state needs, in other words, to take risks that private firms will not.

Saying this is easy, but how to go about doing this?

That is, if governments need to tackle long-term low-probability-of-success and uncertain-outcome initiatives that are important, but unlikely to be taken up by the private sector, the question that then arises is: how?

Mazzucato offers two points in this regard that I found interesting:

Block (2008, 188) identifies the four key characteristics of the DARPA model:

1. A series of relatively small offices, often staffed with leading scientists and engineers, are given considerable budget autonomy to support promising ideas. These offices are proactive rather than reactive and work to set an agenda for researchers in the field. The goal is to create a scientific community with a presence in universities, the public sector and corporations that focuses on specific technological challenges that have to be overcome.

2. Funding is provided to a mix of university-based researchers, start-up firms, established firms and industry consortia.

3. There is no dividing line between ‘basic research’ and ‘applied research’, since the two are deeply intertwined. Moreover, the DARPA personnel are encouraged to cut off funding to groups that are not making progress and reallocate resources to other groups that have more promise.

4. Since the goal is to produce usable technological advances, the agency’s mandate extends to helping firms get products to the stage of commercial viability. The agency can provide firms with assistance that goes well beyond research funding. Part of the agency’s task is to use its oversight role to link ideas, resources and people in constructive ways across the different research and development sites.

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In effect, she is suggesting that government alone cannot do this, it needs to be a “scientific community” that is decentralized, has autonomy, sets the agenda, and applies Darwinian principles (see point 3). Hmm, sounds familiar. Different context, but a similar lesson!

And elsewhere in the book, her example of how Japan did this in the 1970’s is instructive:

The general point can be illustrated by contrasting the experience of Japan in the 1970s and 1980s with that of the Soviet Union (Freeman 1995). The rise of Japan is explained as new knowledge flowing through a more horizontal economic structure consisting of the Ministry of International Trade and Industry (MITI), academia and business R&D. In the 1970s Japan was spending 2.5 percent of its GDP on R&D while the Soviet Union was spending more than 4 per cent. Yet Japan eventually grew much faster than the Soviet Union because R&D funding was spread across a wider variety of economic sectors, not just those focused on the military and space as was the case in the Soviet Union. In Japan, there was a strong integration between R&D, production and technology import activities at the enterprise level, whereas in the Soviet Union there was separation.

LOCATION: 1142

And…

Equally important were the lessons learned by Japanese people that went abroad to study Western technologies for their companies, and relationships between those companies and US firms. These companies benefited from the lessons of the US (hidden) ‘Developmental State’, and then transferred that knowledge to Japanese companies which developed internal routines that could produce Western technologies and eventually surpass them.

LOCATION: 1156

So, bottom-line: the state has to get in this business, but it can’t “go” it alone. There needs to be a community of academicians, researchers, firms, scholars – and as the example of Japan shows, this community needs fostering, and horizontal collaboration.

Or, if you prefer to put it simply, this is going to be hard.

Incentives

Academia suffers from the same problem that government bureaucracy does in India: the incentives are all wrong. Both are about risk minimization.

A professor in a college has no incentive to try and do something new, something risky, something innovative. Why, if you think about it, should she? Your best case scenario is that it works, but you get no upside for it: remember, wages aren’t a function of what you do, they are a function of how long you have been in the system. Your worst case scenario is that what you tried to do blows up in your face. So why take the risk?

And it is the same, of course, with a government bureaucrat. And that makes the conclusion of the previous section even more problematic, for where, exactly, are you going to unearth government bureaucrats willing and able to make this happen?

I’m all for the state being more entrepreneurial. I buy into the idea. But I worry, especially in a country like India, about the feasibility of it, for hey, incentives matter!

In a blogpost I had written earlier this year about the budget, I had touched upon this point:

Here is Ninan’s solution:

“Is there a solution? Yes, railway engineers of old like the metro builder E Sreedharan, builders of government companies like D V Kapur and V Krishnamurthy, and agricultural scientists like M S Swaminathan have shown how they made a difference when given a free hand. Vineet Nayyar as head of Gas Authority of India was able to build a massive gas pipeline within cost and deadline in the 1980s. The officers who are in charge of Swachh Bharat and Ayushman Bharat, and the one who has cleaned up Indore, are others who, while they may not match China’s speed, can deliver. Perhaps all we have to do is to spot more like them and give them a free hand.”

But as any experienced HR professional will tell you, spotting them is very difficult, even in the corporate world. And as any corporate CEO will tell you, giving these talented folks a free hand is even more difficult. And as any student of government bureaucracy will tell you, achieving the intersection set of these two things in a governmental setup is all but impossible.

And so what we need to study and copy from China is not so much anything else, but lessons in achieving, and sustaining, excellence in government bureaucracy. Or, if you prefer, how to improve state capacity.

In short, quality of government, not size of government, is what matters for freedom and prosperity.

https://econforeverybody.com/2020/02/17/how-to-think-about-the-budget/

That point resonates even more in this context: fostering an ecosystem led by the government is dead in the water without either the proper incentives, or at least bureaucrats who are able to work through poorly designed incentives. It is a hard problem, state led entrepreneurship, and made harder by the problem of incentives.

Spillovers

Or externalities, if you prefer. It doesn’t matter how hard the problem is, the payoffs are worth it!

Ruttan (2006) argues that large-scale and long-term government investment has been the engine behind almost every GPT (general purpose technology) in the last century. He analysed the development of six different technology complexes (the US ‘mass production’ system, aviation technologies, space technologies, information technology, Internet technologies and nuclear power) and concluded that government investments have been important in bringing these new technologies into being.

LOCATION: 1570

(Note: emphasis added)

If those GPT’s are the outcome of general, as opposed to specific, R&D, sign me up. They are magnificent positive externalities. Indeed, elsewhere in the book, Mazzucato points to how almost everything produced by Apple today simply could not have been produced without an entrepreneurial state:

LOCATION: 2326

The final point that I’ll make relates to how Mazzucato proposes “capturing” some of these externalities:

Where an applied technological breakthrough is directly financed by the government , the government should in return be able to extract a royalty from its application . Returns from the royalties , earned across sectors and technologies , should be paid into a national ‘ innovation fund ’ which the government can use to fund future innovations . Granting a return to the State should not prohibit the dissemination of new technology throughout the economy , or disincentivize innovators from taking on their share of the risk . Instead it makes the policy of spending taxpayers ’ money to catalyse radical innovations more sustainable , by enabling part of the financial gains from so doing to be recycled directly back into the programme over time .

Location 3735

Mazzucato does present alternative schemes to the one shown above, but this is the one that strikes me as being the one with the most promise, if administered well, with appropriate risk-mitigation built in. But again, saying that is much easier than actually getting it done.

But all the being said, one simple fact is inescapable: India needs to be thinking about how to get something like this off the ground, and ASAP.

For that reason alone, more of us should be reading this book.

Ec101: Links for 2nd January, 2020

Five links to help us better understand incentives

  1. Wikipedia gives us the inside dope on economic incentives.
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  2. Quora remains a reasonably good place to get answers…
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  3. The Econlib page on incentives is full of interesting snippets…
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  4. But beware! Incentives aren’t easy to design!
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    “Studies show that offering incentives for losing weight, quitting smoking, using seat belts, or (in the case of children) acting generously is not only less effective than other strategies but often proves worse than doing nothing at all. Incentives, a version of what psychologists call extrinsic motivators, do not alter the attitudes that underlie our behaviors. They do not create an enduring commitment to any value or action. Rather, incentives merely—and temporarily—change what we do.”
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  5. A Forbes article that tells you how might mitigate some of the problems with incentive design.

EC101: Links for 7th November, 2019

  1. Idea Vodafone debt rating downgraded. Uh-oh.
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  2. “When Arun Sarin, Vodafone Group Plc’s India-born former CEO, was charting the British telecommunications firm’s expansion into emerging markets in the mid-2000s, his home country with more than a billion potential phone users seemed a compelling choice.Sarin wasn’t alone. Norway’s Telenor ASA, Russia’s Mobile TeleSystems PJSC and Malaysia’s Maxis Bhd were also among a slew of companies that flocked to this fast-growing market. The carriers banded with local partners, bid for airwaves and licenses, spending billions of dollars to prepare their networks.

    But what once appeared to be their most-promising Asian wireless market has turned sour. Vodafone’s Indian venture with billionaire Kumar Mangalam Birla, saddled with $14 billion of debt, is said to be seeking to revamp its borrowings amid mounting losses and a tariff war. Tycoon Sunil Mittal’s Bharti Airtel Ltd. is rated junk by Moody’s Investors Service. In a market that had a dozen carriers two years ago, just three are left standing today — two of them, barely.”
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    Here’s more context from Bloomberg.
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  3. “Notoriously high levels of pendency of cases discourage those with limited influence and resources from approaching the courts for justice. Police stations, especially those in rural areas, make registration of complaints and first information reports cumbersome to help them manage their strike rates. Some websites expect visitors to read privacy policies and indicate consent by checking specific boxes before letting them browse pages. The notice is sometimes in an unfamiliar language. Immigration applications involve onerous paperwork that is lengthy and confusing.”
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    Puja Mehra, author of the excellent “The Lost Decade” explains what sludge is, and why it matters in India
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  4. All incentives matter, but some incentives matter more than others. That’s the basic takeaway, but please, I beg you – take the time to read this article in full. Slate Star Codex is just utterly magnificent.
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  5. A fascinating article on the origins of the Amazon battery.

ROW: Links for 24th July, 2019

How to learn more about a country? Read a bit about it! In the process of writing up these ROW links, I plan to link to five articles (mostly random) about a country. The only thing that is common to them is that they’re all about one particular country.

And today’s country is Australia: I have not (yet) been to the country, but loved reading about it in Bill Bryson’s book, and loved hating the Australian cricket team (still do!). But on a more serious note, it is a country that I need to read more about.

In no particular order, or theme, five articles I read recently about Australia:

  1. “It’s on the matter of culture that Alan is most unconsciously revealing — unconsciously because Alan’s generation did not think of it as “culture” so much as of “character”. His upbringing was simple, in farming country near Gosford since swamped by housing. “I didn’t known what a steak was until I got to Sydney,” he recalls. “My mother knew how to cook rabbit 10 different ways.””
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    How to not begin with an article on cricket? Alan Davidson, the original Wasim Akram – and a profile on him by Gideon Haigh. Please read, if you are a fan of cricket, Haigh’s book on Warne, called… “On Warne“.
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  2. “Australia loves larrikins, as long as they are white, and polite, and display no flamboyance and voice no controversial opinions. Australia laments there is no colour in public life anymore, complains that sports-people show no personality in their interviews, and then punishes them the moment they do. Australia is willing to embrace Nick Kyrgios, as long as he becomes someone else.”
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    From Australian sportsmen then, to Australian sportsmen now. Nick Kyrgios.
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  3. “Australia will be a great nation, and a power for good in the world, when her head of state is a part-Aboriginal and her prime minister a poor man. Or vice versa.”
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    Words written by Les Murray, who passed away recently. This article is via The Browser, and is worth reading for glimpses of Murray’s poetry, but also for an insight into Murray’s opinion about Australia.
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  4. “It is commonly reported that the colonisation of Australia was driven by the need to address overcrowding in the British prison system, and the fact of the British losing the Thirteen Colonies of America in the American Revolution; however, it was simply not economically viable to transport convicts halfway around the world for this reason alone.[4] Many convicts were either skilled tradesmen or farmers who had been convicted for trivial crimes and were sentenced to seven years’ transportation, the time required to set up the infrastructure for the new colony. Convicts were often given pardons prior to or on completion of their sentences and were allocated parcels of land to farm.”
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    Almost everybody who has attended a class I’ve taught on Principles of Economics knows the story – well, the story stands on somewhat weakened foundations.
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  5. Finally, Professor Cowen picks his favorite things Australian. I am gloriously unaware of all of them.

EC101: Links for 18th July, 2019

Some news: the Gokhale Institute of Politics and Economics (where I work) recently started an undergraduate program in economics. I can’t tell you how excited I am at the opportunity to teach young people economics. Hopefully – although I cannot commit to this yet – I will be able to keep you updated with what we’re trying that’s different, and what I learn through the process of teaching in this program.

In honor of this first batch of students, though, here are five links from two people who have inspired me, and countless others, to both learn and teach economics. Marginal Revolution: thank you.

  1. What should I read to learn economics?
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  2. What’s the shortest description of economics as a field of study?
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  3. How soon is too soon to start teaching economics?
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  4. Can skating teach you about economics? Well, uh, it’s complicated
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  5. The most important lesson in economics I have ever learnt, and can ever teach.

 

As I said, I hope to update this blog regularly with lessons I have learnt, of many sorts. And fingers crossed, I will be able to do so. Here is the syllabus, in case you are interested.  In the meantime, if you have suggestions, comments, feedback – please do let me know.

Thanks.

EC101: Links for 27th June, 2019

  1. “Total Expense Ratio aka TER means cost incurred by a fund house to run a fund. It includes management fee, legal fees, registrar fee, custodian fee, distributor fee etc. The major part of the TER consists of management fee followed by distributor fee. The TER is calculated daily and will be deducted by AMCs on the same day, which means your NAV includes the impact of fees on your fund.”
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    A good article to help you understand how mutual funds make money, what the new SEBI regulations mean for retail investors, and how dependent the mutual funds are (as of now) on the distributor.
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  2. “…Say’s Law provides a theory whereby disequilibrium in one market, causing the amount actually supplied to fall short of what had been planned to be supplied, reduces demand in other markets, initiating a cumulative process of shrinking demand and supply. This cumulative process of contracting supply is analogous to the Keynesian multiplier whereby a reduction in demand initiates a cumulative process of declining demand. Finally, it is shown that in a temporary-equilibrium context, Walras’s Law (and a fortiori Say’ Law) may be violated.”
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    Econ nerds only – and perhaps the even stranger beasts called macro-econ nerds only. David Glasner gives us a view of Say’s Law that may actually be (gasp) Keynesian in nature.
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  3. “Why incentives? Economics is based on the premise that incentives matter. Incentives can help by increasing or decreasing the motivation to take up a certain activity, by changing the cost or benefit of the activity. If someone were to pay John enough for each time he hit his steps goal, he would likely begin walking, perhaps even enthusiastically. After all, health consequences are in the distant future, but cold, hard cash can be given in the present. ”
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    That is from this link – you’ll actually have to download and read the PDF. This excerpt is useful to me because it essentially says that behavioral economics is, well, economics.
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  4. “This view goes something like this – there are no priors (in fact, you discredit experience as being biased – after all you guys have been doing development for decades and we still have poverty and misery in abundance) >> and therefore conventions, latent wisdom, and experience counts for little >> therefore there are no theories >> so we need evidence on everything >> how better to create evidence than look for data >> so let’s do experiments (RCTs) or mine administrative data and understand reality and design evidence-based policies.”
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    Gulzar Natarajan is less than pleased with Raj Chetty’s new course at Harvard (the first item from 23rd May, 2019’s posting), and I am very inclined to agree with his views. Empiricism is slightly overrated today.
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  5. “The Baumol effect predicts that more spending will be accompanied by no increase in quality.
    The Baumol effect predicts that the increase in the relative price of the low productivity sector will be fastest when the economy is booming. i.e. the cost “disease” will be at its worst when the economy is most healthy!
    The Baumol effect cleanly resolves the mystery of higher prices accompanied by higher quantity demanded.”
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    Alex Tabarrok over on Marginal Revolution is on a spree with the Baumol Effect, and having followed his series, I’d say with good reason. It upends several things in microeconomics that we might have taken for granted.

Links for 29th April, 2019

  1. “It may seem silly to lament over music selections in an exercise class, but it’s an issue that fitness companies may increasingly face as they transform from traditional health companies into media publishers. Let’s face it: working out can be boring, and people are willing to pay top dollar to have someone yell at us while sweating to the latest Migos track. Combine that with the flexibility to exercise in your own home on your own time and it’s a revenue strategy that has helped brands like Equinox, Pure Barre, SoulCycle, and Physique 57 tap into a demographic that previously found the studios inaccessible. Even companies like ClassPass and Fitbit have also expanded beyond their initial product of a subscription service and fitness trackers, offering their own guided fitness sessions for $8 to $15 a month.”
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    I don’t know if you have heard of any of these services, but the legal angle of copyrights is worth reading about.
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  2. “Respect among Russians for Josef Stalin has surged to the highest level of President Vladimir Putin’s era, with 70 percent saying his rule had been good for the country, according to a poll tracking attitudes toward the Soviet dictator.”
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    With an excerpt like that, why would you not want to read more?
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  3. “Japan has certainly lost the late 1980s bubble-economy swagger that once terrified Western chief executive officers. Yet neither is the world’s third-biggest economy some sort of Mad Max economic dystopia. Japan remains a rich country, home to some of the best infrastructure and fastest bullet trains, leading auto and robotics industries, and one of the highest life expectancy rates. It’s a financial superpower—the largest creditor nation and provider of investment and savings, with net external assets of almost $3 trillion. Japan’s megabanks are the foremost lenders in Asia outside of China.At the moment, Japan looks like an island of stability among developed nations that are riven by polarized debates about unfettered capital flows, free trade, and open borders. Ordinary Japanese aren’t being torn asunder by American-scale income inequality and culture wars, grappling with a slow-motion train wreck like Brexit, or coping with French-style yellow vest worker protests on the streets of Tokyo.”
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    Is Japan growing? No. But so, this article asks, what? Also a good overview of all of what Japan has tried in the last thirty years or so, in terms of economics and society.
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  4. “Documents seen by the Financial Times and extensive interviews with more than a dozen senior figures in the <word removed by me> world show a co-ordinated global effort by the Russian state, through ambassadors and representatives of its banks and biggest companies, to win votes with promises of money and political pressure. 
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    Without cheating, can you guess what this article is about? Once you have made a guess, click through to find out what the article is about.
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  5. “Exxon’s arrangement in Texas reflects, in miniature, our national state of indecision about the best approach to climate change. Depending on whom you ask, climate change doesn’t exist, or is an engineering problem, or requires global mobilization, or could be solved by simply nudging the free market into action. Absent a coherent strategy, opportunists can step in and benefit in wily ways from the shifting landscape. Tax-supported renewables in Texas take coal plants offline, but they also support oil extraction. Technology advances, but not the system underneath. Faced with this volatile and chaotic situation, the system does what it does best: It searches out profits in the short term.”
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    Economics at play in terms of energy, policy, climate change, short term profits, incentives, horizons and so much more.