Redefining Public Power: Why State Capacity Matters More Than Mere Ownership in the Modern Economy

By Mariana Mazzucato and Anna Hope Emerson
Published: October 26, 2026
Section: Economics

Introduction: The Illusion of Fiscal Constraint

LONDON — As governments around the world grapple with deepening systemic crises, a familiar refrain dominates policymaking circles: there is simply no room to act. From surging inequality and punishing costs of living to the compounding threats of climate instability, political leaders frequently plead powerlessness. We are routinely told that fiscal space is tight, that public coffers are depleted, and that the state must tighten its belt to appease the invisible arbiters of global bond markets.

Yet, in many cases, this squeeze is entirely self-imposed. It stems from a fundamental and pervasive policy error—equating fiscal responsibility strictly with the aggressive cutting of budget deficits and sovereign debt, rather than with building an economy’s structural capacity to grow, withstand external shocks, and meet its long-term obligations to citizens.

For decades, conventional macroeconomic dogma has taught that public budgets should mirror household checkbooks. This analogy, comforting in its simplicity, is profoundly misleading. When governments respond to economic downturns or structural crises by reflexively slashing spending, they frequently achieve the exact opposite of their stated goals. Austerity in a weak economy depresses aggregate demand, strangles growth, and can ultimately leave the debt-to-GDP ratio higher, not lower. Moreover, when fiscal rules bite hardest, public investment—the very engine of future productivity and innovation—is almost invariably the first item cut.

As more governments begin to recognize the urgent need for greater public intervention and control over economic outcomes, they stand at a critical crossroads. However, if this renewed state activism is to succeed, policymakers must be exceptionally careful to define their concepts. Ownership alone is not a panacea. Simply nationalizing an industry or acquiring equity stakes does not guarantee public benefit. What ultimately matters is state capacity—the institutional competence, strategic vision, and operational muscle required to steer economic activity toward explicit objectives in service of the common good.

Main Facts: The Anatomy of Modern State Intervention

To understand the current shift in economic philosophy, one must examine the empirical realities driving governments back into the market. The neoliberal consensus that dominated the late 20th and early 21st centuries—characterized by wholesale privatization, deregulation, and a shrunken state reduced to a mere "market fixer"—has left advanced and developing economies uniquely vulnerable.

1. The Myth of the Neutrally Regulated Market

The core premise of the post-2008 economic landscape was that markets, left to their own devices, are inherently self-correcting and efficient. The state’s role was largely restricted to correcting "market failures" post-hoc through taxation and antitrust litigation. However, recent shocks—including pandemic-era supply chain collapses, energy price volatility driven by geopolitical conflict, and the accelerating costs of climate adaptation—have exposed the fragility of this model. Markets do not merely exist in nature; they are actively shaped, structured, and co-created by public institutions, legal frameworks, and state-backed investments.

2. The Shift from Ownership to Direction

A growing number of political leaders are rediscovering industrial policy, sovereign wealth funds, and public equity stakes. From green transition subsidies in the European Union to strategic manufacturing investments under the CHIPS and Science Act in the United States, governments are once again spending trillions of dollars to direct economic trajectories.

However, Mazzucato and Emerson argue that debates often get bogged down in false binaries: state control versus private enterprise. History shows that public ownership without strategic direction can lead to bureaucratic stagnation, just as unconditioned private enterprise can lead to extraction over innovation. The defining question of 2026 is not who owns the assets, but how purposefully the state can direct economic actors—both public and private—to solve collective problems.

Chronology: The Evolution of Public Economic Thought

To trace how we arrived at the current economic orthodoxy—and the ongoing rebellion against it—we must look at the historical trajectory of state involvement over the past century.

• The Post-War Era (1945–1970s): The Golden Age of State-Led Growth
  Following the devastation of the Second World War and the trauma of the Great Depression, Western capitalist economies embraced Keynesian macroeconomic management. Governments built robust welfare states, established nationalized industries (such as energy, rail, and telecommunications), and acted as direct investors in monumental technological achievements, including the internet and the Apollo space program.
• The Neoliberal Turn (1980s–2007): Rolling Back the State
  Faced with stagflation in the 1970s, political leaders like Margaret Reagan and Ronald Thatcher spearheaded a radical paradigm shift. The prevailing economic theory argued that the state was inherently inefficient, prone to rent-seeking, and crowding out private capital. Decades of large-scale privatizations followed. State-owned enterprises were sold off, public services were outsourced, and financial markets were aggressively deregulated.
• The Global Financial Crisis and Pandemic Shocks (2008–2022): The Return of the Rescuer
  The 2008 financial crash shattered the illusion of self-regulating markets, requiring massive public bailouts to save the global banking system. This dynamic repeated itself during the COVID-19 pandemic, where governments underwrote entire labor markets via furlough schemes and poured unprecedented sums into vaccine research and development. In both instances, the state was quietly re-summoned as the ultimate insurer of last resort, yet without reclaiming structural control or long-term upside.
• The Contemporary Era (2023–2026): The Crisis of Fiscal Orthodoxy
  By 2026, the cumulative pressures of climate change, inflationary shocks, and stagnant real wages have made the limitations of passive governance impossible to ignore. Governments are desperately trying to reassert control. Yet, trapped by outdated fiscal rules and a vocabulary limited to "cuts versus spends," policymakers are struggling to build the institutional muscle needed to make state intervention effective.

Supporting Data: The Cost of Misguided Fiscal Rules

The debate over state capacity is underpinned by compelling empirical data regarding public investment, debt dynamics, and economic resilience.

• The Multiplier Effect of Public Investment: According to macroeconomic analyses by international labor and economic institutes, public investment in infrastructure, green energy, and care economies carries a significantly higher fiscal multiplier during downturns than across-the-board tax cuts. Every dollar invested in foundational public goods often generates more than a dollar of sustained economic activity by crowding in private innovation.
• The Composition of Debt: Financial markets routinely penalize developing and advanced economies alike for high debt-to-GDP ratios without evaluating what the debt financed. Debt incurred to build productive assets (such as renewable energy grids, public housing, and advanced research facilities) generates future revenue streams and economic resilience. Conversely, debt incurred purely to plug structural deficits without investment leads to stagnation.
• The Privatization Paradox: Decades of data on privatized utilities and public services reveal mixed-to-negative outcomes for consumers. In sectors like rail transport and water management in various European jurisdictions, privatization frequently led to under-investment in maintenance, higher consumer tariffs, and the extraction of wealth for shareholder dividends, ultimately forcing states to re-absorb failing entities at taxpayer expense.

Official Responses and Global Perspectives

Governments, central banks, and international financial institutions are sharply divided over how to navigate this new era of state intervention.

The Fiscal Conservatives: Preserving Market Discipline

Traditionalists within institutions like the International Monetary Fund (IMF) and various national treasuries maintain that while state intervention may be necessary during acute emergencies, permanent structural expansions of the state risk igniting inflation and crowding out private investment. Proponents of this view argue that fiscal rules—such as strict debt ceilings and deficit caps—are vital to maintaining investor confidence and keeping sovereign borrowing costs low. From this perspective, reforming public administration or boosting internal state capacity is secondary to maintaining balanced budgets.

The New Industrialists: Building Public-Private Partnerships with Teeth

Conversely, a rising coalition of progressive economists, pragmatic industrialists, and policymakers are advocating for a complete rewrite of macroeconomic playbooks. They argue that central banks and treasuries must coordinate directly with industrial policy agencies.

In the European Union, discussions around reforming the Stability and Growth Pact have increasingly centered on carving out "green golden rules"—exempting strategic public investments from deficit calculations. Similarly, in major emerging economies, sovereign wealth funds are being redeployed not merely as passive savings accounts, but as active venture capitalists that share risks and rewards with the private sector, ensuring that public rewards match public risks.

Implications: What Real State Capacity Requires

If governments are to move beyond the shallow rhetoric of "doing more with less" or executing superficial nationalizations, they must confront the hard operational realities of state capacity. Building an economy that serves the common good requires three fundamental transformations:

1. Rebuilding Institutional Competence

Decades of outsourcing public administration to private consulting firms and management contractors have hollowed out the internal expertise of state agencies. Governments can no longer design, monitor, or direct complex industrial strategies if they have outsourced their collective brainpower. Rebuilding in-house technical, scientific, and economic expertise within civil services is non-negotiable.

2. Conditioning Public Support

When governments disburse billions in subsidies, loans, or bailout funds to private corporations, those funds must come with strict conditionalities. Public money should not be used for stock buybacks or executive bonuses; it must be tied to reinvestment in innovation, fair wages, decarbonization, and the retention of domestic production capacity. If the public sector takes the high-risk gamble of funding foundational research or industrial transformation, it must also share in the upside rewards.

3. Redefining Fiscal Metrics

Finally, fiscal rules must be modernized to reflect economic reality. Accounting systems that treat public hospitals, schools, and green energy grids merely as liabilities while ignoring their long-term value generation are fundamentally obsolete. True fiscal responsibility means investing proactively to prevent crises, rather than bankrupting the public treasury to clean up after them.

Conclusion

The debate facing modern economies is no longer about whether the state should intervene—that ship has sailed amid the turbulence of global shocks. The true test for governments in 2026 and beyond is how they intervene. By shifting the focus away from ideological debates over bare ownership and toward the rigorous cultivation of state capacity, policymakers can finally move past self-imposed fiscal straightjackets. Only then can they build resilient, dynamic economies capable of delivering sustainable prosperity for the common good.