State-owned firms are not as innovative as private firms. But it does not follow, Philippe Aghion says, that government ought to be small. Government is needed as investor in the economy's productive capacity -- R&D, education, green innovation -- as well as insurer against market risks. Aghion calls for a competition-friendly industrial policy to address inefficiencies in production, in particular in path-dependent dirty industries.

Aghion is introduced by Roman Frydman, to whom the key question is whether public infrastructure investment can raise overall productivity to the point where additional tax revenues pay for the investment.

Philippe Aghion is Professor of Economics at Harvard University. He is speaking in the panel "The Market or the State? Can market Forces Deliver Innovation, Education, and Infrastructure?" at the Bretton Woods Conference on April 10, 2011.

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