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what if, in the end, these descriptions are simply just stories? Narratives created in order to justify inequalities of wealth and income, massively rewarding the few who are able to convince governments and society that they deserve high rewards, while the rest make do with the leftovers.
Until the 1960s, finance was not widely considered a ‘productive’ part of the economy. It was viewed as important for transferring existing wealth, not creating new wealth. Indeed, economists were so convinced about the purely facilitating role of finance that they did not even include most of the services that banks performed, such as taking in deposits and giving out loans, in their calculations of how many goods and services are produced by the economy.
mentality they breed pervade industry, as can be seen when managers choose to spend a greater proportion of profits on share buy-backs–which in turn boost stock prices, stock options and the pay of top executives–than on investing in the long-term future of the business. They call it value creation but, as in the financial sector itself, the reality is often the opposite: value extraction.
In 2014 the pharmaceutical giant Gilead priced its new treatment for the life-threatening hepatitis C virus, Harvoni, at $94,500 for a three-month course. Gilead justified charging this price by insisting that it represented ‘value’ to health systems. John LaMattina, former President of R&D at the drugs company Pfizer, argued that the high price of speciality drugs is justified by how beneficial they are for patients and for society in general. In practice, this means relating the price of a drug to the costs that the disease would cause to society if not treated, or if treated with the
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Indeed, a high proportion of health care costs in the Western world has nothing to do with health care: these costs are simply the value the pharmaceutical industry extracts.
This seductive story of value creation has lead to lower rates of capital gains tax for the venture capitalists funding the tech companies, and questionable tax policies like the ‘patent box’, which reduces tax on profits from the sale of products whose inputs are patented, supposedly to incentivize innovation by rewarding the generation of intellectual property.
Policymakers’ objectives should not be to increase the profits from monopolies, but to favour the reinvestment of those profits in areas like research.
This stance feeds a modern-day banality: entrepreneurs good, government bad–or inept.
Apple and other companies conveniently ignore the pioneering role of government in new technologies.
But where did the smart tech behind those gizmos come from? Public funds. The Internet, GPS, touchscreen, SIRI and the algorithm behind Google–all were funded by public institutions. Shouldn’t the taxpayer thus get something back, beyond a series of undoubtedly brilliant gadgets?
we need a radically different type of narrative as to who created the wealth in the first place–and who has subsequently extracted it.
Government is depicted as a drain on society, funded by obligatory taxes on long-suffering citizens. In this story, there is always only one conclusion: that we need more market and less state. The slimmer, trimmer and more efficient the state machine the better.
myth-making, I argue, has allowed an immense amount of value extraction, enabling some individuals to become very rich and draining societal wealth in the process.
I will argue that the way the word ‘value’ is used in modern economics has made it easier for value-extracting activities to masquerade as value-creating activities.
What’s more, if we cannot differentiate value creation from value extraction, it becomes nearly impossible to reward the former over the latter.
If the goal is to produce growth that is more innovation-led (smart growth), more inclusive and more sustainable, we need a better understanding of value to steer us.
How we discuss value affects the way all of us, from giant corporations to the most modest shopper, behave as actors in the economy and in turn feeds back into the economy, and how we measure its performance.
This is what philosophers call ‘performativity’: how we talk about things affects behaviour, and in turn how we theorize things.
change in our economic system must be underpinned by bringing value back to the centre of our thinking–we need a revived ability to contest the way the word value is used, keeping alive the debate, and not allowing simple stories to affect who we think is productive and who is unproductive.
Why were the takers making so much money at the expense of the makers?
In 2016 the British high-street retailer BHS collapsed. It had been founded in 1928 and in 2004 was bought by Sir Philip Green, a well-known retail entrepreneur, for £200 million. In 2015 Sir Philip sold the business for £1 to a group of investors headed by the British businessman Dominic Chappell. While it was under his control, Sir Philip and his family extracted from BHS an estimated £580 million in dividends, rental payments and interest on loans they had made to the company.
While Sir Philip’s activities could be viewed as an aberration, the excesses of an individual, his way of thinking is hardly unusual: today, many giant corporations are also guilty of confusing value creation with value extraction.
What is more, these ‘Irish’ subsidiaries of Apple are in fact not resident for tax purposes anywhere. This is because they have exploited discrepancies between the Irish and US definitions of residence. Almost all the profits earned by the subsidiaries were allocated to their ‘head offices’, which existed only on paper. The Commission ordered Apple to pay the back taxes on the grounds that Ireland’s deal with Apple constituted illegal state aid
Not only did Apple extract value from Irish taxpayers, but the Irish government has extracted value from the US taxpayer.
all the technology that makes the smartphone smart was publicly funded.
California’s infamously large debt would be significantly reduced if Apple fully and accurately reported its US revenues in that state, where a major portion of its value (architecture, design, sales, marketing and so on) originated. Value extraction thus pits US states against each other, as well as the US against other countries.
As well as a systemic refusal to fund tax law enforcement and close loopholes.
Apple certainly creates value, of that there is no doubt: but to ignore the support taxpayers have given it, and then to pit states and countries against each other, is surely not the way to build an innovative economy or achieve growth that is inclusive, that benefits a wide section of the population, not only those best able to ‘game’ the system.
Prior to the 2007 financial crisis, the income share of the top 1 per cent in the US expanded from 9.4 per cent in 1980 to a staggering 22.6 per cent in 2007. And things are only getting worse. Since 2009 inequality has been increasing even more rapidly than before the 2008 financial crash. In 2015 the combined wealth of the planet’s sixty-two richest individuals was estimated to be about the same as that of the bottom half of the world’s population–3.5 billion people.
A common critique of contemporary capitalism is that it rewards ‘rent seekers’ over true ‘wealth creators’.
‘Rent-seeking’ here refers to the attempt to generate income, not by producing anything new but by overcharging above the ‘competitive price’, and undercutting competition by exploiting particular advantages (including labour), or, in the case of an industry with large firms, their ability to block other companies from entering that industry,
thereby retaining a monopoly...
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The usual targets of such criticism are the banks and other financial institutions. They are seen as profiting from speculative activities based on little more than buying low and selling high, or buying and then stripping productive assets simply to sell them on again with no real value added.
it is not enough to look at impediments to an idealized form of perfect competition. Yet mainstream ideas about rent do not fundamentally challenge how value extraction occurs–which is why it persists.
In order to tackle these issues at root, we need to examine where value comes from in the first place. What exactly is it that is being extracted?
Value can be defined in different ways, but at its heart it is the production of new goods and services.
Also crucial is whether what it is that is being created is useful: are the products and services being created increasing or decreasing the resilience of the productive system? For example, it might be that a new factory is produced that is valuable economically, but if it pollutes so much to destroy the system around it, it could be seen as not valuable.
By ‘value creation’ I mean the ways in which different types of resources (human, physical and intangible) are established and interact to produce new goods and services. By ‘value extraction’ I mean activities focused on moving around existing resources and outputs, and gaining disproportionately from the ensuing trade.
I use ‘value’ in terms of the ‘process’ by which wealth is created–it is a flow. This flow of course results in actual things, whether tangible (a loaf of bread) or intangible (new knowledge). ‘Wealth’ instead is regarded as a cumulative stock of the value already created. The book focuses on value and what forces produce it–the process. But it also looks at the claims around this process, which are often phrased in terms of ‘who’ the wealth creators are.
Later, this emphasis on ‘objective’ conditions of production, technology and power relationships was replaced by concepts of scarcity and the ‘preferences’ of economic actors: the amount of work supplied is determined by workers’ preference for leisure over earning a higher amount of money. Value, in other words, became subjective.
in order to understand the prices of goods and services it was first necessary to have an objective theory of value, a theory tied to the conditions in which those goods and services were produced, including the time needed to produce them, the quality of the labour employed; and the determinants of ‘value’ actually shaped the price of goods and services.
All of a sudden, value was in the eye of the beholder. Any goods or services being sold at an agreed market price were by
One was the rise of socialism, which partly based its demands for reforms on the claim that labour was not being rewarded fairly for the value it created, and the ensuing consolidation of a capitalist class of producers. The latter group was, unsurprisingly, keen on the alternative theory, that price determined value, a story which allowed them to defend their appropriation of a larger share of output, with labour increasingly being left behind.
In the intellectual world, economists wanted to make their discipline seem ‘scientific’–more like physics and less like sociology–with the result that they dispensed with its earlier political and social connotations. While Adam Smith’s writings were full of politics and philosophy, as well as early thinking about how the economy works, by the early twentieth century the field which for 200 years had been ‘political economy’ emerged cleansed as simply ‘economics’. And economics told a very different story.
So while economics students used to get a rich and varied education in the idea of value, learning what different schools of economic thought had to say about it, today they are taught only that value is determined by the dynamics of price, due to scarcity and preferences. This is not presented as a particular theory of value–just as Economics 101, the introduction to the subject. An intellectually impoverished idea of value is just taken as read, assumed simply to be true. And the disappearance of the concept of value, this book argues, has paradoxically made it much easier for this crucial
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Inside the boundary are the wealth creators. Outside are the beneficiaries of that wealth, who benefit either because they can extract it through rent-seeking activities, as in the case of a monopoly, or because wealth created in the productive area is redistributed to them, for example through modern welfare policies.
Historically, the boundary fence has not been fixed. Its shape and size have shifted with social and economic forces. These changes in the boundary between makers and takers can be seen just as clearly in the past as in the modern era. In the eighteenth century there was an outcry when the physiocrats, an early school of economists, called landlords ‘unproductive’. This was an attack on the ruling class of a mainly rural Europe. The politically explosive question was whether landlords were just abusing their power to extract part of the wealth created by their tenant farmers, or whether their
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But things are not so simple. The point is not to blame some as takers and to label others as makers. The activities of people outside the boundary may be needed to facilitate production–without their work, productive activities may not be so valuable. Merchants are necessary to ensure the goods arrive at the marketplace and are exchanged efficiently.
How these activities can be shaped to actually serve their purpose of producing value is the real question.
Indeed, the recurring debate about the optimal size of government and the supposed perils of high public debt boils down to whether government spending helps the economy to grow–because government can be productive and add value–or whether it holds back the economy because it is unproductive or even destroys value.
It is also true that many other services that people provide throughout society go unpaid, such as care given by parents to children or by the healthy to the unwell, and are not well accounted for.
