The Value of Everything: Making and Taking in the Global Economy

by Mariana Mazzucato

If bankers, estate agents and bookmakers claim to create value rather than extract it, mainstream economics offers no basis on which to challenge them, even though the public might view their claims with scepticism.

Or when pharmaceutical companies argue that the exorbitantly high price of one of their drugs is due to the value it produces? Government officials can become convinced (or ‘captured’) by stories about wealth creation, as was recently evidenced by the US government’s approval of a leukemia drug treatment at half a million dollars, precisely using the ‘value-based pricing’ model pitched by the industry–even when the taxpayer contributed $200 million dollars towards its discovery.

All income, according to this logic, is earned income: gone is any analysis of activities in terms of whether they are productive or unproductive.

Yet this reasoning is circular, a closed loop. Incomes are justified by the production of something that is of value. But how do we measure value? By whether it earns income.

In theory, no income may be judged too high, because in a market economy competition prevents anyone from earning more than he or she deserves.

so prices and wages are often set by the powerful and paid by the weak.

The possibility that some activities perpetually earn rent because they are perceived as valuable, while actually blocking the creation of value and/or destroying existing value, is hardly discussed.

Certain types of tax credits, for, say, R&D, try to stimulate more investment in innovation. We subsidize education and training for students because as a society we want more young people to go to university or enter the workforce with better skills. Behind such policies may be economic models that show how investment in ‘human capital’–people’s knowledge and capabilities–benefits a country’s growth by increasing its productive capacity.

Rather, ascribing value, or the lack of it, has always involved malleable socio-economic arguments which derive from a particular political perspective–

Only in this way will the current narrative about value creation be subject to greater scrutiny, and statements such as ‘I am a wealth creator’ measured against credible ideas about where that wealth comes from. A pharmaceutical company’s value-based pricing might then be scrutinized with a more collective value-creation process in mind, one in which public money funds a large portion of pharmaceutical

research–from which that company benefits–in the highest-risk stage.

if an investment bank makes an enormous profit from the exchange rate instability that affects a country, that profit can be seen as what it really is: rent.

economists from the seventeenth century onwards have thought about steering growth by increasing productive activities and reducing unproductive ones, something they conceptualized by means of a theoretical production boundary.

From the second half of the nineteenth century onwards, value went from being an objective category to a more subjective one tied to individual preferences.

This is all very well, but the fact that the production boundary debate is no longer explicit, nor linked openly to ideas about value, means that economic actors can–through sustained lobbying–quietly place themselves within the boundary. Their value-extracting activities are then counted in GDP–and very few notice.

I explore the development of ‘asset manager capitalism’: how the financial sector expanded beyond the banks to incorporate an increasingly large number of intermediaries dedicated to managing funds (the asset management industry), and ask whether the role of these intermediaries, and the actual risks they take on, justify the rewards they earn.

our national accounting systems are really rewarding value extraction as though it is value creation, maybe this can help us understand the dynamics of value destruction that characterized the financial crisis.

In seeking a quick return, short-term finance has affected industry: companies are run in the name of maximizing shareholder value (MSV).

MSV has been detrimental to sustained economic growth, not least because it encourages short-term gain for shareholders at the expense of long-term gains

for the company–a development closely linked to the increasing influence of fund managers seeking returns for their clients and for themselves. Underlying MSV is the notion of shareholders as the biggest risk takers, meriting the large rewards they often obtain.

I explore the biased view of the current innovation narrative: how public-sector risk-taking is ignored, the state being seen as merely facilitating and ‘de-risking’ the private sector. The result has been policies, including reforms to the intellectual property rights (IPR) system, which have strengthened the power of incumbents, limiting innovation and creating ‘unproductive entrepreneurship’.

Claiming value in innovation, most recently with the concept of ‘platforms’ and the related notion of the sharing economy, is less about genuine innovation and more to do with facilitating value extraction through the capture of rents.

in the same way and at the same time that finance was made productive, the public sector has been made to appear unproductive. Modern economic thought has relegated government to just fixing market failures rather than actively creating and shaping markets.

It is not enough to critique speculation and short-term value extraction, and to argue for a more progressive tax system that targets wealth. We must ground those critiques in a different conversation about value creation, otherwise programmes for reform will continue to have little effect and will be easily lobbied against by the so-called ‘wealth creators’.

today finance nurtures not the industries for which it is meant to ‘grease’ the wheels of commerce, but rather other parts of the financial sector itself. It thus lies outside the boundary, even though it is formally counted as being inside. But this does not have to be the case: we can shape financial markets so that they do indeed belong inside the boundary.

new financial institutions dedicated to lending to those organizations interested in long-term high-risk investments that can help foster a more innovative economy, as well as changing measures in the tax code that reward long-term investments over short-term ones.

changes to the current unhelpful use of patents could help them stimulate innovati...

We cannot limit progressive politics to taxing wealth, but require a new understanding of and debate about wealth creation so that it is more fiercely and openly contested. Words matter: we need a new vocabulary for policymaking.

Policy is not just about ‘intervening’. It is about shaping a different future: co-creating markets and value, not just ‘fixing’ markets or redistributing value. It’s about taking risks, not only ‘de-risking’. And it must not be about levelling the playing field but about tilting it towards the kind of economy we want.

perhaps the reason there is so much despair across the

globe–despair now leading to populist politics–is that the economy is presented to us simply as ‘made’ by trade rules, technocrats and neoliberal forces.

In the early modern period, the pace of change quickened. Previously static economies became dynamic. Movement was in the air. The rise of the nation state in Europe, the need to finance war, colonization, machinery, factories and coal, combined with expanding populations to stimulate new thinking across many fields.

The mercantilists focus on trade and the needs of merchants (selling things). From the mid-eighteenth to the late nineteenth century, economists saw value as arising from the amount of labour that went into production, at first farm labour (the physiocrats) and then industrial labour (the classicals).

Later, as we will see in the next chapter, they were superseded by another perspective–that of the neoclassicals–focused less on objective forces of production and more on the subjective nature of the ‘preferences’ of different actors in the economy.

Since ancient times, humanity has divided its economic activity into two types: productive and unproductive, virtuous and vile, industrious and lazy.

Scholars and politicians of the time who

argued that accumulating precious metals was the route to national power and prosperity are called mercantilists (from mercator, the Latin word for merchant), because they espoused protectionist trade policies and positive trade balances to stimulate the inflow, and prevent the outflow, of gold and silver.

Mun summed up the mercantilist doctrine: we must, he said, ‘sell more to strangers yearly than wee consume of theirs in value’.

I.e avoid being on the losing side of a trade deficit.

He realized that income and expenditure at the national level should be the same. He understood that, if you treat a country as a closed system, each pound one person spends in it is another person’s income of one pound. It was the first time anyone had grasped and worked with this fundamental insight.

income. In so doing he started, implicitly, to impose a production boundary, including within it only money spent on the production of ‘Food, Housing, Cloaths, and all other necessaries’.8 All other ‘unnecessary expenses’, as defined by Petty, were omitted. In this way, by extension, Petty came to see any branch of the economy that did not produce those necessities as unproductive, adding nothing to national income.

‘great professions’ Petty meant lawyers, clergymen, civil servants, lords and the like. In other words, for Petty some ‘great professions’ were merely a necessary evil–needed simply for facilitating production and for maintaining the status quo–but not really essential to production or exchange.

King assessed productivity, which he defined as income

being greater than expenditure. King thought merchant traders were the most productive group, their income being a quarter more than their expenditure, followed by the ‘temporal and spiritual lords’, then by a variety of prestigious professions. On the boundary were farmers, who earned almost no more than they spent. Firmly on the ‘unproductive’ side were seamen, labourers, servants, cottagers, paupers and ‘common soldiers’.12 In King’s view, the unproductive masses, representing slightly more than half the total population, were leeches on the public wealth because they consumed more than they produced.

Their different views may have stemmed from their backgrounds. A man of humble origins and republican instincts, Petty started out serving Oliver Cromwell; moving in aristocratic and court circles, King was perhaps less

inclined to think that Petty’s ‘great professions’ were unproductive. Both, however, classed ‘vagrants’ as unproductive, an analysis that has parallels today with people receiving welfare from governments financed by taxes on the productive sectors.

Tariffs, import quotas and other measures to control trade and support domestic enterprises are also reminiscent of these early ideas about how value is created. There is basically nothing new in the calls to protect Western steel producers from Chinese imports or to subsidize domestic low-carbon energy generation to substitute for imports of oil, gas and coal.

Their search for the source of value led them to locate it in production, first in land–understandably so, in predominantly agrarian societies–and then, as economies became more industrialized, in labour. The labour theory of value reached its apogee with Karl Marx in the mid-nineteenth century, when the Industrial Revolution was in full swing.

He used his medical training to understand the economy as a ‘metabolic’ system. Crucially, in metabolism, everything must come from somewhere and go somewhere–and that, for Quesnay, included wealth.

At the time Quesnay wrote, French society was already facing the problems that would lead to the French Revolution fifteen years after his death. French agriculture was in a bad state. Farmers were choked by high taxes, imposed by their usually noble landlords to fund their lavish lifestyles and by central government to finance war and trade. Adding to this burden, the French government’s mercantilist policy, faced with a now aggressively expanding Britain, kept the prices of agricultural produce low to provide cheap subsistence to domestic manufactures, which could in turn be cheaply made and exported in exchange for the highly coveted gold, still generally believed to be a measure of national wealth.

Contrasting sharply with the prevailing mercantilist thinking that gave gold a privileged place, Quesnay believed that land was the source of all value.