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

by Mariana Mazzucato

This approach has a very important consequence. It suggests that government should never intervene in the economy unless there are market failures.

The FFT holds that markets are the most efficient allocators of resources under three specific conditions: first, that there exists a complete set of markets, so that all goods and services which are demanded and supplied are traded at publicly known prices; that all consumers and producers behave competitively; and that an equilibrium exists.

Market failures might arise when there are ‘positive externalities’, benefits to society such as basic science research from which it is hard for individual firms to profit; or ‘negative externalities’, bad things like pollution, which harm society but are not included in firms’ costs.

In Clark’s view, capital goods themselves were the rewards for capitalist self-restraint. Instead of consuming their profits, they had saved them–saving that would eventually result in higher investment in more capital goods

Furthermore, following the ideas of Marx, Robinson and Sraffa argued that the rate of profit was not the reward for productive contribution of ‘capital’; it derived from social relations, that’s to say, who owned the means of production and who was forced to work for them.

Remarkably, the neoclassical theory of value has not changed much in the last hundred years. The maximization of utility has been extended beyond the economic sphere to explain human behaviour, including crime, drug addiction and, infamously, models of divorce.

other work has looked at the need to include non-priced goods (such as care) into GDP.

marginal utility theory prevails and is highly influential.

narrow equilibrium view that we will all benefit from perfect competition has influenced–and continues to influence–government policies an...

such as the International Monetary Fund and ...

On the basis of contemporary economic assumptions, we can no longer reliably say who creates value and who extracts it and therefore how the proceeds of production–income–should reasonably be distributed.

When students learn about microeconomics in the classroom (e.g. how prices are determined, including wages), they are not told that this is only one of many different approaches to thinking about value.

Why it does matter is the subject of this book: it is crucial to our understanding of value extraction–and hence the ability to limit it.

Both Smith and Ricardo realized that freeing the economy from rent called for strong intervention–in practice by government–to prevent value extraction. Neoclassical economists too; they see rent as an impediment to ‘free competition’ (free entry and exit of different types of producers and consumers). Once those impediments are removed, competition will benefit everyone.

Tellingly, Walras wrote that the entrepreneur neither adds nor subtracts from value produced.

allows us to disregard interactions with other sectors and introduce quasi-rents, and has since the 1970s led to the idea of ‘rent-seeking’ by creating artificial monopolies, for example tariffs on trade.

The neoclassical approach to rent, which largely prevails today, lies at the heart of the rest of this book. If value derives from price, as neoclassical theory holds, income from rent must be productive. Today, the concept of unearned income has therefore disappeared.

Our understanding of rent and value profoundly affects how we measure GDP, how we view finance and the ‘financialization’ of the economy, how we treat innovation, how we see government’s role in the economy, and how we can steer the economy in a direction that is propelled by more investment and innovation, sustainable and inclusive.

As long as products and services fetch a price on the market, they are worthy of being included in GDP; whether they contribute to value or extract it is ignored.

The result is that the distinction between profits and rents is confused and value extraction (rent) can masquerade as value creation.

marginal utility theory has also failed to account for one of the key problems in modern capitalism: the extractive activities of the financial sector.

As we saw in Chapter 2, according to marginalism the only economic sectors outside the production boundary are government–which depends on taxes paid by the productive sectors–and most recipients of welfare, which is financed from taxation.

These oddities include how government services are valued; how investments in future capacity, such as R&D, are measured; how jobs earning high incomes, as in the financial sector, are treated; and how important services with no price (such as care) or no legal price (such as the black market) are dealt with.

Although radically different from the thinking of earlier economists, it continued to underscore the importance of value theory in national accounting.

However, he did argue that unpaid housework should be included, because it clearly improves economic welfare. Kuznets, then, drew the production boundary according to what he believed improved the material standard of living and what did not.

the exigencies of the Second World War, which forced governments to focus on the war effort, took economists down a different path: estimating output rather than concerning themselves with welfare.

In short, during the war years practice became significantly detached from the prevailing theory–or, seen another way, the utility theory of value did not solve the urgent war-related problems of the time.

In many ways, the national accounts as we know them today stem from the trauma of the Great Depression of the 1930s, and the needs of the Second World War war effort.

In this, as in so much else, the British economist John Maynard Keynes (1883–1946) was a pivotal figure. In his 1936 masterpiece The General Theory of Employment, Interest and Money, written during the Great Depression, Keynes assumed that workers would underestimate the purchasing power of th...

Keynes used this idea to develop a theory of the macroeconomy–the economy as a whole–in which government spending could stabilize the business cycle when business was investing too little, and even raise the economy’s output.

accountants took up Keynes’s ideas about how government could invigorate an economy, and came to view government spending as directly increasing output.

national accounting conventions have in fact been quietly tracking its value-added contribution for the last half century—and it’s not small!

It is important to stress, however, that the difference between value added and final expenditure is not the government’s budget deficit. Rather, the deficit is government revenue (mainly taxes) minus expenses, including transfers of funds from the government to households, such as pensions and unemployment benefit–which, since households spend the money from pensions and benefits, are defined in national accounting as household, rather than government, spending (it’s the final expenditure that matters, remember). It is that household spending that counts towards final demand for the whole economy. So, what is going on?

Consider schools, state-funded universities, public healthcare, public transport, parks, recreation

and the arts, police and fire services, the law courts, environmental protection such as flood prevention and so on. These goods are largely financed by taxes or debt.

If the non-market prices of the output are lower than the total costs of intermediate inputs, value added would even show up as negative–indeed, government activities would ‘subtract’ value. However, it makes no sense to say that teachers, nurses, policewomen, firefighters and so on destroy value in the economy.

the contribution to the economy by public-sector services has to be measured in terms of ‘delivering value’.21 But if this value is not profit, what is it?

Once the output is defined, value added can be computed because the costs of intermediate inputs, such as the computers that employees use, are known.

Indeed, following this logic, government is also a producer of intermediate inputs for businesses. Surely education, roads, or the police, or courts of law can be seen as necessary inputs into the production of a variety of goods?

Governments build roads. But how much of their value accrues to families going on holiday and how much to a trucking company moving essential spare parts from factory to user? Neither family nor trucking company can build the road. But the family on holiday adds to total final demand; the trucking company is an intermediate cost for businesses.

this in turn affects how we view government, how it behaves and how it can get ‘captured’ easily by those who confidently see themselves as wealth creators.

A resource that is destroyed by pollution may not be counted as a subtraction from GDP–but when pollution is cleaned up by marketed services, GDP increases. And then there’s the biggest oddity of all: the financial sector.

Then there’s housework. Feminists in particular have long objected to the lack of recognition given to housework’s contribution to the economy. The national accounts exclude all housework, and therefore a large part of women’s work, from production.

They have expressed a ‘reluctance’ to include such work because, although it is equivalent to work done by servants, ‘By convention… only the wages of the domestic staff are treated as the value of output.’

According to this awkward logic, a nation would increase its GDP if we paid our neighbours to look after our children and do our laundry, and they paid us to do theirs.30 Underlying this ‘common-sense’ approach to household work is the utility theory of value: what is valuable is what is exchanged on the market.

By the same token, if you strip out those imputed rentals, GDP can be shown to have risen more slowly in the years before the financial crash than after 2009.33

When the polluter pays to clean it up, the expenditure is treated as a cost which reduces profits and GDP. But when the government pays another company to clean up the river, the expenditure adds to GDP because paying workers adds value. If the cost of cleaning up pollution is borne by someone other than the polluter it is called an externality–the cost is ‘outside’ the polluter’s profit-and-loss account–and increases GDP.

Kuznets argued that such a calculation should be balanced by the ‘disservice’ that has been created by pollution, and therefore that the cost of that ‘disservice’ be taken out of the ‘net’ calculation of value added.

From being perceived as transferring existing value and ‘rent’ in the sense of ‘unearned income’, finance was transformed into a producer of new value. This seismic shift was justified by labelling commercial bank activities as ‘financial intermediation’, and investment bank activities as ‘risk-taking’. It was a change that co-evolved with the deregulation of the sector, which also swelled its size even further.

The way we define and measure growth is of course affected by our theory of value. And the resulting growth figures may guide the activities that are deemed important. And in the process possibly distort the economy.