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

by Mariana Mazzucato

charge for their drugs.

Prices of specialty drugs are completely unrelated to manufacturing costs.

The standard defence by pharmaceutical companies used to be that these high prices are necessary to cover the R&D costs of developing new drugs and of compensating for the risks associated with both the research and the clinical trials.

research has disproved it.47

basic research expenditure by pharmaceutical companies is very small compared t...

Second, the research leading to real pharmaceutical innovation,51 broadly defined as new molecular entities, has come mostly from publicly funded laboratories.

NIH and the US Veterans Administration funded the research leading to the main compound in both Sovaldi and Harvoni–from early-stage science even into later-stage clinical trials.

They argue that these prices are proportionate to the intrinsic ‘value’ of the drugs.

Critics have replied that there is in fact no discernible link between specialty drug prices and the medical benefits they provide. They have some evidence on their side.

Dr Peter Bach, a renowned oncologist, put online an interactive calculator with which you can establish the ‘correct’ price of a cancer drug on the basis of its valuable characteristics–increase in life expectancy, side effects and so on. The calculator shows that the value-based price of most drugs is lower than their market price.

Basic mainstream analysis of elasticity of demand (that is, how sensitive consumers are to changes in prices, depending on the characteristics of goods) is sufficient to explain the very high prices of specialty drugs, which makes pharma’s vague and rhetorical arguments about value all the more unconvincing. Specialty drugs like Sovaldi and Harvoni are covered by patents, so their producers are monopolists and competition does not constrain the prices they set. Normally, however, you would expect the elasticity of demand to be a constraint: the higher the price, the lower the demand for the monopolist’s product. But the elasticity of demand for specialty drugs is of course very low: peoples’ lives are at stake. They need these drugs to have some chance of surviving, and medical insurers, whether public or private, are under an obligation to pay for them.

What is not being pointed out, however, is that the principle that a specialty drug’s price should equal the costs it saves society is fundamentally flawed. If we took such a principle seriously, basic therapies or vaccines should cost a fortune.

But it is hard to make the pitch for government when the term ‘public value’ doesn’t even currently exist in economics. It is assumed that value is created in the private sector; at best, the public sector ‘enables’ value.

A government subsidy may be placed on the good and a tax on the bad. But the current message to government is: intervene only if there is a problem, otherwise sit back, focus on getting the ‘conditions’ right for business and let the business sector do its thing, which is to create value.

In the process, he showed that the national capitalist market–the one studied in economics classes with supply and demand curves–was actually forced into existence by the state. Government, Polanyi asserted, does not ‘distort’ the market. Rather, it creates the market.

The stories told about government have undermined its confidence, limited the part it

can play in shaping the economy, undervalued its contribution to national output, wrongly led to excessive privatization and outsourcing, ignored the case for the taxpayer sharing in the rewards of a collective–public–process of value creation, and enabled more value extraction.

In a nutshell, austerity assumes that public debt is bad for growth, and that the only way to reduce it is to cut government spending and debt by running a budget surplus, irrespective of the possible social cost.

this fixation on austerity to reduce debt misses a basic point: what matters is long-run growth, its source (what is being invested in), and its distribution (who reaps the rewards). If, through austerity, cuts are made to essential areas that create the capacity for future growth (education, infrastructure, care for a healthy population), then GDP (however ill defined) will not grow.

cutting the deficit may have little effect on the debt/GDP if the denominator of the ratio is being badly affected.

Instead, if public investment is made in areas like infrastructure, innovation, education and health, giving rise to healthy societies and creating opportunities for all, tax revenues will most likely rise and debt fall relative to GDP.

Also in 2013, as part of his PhD studies, Thomas Herndon, a twenty-eight-year-old student at the University of Massachusetts Amherst, tested Reinhart and Rogoff’s data.6 He couldn’t replicate their results: his calculations showed no steep drop in growth rates when debt was high.

Herndon found a simple spreadsheet error.

What matters is not the deficit but what government is doing with its funds. As long as these funds are invested productively in sectors like healthcare, education, research and others that increase productivity, then the debt/GDP denominator will rise, keeping the ratio in check.

research into the impact of government size on economic growth has found almost unanimously that small government is ‘bad’ if, for example, it cannot even maintain basic infrastructure, rule of law (e.g. funding of police) and the educational needs of the population.

there has been a dearth of thinking by economists–both historically and in recent decades–about the value created by government.

he was convinced that national wealth could only be increased through division of labour in ‘a well-governed society’,18 in which he singled out three crucial functions of government: the military, the judiciary and other public services such as provision of infrastructure.

Admiring Ricardo’s rigorous analytical arguments, in comparison with Smith’s more fluid and interdisciplinary philosophical and political approach, economists followed him and excluded government from the productive sector.

The capitalist class had an interest in maintaining the state in a position strong enough to guarantee the rule of law and advance their class interests–but nothing more than that:

involve taking risks and investing–exactly what austerity doesn’t do–and in so doing they create value. But that value is not easily visible, for the simple reason that much of it goes into the pockets of the private sector.

For Keynes, government was in fact essential because it could create value by reviving demand–precisely when demand might be low, as in recessions, or when business confidence is low.

In the 1970s, inflation began to increase, opening the way for the monetarists, led by Milton Friedman.

ignoring that this assumes that the economy is already operating at full capacity so that any extra demand (stimulated by government) would result in higher prices.

Keynes’s whole point was that the economy would often be working at under-utilized capacity.

For these reasons, government’s role should be restricted to incentivizing individual producers and workers to supply more output and labour–for example by cutting taxes.

lower interest rates do not necessarily lead to more investment, since firms tend to be less sensitive to interest rates and more sensitive to expectations of where future growth opportunities lie.

The national accounts fail to capture the full amount of this government value added and have several major flawed assumptions.

Second, the return on investment by government is assumed to be zero; by this logic it does not earn a surplus.

The crucial point here is that zero government return on investment is a political choice, not a scientific inevitability.

So, in the case of free public education, while increasing the number of teachers might add to GDP (because they are paid), the value they actually produce does not increase GDP.

All of which means that government can only increase its value added with non-market production, thereby obscuring the true importance of government in the economy: value that government businesses do add is not shown in official statistics, nor is the value that education or health generate.

Public Choice theory’s interpretation of government failures as worse than market failures, and the drive towards making government ‘efficient’, has had the effect of eroding the ethos and purpose of public services.

The epigraph opening this chapter, in which Keynes argues the need for governments to think big–to do what is not being done–shows that he believed that government needs to be bold, with a sense of mission, not merely to replicate the private sector but to achieve something fundamentally different from it.

Equally, it is not enough to create money in the economy through quantitative easing; what is needed is the creation of new opportunities for investment and growth–infrastructure and finance must be embedded within the greater systemic plans for change.

In other words, it is a government’s duty to think big and confront difficulties–exactly the opposite of the facilitating role predicated by Public Choice theory, the inevitable result of which is timid and lacklustre public agencies which will be easier to privatize later.

Civil servants are told to step back, minimize costs, think like the private sector and be fearful of making mistakes. Government departments are ordered to cut costs, inevitably also diminishing the skills and capacity of the public structures in questions (departments, agencies, etc.).

Yet any venture capitalist will say that innovation involves exploring new and difficult paths, and that occasional failure is part of that journey. The guaranteed loan ($465 million) provided to Tesla for the development of the Model S electric car was, as we saw in Chapter 7, a success.

To limit government in this way is to completely ignore its track record, from the development of touchscreen technology to innovation in the renewables sector. Government has often been at its best when mission-oriented–precisely because, as President Kennedy said, it is hard.

Doing ‘hard’ things means being willing to explore, experiment, make mistakes and to learn from those mistakes. But this is almost impossible in a context in which government ‘failure’ is deemed the worst of all sins, and in which the guns are loaded, waiting for government to make the slightest mistake.

Profit-maximizing firms can try to increase their profits by soliciting special policy-related favours, and are often successful because politicians and policymakers are open to influence and even corruption. The possibility of this sort of capture (of government by vested interests) is a problem, but it becomes even more acute when there is no clear appreciation of government value.