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

by Mariana Mazzucato

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.

They call it value creation but, as in the financial sector itself, the reality is often the opposite: value extraction.

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. And in the process rents (unearned income) get confused with profits (earned income); inequality rises, and investment in the real economy falls.

The social, economic and political impacts of value extraction are huge. 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.8

The French economist Thomas Piketty’s influential book Capital in the Twenty-First Century focuses on the inequality created by a predatory financial industry that is taxed insufficiently, and by ways in which wealth is inherited across generations, which gives the richest a head start in getting even richer.

Value can be defined in different ways, but at its heart it is the production of new goods and services.

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.

The swing from value determining price to price determining value coincided with major social changes at the end of the nineteenth century. 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.

Rents, as understood by the classical economists, were unearned income and fell squarely outside the production boundary. Profits were instead the returns earned for productive activity inside the boundary.

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). This value, they believed, therefore determined the price of what was finally sold.

neoclassicals–focused less on objective forces of production and more on the subjective nature of the ‘preferences’ of different actors in the economy.

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.

When harnessed to the division of labour, mechanization would radically increase productivity–the principal engine of economic growth.

His metaphor of the ‘invisible hand’ has been cited ad nauseam to support the current orthodoxy that markets, left to themselves, may lead to a socially optimal outcome–indeed, more beneficial than if the state intervenes.

Smith believed that there were three kinds of income: wages for labour in capitalist enterprises; profits for capitalists who owned the means of production; and rents from ownership of land.

Ricardo defined rent as a transfer of profit to landlords simply because they had a monopoly of a scarce asset. There was no assumption, as in modern neoclassical theory (reviewed in Chapter 2), that these rents would be competed away.

Workers, in other words, are exploited because capitalists pocket the surplus value workers produce over and above their subsistence requirements.

If labour produced value, why was labour continuing to live in poverty and misery? If financiers did not create value, how did they become so rich?

For Marx, capitalists appropriate surplus value by paying a wage less than the value of labour. Smith and Ricardo held that value was created by effort that directly added up to the wealth of nations. But with marginal utility there are no longer classes, only individuals, and there is no objective measurement of value.

They also had to overlook the fact that money appears from nowhere when firms or households invest more than their savings, and borrow the difference. When a bank makes you a loan, say for a mortgage, it does not hand over cash. It credits your account with the amount of the mortgage. Instantly, money is created. But at the same time the bank has also created a liability on itself (the new deposits in your account), and banks must ensure they have sufficient reserves or cash (both forms of central bank money) to meet requests by you for payments to other banks or cash withdrawals. They must also hold capital in reserve in case loans are not repaid, in order to prevent insolvency. Both of these create constraints on bank lending and mean that banks generally refrain from lending to people and firms that do not fulfil certain criteria such as creditworthiness or expected profitability. Money creation also occurs when you pay for dinner with a credit or debit card. As a matter of fact, only about 3 per cent of the money in the UK economy is cash (or what is sometimes called fiat money, i.e. any legal tender backed by government). Banks create all the rest. It wasn’t until after the 2008 crisis that the Bank of England admitted that ‘loans create deposits’, and not vice versa.18

Writing in the 1930s, one of the most influential critics of finance, John Maynard Keynes, was upfront about what financial speculation entailed. In his lifetime he observed how financial markets and public attitudes to financial trading were changing, becoming ends in themselves rather than facilitators of growth in the real economy. When speculation spread from a rich leisure class to the wider population, it drove the stock market bubble that ushered in the Wall Street Crash and 1930s depression; but as public spending helped to restore people’s jobs and incomes, those with money again began to gamble it on stocks and shares. Wall Street was, he said, ‘regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield’. By this yardstick, Keynes commented, Wall Street could not ‘be claimed as one of the outstanding triumphs of laissez-faire capitalism–which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object’.22 That ‘different object’, in Keynes’s view, was not a form of production, but ‘betting’–and the profits of the bookmaker were ‘a mere transfer’,23 a transfer which should be limited lest individuals ruin themselves and harm others in the process. Moreover, Keynes argued, since gambling is luck, there should be no pretence that financial speculation involved skill. Any reference to skill–or productiven...

Banks and investment funds may believe they are deriving income from new production, and their individual ‘risk models’ will show that they will survive most conceivable financial shocks because of the diversification of their portfolios. But their incomes are ultimately transfers from other financial firms, and can suddenly dry up when one firm’s inability to meet a transfer obligation (defaulting on a loan, or withholding a dividend) forces others to do so in turn. That is what happened when Lehman Brothers, the American investment bank, collapsed in 2008, thereby precipitating the financial crisis.

As long as financial assets can be bought and sold in a reasonable amount of time without incurring losses, and debt can be rolled over to pay previous loans, markets are liquid and the economy runs smoothly. But once investors realize that borrowers are not earning enough to pay interest and principal (on which the interest is based), creditors stop financing them and try to sell their assets as soon as possible. Financial bubbles can be seen as the result of value being extracted; during financial crises value is actually destroyed. The fallout can be measured not only in output and job losses but also by the amount of money that governments had to pour into private banks because they were ‘too big to fail’: the quantitative easing (QE) schemes that followed the crisis might have been used to help sustain the economy, but ended up further propping up the banks.

As we saw in Chapter 3, banks mark up borrowers’ interest rates as an indication of value added (FISIM): an obvious example of fictitious financial value. But this is only the tip of the iceberg. Today, leading investment banks like Goldman Sachs and J. P. Morgan don’t attribute their employees’ vast salaries to success in ordinary borrowing and lending. The great bulk of these banks’ profits comes from activities such as underwriting the initial public offerings (IPOs) of corporate bonds and shares, financing mergers and acquisitions, writing futures and options contracts that take over risk from non-financial businesses, and trading in these and other financial instruments for capital gain.

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. For that matter, how high should the price of water be, given its indispensable value to society?

If something is free online, you are not the customer, you are the product.

Herbert Simon (1916–2001), who made his name in the study of organizational decision-making, and who won the Nobel Prize in Economics in 1978. ‘If we are generous with ourselves,’ Simon considered, ‘I suppose that we might claim that we “earned” as much as one-fifth of our income. The rest of the patrimony [is] associated with being a member of an enormously productive social system, which has accumulated a vast store of physical capital, and an even larger store of intellectual capital–including knowledge, skills, and organizational know-how held by all of us.’79 Ignoring this collectively produced social system, certain individuals feel justified in earning a much higher proportion of a nation’s income than their own contribution warrants. But, more specifically, it has affected policies on taxes, patents and prices, thus fuelling the dynamics of inequality.

The austerity policy of cutting taxes and government spending does not revive investment and economic growth, when the real problem is weak demand. And in countries like Greece and Spain, where 50 per cent of young people cannot find work, pursuing policies that don’t actually affect investment–and hence jobs–means that an entire generation can lose its right to a prosperous future.

Noam Chomsky has called the ‘standard technique of privatization: ‘defund, make sure things don’t work, people get angry, you hand it over to private capital’.

As Robert Solow showed, most of the gains in productivity of the first half of the twentieth century can be attributed not to labour and capital but to technical change. And this is due not only to improved education and infrastructure, but also, as discussed in the previous chapter, to the collective efforts behind some of the most radical technical changes where the public sector has historically taken a lead role–‘the entrepreneurial state’.72 But the socialization of risks has not been accompanied by socialization of rewards. The issue, then, is how the state can reap some return from its successful investments (the ‘upside’) to cover the inevitable losses (the ‘downside’)–not least, to finance the next round of investments. This can be done in various ways, as discussed in Chapter 7, whether through equity-holding, conditions on reinvestment, caps on prices, or the need to keep patents as narrow as possible.

Once the notion of public value is understood and accepted, reappraisals are urgently required–of the idea of public and private and of the nature of value itself. ‘Public values are those providing normative consensus about (1) the rights, benefits, and prerogatives to which citizens should (and should not) be entitled; (2) the obligations of citizens to society, the state, and one another; (3) and the principles on which governments and policies should be based.’73

A much more dynamic analysis, one which can capture more of the market-shaping process, is urgently required. For example, any measure of the success of a government project to organize a charging infrastructure for electric cars must try to take into account the opportunities offered for further technical development, the reduction of pollution and the political and ecological gains of lessening reliance on non-renewable oil from countries with objectionable governments.

As we have already seen, even Adam Smith was of the opinion that markets needed to be shaped. Contrary to the modern interpretation of his work as ‘laissez-faire’ (leave the market alone), he believed that the right kind of freedom is not the absence of government policy, but freedom from rent extraction. Smith would have been baffled by the current understanding of economic freedom as a minimum of non-private activity. His Wealth of Nations is a huge book, largely because even in that simpler economic world there were so many varieties of rent-seeking to discuss. He devoted many pages to productive and unproductive activities, often simplistically putting some inside the production boundary and some outside.

I have tried to open the new dialogue by showing that the creation of value is collective, that policy can be more active around co-shaping and co-creating markets, and that real progress requires a dynamic division of labour focused on the problems that twenty-first-century societies are facing. If I have been critical, it’s because such criticism is badly needed; it is, moreover, a necessary preliminary to the creation of a new economics: an economics of hope. After all, if we cannot dream of a better future and try to make it happen, there is no real reason why we should care about value. And this perhaps is the greatest lesson of all.