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.

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.

Where do those stories come from–in whose interests are they told? If we cannot define what we mean by value, we cannot be sure to produce it, nor to share it fairly, nor to sustain economic growth. The understanding of value, then, is critical to all the other conversations we need to have about where our economy is going and how to change its course.

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 advantage. Rent-seeking activity is often described in other ways: the ‘takers’ winning out over the ‘makers’, and ‘predatory’ capitalism winning over ‘productive’ capitalism.

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?

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.

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.

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.

As economists, and wider society, came to determine value by supply and demand–what is bought has value–activities such as financial transactions were redefined as productive, whereas previously they had usually been classed as 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. You earn income because you are productive and you are productive because you earn income. So with a wave of a wand, the concept of unearned income vanishes.

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. In practice, markets are what economists call imperfect, so prices and wages are often set by the powerful and paid by the weak.

Measurements are not neutral: they affect behaviour and vice versa (this is the concept of performativity which we encountered in the Preface).

Smith was not criticizing the wealthy per se. But he was criticizing those who wasted their wealth on lavish consumption–‘collecting books, statues, pictures’, or ‘more frivolous, jewels, baubles, ingenious trinkets’–instead of productive investment.

Ricardo proposed that the rent from more productive land always goes to the landlord because of competition between tenants. If the capitalist farmer–the tenant–wants to hang on to the largest possible profit by paying less rent, the landlord can give the lease to a competing farmer who will pay a higher rent and therefore be willing to work the land for only the standard profit. As this process goes on, land of increasingly poor quality will be brought into production, and a greater portion of the income will go to the landlords. Ricardo predicted that rents would rise. More significantly, rising rents were the flipside of rising food prices, caused by lack of good-quality agricultural land. More costly food increased the wages workers needed for subsistence. This growing wage share, Ricardo believed, put a squeeze on profits in other sectors such as manufacturing. As economic development proceeded, the profit rate–basically the manufacturing capitalist’s return on capital–would fall. The profit share–the part of the national income going to capitalists–would also fall. Correspondingly, the wage share going to manufacturing workers would rise. But the extra wages would have to be spent on food, which was more expensive because landlords were charging higher rents. As a result, much of the nation’s income would ultimately go to landlords. This would halt further economic growth and investment in, say, manufacturing because the low returns would not justify the risks.

When goods are sold, how are the proceeds of that sale divided? Does everyone involved get their ‘just share’ for the amount of effort they put into production? Ricardo’s answer was an emphatic ‘No’.

For Ricardo, capitalists would put that surplus to productive use, but landlords–including the nobility–would waste it on lavish lifestyles. Ricardo echoes Smith here. Both had seen with their own eyes the extravagance of the aristocracy, a class which often seemed better at spending money than making it and was addicted to that ultimate unproductive activity–gambling. But Ricardo parted company from Smith because he was not concerned about whether production activities were ‘material’ (making cloth) or ‘immaterial’ (selling cloth). To Ricardo, it was more important that, if a surplus was produced, it was spent productively.

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

unlike the feudal lords, capitalists will not squander all of the surplus on consumption, but will have incentives to reinvest part of it in expanding production to make yet more profits. However, Marx noted that there was a contradiction in the system. The drive to increase productivity would increase mechanization, which, in displacing labour (machines taking over human work), would then eventually reduce the key source of profits: labour power. He also foresaw the problem of growing financialization, which could potentially undermine industrial production. Throughout his analysis, his focus was on change, and the effects of change on the creation of value.

Marx argued that workers are productive if they create surplus value which the capitalist class then retains. For Marx, while workers in capitalist production are productive, the key questions when drawing his production boundary are: who participates in capitalist production? And who receives the surplus that is produced?

The value of labour power is expressed to workers as wages, to capitalists as profits. The rate of profit for an enterprise is the surplus value divided by variable and constant capital–roughly what today we call the rate of return on a company’s assets. The average profit rate of the economy as a whole is total surplus value divided by total variable and constant capital. But the size of the average profit rate depends on the composition of capital (how much variable and constant capital) and on class struggle–effectively, the size of workers’ wages relative to value produced.

For Marx, then, the production boundary is defined not by sectors or occupations but by how profits are generated–more specifically, whether an occupation is carried out in a capitalist production context. Only the capitalist enterprise will accumulate the surplus value that can lead to an expansion of production. In this way, the capitalist economy reproduces itself.

The marginal utility theory of value states that all income is reward for a productive undertaking.

So what was the new value theory, marginalism, about? First, it is based on the notions of utility and scarcity and is subjective: the value of things is measured by their usefulness to the consumer. There is, therefore, no ‘objective’ standard of value, since utility may vary between individuals and at different times. Second, this utility decreases as the amount of a thing that is held or consumed increases.

Prices, then, reflect the utility that buyers get from things. The scarcer they are–the higher their marginal utility–the more consumers will be willing to pay for them.

In marginal thinking, however, such classification was swept aside. What replaced it was the notion that it is only whatever fetches a price in the market (legally) that can be termed productive activity. Moreover, productivity will fluctuate with prices, because prices determine value, not vice versa.

Market failure theory uses the first fundamental theorem (FFT) of welfare economics as its starting point. 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.

The equilibrium view diverted attention from the tensions between capital and labour, and ultimately from alternative theories on the sources and distribution of value

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. It is, as far as they are concerned, the only one–and, as a result, there is no need to refer to the word ‘value’. The term essentially disappears from the discourse. It is simply Microeconomics 101. In concluding our history of economic thought, we should ask: is this only an academic exercise, or does it matter? 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.

What we measure affects what we do; and if our measurements are flawed, decisions may be distorted. Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi, Mismeasuring Our Lives (2010)

In other words, how we measure GDP is determined by how we value things, and the resulting GDP figure may determine how much of a thing we decide to produce. Performativity!

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. Clearly, a different measurement is needed.

Apart from this curious view of government, the national accounts expose a number of other accounting oddities. GDP, for instance, does not clearly distinguish a cost from an investment in future capacity, such as R&D; services valuable to the economy such as ‘care’ may be exchanged without any payment, making them invisible to GDP calculators; likewise, illegal black-market activities may constitute a large part of an economy. 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.

In essence, we behave as economic actors according to the vision of the world of those who devise the accounting conventions. The marginalist theory of value underlying contemporary national accounting systems leads to an indiscriminate attribution of productivity to anyone grabbing a large income, and downplays the productivity of the less fortunate. In so doing, it justifies excessive inequalities of income and wealth and turns value extraction into value creation.

Underpinning this expansion is the belief that a country benefits from an ever-growing financial sector, in terms of its growing contribution to GDP and exports, and as total financial-sector assets (bank loans, equities, bonds and derivatives) become an ever-larger multiple of GDP.

The steady growth in household borrowing in the UK, US and most other OECD countries since the 1990s has automatically boosted banks’ measured contribution to GDP, through the rising flow of interest payments they collect from households. The increasingly hazardous nature of lending to subprime and already indebted households further boosted this measured contribution, since it resulted in a higher premium of borrowers’ rates over the reference rate with inadequate adjustment for the increased risks.

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 productiveness on the part of speculators–was a sign that somebody was trying to trick somebody else. Keynes also thought that the proceeds from such betting and speculating should go to the state to remove the incentive–a better word might be temptation–to reap private gains from it.24 He went on to stress the difference between this kind of speculation (value extraction) and finance for actual productive investment (value creation), which he saw as crucial for growth and which was only possible without the speculative apparatus around it. If ‘the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done’.

This theory, which began far from the mainstream but forced its way in when a bubble-bursting ‘Minsky moment’ broke the long boom in 2008, holds that the quantity of money in an economy is created by the interplay of economic forces rather than by an outside agency such as a central bank. Although portrayed as all-powerful (and so responsible for all financial instability) by Milton Friedman (1912–2006; Nobel Prize 1976) and the ‘monetarists’ propelled to prominence by 1970s stagnation, central banks such as the US Federal Reserve can only indirectly and weakly control the private-sector banks and their money creation, by setting the base interest rate. Minsky charted the way in which the banking system would eventually end up moving to ‘speculative finance’, pursuing returns that depended on the appreciation of asset values rather than the generation of income from productive activity.

Commercial banks seem literally to have been given a licence to print money, through their ability to create money in the process of lending it, and to lend it at higher interest rates than they borrow. But such lending remains a risky source of profit, if those they lend to don’t pay back. And because they can only lend if a household or business wants to borrow, it’s a highly cyclical source of profit, rising and falling with the scale of investment activity.

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.

The upshot of growing inequality of income and wealth was that, to maintain the living standards they had enjoyed from the Second World War to the 1980s, workers had to shoulder an increasing debt burden from the 1980s onwards. Looking at the broader economic picture, without growing household debt, demand might have been weaker and sales by businesses lower. Finance bridged the gap, in the form of new forms of credit whose resultant interest flows and charges underpinned the sector’s expansion.

By the late twentieth century, finance was perceived as being much more productive than before. Finance, too, became increasingly valuable to policymakers, in order to maintain economic growth and manage inequality of wealth and income. The cost was mounting household debt and increasing government dependence on tax revenues from the financial sector.

Finance has both benefited from and partly caused widening inequality of income and wealth,

Rising inequality might be ‘justified’ by economic gains if it promotes faster growth that raises basic or average incomes, for example by giving richer entrepreneurs the means and incentive to invest more. But recent increases in inequality have been associated with slower growth,5 linked to its social impact as well as the deflationary effect of reducing already-low incomes.

PE firms are often criticized for placing that debt on the balance sheets of the companies they buy, while continuing to extract dividends from the companies rather than service the debt.

How does finance extract value? There are broadly three related answers: by inserting a wedge, in the form of transaction costs, between providers and receivers of finance; through monopoly power, especially in the case of banks; and with high charges relative to risks run, notably in fund management.

Shareholders also seem impressed by rising EPS, preferring not to notice that buy-backs remove just as much cash as dividends from the funds available for investment. They also seem to ignore the fact that companies are more likely to buy back shares when the price is high than when the price is low,5 despite the inefficiency of this market timing.

And the average holding time for equity investment, whether by individuals or institutions, has relentlessly fallen: from four years in 1945 to eight months in 2000, two months in 2008 and (with the rise of high-frequency trading) twenty-two seconds by 2011 in the US.20 Average PE holding times jumped to almost six years when stock markets froze in the wake of the 2008 global financial crash, but were on a firm downward course again by 2015.

William Lazonick, the chronicler of share buy-backs, has characterized these two trends, when taken together, as a shift from a model of ‘Retain and Invest’ to ‘Downsize and Distribute’. The first strategy–‘Retain and Invest’–uses finance only to set up a company and start production. Once profits are being made loans are likely to be at least partly repaid because retained earnings are a cheap way of financing the next production cycle and investments to expand market share. The second strategy–‘Downsize and Distribute’–is entirely different. It views companies merely as ‘cash cows’ whose least productive branches have to be sold. The resulting surplus is then distributed to managers and owners, rather than to others such as the workers who have also contributed to the business. The result may hamper the growth of the company and even cut the workforce–‘Downsize’. If the shareholders are happy, however, the strategy is justified.