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

by Mariana Mazzucato

We cannot understand economic growth if we do not go back to the beginning: what is wealth and where does value come from?

for almost four decades a tiny elite has captured nearly all the gains from an expanding economy. Is this because they are particularly productive members of society?

Yet in presenting themselves as modern-day heroes, and justifying their record profits and cash mountains, Apple and other companies conveniently ignore the pioneering role of government in new technologies.

the way the word ‘value’ is used in modern economics has made it easier for value-extracting activities to masquerade as value-creating activities.

a cynic is one who knows the price of everything but the value of nothing.

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.

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.

Value can be defined in different ways, but at its heart it is the production of new goods and services. How these outputs are produced (production), how they are shared across the economy (distribution) and what is done with the earnings that are created from their production (reinvestment) are key questions in defining economic value.

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 lack of analysis of value has massive implications for one particular area: the distribution of income between different members of society.

in trying to steer the economy in particular directions, policymakers are–whether they recognize it or not–inevitably influenced by ideas about value.

Growth will not somehow go in this direction by itself.

investment in ‘human capital’–people’s knowledge and capabilities–benefits a country’s growth by increasing its productive capacity.

The emphasis by populist politicians on the negative effect of free trade, and the need to put up different types of walls to prevent the free movement of goods and labour, also gestures back to the mercantilist era, with emphasis more on getting the prices right (including exchange rates and wages) than on making the investments needed to create long-run growth and higher per capita income.

Although their theories differed in many respects, the classical economists shared two basic ideas: that value derived from the costs of production, principally labour; and that therefore activity subsequent to value created by labour, such as finance, did not in itself create value.

For Smith (as for Quesnay), employing an overly large portion of labour for unproductive purposes–such as the hoarding of cash, a practice that still afflicts our modern economies–prevents a nation from accumulating wealth.

This is where Smith addressed head-on how the wealth of nations could grow. It was in effect his policy advice. Instead of ‘wasting’ the surplus on paying for unproductive labour, he argued, it should be saved and invested in more production so that the whole nation could become richer.

Amassing gold was unnecessary and insufficient for growth. Huge amounts of gold flowed to Spain from its colonies, but the kingdom did not become more productive.

Ricardo, by contrast, felt that the distribution of wages was, as he stressed in his magnum opus On the Principles of Political Economy and Taxation, the ‘principle problem’ in economics and ultimately regulates the growth and wealth of a nation.

By highlighting the different types of incomes earned, such as rent, profits and wages, Ricardo drew attention to an important question. 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’.

Some heterodox economists today argue that growth will fall if finance becomes too big relative to the rest of the economy (industry) because real profits come from the production of new goods and services rather than from simple transfers of money earned from those goods and services.

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.

‘Marginal productivity’ is the effect that an extra unit of produced goods would have on the costs of production. The marginal cost of each extra Mars Bar that rolls off the production line is lower than the cost of the previous one.

The term neoclassical reflected how the new theorists stood on the shoulders of giants but then took the theory in new directions.

For the marginalists, this scarcity theory of value became the rationale for the price of everything, from diamonds, to water, to workers’ wages.

what this model gains in versatility–the notion that the preferences of millions of individuals determine prices, and hence value–it loses in its ability, or, rather, lack of ability, to measure what Smith called ‘the wealth of nations’, the total production of an economy in terms of value. As value is now merely a relative concept–we can compare the value of two things through their prices and how the prices may change–we can no longer measure the labour that produced the goods in the economy and by this means assess how much wealth was created.

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.

somebody earning a very high salary is indicative of their productivity and worth.

A este acercamiento lo destrozó youtube, meta y sus secuaces

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.

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.

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Back in the 1500s, the newly founded Order devised an innovative accounting system which blended vision with finance. In order to align finance with the values of their order, they made sure that the cash box could only be opened with two keys: one operated by the person in charge of the finances (the procurator, today’s CFO) and another by the person in charge of the strategy (the rector, today’s CEO).

accounting is not neutral, nor is it set in stone; it can be moulded to fit the purpose of an organization and in so doing affect that organization’s evolution.

Kuznets, then, drew the production boundary according to what he believed improved the material standard of living and what did not.

Perhaps Kuznets’s view would have had more traction in a peaceful world. But 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. As a result, economists who believed that national product is the sum total of market prices prevailed.

In order to lift the economy out of the depression, governments needed information to measure how their policies were working. Up until then, they had flown mostly blind: they had no need for detailed statistics because the economy was supposed to be self-regulating. Keynes’s book How to Pay for the War, published in 1940, introduced the idea of recording national income in a set of accounts and completely changed the way in which governments used that data.

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.

As the British economist Charles Bean, a former Deputy Governor for Economic Policy at the Bank of England, argues in his Independent Review of UK Economic Statistics (2016),20 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?

Does the financial sector simply facilitate the exchange of existing value, or does it create new value? As we will see in Chapters 4 and 5, this is the billion-dollar question: if it’s answered wrongly, it may be that the growing size of the financial sector reflects not an increase of growth, but rent being captured by some actors in the economy.

Banking services are of course necessary to keep the economy’s wheels turning. But it does not follow that interest and other charges on the users of financial services are a productive ‘output’.

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

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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.

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.

Financial regulators have focused on introducing more competition–through the break-up of large banks and the entry of new ‘challenger banks’–as an essential step towards preventing another financial crisis. But this ‘quantity theory of competition’–the assumption that the problem is just size and numbers, and not fundamental behaviour–avoids the uncomfortable reality that crises develop from the uncoordinated interaction of numerous players. There is danger in a complex system with many players.

Greater stability might be achieved when a few large companies serve the real economy, subject to heavy regulation in order to make sure that they concentrate on value creation and not value extraction.

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.

the real challenge is not to label finance as value-creating or value-extracting, but to fundamentally transform it so that it is genuinely value-creating. This requires paying attention to characteristics such as timeframe. Impatient finance–the quest for short-term returns–can hurt the productive capacity of the economy and its potential for innovation.

Between 2004 and 2014, the value of assets serviced by the ‘informal lending sector’ globally rose from $26 trillion to $80 trillion and may account for as much as a quarter of the global financial system.

Shadow-banking activities–borrowing, lending and asset-trading by firms that are not banks and escape their more onerous regulation–all have one thing in common: they funnel finance to finance, making money from moving existing money around.

Today, the sector has sprawled way beyond the limits of traditional finance, mainly banking, to cover an immense array of financial instruments and has created a new force in modern capitalism: asset management. The financial sector now accounts for a significant and growing share of the economy’s value added and profits.

In his 2007 Budget Statement, months before the first signs of the coming crash appeared on the horizon, Brown solemnly declared (not for the first time): ‘We will not return to the old boom and bust.’ How could Brown–and so many others–have got it so horribly wrong? The key to this catastrophic misjudgement lies in their losing sight of one crucial factor: the distinction between ‘price’ and ‘value’, which over the previous decades had been lost from sight.