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

by Mariana Mazzucato

Their job was not to invest in productive assets like entrepreneurs, but to be the temporary stewards of savings which they invested in liquid and, generally, financial assets (as opposed to, say, property). In the US, assets under management (AUM) grew dramatically from $3.1 billion in 1951 to some $17 trillion in 2015.13 In the UK, the asset management industry accounted for £5.7 trillion by the end of 2015, more than three times the size of GDP in the same year.14

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.

Owning an asset that suddenly jumps in value has always been a faster way to get rich than patiently saving and investing out of income;31 and the speed differential of asset ‘revaluation’ over asset accumulation has been amplified in the present era of historically low interest rates.

so important to understand the huge extent of the financialization of the productive sector. In the 2000s, for example, the US arm of Ford made more money by selling loans for cars than by selling the cars themselves.

Companies such as Ford and GE contributed heavily to the sharp rise in the value of financial assets relative to US GDP in the quarter-century after 1980.

However, far from being a lodestar for corporate management, maximizing shareholder value turned into a catalyst for a set of mutually reinforcing trends, which played up short-termism while downplaying the long-term view and a broader interpretation of whom the corporation should benefit.

whereas traditional institutional investors were often satisfied to ‘buy and hold’, and to await share price gains via profit being reinvested rather than paid out, PE seeks to buy and resell at a higher price within a few years. What this means is that many firms owned by PE funds are pushed into taking a significantly shorter-term view than they might have done otherwise–the exact reverse of ‘patient capital’ and raising productivity to benefit society in the long run.

Another constituency shared the managers’ interest in rent-seeking: the asset managers, a driving force behind the fashion for breaking up conglomerates to extract greater shareholder value. Economically and socially, asset managers were closer to corporate managers than they were to their real customers, the remote and probably poorly informed members of pension funds or holders of life insurance policies. MSV offered asset managers the chance to get rich alongside the managers of the companies in which they invested their clients’ money. Asset managers became the major holders of public equities, the ‘residual’ shareholder acting at least nominally on behalf of others.

The time within which shareholders seek to make profit, through a flow of dividends or a share price movement, is determined by the time for which they hold a particular share. 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.

according to the World Federation of Exchanges, which represents the world’s publicly regulated stock exchanges, in the US turnover of domestic shares was around 20 per cent a year in the 1970s, rising steeply to consistently over 100 per cent a year in the 2000s. Turnover measures how often a share changes hands and is calculated by dividing the number of shares traded in a given period by the number of shares outstanding in the same period. Increasing turnover is a sign that institutional investors’ sights were trained on the short-term movement of stock prices rather the intrinsic, long-term value of the corporation.

Short-term decisions such as share buy-backs reduce long-term investment in real capital goods and innovation such as R&D. In the long run, this will hold back productivity. With lower productivity, the scope for higher wages will be limited, thus lowering domestic demand and the propensity to invest in the economy as a whole.

The original spirit of MSV has been perverted: the massive share options which have been a major part of many CEOs’ pay packages do not really align with managers’ and shareholders’ interests.

While Samuel Palmisano (IBM President from 2000 to 2011, and CEO from 2002 to 2011) argued that IBM’s main aim was to double earnings per share over the next five years, half a century earlier in 1968 Tom Watson Jr (IBM President from 1952 to 1971) argued that IBM’s three core priorities were (1) respect for individual employees, (2) a commitment to customer service and (3) achieving excellence.

wealth creation is a collective process.

Recognizing the collective nature of value creation takes us from a shareholder to a stakeholder view.

‘pursuit of gains for shareholders at the expense of other stakeholders [is] a pursuit which ultimately destroys both shareholder and stakeholder value’.

The stakeholder theory of business is more than a theory of how to run a company better; it also has far-reaching social and economic implications. It answers the question, ‘What makes a business successful?’ very differently to the proponents of MSV.

a stakeholder view emphasizes the social relationships between management and employees, between the company and the community, the quality of the products produced, and so on. These relationships give the company social goals as well as financial ones.

short-termism distorts finance, making it more speculative. A stakeholder understanding of value denotes a very different type of finance: one that is more ‘patient’ and supports necessary long-term investments.

The ingenuity of these people has undoubtedly been instrumental in changing how we communicate, transact business and live our lives. Their products and services epitomize our contemporary idea of progress.

the dominant narratives about innovators and the reasons for their success fundamentally ignore the deeply collective and cumulative process behind innovation.

Value extraction in the innovation economy occurs in various ways. First, in the way that the financial sector–in particular venture capital and the stock market–has interacted with the process of technology creation. Second, in the way that the system of intellectual property rights (IPR) has evolved: a system that now allows not just the products of research but also the tools for research to be patented and their use ring-fenced, thereby creating what the economist William J. Baumol termed ‘unproductive entrepreneurship’. Third, in the way that prices of innovative products do not reflect the collective contribution to the products concerned, in fields as diverse as health, energy or broadband. And fourth, through the network dynamics characteristic of modern technologies, where first-mover advantages in a network allow large companies to reap monopolistic advantages through economies of scale and the fact that customers using the network get locked in (finding it too cumbersome or disadvantageous to switch service).

technological and organizational changes are the principal source of long-term economic growth and wealth creation.

innovation is collective: the interactions between different people in different roles and sectors (private, public, third sectors) are a critical part of the process.

Given the lengthy and cumulative process of innovation, understanding which actors enter the innovation process, how they do it and at what point is key.

Yet, if it has proved hard to make reliable money from the development of actual new blockbuster drugs, it seems that there have been plenty of ways to derive income by speculating about the possibilities of doing so.

Instead of encouraging better technology transfer–for example, of human stem cell patents held by the University of Wisconsin–the system has delayed technology diffusion.

We cannot assume that entrepreneurship will always be ‘productive’, in the sense of leading to the discovery of new products, services or processes that increase society’s wealth.

Today, the patent system offers many opportunities for these kinds of ‘unproductive entrepreneurship’; patents can reinforce monopolies and intensify abuse of market power, block the diffusion of knowledge and follow-on innovations, and make it easier to privatize research that is publicly funded and collectively created.

The way the modern-day patenting system is structured (e.g. allowing upstream patenting, and strategic patenting), I would contend, is analogous to what Marx called ‘unproductive labour’, because it extracts rather than creates value.

Instead of the creation of value, the expansion of patents has fuelled rent-seeking, value extraction, value destruction, strategic gaming and the privatizing of the results of publicly funded scientific research.

Sovaldi and Harvoni are not isolated cases. The price of ‘specialty’ drugs–which treat complex chronic conditions such as cancer, HIV or inflammatory disease–has skyrocketed in recent years, fuelling a heated debate about why prices are so high and whether they are justified.

basic research expenditure by pharmaceutical companies is very small compared to the profits they make.48 It is also much less than what they spend on marketing,49 and often less than what they spend on share buy-backs aimed at boosting short-term stock prices, stock options and executive pay.

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. Private investors spent no more (and perhaps much less) than $300 million in R&D outlays for Sovaldi and Harvoni over the course of a decade.53 If we consider that in the first six months of 2015 the two drugs combined produced around $9.4 billion in sales (and $45 billion in the first three years since launch from 2014 to 2016) it is clear that their price bears no relation to R&D costs.54

we read, in a ‘fact sheet’ prepared by the US industry trade body PhRMA to justify high prices, that ‘every additional dollar spent on medicines for adherent patients with congestive heart failure, high blood pressure, diabetes and high cholesterol generated $3 to $10 in savings on emergency room visits and in patient hospitalizations’, that ‘a 10 per cent decrease in the cancer death rate is worth roughly $4.4 trillion in economic value to current and future generations’ and that ‘research and medicines from the biopharmaceutical sector are the only chance for survival for patients and their families’.57 While these claims may be true, it is striking that they are used as an explanation (or justification) for high drug prices.

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

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The internal combustion engine has retained its dominance for over a hundred years, not because it is the best possible engine, but because through historical accident it gained an initial advantage.

What’s the problem? Giant online firms like Facebook, Amazon and Google are often portrayed by their managers and by their apologists as ‘forces for good’ and for the progress of society rather than as profit-oriented businesses.

the view that these services are offered to everyone for free out of Silicon Valley’s goodwill, with the aim of ‘empowering’ people and creating a more open world, is exceedingly naïve. A more realistic analysis should start from a grasp of how these firms work and where their profits come from, with an eye to assessing their overall social impact in terms of value creation and value extraction.

We should not see Google, for example, as providing services for free to its users. Rather, it is users who provide Google with necessary inputs for its production process: their looks on ads and, most importantly, their personal data.

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

Contrary to the pious pronouncements of Internet pioneers, network effects are increasingly centralizing the Internet, thereby placing an enormous concentration of market power in the hands of a few firms.

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A recent study by researchers at the University of Pennsylvania surveyed 1,500 American Internet users to understand why they agree to give up some privacy in return for access to Internet services and applications. The standard explanation is that consumers compare the cost of losing some privacy with the benefit of accessing these services for free, and accept the deal when benefits exceed costs.

In the absence of strong, transnational, countervailing regulatory forces, firms that first establish market control can reap extraordinary rewards.

The activities which make profits for online platforms–advertising and analyses of users’ private information and behaviour–do not increase the value of what is produced, which is services to users such as posting a message on Facebook or making a search on Google. Rather, these activities help firms competing against one another to appropriate, individually, a larger share of the value produced.

regulation is not about interference, as is commonly perceived, but about managing a process that produces the results that are best for society as a whole.

The key issue is the relationship between the Internet monopolies and these falling incomes. The privatization of data to serve corporate profits rather than the common good produces a new form of inequality–the skewed access to the profits generated from big data.

Policymaking should start from understanding that innovation is a collective process. Given the immense risks the taxpayer takes when the government invests in visionary new areas like the Internet, couldn’t we construct ways for rewards from innovation to be just as social as the risks taken?

Rather than creating myths about actors in the innovation economy such as venture capitalists, it is important to recognize the stages at which each of these actors is important.