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

by Mariana Mazzucato

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.

Ricardo’s gloomy picture of economic stagnation is relevant to a modern debate: how the rise of the financial sector in recent decades and the massive rents it earned from speculative activity have created disincentives for industrial production.

The ingenuity of capitalism, according to Marx, is that it can organize production to make workers generate unprecedented amounts of this surplus value. In early societies of hunter-gatherers and subsistence farmers, people worked enough to create the value that would allow them to survive, but no surplus over and above that.

By contrast, it is remarkable how national accountants go to great lengths to include inside the production boundary the house itself, the property in which the supposedly unproductive household work is done. In the national accounts, houses owned by their occupants generate services that are included in GDP. In the US, such ‘work’ contributes 6 per cent of GDP–that is, a cool $1 trillion–even though none of these dollars actually exist. How do the statisticians come up with such an absurdity? They impute a rent to everyone who lives in their own home. A market rent is estimated for a property which the owner-occupier then pays herself as lessor for the services the house provides. Since the imputed rent is regarded as income, it is also recorded in the national accounts as production. Accountants justify this with the argument that ‘both international and inter-temporal comparisons of the production and consumption of housing services could be distorted if no imputation were made for the value of own-account housing services’.31

Equally importantly, the boundary loops around the issue of the environment. Consider a river polluted by industrial waste. When the polluter pays to clean it up, the expenditure is treated as a cost which reduces profits and GDP. But when the government pays another company to clean up the river, the expenditure adds to GDP because paying workers adds value. If the cost of cleaning up pollution is borne by someone other than the polluter it is called an externality–the cost is ‘outside’ the polluter’s profit-and-loss account–and increases GDP.

Policymakers’ faith in the value of finance was undiminished by its 2008 implosion. Indeed, their reaction to the global financial crisis was to insist that more of each economy’s ‘capital’ should be assigned to private-sector banks, and to support them with an ultra-relaxed monetary policy, in which near-zero interest rates were supplemented by central banks’ buying-up of government or even corporate bonds to keep their prices high. This massively increased the ‘asset’ side of the world’s main central banks.

By licensing only a few investment banks, governments granted them the monopoly power needed to co-ordinate expansion of related industries, and to achieve the profit required to absorb high risks.6 The banks’ unique role in development was recognized by some mid-twentieth-century economists, notably Joseph Schumpeter (1934) and Alexander Gerschenkron (1962).7 The ‘banking problem’ arose because, as the twentieth century progressed, banks’ role in fuelling economic development steadily diminished in theory and practice–while their success in generating revenue and profit, through operations paid for by households, firms and governments, steadily increased. A fast-expanding part of the economy in the middle of the twentieth century was not being accounted for in the national accounts. The economists (like Schumpeter and Gerschenkron) who had ascribed banks a key role in development were nevertheless clear that they achieved this through exercising a degree of monopoly power, collecting rent as well as profit.

money is made by shorting property-related investments before a slump, as investors such as the hedge fund manager John Paulson famously did before the 2008 crash, the profit increases GDP. But surely if, for example, bus fares kept rising in real terms, we’d demand to know why bus companies were becoming less efficient, and take action against operators who used monopoly power to push up their prices? But when the cost of financial intermediation keeps rising in real terms, we celebrate the emergence of a vibrant and successful banking and insurance sector.

That banks create money is still a highly contested notion. It was politically unmentionable in 1980s America and Europe, where economic policy was predicated on a ‘monetarism’ in which governments precisely controlled the supply of money, whose growth determined inflation. Banks traditionally presented themselves purely as financial intermediaries, usefully channelling household depositors’ savings into business borrowers’ investment.

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.

Back in the mid-1980s, to try to prevent the banking system from moving to speculative finance, Hyman Minsky formulated an economic recipe that can be summarized as ‘big government, big bank’. In his vision, government creates jobs by being the ‘employer of last resort’ and underwrites distressed financial operators’ balance sheets by being the ‘lender of last resort’.28 When the financial sector is so interconnected, it is very possible for one bank’s failure to become contagious, leading to the bankruptcy of banks all over the world. In order to avoid this ‘butterfly effect’ (as chaos theory calls it), Minsky favoured strong regulation of financial intermediaries.

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.

Two classes of financial instrument in particular were made available to investors by deregulation from the 1970s onwards, and were central to the subsequent massive growth in financial transactions and profitability. These were derivatives, contracts on the future delivery of a financial instrument or commodity which allowed investors to make bets on their price movement; and securitizations, bundles of income-yielding instruments that turned these into tradable securities (and enabled their inclusion in derivative contracts). Commercial banks made a particular breakthrough in the early 2000s when they began to ‘securitize’ past lending to finance new lending.

But of course vital government investments abound: obvious examples include infrastructure projects like the Federal interstate highway system in the US or motorways in the UK. It makes no sense simply to assume that the return on enormous government investments is zero, when similar investments by the private sector do produce a return.

These rules have been made in order to find a straightforward way to account for economic activity. Yet, when you consider the combined weaknesses of accounting conventions–government is lumped with households as a ‘final’ consumer; government cannot make a surplus, earn returns, increase its productivity or raise value added through market production–you can’t help but notice that, while every effort has been made to depict finance as productive, the opposite seems to be true for government. Simply because of the way that productivity is defined, the fact that government expenditure is higher than value added reinforces the widely held idea that ‘unproductive’ government has to take before it can spend.

Fear of government failure has convinced many governments that they should emulate the private sector as far as they can. The premise here is that government is inevitably prone to corruption and laziness because agent and principal are too close to each other. It is essential, therefore, to make public services more ‘efficient’. From the 1980s onwards, private-sector measurements of efficiency were applied to the public sector and in the process ‘marketized’ government.

Similar situations have occurred with banks which are affected by bad loans, such as RBS in the UK. Such banks end up with balance sheets full of worthless loans that then prevent the banks in question from making any further loans. The default answer in such cases has often been to take out all the toxic assets from the ‘good’ part of the bank, and to put them in a government-run ‘bad bank’. The idea is that doing so will allow the private bank to get back on its feet, with the taxpayer taking on the responsibility of managing or selling off the bad assets. But this has resulted in the socialization of risks and privatization of rewards that we examined in Chapter 7: in the same way that the US government picked up the bill for the failed Solyndra, and let the profits from the similar investment made in Tesla go private, the taxpayer picks up the bill for those parts of public assets that are less efficient, and sells off the better bits to the private sector–and often at a garage sale discount. Similar examples have occurred in other companies: in 2014 Italy’s national airline Alitalia was split into a good company, sold privately, and a bad company which remained in government hands.

So the state-owned BBC is thought to serve the public good when it makes documentaries about giraffes in Africa, but is questioned if it makes soap operas or talk shows. State agencies can often fund basic science due to the ‘positive externalities’, but not downstream applications. Public banks can provide counter-cyclical lending, but they cannot direct their lending to socially valuable areas like the green economy. These arbitrary distinctions reflect a narrow view of the economy which often results in a public actor being accused of ‘crowding out’ a private one–or, worse still, delving into the dangerous waters of ‘picking winners’: the state is only supposed to do what the private sector does not want to do, rather than have its own vision of a desirable and achievable future.

It is crucial to find metrics which favour long-run investments and innovation. In the 1980s, it was not cost-benefit analysis that encouraged the BBC to establish a dynamic ‘learning programme’ to get kids to code. The activity led to the development of the BBC Microcomputer, which found its way into all British classrooms. While the Micro did not itself become a commercial success, procurement for its parts supported Acorn Computers and eventually led to the creation of ARM Holdings, one of the most successful UK technology companies of recent decades.