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

by Mariana Mazzucato

Innovation is a collective process, with different types of public institutions playing a pivotal role. That role is ignored, so our theory of value creation is flawed.

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

Between 1975 and 2017 real US GDP–the size of the economy adjusted for inflation–roughly tripled, from $5.49 trillion to $17.29 trillion.1 During this period, productivity grew by about 60 per cent. Yet from 1979 onwards, real hourly wages for the great majority of American workers have stagnated or even fallen.2

This book questions the stories we are being told about who the wealth creators are in modern-day capitalism, stories about which activities are productive as opposed to unproductive, and thus where value creation comes from.

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. Indeed, economists were so convinced about the purely facilitating role of finance that they did not even include most of the services that banks performed, such as taking in deposits and giving out loans, in their calculations of how many goods and services are produced by the economy.

Financial operations and the mentality they breed pervade industry, as can be seen when managers choose to spend a greater proportion of profits on share buy-backs–which in turn boost stock prices, stock options and the pay of top executives–than on investing in the long-term future of the business. They call it value creation but, as in the financial sector itself, the

John LaMattina, former President of R&D at the drugs company Pfizer, argued that the high price of speciality drugs is justified by how beneficial they are for patients and for society in general. In practice, this means relating the price of a drug to the costs that the disease would cause to society if not treated, or if treated with the second-best therapy available.

With ‘innovation’ as the new force in modern capitalism, Silicon Valley has successfully projected itself as the entrepreneurial force behind wealth creation–unleashing the ‘creative destruction’ from which the jobs of the future come.

This seductive story of value creation has lead to lower rates of capital gains tax for the venture capitalists funding the tech companies, and questionable tax policies like the ‘patent box’, which reduces tax on profits from the sale of products whose inputs are patented, supposedly to incentivize innovation by rewarding the generation of intellectual property. It’s a policy that makes little sense, as patents are already instruments that allow monopoly profits for twenty years, thus earning high returns.

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 Internet, GPS, touchscreen, SIRI and the algorithm behind Google–all were funded by public institutions.

Government is depicted as a drain on society, funded by obligatory taxes on long-suffering citizens. In this story, there is always only one conclusion: that we need more market and less state. The slimmer, trimmer and more efficient the state machine the better.

But who decided that they are creating value? What definition of value is used to distinguish value creation from value extraction, or even from value destruction?

Plato recognized that stories form character, culture and behaviour: ‘Our first business is to supervise the production of stories, and chose only those we think suitable, and reject the rest.

Plato disliked myths about ill-behaved gods. This book looks at a more modern myth, about value creation in the economy. Such myth-making, I argue, has allowed an immense amount of value extraction, enabling some individuals to become very rich and draining societal wealth in the process.

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.

What’s more, if we cannot differentiate value creation from value extraction, it becomes nearly impossible to reward the former over the latter.

This is what philosophers call ‘performativity’: how we talk about things affects behaviour, and in turn how we theorize things. In other words, it is a self-fulfilling prophecy.

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.

The barbarous gold barons–they did not find the gold, they did not mine the gold, they did not mill the gold, but by some weird alchemy all the gold belonged to them.

For BHS workers and pensioners who depended on the company for a decent living for their families, this was value extraction–the appropriation of gains vastly out of proportion to economic contribution–on an epic scale. For Sir Philip and others who controlled the business, it was value creation.

The Commission ordered Apple to pay the back taxes on the grounds that Ireland’s deal with Apple constituted illegal state aid (government support that gives a company an advantage over its competitors); Ireland had not offered other companies similar terms.

Apple earned $2.5 billion in interest and dividends reported in Nevada to avoid Californian tax. California’s infamously large debt would be significantly reduced if Apple fully and accurately reported its US revenues in that state, where a major portion of its value (architecture, design, sales, marketing and so on) originated. Value extraction thus pits US states against each other, as well as the US against other countries.

Apple certainly creates value, of that there is no doubt: but to ignore the support taxpayers have given it, and then to pit states and countries against each other, is surely not the way to build an innovative economy or achieve growth that is inclusive, that benefits a wide section of the population, not only those best able to ‘game’ the system.

The vital but often muddled distinction between value extraction and value creation has consequences far beyond the fate of companies and their workers, or even of whole societies.

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.

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.

Another leading thinker, the US economist Joseph Stiglitz, has explored how weak regulation and monopolistic practices have allowed what economists call ‘rent extraction’, which he sees as the main impetus behind the rise of the 1 per cent in the US.10 For Stiglitz, this rent is the income obtained by creating impediments to other businesses, such as barriers to prevent new companies from entering a sector, or deregulation that has allowed finance to become disproportionately large in relation to the rest of the economy.

To understand how some are perceived as ‘extracting value’, siphoning wealth away from national economies, while others are ‘wealth creators’ but do not benefit from that wealth, it is not enough to look at impediments to an idealized form of perfect competition. Yet mainstream ideas about rent do not fundamentally challenge how value extraction occurs–which is why it persists.

What exactly is it that is being extracted? What social, economic and organizational conditions are needed for value to be produced?

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.

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.

A note of caution is important. In the book I use the words ‘wealth’ and ‘value’ almost interchangeably.

I want to be clear on how these two words are used. I use ‘value’ in terms of the ‘process’ by which wealth is created–it is a flow. This flow of course results in actual things, whether tangible (a loaf of bread) or intangible (new knowledge). ‘Wealth’ instead is regarded as a cumulative stock of the value already created.

For some economic schools of thought, the price of products resulted from supply and demand, but the value of those products derived from the amount of work that was needed to produce things, the ways in which technological and organizational changes were affecting work, and the relations between capital and labour. Later, this emphasis on ‘objective’ conditions of production, technology and power relationships was replaced by concepts of scarcity and the ‘preferences’ of economic actors: the amount of work supplied is determined by workers’ preference for leisure over earning a higher amount of money. Value, in other words, became subjective.

Until the mid-nineteenth century, too, almost all economists assumed that in order to understand the prices of goods and services it was first necessary to have an objective theory of value,

Then, this thinking began to go into reverse. Many economists came to believe that the value of things was determined by the price paid on the ‘market’–or, in other words, what the consumer was prepared to pay.

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.

While Adam Smith’s writings were full of politics and philosophy, as well as early thinking about how the economy works, by the early twentieth century the field which for 200 years had been ‘political economy’ emerged cleansed as simply ‘economics’. And economics told a very different story.

Eventually the debate about different theories of value and the dynamics of value creation virtually vanished from economics departments, only showing up in business schools in a very new form: ‘shareholder value’,13 ‘shared value’,14 ‘value chains’,15 ‘value for money’, ‘valuation’, ‘adding value’ and the like.

To understand how different theories of value have evolved over the centuries, it is useful to consider why and how some activities in the economy have been called ‘productive’ and some ‘unproductive’, and how this distinction has influenced ideas about which economic actors deserve what–how the spoils of value creation are distributed.

This has essentially created a boundary–the fence in Figure 1 below–thereby establishing a conceptual boundary–sometimes referred to as a ‘production boundary’–between these activities.16 Inside the boundary are the wealth creators. Outside are the beneficiaries of that wealth, who benefit either because they can extract it through rent-seeking activities, as in the case of a monopoly, or because wealth created in the productive area is redistributed to them, for example through modern welfare policies.

The politically explosive question was whether landlords were just abusing their power to extract part of the wealth created by their tenant farmers, or whether their contribution of land was essential to the way in which farmers created value.

But things are not so simple. The point is not to blame some as takers and to label others as makers. The activities of people outside the boundary may be needed to facilitate production–without their work, productive activities may not be so valuable. Merchants are necessary to ensure the goods arrive at the marketplace and are exchanged efficiently. The financial sector is critical for buyers and sellers to do business with each other. How these activities can be shaped to actually serve their purpose of producing value is the real question.

Is government inherently unproductive, as is often claimed, its only earnings being compulsory transfers in the form of taxes from the productive part of the economy? If so, how can government make the economy grow? Or can it at best only set the rules of the game, so that the value creators can operate efficiently?

As we will explore in Chapter 8, this question is more tainted by political views and ideological positions than informed by deep scientific proofs.

Indeed, it is important to remember that economics is at heart a social science, and the ‘natural’ size of government will depend on one’s theory of (or simply ‘position’ on) the purpose of government.

Over time, this conceptual production boundary was expanded to encompass much more of the economy than before, and more varied economic activities.

Significantly, the only major part of the economy which is now considered largely to lie outside the production boundary–and thus to be ‘unproductive’–remains government.