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October 28 - November 5, 2018
is also true that many other services that people provide throughout society go unpaid, such as care given by parents to children or by the healthy to the unwell, and are not well accounted for.
First, the disappearance of value from the economic debate hides what should be alive, public and actively contested.17 If the assumption that value is in the eye of the beholder is not questioned, some activities will be deemed to be value-creating and others will not, simply because someone–usually someone with a vested interest–says so, perhaps more eloquently than others.
Or when pharmaceutical companies argue that the exorbitantly high price of one of their drugs is due to the value it produces? Government officials can become convinced (or ‘captured’) by stories about wealth creation, as was recently evidenced by the US government’s approval of a leukemia drug treatment at half a million dollars, precisely using the ‘value-based pricing’ model pitched by the industry–even when the taxpayer contributed $200 million dollars towards its discovery.
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.
Indeed, for economists there is no longer any story other than that of the subjective theory of value, with the market driven by supply and demand.
Today, there is a lot of talk about the need to make growth ‘smarter’ (led by investments in innovation), more sustainable (greener) and more inclusive (producing less inequality).19
Similarly, today’s deepening concern that the financial sector in some countries is too large–compared, for example, to manufacturing–might be informed by theories of what kind of economy we want to be living in and the size and role of finance within it.
But the distinction between productive and unproductive activities has rarely been the result of ‘scientific’ measurement. Rather, ascribing value, or the lack of it, has always involved malleable socio-economic arguments which derive from a particular political perspective–which is sometimes explicit, sometimes not.
And if an investment bank makes an enormous profit from the exchange rate instability that affects a country, that profit can be seen as what it really is: rent.
Indeed, claims about value creation have always been linked to assertions about the relative productiveness of certain elements of society, often related to fundamental shifts in the underlying economy: from agricultural to industrial, or from a mass-production-based economy to one based on digital technology.
Chapter 2 delves into the biggest shift of all. From the second half of the nineteenth century onwards, value went from being an objective category to a more subjective one tied to individual preferences.
This is all very well, but the fact that the production boundary debate is no longer explicit, nor linked openly to ideas about value, means that economic actors can–through sustained lobbying–quietly place themselves within the boundary. Their value-extracting activities are then counted in GDP–and very few notice.
Chapter 4 I look at the emergence of finance as a major economic sector and its transition from being considered largely unproductive to becoming accepted as largely productive.
In Chapter 5 I explore the development of ‘asset manager capitalism’: how the financial sector expanded beyond the banks to incorporate an increasingly large number of intermediaries dedicated to managing funds (the asset management industry), and ask whether the role of these intermediaries, and the actual risks they take on, justify the rewards
Chapter 6 examines the financialization of the whole economy. In seeking a quick return, short-term finance has affected industry: companies are run in the name of maximizing shareholder value (MSV).
I will argue, however, that MSV has been detrimental to sustained economic growth, not least because it encourages short-term gain for shareholders at the expense of long-term gains for the company–a development closely linked to the increasing influence of fund managers seeking returns for their clients and for themselves.
Risk-taking is often the justification for the rewards investors reap, and Chapter 7 continues to look at other types of value extraction carried out in its name. Here I consider the kind of risk-taking required for radical technological innovation to occur. Innovation is without doubt one of the most risky and uncertain activities in capitalism: most attempts fail. But who takes it on? And what sort of incentives must be created? I explore the biased view of the current innovation narrative: how public-sector risk-taking is ignored, the state being seen as merely facilitating and ‘de-risking’
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Claiming value in innovation, most recently with the concept of ‘platforms’ and the related notion of the sharing economy, is less about genuine innovation and more to do with facilitating value extraction through the capture of rents.
Modern economic thought has relegated government to just fixing market failures rather than actively creating and shaping markets.
This book does not try to argue for one correct theory of value. Rather, it aims to bring back value theory as a hotly debated area, relevant to the turbulent economic times in which we find ourselves.
This idea that we can shape markets has important consequences. We can create a better economy by understanding that markets are outcomes of decisions that are made–in business, in public organizations and in civil society. The eight-hour working day has formed markets–and that was the result of a fight held in labour organizations.
There is one sort of labour which adds to the value of the subject upon which it is bestowed: there is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour. Adam Smith, The Wealth of Nations (1776)
Governments and people of all stations in life wanted to know what was causing unprecedented movement and how it could be managed. What taxes can we raise? Why are my wages so low compared with the profits of capitalists? How sure can one be of the future when investing now? What creates value?
But the distinction between what is or is not productive has varied depending on economic, social and political forces. Ever since economists began to explore the changing conditions of production some 300 years ago they have struggled to provide a rationale for labelling some activities productive and others unproductive.
at first farm labour (the physiocrats) and then industrial labour (the classicals). This value, they believed, therefore determined the price of what was finally sold.
Later, as we will see in the next chapter, they were superseded by another perspective–that of the neoclassicals–focused less on objective forces of production and more on the subjective nature of the ‘preferences’ of different actors in the economy.
Scholars and politicians of the time who argued that accumulating precious metals was the route to national power and prosperity are called mercantilists (from mercator, the Latin word for merchant), because they espoused protectionist trade policies and positive trade balances to stimulate the inflow, and prevent the outflow, of gold and silver.
Seventeenth-century Britain saw two groundbreaking attempts to quantify national income.
Petty made a decisive breakthrough. He realized that income and expenditure at the national level should be the same. He understood that, if you treat a country as a closed system, each pound one person spends in it is another person’s income of one pound. It was the first time anyone had grasped and worked with this fundamental insight.
In this way, by extension, Petty came to see any branch of the economy that did not produce those necessities as unproductive, adding nothing to national income.
In the late 1690s, after the first publication of Petty’s work Political Arithmetick, Gregory King made more detailed estimates of England’s income.
In King’s view, the unproductive masses, representing slightly more than half the total population, were leeches on the public wealth because they consumed more than they produced.
Mercantilist ideas still resonate in current economic practices. Modern ‘management’ of exchange rates by governments, trying to steal a competitive advantage for exports and accumulate foreign exchange reserves, harks back to mercantilist notions of boosting exports to accumulate gold and silver.
Petty and King were seminal figures in these early forays into the question of how and where value is created. Yet, ultimately, both could label productive and unproductive occupations however they chose.
As the study of economics developed during the course of the eighteenth century, thinkers became increasingly concerned with finding a theory to explain why some nations grew and prospered while others declined.
The labour theory of value reached its apogee with Karl Marx in the mid-nineteenth century, when the Industrial Revolution was in full swing.
In his seminal work Tableau Économique, published in 1758, he constructed an ‘economic table’ which showed how new value was created and circulated in the economy. In it he continued the metabolic analogy: pumps were drawn to signify the ways in which new value was introduced, and outgoing tubes illustrated how value left the system.
Contrasting sharply with the prevailing mercantilist thinking that gave gold a privileged place, Quesnay believed that land was the source of all value. Figure 3 illustrates how for him, in the end, everything that nourished humans came from the earth. He pointed out that, unlike humans, Nature actually produced new things: grain out of small seeds for food, trees out of saplings and mineral ores from the earth from which houses and ships and machinery were built.
The third class was the unproductive ‘proprietor’, ‘distributive’ or ‘sterile’ class, which was made up of landlords, nobility and clergy. Here, ‘distributive’ was meant pejoratively: this class redistributes value, but only to itself, for the sole reason that it owns the land and does not give anything in return.16
Turgot’s more refined analysis therefore placed emphasis on the character of the work being done, rather than the category of work itself.
Quesnay and Turgot’s almost complete identification of productivity with the agricultural sector had an overriding aim. Their restrictive production boundary gave the landed aristocracy ammunition to use against mercantilism, which favoured the merchant class, and fitted an agricultural society better than an industrial one.
Economists started to measure the market value of a product in terms of the amount of work, or labour, that had gone into its production.
Another enormously influential book, Ricardo’s On the Principles of Political Economy and Taxation, first published in 1817, contained a famous chapter called ‘On Machinery’, in which he argued that mechanization was reducing demand for skilled labour and would depress wages.
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. Marx, we will see, was more subtle in his understanding of this distinction.
But even the simple reorganization of labour, without machinery, by which each worker specialized and developed skills in a specific area, enabled Smith to make this critical point.
Equally significant was Smith’s analysis of how the ‘market’ determines the way in which consumers and producers interact. Such interaction, he contended, was not down to ‘benevolence’ or central planning.21 Rather, it was due to the ‘invisible hand’ of the market:
But for Smith, industrial workers–not, as for Quesnay, farmers–were at the heart of the productive economy. Manufacturing labour, not land, was the source of value.23 The labour theory of value was born.
He was convinced that growth depended on increasing the relative share of ‘manufactures’–factories employing formerly independent artisans or agricultural workers as dependent wage labourers–in the overall make-up of industry and believed that free trade was essential to bring this about. He felt that the enemies of growth were, first, the protectionist policies of mercantilists; second, the guilds protecting artisans’ privileges; and third, a nobility that squandered its money on unproductive labour and lavish consumption.
In Smith’s view, ‘how honourable, how useful, or how necessary soever’ a service may be, it simply does not reproduce the value used in maintaining (feeding, clothing, housing) unproductive labourers.
How, then, are those that do not produce this unit of value kept alive? Smith’s answer lay in the concept of a ‘surplus’. Many productive workers produce the equivalent of more grain than they need to feed themselves to survive.
