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

by Mariana Mazzucato

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.

His emphasis on investment linked directly to his ideas about rent. Smith believed that there were three kinds of income: wages for labour in capitalist enterprises; profits for capitalists who owned the means of production; and rents from ownership of land. When these three sources of income are paid at their competitive level, together they determine what he called the ‘competitive price’.

In the seventeenth century, a government desperate for revenue had granted–often to well-placed courtiers–an extraordinary range of monopolies, from daily necessities such as beer and salt to mousetraps and spectacles.

Armed with Smith’s ideas, free traders showed that nations could get richer even if there was no trade surplus and no gold accumulation. 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.

The victory of the free traders over the mercantilists is better understood in terms of their rival conceptions of value.

The debates about Smith’s theories of value rumbled on for centuries. Other of Smith’s ideas, such as free trade and the unproductive nature of government, have also left an enduring legacy.

In the 1810s, another towering figure of the English classical economic school used the labour theory of value and productiveness to explain how society maintains the conditions which enable it to reproduce itself.

Ricardo was drawn to economics by reading Smith’s The Wealth of Nations, but was concerned with something that he felt was glaringly absent from Smith’s theory of value: how that value was distributed throughout society–or what we would today call income distribution. It need hardly be said that, in today’s world of growing inequality of income and wealth, this question remains profoundly relevant.

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.

Ricardo inherited this ‘dismal theory’ of wages from his contemporary Thomas Malthus (1766–1834), another English writer on political economy, who proposed that whenever real wages are above subsistence level, the population will grow until it is so large that the demand for food will push up food prices enough to bring wages back to subsistence level.

Profits are the residual from the value that workers produce and do not need to consume for their own ‘maintenance’, as Ricardo put it, ‘to subsist and perpetuate their race’.

Production in agriculture depends on two types of input: goods and services needed for production. One type can be scaled–increased in proportion to requirements. It includes labour, machinery, seeds and water. The other type cannot be scaled: good arable land. As Mark Twain is supposed to have said, ‘Buy land, they’re not making it any more.’

Ricardo defined rent as a transfer of profit to landlords simply because they had a monopoly of a scarce asset.

Ricardo proposed that the rent from more productive land always goes to the landlord because of competition between tenants. If the capitalist farmer–the tenant–wants to hang on to the largest possible profit by paying less rent, the landlord can give the lease to a competing farmer who will pay a higher rent and therefore be willing to work the land for only the standard profit.

If some input into production–such as good arable land–is scarce, the cost of producing the same output–a given quantity of corn–will vary according to availability of the input. The cost is likely to be lower with good land, higher with inferior land.

Ricardo’s theory was so convincing that it is, in essence, still used today in economics to explain how rents work.

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. 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’s portrayal of rents dominating production also had a political impact. It helped to persuade Britain to abolish the Corn Laws in 1846 and embrace free trade, which diminished the power of big vested interests and allowed production costs, rather than embedded monopoly and the privileges that went with it, to govern production.

Here Ricardo made a fundamental point about consumption, by which he means consumption by capitalists, not just households. As with production, consumption can be productive or unproductive. The productive kind might be a capitalist who ‘consumes’ his capital to buy labour, which in turn reproduces that capital and turns a profit.

The alternative–unproductive consumption–is capital spent on luxuries that do not lead to reproduction of that capital expenditure. On this matter, Ricardo is absolutely clear: ‘It makes the greatest difference imaginable whether they are consumed by those who reproduce, or by those who do not reproduce another value.’

For Ricardo, capitalists would put that surplus to productive use, but landlords–including the nobility–would waste it on lavish lifestyles.

But 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.

Significantly for our discussion, Ricardo singled out government as the ultimate example of unproductive consumption. Government, in his view, is a dangerous leech on the surplus. Most of government spending comes from taxes, and if it consumes–by spending on armies, for example–too large a share of the national income, ‘the resources of the people and the state will fall away with increasing rapidity, and distress and ruin will follow’.

By omitting to discuss the role of government in productivity, he paved the way for generations of economists to be equally oblivious–with hugely significant consequences that we will look at in Chapter 8

In essence, Ricardo’s theory of value and growth led to a production boundary that does not depend on a job or profession itself (manufacturer, farmer or vicar) or on whether the activity is material or immaterial. He believed that industrial production in general leads to surpluses, but for him the real question is how those surpluses are used. If the surpluses finance productive spending, they are productive; if not, they are unproductive.

Ricardo focused on the ‘plight’ of capitalists and their struggle against landlords. However, he never addressed the awkward fact that labour creates value but the capitalists get the spoils–the surplus ...

Two years later Marx was expelled from France because of his socialist political activities and settled in Brussels. There in 1848 he published with Engels the Communist Manifesto.

Marx developed his own version of the labour theory of value. He emphasized how definitions of ‘productive’ activity depend on historical circumstances–the society of any given time. He also focused on the nature of productive activity within the capitalist system. Under capitalism, firms produce commodities–a general term for anything from nuts and bolts to complete machines. If commodities are exchanged–sold–they are said to have an exchange value. If you produce a commodity which you consume yourself it does not have an exchange value. Exchange value crystallizes the value inherent in commodities.

This description of the source of value largely followed Ricardo. But Ricardo had tried unsuccessfully to find an external commodity that could serve as an ‘invariable standard of value’ by which the value of all other products could be determined. Marx solved this problem by locating this invariable measure in workers themselves.

He was careful to distinguish labour expended in production from labour power, which is the capacity to work. Workers expend labour, not labour power. And in this distinction lies the secret of Marx’s theory of value. Humans can create more value than they need to restore their labour power.

The ingenuity of capitalism, according to Marx, is that it can organize production to make workers generate unprecedented amounts of this surplus value.

But after the means of production were taken away from independent producers–mostly by violence and expropriation through property rights legislation, such as enclosures of common land in England by big landowners–they became workers, ‘free’ and without property.

Capitalists were able to purchase the workers’ labour power because workers lost their independent means of subsistence and needed a wage to survive.

However, Marx noted that there was a contradiction in the system. The drive to increase productivity would increase mechanization, which, in displacing labour (machines taking over human work), would then eventually reduce the key source of profits: labour power. He also foresaw the problem of growing financialization, which could potentially undermine industrial production.

But Marx gives capital a social dimension and surplus a negative connotation. Labour produces surplus value, which fuels capital accumulation and economic growth. But capital accumulation is not just due to productive labour. It is also deeply social. Because workers do not own the means of production they are ‘alienated’ from their work. The surplus they produce is taken away from them.

But precisely because the division of labour, which Smith extolled, left most workers overly specializing in discrete aspects of the production process, he believed that social relations became relations between commodities (things).

Marx defined the production boundary in terms of how profits are made. Marx asked how, by owning the means of production, the capitalist could appropriate surplus value while the workers who provided the labour received barely enough to live on–exactly the question Big Bill Heywood posed. By placing this distinction at the heart of value theory, Marx generated a new and unprecedented production boundary. Marx’s value theory changed economics–at least for a time.

At any moment in a capitalist economy, there is a ratio of surplus value to value used for workers’ subsistence–what Marx calls simply the rate of surplus value.

The value used for workers’ subsistence, the ‘wage share’, could not be less than was needed to restore labour power or workers would perish, leaving the capitalist unable to produce surplus value.

If wages increased because workers had a lot of bargaining power in a tight labour market, capitalists would substitute more machines for labour, creating more unemployment and competition among workers for jobs. Marx thought that capitalists would try to keep a ‘reserve army’ of the unemployed to hold down wages and maintain or increase their own share of the value workers created.

The average profit rate is also affected by economies of scale as the productivity of workers rises with a growing market and the increasing specialization of workers.

In particular, Marx believed that increasing agricultural production would not lead to Ricardo’s stationary, food-constrained world.51 He was right: broadly speaking, food production has kept pace with population increase. Marx was also acute in his understanding of the capacity of technology to transform society. He would not have been surprised by the extent to which automation has replaced people, nor perhaps by the possibility of machines more intelligent than their human creators.

Like economists before him, Marx believed that competition would tend to equalize rates of profits across the economy.52 But at this point Marx introduced a distinction that is critically important for his and for subsequent theories of value: the way in which different kinds of capitalists came by their profits.

The first produces commodities; the second circulates commodities by selling them, making the money received available to production capital for buying the means of production (the dark grey sphere in the lighter blob in Figure

Commercial capital, Marx noted, had existed for millennia: international merchants such as the Phoenicians and the Hanse bought cheap and sold dear. What they did not do was to add value by capitalist production.

Crucially, these capitalists and the labour they employ are purely concerned with the ‘circulation’ of capital; they do not produce commodities which generate surplus value and therefore they are unproductive.54 However, because they are also capitalist firms, they require the same rate of profit as does production capital. Consequently, some surplus value is diverted to become their income, diminishing the average profit rate in the economy.

Marx then identified ‘interest-bearing’ capital–capitalists such as banks who earned interest on loans that production capitalists took out to expand production.

Interest-bearing capital, unlike commercial capital, does not lower the general rate of profit; it just subdivides it between recipients of interest and earners of profit.

However, since interest-bearing capital does not produce any surplus value, it is not directly productive.

Finally, in addition to these types of capitalists, Marx identified another: owners of scarce things like land, coal, a patent, a licence to practise law, and so on.