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

by Mariana Mazzucato

‘Our first business is to supervise the production of stories, and chose only those we think suitable, and reject the rest. We shall persuade mothers and nurses to tell our chosen stories to their children, and by means of them to mould their minds and characters rather than their bodies. The greater part of the stories current today we shall have to reject.’

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.

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.

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 emphasis by populist politicians on the negative effect of free trade, and the need to put up different types of walls to prevent the free movement of goods and labour, also gestures back to the mercantilist era, with emphasis more on getting the prices right (including exchange rates and wages) than on making the investments needed to create long-run growth and higher per capita income.

Breaking away from the mercantilists, who placed exchange and what was gained from it–gold–at the centre of value creation, he now linked value creation inextricably with production. Developing his classification of productive and unproductive work, Quesnay grouped society into three classes. First came farmers and related occupations working on the land and water; according to Quesnay, this was the only productive class. Next were manufacturers, artisans and related workers who transform the materials they receive from the productive class: wood and stone for furniture and houses, sheep’s wool for clothing and metals from the mines for tools.15 Yet, argued Quesnay, this class did not add value; rather, their work merely recirculated existing value. 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

thereby allowing the economy to continue reproducing itself. If any of the unproductive members of society take too much, reducing the amount the farmer can reinvest in production, the economy will grind to a halt. In other words, if value extraction by the unproductive members exceeds value creation by the productive members, growth stops.

A. R. J. Turgot retained the notion that all value came from the land, but noted the important role of artisans in keeping society afloat. He also recognized that there were other ‘general needs’ that some people had to fulfil–such as judges to administer justice–and that these functions were essential for value creation. Accordingly, he re-labelled Quesnay’s ‘sterile’ class as the ‘stipendiary’, or waged, class.

Although their theories differed in many respects, 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.

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.

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.

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’.

The victory of the free traders over the mercantilists is better understood in terms of their rival conceptions of value. Mercantilists thought gold had inherent worth and that everything else could be valued in terms of how much gold it was exchanged for. Following Smith, free traders could trace value to labour, and the logic of value was thereby inverted. Gold, like all other things, was valued by how much labour it took to produce.31

Adding value in any branch of production is productive; not adding value is unproductive. Following this definition, services such as cleaning or vehicle repair can be productive–thereby invalidating Smith’s own material–immaterial division of the production boundary.

Ricardo actually believed in the labour theory of value, and, unlike Smith, was at pains to point out that the value of a commodity was strictly proportional to the amount of labour time needed to produce it.

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’.

As profits grow, so capitalists invest and expand production, which in turn creates more jobs and raises wages, thereby increasing the population, whose wages finally go back to subsistence level, and so on.

Ricardo defined rent as a transfer of profit to landlords simply because they had a monopoly of a scarce asset. There was no assumption, as in modern neoclassical theory (reviewed in Chapter 2), that these rents would be competed away. They remained due to power relationships inherent in the capitalist system.

rising rents were the flipside of rising food prices, caused by lack of good-quality agricultural land. More costly food increased the wages workers needed for subsistence. This growing wage share, Ricardo believed, put a squeeze on profits in other sectors such as manufacturing. As economic development proceeded, the profit rate–basically the manufacturing capitalist’s return on capital–would fall. The profit share–the part of the national income going to capitalists–would also fall. Correspondingly, the wage share going to manufacturing workers would rise. But the extra wages would have to be spent on food, which was more expensive because landlords were charging higher rents. As a result, much of the nation’s income would ultimately go to landlords. This would halt further economic growth and investment in, say, manufacturing because the low returns would not justify the risks.

The cost is likely to be lower with good land, higher with inferior land. Profits, instead, are likely to be higher with good land and lower with inferior land. The owner of good land will pocket the difference in profit between the good land and inferior land simply because he or she has a monopoly of that asset.

Ricardo’s heroes are the industrial capitalists, ‘those who reproduce’, who can ensure that workers subsist and generate a surplus that is free for the capitalist to use as he or she sees fit. His villains are those ‘who do not reproduce’–the landed nobility, the owners of scarce land who charge very high rents and appropriate the surplus.

Ricardo believed that government is by nature unproductive.

Ricardo did not write about that part of government expenditure which creates the conditions for productivity in the first place: infrastructure (bridges, roads, ports and so on), national defence and the rule of law. By omitting to discuss the role of government in productivity, he paved the way for generations of economists to be equally oblivious–

Marx developed his own version of the labour theory of value.

Exchange value crystallizes the value inherent in commodities. The source of that inherent value is the one special commodity workers own: their labour power, or–put another way–their capacity to work. Capitalists buy labour power with their capital. In exchange, they pay workers a wage. Workers’ wages buy the commodities such as food and housing needed to restore a worker’s strength to work. In this way, wages express the value of the goods that restore labour power.

if a worker has to work five hours to produce the value needed to restore labour power per day, the labour power’s value is equivalent to the five hours of work. However, if the working day lasts ten hours, the additional five hours’ work will create value over and above that needed to restore labour power. Labour power creates surplus value. The ingenuity of capitalism, according to Marx, is that it can organize production to make workers generate unprecedented amounts of this surplus value.

Workers, in other words, are exploited because capitalists pocket the surplus value workers produce over and above their subsistence requirements.

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

Capital not used to hire workers is invested in other means of production that are ‘constant’ capital–including machinery, land, buildings and raw materials–whose value is preserved but not increased during production.49 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.

Workers’ wages were set by class struggle. The side with more power could force through a wage rate favourable to itself.

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 two categories Marx identified were production (or industrial) capital and commercial capital.

As Marx explained, the first creates surplus value, the second ‘realizes’ it. Any unsold commodity will therefore be of no use to a capitalist,

As production expands, however, separate capitalist enterprises will probably emerge to carry out these functions as commodity or money capitalists. 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.

The emergence of distinct commercial capital enterprises alters the structure of the whole economy and the amount of surplus value available to production capitalists.

Marx then identified ‘interest-bearing’ capital–capitalists such as banks who earned interest on loans that production capitalists took out to expand production. The generation of interest is possible because, in capitalism, money represents not just purchasing power–buying commodities for consumption–but also the potential to generate more profit in the future through investment as capital.

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.

Marx identified another: owners of scarce things like land, coal, a patent, a licence to practise law, and so on. Such scarce things can improve productivity above the general productivity level–the same product can be produced in less labour time or with fewer means of production. That in turn creates ‘surplus profits’–what Smith and Ricardo might have thought of as ‘rent’–for capitalists, or landlords and proprietors, who can exploit these advantageous production conditions. Marx thus outlined a theory of ‘monopoly’ gain.

For Marx, then, the production boundary is defined not by sectors or occupations but by how profits are generated–more specifically, whether an occupation is carried out in a capitalist production context. Only the capitalist enterprise will accumulate the surplus value that can lead to an expansion of production.

different types of capitalist activity–production, circulation, interest-bearing capital and rent–Marx offers the economist an additional diagnostic tool with which to examine the state of the economy.

rent is income from redistributing value and not from creating it.

In France, Jean-Baptiste Say (1767–1832), Smith’s contemporary and a hostile critic of Quesnay, argued in his 1803 book Treatise on Political Economy that the value of a commodity resides in its utility to a buyer and, therefore, that productive labour is labour which produces utility.

So what was the new value theory, marginalism, about? First, it is based on the notions of utility and scarcity and is subjective: the value of things is measured by their usefulness to the consumer. There is, therefore, no ‘objective’ standard of value, since utility may vary between individuals and at different times. Second, this utility decreases as the amount of a thing that is held or consumed increases.

Prices, then, reflect the utility that buyers get from things. The scarcer they are–the higher their marginal utility–the more consumers will be willing to pay for them. These changes in the marginal utility of a product came to be known as consumer ‘preference’. The same principle applies to producers. ‘Marginal productivity’ is the effect that an extra unit of produced goods would have on the costs of production.

Microeconomic theory, the theory of how firms, workers and consumers make choices, is based on the neoclassical theory of production and consumption which rests on the maximization of profits (firms), and utility (consumers and workers).

the point at which a consumer’s money is worth more to him or her than the additional (marginal) unit of a commodity (that next Mars Bar) that their money would purchase, is where the system is in ‘equilibrium’, an idea reminiscent of Newton’s description of how gravity held the universe together.

The inclusion of concepts like equilibria in the neoclassical model had the effect of portraying capitalism as a peaceful system driven by self-equilibrating competitive mechanisms–a stark contrast to the ways in which the system was depicted by Marx, as a battle between classes, full of disequilibria and far from optimal, whose resulting revolutions would have been better described by Erwin Schrödinger’s concept of quantum leaps and wave mechanics.

For the marginalists, this scarcity theory of value became the rationale for the price of everything, from diamonds, to water, to workers’ wages.

Competition ensures that the ‘marginal utility’ of the last item sold determines the price of that commodity. The size of the market in a particular commodity–that is, the number of items that need to be sold before marginal utility no longer covers the costs of production–is explained by the scarcity, and hence price, of the inputs into production. Price is a direct measure of value.

Marginal utility and scarcity need a couple of additional assumptions for price determination to work as intended. First, all humans have to be one-dimensional utility calculators who know what’s best for themselves, what price to pay for what commodity and how to make an economically ‘rational’ choice.11 Second, there must be no interference, for example by monopolies, in price-setting. ‘Equilibrium’ with ‘perfect competition’–in which supply and demand are exactly balanced,