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

by Mariana Mazzucato

You are valuable because what you provide is scarce.

Workers might choose unemployment because that gives them more marginal utility than working for that or a given wage. The corollary of this logic is that unemployment is voluntary. Voluntary unemployment arises from viewing economic agents as rationally choosing between work and leisure

Today, competitive markets where no one can be made better off without someone being made worse off are known as ‘Pareto-optimal’

Our problems, marginalism holds, derive solely from imperfections in, and inhibitions on, the smooth working of the capitalist machine.

This approach has a very important consequence. It suggests that government should never intervene in the economy unless there are market failures.

The FFT holds that markets are the most efficient allocators of resources under three specific conditions: first, that there exists a complete set of markets, so that all goods and services which are demanded and supplied are traded at publicly known prices; that all consumers and producers behave competitively; and that an equilibrium exists.

Market failures might arise when there are ‘positive externalities’, benefits to society such as basic science research from which it is hard for individual firms to profit; or ‘negative externalities’, bad things like pollution, which harm society but are not included in firms’ costs.

GDP can be measured as the total amount of products produced, the total amount demanded, or the total income earned

As long as products and services fetch a price on the market, they are worthy of being included in GDP; whether they contribute to value or extract it is ignored. The result is that the distinction between profits and rents is confused and value extraction (rent) can masquerade as value creation.

Value added is the monetary value of what those industries produce, minus the costs of material inputs or ‘intermediate consumption’: basically, revenue minus material input cost.

Value added, however, is a figure specifically calculated for national accounting: the residual difference (residual) between the resource side (output) and the use side (consumption).

Rather than assess whether final consumption increased utility, they added any final consumption to national income.

By simply adding up market prices they ignored the fact that those prices would not always produce an equilibrium and be compatible with ‘perfect competition’; prices could therefore be higher or lower than if equilibrium prevailed, thereby giving a distorted impression of value creation.

This redefinition of government as a contributor to national product was a decisive development in value theory. Keynes’s ideas quickly gained acceptance

= Consumption by households (C) + Investment by companies and by residential investment in housing (I) + Government spending (G). This can be expressed as: GDP = C + I + G.

GDP, for instance, does not clearly distinguish a cost from an investment in future capacity, such as R&D; services valuable to the economy such as ‘care’ may be exchanged without any payment, making them invisible to GDP calculators; likewise, illegal black-market activities may constitute a large part of an economy.

resource that is destroyed by pollution may not be counted as a subtraction from GDP–but when pollution is cleaned up by marketed services, GDP increases.

since 2008 GDP has been enlarged by the annual cost of R&D, including the depreciation of fixed assets used.

The implicit production boundary is determined by whether money changes hands for the service. Therefore, there is ‘extreme difficulty’ in giving a value to work done by women (or men) who do not receive a wage in exchange for it.

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’.

Another valid question is why a hike in rent should increase the value produced by real-estate agencies, especially if the quality of the rental service is not improving.

Rising house prices mean rising implicit rentals, and hence rising incomes when the implicit rental is included. The paradoxical result is that a house price bubble, perhaps caused by low interest rates or relaxed lending conditions, will show up as an acceleration of GDP growth. Why? Because households’ services to themselves–as their own landlords, charging themselves implicit rentals–are suddenly rising in value,

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.

as long as products and services fetch a price on the market, they are deemed worthy of being included in GDP; whether they contribute to value or extract it is ignored.

Banking, it is argued, provides three main ‘services’: ‘maturity transformation’ (the conversion of short-term deposits into mortgages and business loans); liquidity (the instant availability of cash through a short-term loan or overdraft for businesses and households that need to pay for something); and, perhaps most importantly, credit assessment (vetting loan applications to decide who is creditworthy and what the terms of the loan should be).

How does finance extract value? There are broadly three related answers: by inserting a wedge, in the form of transaction costs, between providers and receivers of finance; through monopoly power, especially in the case of banks; and with high charges relative to risks run, notably in fund management.

PE is MSV turbo-charged. Many of the companies in which PE firms invest are not financial ones; often, indeed, they can be found on the productive side of the production boundary. But whereas traditional institutional investors were often satisfied to ‘buy and hold’, and to await share price gains via profit being reinvested rather than paid out, PE seeks to buy and resell at a higher price within a few years. What this means is that many firms owned by PE funds are pushed into taking a significantly shorter-term view than they might have done otherwise–the exact reverse of ‘patient capital’ and raising productivity to benefit society in the long run.

when taken together, as a shift from a model of ‘Retain and Invest’ to ‘Downsize and Distribute’.

which proponents of stakeholder value level against MSV is that the ‘pursuit of gains for shareholders at the expense of other stakeholders [is] a pursuit which ultimately destroys both shareholder and stakeholder value’.

Innovation rarely occurs in isolation. Rather it is by nature deeply cumulative: innovation today is often the result of pre-existing investment. Innovation is, moreover, collective, with long lead-times: what might appear as a radical discovery today is actually the fruit of decades of hard work by different researchers. It is also profoundly uncertain, in that most attempts at innovation fail and many results are unexpected.

unproductive advertising activities are counted as a net contribution of online giants to national income, while the more valuable services that they provide to users are not.

Marginal utility, as we have seen, locates value in the price of any transaction that takes place freely in the market. According to this perspective, government produces nothing: it cannot create value. And government’s main source of income is taxes, which are a transfer of existing value created in the private sector.

Keynes disposed of the assumption that supply creates its own demand. He argued instead that producers’ expectations of demand and consumption determine their investment, and consequently the employment and production that follow from it;28 therefore, low expectations could lead to underemployment. This he called the ‘principle of effective demand’: investment can fall as a result of expectations or bets on the future

When the private sector cuts production in times of downbeat expectations about demand, he argued, government could intervene positively, increasing demand through additional spending, which in turn would lead to more positive expectations of future consumption and induce the private sector to invest, with higher GDP as a result.

In Keynes’s macroeconomics, therefore, government creates value in that it allows the economy to produce more goods and services than it would without government involvement.

Once the recovery was under way, the need for big deficits would pass and the debt could be paid off.

A libertarian, Friedman rejected the idea that government spending is beneficial, arguing that it most likely leads to inflation,

government’s role should be restricted to incentivizing individual producers and workers to supply more output and labour–for example by cutting taxes.

The accounting method adopted was simply to add up the costs of government production, subtract intermediate material inputs and equate the difference–basically, government employees’ salaries–with the output of government.

national accounts regard most of government value added only as costs, mainly pay to government employees; government activity lacks an operating surplus, which would increase its value added.

the return on investment by government is assumed to be zero; by this logic it does not earn a surplus.

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.

But if the output of government is defined simply as what it costs to do something, then an increase in output will always require the same increase in inputs.

Even though state-owned corporations earn profits (and in the stats, higher profits means higher value added), their profits are accounted for in the industrial sector they work for, not the ‘government’ sector.

Only government-owned entities that don’t sell at market prices are by definition included in the government sector.

So, in the case of free public education, while increasing the number of teachers might add to GDP (because they are paid), the value they actually produce does not increase GDP.

the multiplier refers to the effect that an increase in expenditure (demand) has on total production. Its significance lies in the fact that, in the view of Keynes and Kahn, government spending benefits the economy way beyond the amount of demand that spending generates.

According to the ‘new classicals’, the proponents of fiscal austerity measures, the multiplier’s value is less than one, or even negative.36

an increase of £1 of public expenditure is supposed to generate less than £1 or even have a negative effect on total GDP because it crowds out private investment.

Public Choice theory argues that government failure is caused by private interests ‘capturing’ policymakers through nepotism, cronyism, corruption or rent-seeking,39 misallocation of resources such as investing public money in unsuccessful new technologies (picking losers),40 or undue competition with private initiatives (‘crowding out’ what might otherwise be successful private investment).41 Public Choice theory stresses that policy must be vigilant to make sure that the gains from government intervention in the economy outweigh the costs of government failures.42 The idea is that there is a trade-off between two inefficient outcomes: one generated by free markets (market failure) and the other by governmental intervention (government failure).