Mariana Mazzucato
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THE VALUE OF EVERYTHING
Making and Taking in the Global Economy
Contents
Preface: Stories About Wealth Creation
Introduction: Making versus Taking
Common Critiques of Value Extraction
What is Value?
Meet the Production Boundary
Why Value Theory Matters
The Structure of the Book
1. A Brief History of Value
The Mercantilists: Trade and Treasure
The Physiocrats: The Answer Lies in the Soil
Classical Economics: Value in Labour
2. Value in the Eye of the Beholder: The Rise of the Marginalists
New Times, New Theory
The Eclipse of the Classicals
From Objective to Subjective: A New Theory of Value Based on Preferences
The Rise of the ‘Neoclassicals’
The Disappearance of Rent and Why it Matters
3. Measuring the Wealth of Nations
GDP: A Social Convention
The System of National Accounts Comes into Being
Measuring Government Value Added in GDP
Something Odd About the National Accounts: GDP Facit Saltus!
Patching Up the National Accounts isn’t Enough
4. Finance: A Colossus is Born
Banks and Financial Markets Become Allies
The Banking Problem
Deregulation and the Seeds of the Crash
The Lords of (Money) Creation
Finance and the ‘Real’ Economy
From Claims on Profit to Claims on Claims
A Debt in the Family
5. The Rise of Casino Capitalism
Prometheus (with a Pilot’s Licence) Unbound
New Actors in the Economy
How Finance Extracts Value
6. Financialization of the Real Economy
The Buy-back Blowback
Maximizing Shareholder Value
The Retreat of ‘Patient’ Capital
Short-Termism and Unproductive Investment
Financialization and Inequality
From Maximizing Shareholder Value to Stakeholder Value
7. Extracting Value through the Innovation Economy
Stories about Value Creation
Where Does Innovation Come From?
Financing Innovation
Patented Value Extraction
Unproductive Entrepreneurship
Pricing Pharmaceuticals
Network Effects and First-mover Advantages
Creating and Extracting Digital Value
Sharing Risks and Rewards
8. Undervaluing the Public Sector
The Myths of Austerity
Government Value in the History of Economic Thought
Keynes and Counter-cyclical Government
Government in the National Accounts
Public Choice Theory: Rationalizing Privatization and Outsourcing
Regaining Confidence and Setting Missions
Public and Private Just Deserts
From Public Goods to Public Value
9. The Economics of Hope
Markets as Outcomes
Take the Economy on a Mission
A Better Future for All
Notes
Bibliography
Acknowledgements
Follow Penguin
For Leon, Micol, Luce and Sofia
Preface: Stories About Wealth Creation
We often hear businesses, entrepreneurs or sectors talking about themselves as ‘wealth-creating’. The contexts may differ – finance, big pharma or small start-ups – but the self-descriptions are similar: I am a particularly productive member of the economy, my activities create wealth, I take big ‘risks’, and so I deserve a higher income than people who simply benefit from the spillovers of this activity. But what if, in the end, these descriptions are simply just stories? Narratives created in order to justify inequalities of wealth and income, massively rewarding the few who are able to convince governments and society that they deserve high rewards, while the rest of us make do with the leftovers.
In 2009 Lloyd Blankfein, CEO of Goldman Sachs, claimed that ‘The people of Goldman Sachs are among the most productive in the world.’1 Yet, just the year before, Goldman had been a major contributor to the worst financial and economic crisis since the 1930s. US taxpayers had to stump up $125 billion to bail it out. In light of the terrible performance of the investment bank just a year before, such a bullish statement by the CEO was extraordinary. The bank laid off 3,000 employees between November 2007 and December 2009, and profits plunged.2 The bank and some its competitors were fined, although the amounts seemed small relative to later profits: fines of $550 million for Goldman and $297 million for J. P. Morgan, for example.3 Despite everything, Goldman – along with other banks and hedge funds – proceeded to bet against the very instruments which they had created and which had led to such turmoil.
Although there was much talk about punishing those banks that had contributed to the crisis, no banker was jailed, and the changes hardly dented the banks’ ability to continue making money from speculation: between 2009 and 2016 Goldman achieved net earnings of $63 billion on net revenues of $250 billion.4 In 2009 alone they had record earnings of $13.4 billion.5 And although the US government saved the banking system with taxpayers’ money, the government did not have the confidence to demand a fee from the banks for such high-risk activity. It was simply happy, in the end, to get its money back.
Financial crises, of course, are not new. Yet Blankfein’s exuberant confidence in his bank would have been less common half a century ago. 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. Finance sneaked into their measurements of Gross Domestic Product (GDP) only as an ‘intermediate input’ – a service contributing to the functioning of other industries that were the real value creators.
In around 1970, however, things started to change. The national accounts – which provide a statistical picture of the size, composition and direction of an economy – began to include the financial sector in their calculations of GDP, the total value of the goods and services produced by the economy in question.6 This change in accounting coincided with the deregulation of the financial sector which, among other things, relaxed controls on how much banks could lend, the interest rates they could charge and the products they could sell. Together, these changes fundamentally altered how the financial sector behaved, and increased its influence on the ‘real’ economy. No longer was finance seen as a staid career. Instead, it became a fast track for smart people to make a great deal of money. Indeed, after the Berlin Wall fell in 1989, some of the cleverest scientists in Eastern Europe ended up going to work for Wall Street. The industry expanded, grew more confident. It openly lobbied to advance its interests, claiming that finance was critical for wealth creation.
Today the issue is not just the size of the financial sector, and how it has outpaced the growth of the non-financial economy (e.g. industry), but its effect on the behaviour of the rest of the economy, large parts of which have been ‘financialized’. 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 reality is often the opposite: value extraction.
These stories of value creation are not limited to finance. In 2014 the pharmaceutical giant Gilead priced its new treatment for the life-threatening hepatitis C virus, Harvoni, at $94,500 for a three-month course. Gilead justified charging this price by insisting that it represented ‘value’ to health systems. 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. The industry calls this ‘value-based pricing’. It’s an argument refuted by critics, who cite case studies that show no correlation between the price of cancer drugs and the benefits they provide.7 One interactive calculator (www.drugabacus.org), which enables you to establish the ‘correct’ price of a cancer drug on the basis of its valuable characteristics (the increase in life expectancy it provides to patients, its side effects, and so on), shows that for most drugs this value-based price is lower than the current market price.8
Yet drug prices are not falling. It seems that the industry’s value creation arguments have successfully neutralized criticism. Indeed, a high proportion of health care costs in the Western world has nothing to do with health care: these costs are simply the value the pharmaceutical industry extracts.
Or consider the way that entrepreneurs in the dot.com and IT industry lobby for advantageous tax treatment by governments in the name of ‘wealth creation’. With ‘innovation’ as the new force in modern capitalism, Silicon Valley’s do-gooders have successfully projected themselves as the entrepreneurs and garage tinkerers who unleash the ‘creative destruction’ from which the jobs of the future come. These new actors, from Google to Uber to Airbnb, are often described as the ‘wealth creators’.
Yet this seductive story of value creation leads to questionable broader tax policies by policymakers: for example, the ‘patent box’ policy that reduces tax on any 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 monopolies which should normally earn high returns. Policymakers’ objectives should not be to increase the profits from monopolies, but to favour investments in areas like research.
Many of the so-called wealth creators in the tech industry, like the co-founder of Pay Pal, Peter Thiel, often lambast government as a pure impediment to wealth creation.9 Thiel went so far as to set up a ‘secessionist movement’ in California so that the wealth creators could be as independent as possible from the heavy hand of government. When Eric Schmidt, CEO of Google, was quizzed about the way companies control our personal data, he replied with what he assumed was a rhetorical question: ‘Would you prefer government to have it?’ His reply fed a modern-day banality: entrepreneurs good, government bad.
Yet in presenting themselves as modern-day heroes, Apple and other companies conveniently ignore the pioneering role of government in new technologies. Apple has unashamedly declared that its contribution to society should not be sought through tax but through recognition of its great gizmos. But doesn’t the taxpayer who helped Apple create those products and the record profits and cash mountain they have generated deserve something back, beyond a series of undoubtedly brilliant gadgets? Simply to pose this question, however, underlines how we need a radically different type of narrative as to who created the wealth in the first place – and who has subsequently extracted it.
If there are so many wealth creators in industry, the inevitable conclusion is that at the opposite side of the spectrum featuring fleet-footed bankers, science-based pharmaceuticals and entrepreneurial geeks are the inert, value-extracting civil servants and bureaucrats in government. In this view, if private enterprise is the fast cheetah bringing innovation to the world, government is a plodding tortoise impeding progress – or, to invoke a different metaphor, a Kafkaesque bureaucrat, buried under papers, cumbersome and inefficient. 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.
In all these cases, from finance to pharmaceuticals and IT, governments bend over backwards to attract these supposedly value-creating individuals and companies, dangling before them tax reductions and exemptions from the red tape that is believed to constrict their wealth-creating energies. The media heap wealth creators with praise, politicians court them, and for many people they are high-status figures to be admired and emulated. 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?
Why have we so readily believed this narrative of good versus bad? How is the value produced by the public sector measured, and why is it more often than not treated simply as a more inefficient version of the private sector? What if there was actually no evidence for this story at all? What if it stemmed purely from a set of deeply ingrained ideas? What new stories might we tell?
The Greek philosopher Plato once argued that storytellers rule the world. His great work The Republic is in part a guide to educating the leader of his ideal state, the Guardian. 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. 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.’10
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. Between 1975 and 2015 real US GDP – the size of the economy adjusted for inflation – roughly tripled from $5.49 trillion to $16.58 trillion.11 During this period, productivity grew by more than 60 per cent. Yet from 1979 onwards, real hourly wages for the great majority of American workers have stagnated or even fallen.12 In other words, for almost four decades a tiny elite has captured nearly all the gains from an expanding economy. You do not have to look far to see who is in that elite. Mark Zuckerberg dropped out of Harvard at the age of nineteen to launch Facebook. He is now in his early thirties. According to Forbes,13 Zuckerberg’s fortune increased by $18 billion in the year to mid-2016, making his current total estimated worth $70.8 billion. He is the fourth-richest man in the US and the fifth-richest in the world.14
It defies reason to maintain, as the dominant narrative does, that the inequality that has increased in the US, and in many other economies, is due to very smart individuals doing particularly well in innovative sectors. While wealth is created through a collective effort, the massive imbalance in the distribution of the gains from economic growth has often been more the result of wealth extraction, whose potential scale globalization has greatly magnified.
At the end of the second quarter of 2016, Facebook had 1.71 billion monthly active users, almost one in every four people on the planet. The imbalance in the distribution of gains from economic growth is a primary cause of widening social inequalities in many mature economies, which in turn has deep political consequences – arguably including the UK’s referendum vote to leave the European Union. Many people who felt globalization had left them behind chose Brexit.
Economists must take a sizeable share of the blame for the lamentable outcomes of the prevailing story
about value. We have stopped debating value – and, as a result, we have allowed one story about ‘wealth creation’ and ‘wealth creators’ to dominate almost unchallenged.
The purpose of this book is to change this state of things, and to do so by reinvigorating the debate about value that used to be – and, I argue, should still be – at the core of economic thinking. If value is defined by price – set by the supposed forces of supply and demand – then as long as an activity fetches a price (legally), it is seen as creating value. So if you earn a lot you must be a value creator. I 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. And in the process rents (unearned income) get confused with profits (earned income); inequality rises, and investment in the real economy falls. What’s more, if we cannot differentiate value creation from value extraction, it becomes nearly impossible to reward the former over the latter. If the goal is to produce growth that is more innovation-led (smart growth), more inclusive and more sustainable, we need a better understanding of value to steer us.
This is not an abstract debate. It has far-reaching consequences – social and political as well as economic – for everyone. How we discuss value affects the way all of us, from giant corporations to the most modest shopper, behave as actors in the economy and in turn feeds back into the economy, and how we measure its performance. 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.
If 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 Value of Everything (UK) Page 1
