The Value of Everything (UK)

by Mariana Mazzucato

  We should not see Google, for example, as providing services for free to its users. Rather, it is users who provide Google with necessary inputs for its production process: their looks on ads and, most importantly, their personal data. In return, they obtain online searches and other services. The bulk of Google’s profits come from selling advertising space and users’ data to firms. If something is free online, you are not the customer, you are the product.64 Facebook’s and Google’s business models are built on the commodification of personal data, transforming through the alchemy of a two-sided market our friendships, interests, beliefs and preferences into sellable propositions. The so-called ‘sharing economy’ is based on the same idea. For all the hype about ‘sharing’, it is less about altruism and more about allowing market exchange to reach into areas of our lives – our homes, our vehicles, even our private relationships – that were previously beyond its scope and to commodify them.65 As Evgeny Morozov has warned, it risks turning us all into ‘perpetual hustlers’,66 with all of our lives up for sale, while at the same time undermining the basis for stable employment and a good standard of living.

  Standing on Platform Capitalism

  ‘Platform capitalism’ is often referred to as the new way in which goods and services are produced, shared and delivered – more horizontally, with consumers interacting with each other, and less intermediation by old institutions (e.g. travel agents). The so-called sharing economy, based on this framework, works by reducing the frictions between the two sides of the market: connecting buyers to sellers, potential customers to advertisers, in more efficient ways. It is presented as a radical transformation in the way that goods and services are produced, shared and delivered. It adds value by taking what was previously peripheral to the service – in Uber’s case, ordering, selecting, tracking and paying for a cab – into its core. But when disabled users have complained to Uber about their drivers refusing to put wheelchairs in the boot of the car, Uber has sought to evade responsibility on the basis that it is not a taxi company, merely a platform.67 Likewise, there is increasing evidence that Airbnb is similarly reluctant to take responsibility for such matters as the safety of premises offered on its site or racial discrimination against renters by property owners.

  Furthermore, Uber’s pursuit of economies of scale (based on the size of the network) and economies of scope (based on the breadth of different services, including UberEats) has led to higher profits on the backs of the key contributors to value creation for the company: the drivers. Indeed, while costs have been falling for the consumer, they have been rising for the drivers: in 2012 Uber Black (one of the company’s car services) cost riders in San Francisco $4.90 per mile or $1.25 per minute. When, in 2016, charges fell to $3.75 per mile or $0.65 per minute, consumers gained. But the result of this sharing economy is that Uber Black drivers are paid less, ‘standards’ rise (with pressure for drivers to offer ‘pool’ services to customers) and competition from Uber’s other services intensifies.68 While drivers are increasingly complaining, Uber’s market reach is higher than ever and growing every day: as of October 2016 it had 40 million monthly riders worldwide.69 In 2016 it had 160,000 drivers in the US, with millions more spread across 500 cities globally – all working as ‘independent contractors’, so that Uber does not have to provide them with the kind of healthcare and other benefits which they would receive as full-time employees.

  Uber, like Google, Facebook and Amazon, seems to have no limit to its size. The network effects that pervade online markets add an important peculiarity: once a firm establishes leadership in a market its dominance increases and becomes self-perpetuating almost automatically. If everyone is on Facebook, no one wants to join a different social network. As most people search on Google, the gap between Google and its competitors grows wider because it can elaborate on more data. And as its market share rises, so does its capacity to attract users, which in turn increases its market dominance.70

  Contrary to the pious pronouncements of Internet pioneers, network effects are increasingly centralizing the Internet, thereby placing an enormous concentration of market power in the hands of a few firms. Google alone accounts for 70 per cent of online searches in the US, and 90 per cent in Europe. Facebook has more than 1.5 billion users, a quarter of the planet’s population and streets ahead of its competitors. Amazon now accounts for around half of the US books market, not to mention e-books. Six firms (Facebook, Google, Yahoo, AOL, Twitter and Amazon) account for around 53 per cent of the digital advertising market (with just Google and Facebook making up 39 per cent).71 Such dominance implies that online giants can impose their conditions on users and customer firms. Many book publishers, for example, are unhappy with the conditions Amazon insists upon and are asking for better ones. But they have no leverage at all, because – as Evgeny Morozov puts it – ‘there is no second Amazon they can turn to’.72 The powerful network effects in the two-sided market have entrenched these companies’ position. Companies like Google are de facto monopolies.73 But they are not recognized as such and have not attracted the kind of anti-trust legislation that large companies in more traditional industries – tobacco, autos, food – have done.

  The dominant position of a platform provider in core markets can then be used to favour their products and services in satellite markets, further extending the company’s reach. The European Commission is investigating Google precisely because it is alleged systematically to tilt its search results in favour of its own products. By the same token, many users are not happy about Facebook appropriating, storing, analysing and selling to third parties so much of their personal data. But as long as all their friends are on Facebook, there is no equivalent competitor they can turn to. The standard defence of companies such as Facebook that ‘competition is just one click away’ is simply false in markets where network effects are so important.

  A recent study by researchers at the University of Pennsylvania surveyed 1,500 American Internet users to understand why they agree to give up some privacy in return for access to Internet services and applications. The standard explanation is that consumers compare the cost of losing some privacy with the benefit of accessing these services for free, and accept the deal when benefits exceed costs. A competing explanation is that many users are simply unaware of the extent to which online companies invade their privacy. But, interestingly, the results of the Pennsylvania survey are inconsistent with both explanations. Instead, they suggest that consumers accept being tracked and surrendering their personal data, even if ideally they would prefer not to, not because they have happily embraced this quid pro quo, but out of resignation and frustration.

  It is understandable that people feel they have no choice. In today’s society, it is hard to live and work without using a well-functioning search engine, a crowded social network and a well-supplied online shopping platform. But the price of accessing these services is to accept the conditions the dominant provider imposes on a ‘take it or leave it’ basis, given that there are no comparable alternatives.

  CREATING AND EXTRACTING DIGITAL VALUE

  The digital giants’ enormous market power raises critical issues about privacy protection, social control and political power. But what concerns us here is the impact of this market power on the relationship between value creation and value extraction.

  The particular dynamics of innovation – the power of early adoption of standards and associated network effects tending towards market dominance – have profound consequences for how the value created is shared and measured.

  The first major consequence is monopoly. Historically, industries naturally prone to being monopolies, for example railways and water, have been either taken into public ownership (e.g. in Europe) or heavily regulated (e.g. in the US) to protect the public against abuses of corporate power. But monopolistic online platforms remain privately owned and largely unregulated despite all the issues they raise: privacy, control of information and their sheer commercial power in the market
, to name a few. In the absence of strong, transnational, countervailing regulatory forces, firms that first establish market control can reap extraordinary rewards. The low rates of tax that technology companies are typically paying on these rewards are also paradoxical, given that their success was built on technologies funded and developed by high-risk public investments.74 If anything, companies owing their fortunes to taxpayer investment should be repaying the taxpayer, not seeking tax breaks. Moreover, the rise of the ‘sharing economy’ is likely to extend market exchange into new areas, where the dynamics of market dominance look set to repeat themselves.

  The second major consequence of the dynamics of innovation is about how value is created, how this is measured, and how and by whom this value is extracted. If we go by national accounts, the contribution of Internet platforms to national income (as measured for example by GDP) is represented by the advertisement-related services they sell to firms. It is not very clear why advertisements should contribute to the real national product, let alone social well-being, which should be the aim of economic activity. But national accounts, in this respect, are consistent with standard neoclassical economics, which tends to interpret any voluntary market-based transaction as signalling the production of some kind of output – whether financial services or advertising, as long as a price is received, it must be valuable.75 That is misleading: if online giants contribute to social well-being, they do it through the services they provide to users, not through the accompanying advertisements.

  The classical economists’ approach appears much more fruitful for analysing these new digital markets. As discussed in Chapter 1, they distinguished between ‘productive’ labour, which contributes to an increase in the value of what is produced, and ‘unproductive’ labour, which does not. The activities which make profits for online platforms – advertising and analyses of users’ private information and behaviour – do not increase the value of what is produced, which is services to users such as posting a message on Facebook or making a search on Google. Rather, these activities help firms competing against one another to appropriate, individually, a larger share of the value produced.76 The confused and misleading approach to the concept of value that is currently dominating economics is generating a truly paradoxical result: 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.

  The rise of big data is often talked about as a win-win opportunity for both producers and consumers. But this depends on who owns the data and how it is ‘governed’. The fact that IPR has become wider and stronger, and more upstream, is due to the way it is governed – or not. Markets of any type must be actively shaped in order for knowledge to be governed in ways that produce the market outcomes that we as a society want. Indeed, regulation is not about interference, as is commonly perceived, but about managing a process that produces the results that are best for society as a whole. In the case of big data, the ‘big five’ – Facebook, Google, Amazon, IBM and Microsoft – virtually monopolize it. But the problem is not just a question of competition – the size and number of firms in the sector. It could be argued that a few large companies can achieve the economies of scale required to drive down costs and make data cheaper – not a bad thing given falling real incomes.

  The key issue is the relationship between the Internet monopolies and these falling incomes. The privatization of data to serve corporate profits rather than the common good produces a new form of inequality – the skewed access to the profits generated from big data. Merely lowering the price monopolists charge for access to data is not the solution. The infrastructure that companies like Amazon rely on is not only publicly financed (as discussed, the Internet was paid for by tax dollars), but it feeds off network effects which are collectively produced. While it is of course OK for companies to create services around new forms of data, the critical issue is how to ensure that the ownership and management of the data remains as collective as its source: the public. As Morozov argues, ‘Instead of us paying Amazon a fee to use its AI capabilities – built with our data – Amazon should be required to pay that fee to us.’77

  SHARING RISKS AND REWARDS

  Acknowledging the collective nature of innovation should result in more sharing of the rewards that accrue from the process of innovation. And yet ignoring the collective story, and only giving credit to a narrow group of individuals, has affected thinking about who should own IPR, how high a medicine’s price can acceptably be, who should or should not retain equity in a new firm or a new technological advance, and the fair share of tax contributions. It is this gap between the collective distribution of risk-taking in innovation and the more individualized, privatized way in which the returns are distributed that is the most modern form of rent.

  Current stories about value, wealth creation and risk-taking that privilege the contribution of individual inventors and capitalists lead to ways of thinking whereby it is acceptable to divide up the fruits of innovation between them – the concept of ‘just deserts’. The term comes from the English philosopher John Locke (1632–1704). His concept of individual entitlement – ‘just deserts’ – to the product of work was based on a production system where individual labour was more important, and was easier to identify, than it is today when collective contributions have been central to technology-driven growth. This point was made by Herbert Simon (1916–2001), who made his name in the study of organizational decision-making, and who won the Nobel Prize in Economics in 1978. ‘If we are generous with ourselves,’ Simon considered, ‘I suppose that we might claim that we “earned” as much as one-fifth of our income. The rest of the patrimony [is] associated with being a member of an enormously productive social system, which has accumulated a vast store of physical capital, and an even larger store of intellectual capital – including knowledge, skills, and organizational know-how held by all of us.’78 Ignoring this collectively produced social system, certain individuals feel justified in earning a much higher proportion of a nation’s income than their own contribution warrants. But, more specifically, it has affected policies on taxes, patents and prices, thus fuelling the dynamics of inequality.

  The question is: what can we do about it?

  Policymaking should start from understanding that innovation is a collective process. Given the immense risks the taxpayer takes when the government invests in visionary new areas like the Internet, couldn’t we construct ways for rewards from innovation to be just as social as the risks taken? These ways might include: capping prices of publicly developed medicines; attaching conditions to public support, such as the requirement that profits be reinvested back into production rather than spent on speculative share buy-backs; allowing public agencies to retain equity or royalties in technologies for which they provided downstream funding; or by making income-contingent loans to businesses as we do for students.

  As is the nature of early-stage investment in technologies with uncertain prospects, some investments are winners, but many are losers. For every Internet (a success story of US government financing), there are many Concordes (a white elephant funded by the British and French governments). Consider the twin tales of Solyndra and Tesla Motors. In 2009, Solyndra, a solar-power-panel start-up, received a $535 million guaranteed loan from the US Department of Energy; that same year, Tesla, the electric-car manufacturer, got approval for a similar loan, of $465 million. In the years afterwards, Tesla was wildly successful, and the firm repaid its loan in 2013. Solyndra, by contrast, filed for bankruptcy in 2011, and among fiscal conservatives became a byword for the government’s sorry track record when it comes to picking winners. Of course, if the government is to act like a venture capitalist, it will necessarily encounter many failures. The problem, however, is that governments, unlike venture capital firms, are often saddled with the costs of the failures while earning next to nothing from the successes. Taxpayers footed the bill for Solyndra’s losses �
� yet got hardly any of Tesla’s profits. Strangely, the US government had put in a claim for 3 million shares into Tesla only if it did not pay back the loan – almost as if the US government has an interest in owning a part of failed companies! Tesla did pay back the loan in 2013, and so had the US government taken a stake in Tesla as a success rather than as a failure, it would have been able to more than cover its losses from Solyndra. The year Tesla received its government loan, the company went public at an opening price of $17 a share; that figure had risen to $93 by the time the loan was repaid. Today shares in Tesla trade above $200.

  In the case of prices of drugs, instead of focusing on the debatable and arbitrary quantification of ‘what it would cost society not to treat’, we should try to understand the production side of the pharmaceutical industry and its interdependencies with related industries such as the biochemical industry and the medical devices industry. We could engineer prices to ensure continuous production of drugs that are actually needed (reducing the amount of ‘me too’ drugs which have little extra benefit); supply the drugs to whomever needs them; and maintain a steady and well-targeted flow of R&D to develop new drugs. A system of this kind does not necessarily need drug prices to be above manufacturing costs. We could, for example, abolish patents on pharmaceutical products and at the same time establish a competitive prize system to reward and incentivize public and private entities to come up with well-targeted pharmaceutical innovation. If we make more use of generic drugs – drugs which are the same medically as branded ones – we can make then widely available and push pharmaceutical companies to concentrate on breakthrough innovations rather than on producing ‘me too’ drugs or running share repurchasing programmes to boost their stock prices.