The Value of Everything (UK)

by Mariana Mazzucato

  Governing Public Value

  The work of Elinor Ostrom (1933–2012), an economist from Indiana University who received the Nobel Prize in 2009, helps clarify the richness of the way in which new metrics can affect behaviour and vice versa, in defusing the conflict between government and market. Ostrom shows how the crude state–private divide that dominates current thinking fails to encapsulate the complexity of institutional structures and relationships – from non-partisan government regulators to state-funded universities and state-run research projects – that span this divide. Rather, she emphasizes common pooled resources, and the shaping of systems that take into account collective behaviour.

  Ostrom’s work supports Polanyi’s historical conclusion in The Great Transformation: governments, along with the many institutions and traditions of a society, are the womb in which markets are nourished, and later the parent which helps them serve the common good. One vital government responsibility in the modern economy – which Ostrom also finds in successful pre-industrial economies – is to limit the amount of rent that emerges from any non-collective approach to wealth creation. This brings us back to Adam Smith’s definition of the ‘free market’ as being free from rent.

  Today, these ways of thinking could significantly benefit many crucial institutions which are neither fully private nor fully public. Universities could proudly promote the pursuit of knowledge, without having to worry about generating immediately profitable patents and spin-off companies. Medical research institutes could expect strong funding, with much less pressure to fight for attention. Think tanks could shake off the taint of lobbying, once they present their work as being supportive of common values. And co-operative, mutual and other not-for-profit enterprises could flourish without having to decide which side of the great private–public divide they are really on.

  In the new discourse, there would certainly be no more talk of the public sector interfering with or rescuing the private sector. Instead, it would be widely accepted that the two sectors, and all the institutions in between, nourish and reinforce each other in pursuit of the common goal of economic value creation. The sectors’ interactions would be less marked by hostility, and more infused with mutual respect.

  Once the story telling about value creation is corrected, changes can embolden private institutions as well as their public partners. The private sector can be transformed by the simple but profound expedient of replacing shareholder value with stakeholder value. This idea has been around for decades, most countries continue to have companies run by shareholder value focused on maximizing quarterly returns. Stakeholder value recognizes that corporations are not really the exclusive private property of one group of providers of profit-sharing financial capital. As social entities, companies must take into account the good of employees, customers and suppliers. They benefit from the shared intellectual and cultural heritage of the societies in which they are embedded and from their governments’ provision of the rule of law, not to mention the state-funded training of educated workers and valuable research; they should in return deliver benefit to all these constituencies. Of course, there is no easy way to agree on the right balance, but a lively discussion is far preferable to the current practice of maximizing profits for shareholders. Indeed, the presence of co-operatives run on a stakeholder understanding of value creation, such as John Lewis in the UK or Mondragon in Spain, should serve as evidence that there is more than one way to govern a business. And governments that want to achieve innovation-led growth should ask themselves whether employees are more likely to share great ideas in businesses in which they are valued, or in ones where they are simply appendages to a profit-making machine that is then siphoned off to a few shareholders.

  This is no easy task, but one that will not even begin without a new positioning of all actors as being central to the collective value creation process.

  In sum, it is only by thinking big and differently that government can create value – and hope.

  9

  The Economics of Hope

  The global financial crisis, which began in 2008 and whose repercussions will continue to echo round the world for years to come, has triggered myriad criticisms of the modern capitalist system: it is too ‘speculative’; it rewards ‘rent-seekers’ over true ‘wealth creators’; and it has permitted the rampant growth of finance, allowing speculative exchanges of financial assets to be compensated more than investments that lead to new physical assets and job creation. Debates about unsustainable growth have become louder, with concerns not only about the rate of growth but also its direction.

  Recipes for serious reforms of this ‘dysfunctional’ system include making the financial sector more focused on long-run investments; changing the governance structures of corporations so they are less focussed on their share prices and quarterly returns; taxing quick speculative trades more heavily; legally and curbing the excesses of executive pay.

  In this book, I have argued that such critiques are important but will remain powerless – in their ability to bring about real reform of the economic system – until they become firmly grounded in a discussion about the processes by which economic value is created. It is not enough to argue for less value extraction and more value creation. First, ‘value’, a term that once lay at the heart of economic thinking, must be revived and better understood.

  Value has gone from being a category at the core of economic theory, tied to the dynamics of production (the division of labour, changing costs of production), to a subjective category tied to the ‘preferences’ of economic agents. Many ills, such as stagnant real wages, are interpreted in terms of the ‘choices’ that particular agents in the system make, for example unemployment is seen as related to the choice that workers make between working and leisure. And entrepreneurship – the praised motor of capitalism – is seen as a result of such individualized choices rather than of the productive system surrounding entrepreneurs – or, to put it another way, the fruit of a collective effort. At the same time, price has become the indicator of value: as long as a good is bought and sold in the market, it must have value. So rather than a theory of value determining price, it is the theory of price that determines value.

  Along with this fundamental shift in the idea of value, a different narrative has taken hold. Focused on wealth creators, risk taking and entrepreneurship, this narrative has seeped into political and public discourse. It is now so rampant that even ‘progressives’ critiquing the system sometimes unintentionally espouse it. When the UK Labour Party lost the 2015 election, leaders of the party claimed they had lost because they had not embraced the ‘wealth creators’.1 And who did they think the wealth creators were? Businesses and the entrepreneurs leading them. Feeding the idea that value is created in the private sector and redistributed by the public sector. But how can a party that has the word ‘labour’ in its title not see workers and the state as equally vital parts of the wealth creation process?

  Such assumptions about the generation of wealth have become entrenched, and have gone unchallenged. As a result, those who claim to be wealth creators have monopolised the attention of governments with the now well-worn mantra of: give us less tax, less regulation, less state and more market.

  By losing our ability to recognize the difference between value creation and value extraction, we have made it easier for some to call themselves value creators and in the process extract value. Understanding how the stories about value creation are around us everywhere – even though the category itself is not – is a key concern of the book, and essential for the future viability of capitalism.

  To offer real change we must go beyond fixing isolated problems, and develop a framework that allows us to shape a new type of economy: one that will work for the common good. The change has to be profound. It is not enough to redefine GDP to encompass quality-of-life indicators, including measures of happiness,2 the imputed value of unpaid ‘caring’ labour and free information, education and communication via
the Internet.3 It is also not enough to tax wealth. While such measures are important in themselves, they do not address the greatest challenge: defining and measuring the collective contribution to wealth creation, so that value extraction is less able to pass for value creation. As we have seen, the idea that price determines value and that markets are best at determining prices has all sorts of nefarious consequences. To sum up, four stand out.

  First, this narrative emboldens value extractors in finance and other sectors of the economy. Here, the crucial questions – which kinds of activities add value to the economy and which simply extract value for the sellers – are never asked. In the current way of thinking, financial trading, rapacious lending, funding property price bubbles are all value-added by definition, because price determines value: if there is a deal to be done, then there is value. By the same token, if a pharma company can sell a drug at a hundred or a thousand times more than it costs to produce, there is no problem: the market has determined the value. The same goes for chief executives who earn 340 times more than the average worker (the actual ratio in 2015 for companies in the S&P 500).4 The market has decided the value of their services – there is nothing more to be said. Economists are aware that some markets are not fair, for example when Google has something close to a monopoly on search advertising; but they are too often enthralled by the narrative of market efficiency to worry whether the gains are actually justly earned profits, or merely rents. Indeed, the distinction between profits and rents is not made.

  Price-equals-value thinking encourages companies to put financial markets and shareholders first, and to offer as little as possible to other stakeholders. This ignores the reality of value creation – as a collective process. In truth, everything concerning a company’s business – especially the underlying innovation and technological development – is intimately interwoven with decisions made by elected governments, investments made by schools, universities, public agencies and even movements by not-for-profit institutions. Corporate leaders are not telling the whole truth when they say that shareholders are the only real risk takers and hence deserve the lion’s share of the gains from doing business.

  Second, the conventional discourse devalues and frightens actual and would-be value creators outside the private business sector. It’s not easy to feel good about yourself when you are constantly being told you’re rubbish and/or part of the problem. That’s often the situation for people working in the public sector, whether these be nurses, civil servants or teachers. The static metrics used to measure the contribution of the public sector, and the influence of Public Choice theory on making governments more ‘efficient’, has convinced many civil-sector workers they are second-best. It’s enough to depress any bureaucrat and induce him or her to get up, leave and join the private sector, where there is often more money to be made.

  So public actors are forced to emulate private ones, with their almost exclusive interest in projects with fast paybacks. After all, price determines value. You, the civil servant, won’t dare to propose that your agency could take charge, bring a helpful long-term perspective to a problem, consider all sides of an issue (not just profitability), spend the necessary funds (borrow if required) and – whisper it softly – add public value. You leave the big ideas to the private sector which you are told to simply ‘facilitate’ and enable. And when Apple or whichever private company makes billions of dollars for shareholders and many millions for top executives, you probably won’t think that these gains actually come largely from leveraging the work done by others – whether these be government agencies, not-for-profit institutions, or achievements fought for by civil society organizations including trade unions that have been critical for fighting for workers’ training programmes.

  Third, this market story confuses policymakers. By and large, policymakers of all stripes want to help their communities and their country, and they think the way to do so is to put more trust in market mechanisms, with policy just a matter of tinkering at the edges. The crucial thing is to be seen as progressive while also ‘business-friendly’. But with a very limited understanding of where value comes from, politicians and all too many government employees are like putty in the hands of those who claim to be value creators. Regulators end up being lobbied by businesses and induced to endorse policies which make incumbents even richer – increasing profits but with little effect on investment. Examples include ways in which governments across much of the Western world have been persuaded to reduce capital gains tax, even though there is no reason to do so if the aim is to promote long-term investments rather than short-term ones. And lobbyists with their innovation stories have pushed through the Patent Box policy, which reduces tax on the profits generated from 20-year patent-based monopolies – even though the policy’s main impact has been merely to reduce government revenue, rather than increasing the types of investments that led to the patents in the first place.5 All of which serves only to subtract value from the economy and make for a less attractive future for almost everyone. Not having a clear view of the collective value creation process, the public sector is thus ‘captured’ – entranced by stories about wealth creation which have led to regressive tax policies that increase inequality.

  Fourth, and last, the confusion between profits and rents appears in the ways we measure growth itself: GDP. Indeed, it is here that the production boundary comes back to haunt us: if anything that fetches a price is value, then the way national accounting is done wont be able to distinguish value creation from value extraction and thus policies aimed that the former might simply lead to the latter. This is not only true for the environment where picking up the mess of pollution will definitely increase GDP (due to the cleaning services paid for) while a cleaner environment won’t necessarily (indeed if it leads to less ‘things’ produced it could decrease GDP), but also as we saw to the world of finance where the distinction between financial services that feed industry’s need for long-term credit versus those financial services that simply feed other parts of the financial sector are not distinguished.

  Only with a clear debate about value can rent-extracting activities in every sector, including the public one, be better identified and deprived of political and ideological strength.

  MARKETS AS OUTCOMES

  Redefining value must start with a deeper interrogation of the concepts on which much of today’s policy is based. First and most fundamental, what are markets? They are not things-in-themselves. They are shaped by society, and are outcomes of multi-agent processes in a specific context. If we regard markets this way, our view of government policy changes too. Rather than a series of intrusive ‘interventions’ in an otherwise free-standing market economy, government policy can be seen for what it is: part of the social process which co-shapes and co-creates competitive markets. Second, what are private–public partnerships? Or, more precisely, what kinds of private–public partnerships will provide society with its desired outcomes? To answer that question economists should abandon their desire to think like physicists and turn instead to biology, and consider how functional partnerships are those that emulate a mutualistic eco-system rather than a parasitic or predator–prey one.

  As Karl Polanyi wrote, markets are deeply embedded in social and political institutions.6 They are outcomes of complex processes, of interactions between different actors in the economy, including government. This is not a normative point but a structural one: how new socio-economic arrangements come about. The very fact that the market is co-shaped by different actors – including, crucially, policymakers – offers hope that a better future can be constructed. We can fashion markets in ways that produce desirable outcomes such as ‘green growth’ or a more ‘caring’ society with care influencing the type of social and physical infrastructure that is built. By the same token, we can allow speculative short-term finance to triumph over long-term investment. As we have already seen, even Adam Smith was of the opinion that markets needed to be shaped. Contrary to the modern
interpretation of his work as ‘laissez-faire’ (leave the market alone), he believed that the right kind of freedom is not the absence of government policy, but freedom from rent extraction. Smith would have been baffled by the current understanding of economic freedom as a minimum of non-private activity. His Wealth of Nations is a huge book, largely because even in that simpler economic world there were so many varieties of rent-seeking to discuss. He devoted many pages to productive and unproductive activities, often simplistically putting some inside the production boundary and some outside. Karl Marx was subtler: it was not the sector itself that mattered, but how exactly it interacted with the creation of value and the important concept in his analysis of surplus value.

  Polanyi helps us to go beyond both Smith and Marx. Rather than focusing on which activities are inside or outside the production boundary, today we can work to ensure that all activities – in both the real economy and in the financial sector – promote the outcomes that we want: if the quality and characteristics of an activity in question help deliver true value, then it should be rewarded for being inside the boundary. Policymakers must be emboldened to broker ‘deals’ that generate symbiotic public–private partnerships. In the case of finance, it would mean favouring long-term investment over short-term (through measures like a financial transaction tax), but, even more, founding new financial institutions (like mission-oriented state investment banks) that can provide the strategic, long-term finance crucial to the high risk investments required for exploration and research underlying value creation.