The value of everything.., p.1
The Value of Everything (US), page 1
Copyright
Copyright © 2018 by Mariana Mazzucato
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First published in Great Britain in 2018 by Allen Lane, an imprint of Penguin Random House UK.
First US Edition: September 2018
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The illustration on p. 230 is by Jon Berkeley for The Economist. Reproduced by permission.
Typeset in 10.5/14pt Sabon LT Std by Jouve (UK), Milton Keynes
Library of Congress Control Number: 2018950683
ISBNs: 978-1-61039-674-5 (hardcover), 978-1-61039-675-2 (ebook)
E3-20180730-JV-NF
Contents
Cover
Title Page
Copyright
Dedication
Acknowledgements
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
Discover More Mariana Mazzucato
About the Author
Bibliography
Notes
Index
For Leon, Micol, Luce and Sofia
Acknowledgements
In 2013 I wrote a book called The Entrepreneurial State. In it I debunked how myths about lone entrepreneurs and start-ups have captured the theory and practice of innovation, ignoring one of the key actors that has been an investor of first resort: the state. Innovation is a collective process, with different types of public institutions playing a pivotal role. That role is ignored, so our theory of value creation is flawed. And this is a major reason for wealth often being distributed in dysfunctional ways.
The book you have in your hand is a direct consequence of this early reasoning. We cannot understand economic growth if we do not go back to the beginning: what is wealth and where does value come from? Are we sure that much of what is passing for value creation is not just value extraction in disguise?
To write the book I needed to delve into the last 300 years of thinking about value. No easy task! Many people very kindly helped me achieve this daunting task–from the deep dive into theory to swimming in the richness of industrial stories.
I would like to thank Gregor Semieniuk, who like me received a PhD from the Graduate Faculty of the New School in New York–a rare place that still teaches alternative theories of economic thought. He generously shared his extraordinary knowledge about value theory, from the physiocrats to the classicals. Gregor was a tremendous support in helping me document, in a ‘user-friendly’ way, the debates between the Physiocrats, Smith and Ricardo–and the strange fact that even Marx had no real theory of the way in which the state can contribute to value.
Michael Prest provided expert and endlessly patient editorial assistance, using his magic pen to make the often too dense material flow much better. He cheerfully cycled to our meetings on even the hottest days of the year and was not just a friendly editor but also a great companion, bringing calm to what often felt like hectic months trying to finish a book while I was raising a large family and starting up a new department at UCL. Our weekly meetings in the Lord Stanley pub in Camden to pore over the material often trailed off into a stream of consciousness dwelling on the ills of modern capitalism–and were nothing but pure joy. With the occasional pint (or two) to keep us going.
Other critical friends include Carlota Perez, who provided me with her wise insights not only on content but also on style, and the following people, who looked at particular chapters in the book and double checked it for errors in its final stages, selflessly offering their wisdom and care: (in alphabetical order) Matteo Deleidi, Lukas Fuchs Tommaso Gabellini, Simone Gasperin, Edward Hadas, Andrea Laplane, Alain Rizk, and Josh Ryan Collins. Of course, any errors, or strongly opinionated statements, can be attributed only to me.
My editor Tom Penn at Penguin was a great sounding board during our endless coffee-filled meetings at the British Library–having the rare qualities of a meticulous proofreader while also retaining a deep engagement with the content, both economic and philosophical.
I also want to thank the excellent administrative assistance I have had over the last four years, first at SPRU in the University of Sussex and now in a new institute that I have founded at UCL, the Institute for Innovation and Public Purpose IIPP). Gemma Smith in particular has helped me always try to get messages across–whether on the 10 o’clock news or in a policy brief–that could be understood by the general public. With the new team at IIPP, I hope the book’s message about the need for revived debate about key questions around value can be linked with the IIPP’s ambition to redefine ways of conceptualizing public value in particular: how to create it, nurture it and evaluate it.
Lastly, I want to thank Carlo, Leon, Micol, Luce and Sofia for putting up with the many long nights and weekends that the book entailed–letting me climb up the stairs and plop myself down to the most happy and conversive dinner table a wife and mother can ask for–putting life back at the centre, where it should be.
Preface: Stories About Wealth Creation
Between 1975 and 2017 real US GDP–the size of the economy adjusted for inflation–roughly tripled, from $5.49 trillion to $17.29 trillion.1 During this period, productivity grew by about 60 per cent. Yet from 1979 onwards, real hourly wages for the great majority of American workers have stagnated or even fallen.2 In other words, for almost four decades a tiny elite has captured nearly all the g
The Greek philosopher Plato once argued that storytellers rule the world. His great work The Republic was in part a guide to educating the leader of his ideal state, the Guardian. This book questions the stories we are being told about who the wealth creators are in modern-day capitalism, stories about which activities are productive as opposed to unproductive, and thus where value creation comes from. It questions the effect these stories are having on the ability of the few to extract more from the economy in the name of wealth creation.
These stories are everywhere. The contexts may differ–finance, big pharma or big tech–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 make do with the leftovers. Consider some of these stories, first in the financial sector.
In 2009 Lloyd Blankfein, CEO of Goldman Sachs, claimed that ‘The people of Goldman Sachs are among the most productive in the world.’3 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.4 The bank and some its competitors were fined, although the amounts were small relative to later profits: fines of $550 million for Goldman and $297 million for J. P. Morgan, for example.5 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.6 In 2009 alone they had record earnings of $13.4 billion.7 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.8 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.
But 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.9 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.10
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 stories in the tech industry. In the name of favouring entrepreneurship and innovation, companies in the IT industry have often lobbied for less regulation and advantageous tax treatments. With ‘innovation’ as the new force in modern capitalism, Silicon Valley has successfully projected itself as the entrepreneurial force behind wealth creation–unleashing the ‘creative destruction’ from which the jobs of the future come.
This seductive story of value creation has lead to lower rates of capital gains tax for the venture capitalists funding the tech companies, and questionable tax policies like the ‘patent box’, which reduces tax on profits from the sale of 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 instruments that allow monopoly profits for twenty years, thus earning high returns. Policymakers’ objectives should not be to increase the profits from monopolies, but to favour the reinvestment of those profits 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.11 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. And Eric Schmidt, CEO of Google, has repeatedly claimed that citizens’ data is safer with Google than with government. This stance feeds a modern-day banality: entrepreneurs good, government bad–or inept.
Yet in presenting themselves as modern-day heroes, and justifying their record profits and cash mountains, 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 where did the smart tech behind those gizmos come from? Public funds. The Internet, GPS, touchscreen, SIRI and the algorithm behind Google–all were funded by public institutions. Shouldn’t the taxpayer thus get 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.
