The Value of Everything

In "The Value of Everything: Making and Taking in the Global Economy", economist Mariana Mazzucato challenges our conventional understanding of value creation in the economy. She argues that our current economic system often rewards value extraction rather than true value creation, leading to increased inequality and reduced economic growth. Through a historical analysis of economic thought and a critical examination of modern financial practices, Mazzucato makes a compelling case for rethinking how we define and measure value in our economy.

The Evolution of Economic Value

Early Conceptions of Value

Mazzucato begins by exploring how early economists viewed the concept of value. In the 17th and 18th centuries, thinkers like François Quesnay believed that all economic value came from the land. According to this view, only work related to agriculture and resource extraction was truly productive. All other economic activities were seen as merely moving products around in exchange for money.

Quesnay developed a theory of economic circulation involving three main classes:

1. Workers on the land
2. Artisans who processed raw materials
3. The "sterile class" of nobility and landlords

In this model, the third class was considered unproductive because they simply extracted value from the economy through rent payments, rather than creating new value.

Classical Economics and the Labor Theory of Value

As economic thought progressed into the 18th and 19th centuries, the idea that landlords were unproductive remained influential. Classical economists like Adam Smith, David Ricardo, and Karl Marx all subscribed to some version of the labor theory of value. This theory held that the value of goods and services was determined by the amount of labor required to produce them.

Adam Smith, often considered the father of modern economics, believed that manufacturers were the true productive force in the economy. They generated enough surplus value to support both themselves and the "unproductive" landlords and aristocrats. Smith didn't object to wealth itself, but he argued that money should be reinvested into productive industries to increase overall prosperity. When wealthy individuals hoarded money or spent it frivolously, it harmed the economy by taking money out of circulation.

David Ricardo further developed these ideas in the early 19th century. He defined rent as profit gained from monopoly control over scarce resources. Ricardo observed that when landlords owned desirable land, farmers would compete to rent it, driving up prices. This concept of economic rent is still relevant today, applying not just to land but to any industry with monopoly power – from patented drugs to oil production.

The Marginalist Revolution

Around the turn of the 20th century, a new school of economic thought emerged that would dramatically reshape how we think about value. The neoclassical economists, led by figures like Alfred Marshall, developed the theory of marginal utility. This approach shifted the focus from workers and production to consumers and their subjective preferences.

According to marginal utility theory, the value of a good or service depends on how much people want or need it, as well as how scarce it is. This value is subjective and can change based on circumstances. For example, you might pay more for a bottle of water when you're very thirsty than when you're not.

Marshall, a trained mathematician, depicted these effects using graphs that are still common in economics textbooks today. This marginalist approach remains at the heart of modern microeconomics.

The shift to marginalism had profound implications for how we think about value:

1. Value became synonymous with price
2. The concept of unproductive work largely disappeared
3. Rent-seeking behavior was no longer seen as fundamentally different from other profit-seeking activities

While this new framework provided elegant mathematical models, it also obscured important distinctions between value creation and value extraction that earlier economists had recognized.

Measuring Economic Value: The Flaws of GDP

The Rise of GDP

In the mid-20th century, particularly around World War II, governments needed new ways to measure and account for economic activity. This led to the development of Gross Domestic Product (GDP) as the primary measure of a nation's economic output and growth.

The United Nations created the System of National Accounts (SNA), which provides guidelines for calculating GDP. This system generally follows marginalist principles, considering anything that fetches a price in the market to be value-creating.

Problems with GDP Calculations

While GDP has become the standard measure of economic progress, Mazzucato argues that it has several significant flaws:

1. Arbitrary inclusions and exclusions: For example, to account for differences in homeownership rates between countries, GDP calculations pretend that homeowners "rent" their homes from themselves. This fictional rental income can account for a significant portion of GDP (about 6% in the US).

2. Misrepresentation of government activity: The public sector is often treated as inherently inefficient in GDP calculations. Government services provided below market rates appear less valuable than if a private company offered the same service at a profit.

3. Inclusion of the financial sector: Until the 1970s, banking and finance were not included in GDP calculations, as they were seen as redistributing existing wealth rather than creating new value. However, as the sector grew, it was simply added to GDP figures without critically examining whether it truly created value.

4. Failure to distinguish value creation from extraction: GDP makes no distinction between economic activities that genuinely add value to the economy and those that extract value through rent-seeking or other means.

These issues mean that GDP often provides a distorted picture of economic health and progress. It can make harmful activities appear beneficial and undervalue important contributions to societal well-being.

The Financialization of the Economy

The Growth of Finance

Since the deregulation of the financial sector in the 1970s, finance has taken up an ever-larger share of GDP in countries like the US and UK. While this is often touted as a sign of economic success, Mazzucato argues that it's more accurately seen as a form of value extraction.

Traditionally, banks were thought to add value to the economy by investing in businesses and promoting economic growth. However, over the 20th century, financial institutions increasingly focused on other activities:

1. Creating complex financial products like derivatives and securitizations
2. Asset management services
3. High-frequency trading

While these activities have been enormously profitable for the financial sector, their contribution to overall economic growth is questionable. The financial sector's share of GDP has grown faster than GDP itself, suggesting that it is extracting an ever-greater portion of value from the rest of the economy rather than spurring broader growth.

The 2008 Financial Crisis

The 2008 global financial crisis starkly illustrated the dangers of an oversized and under-regulated financial sector. Despite playing a significant role in causing the crisis, many financial institutions received massive government bailouts. This highlights the disconnect between the supposed value creation of the financial sector and its actual impact on the broader economy.

Financialization Beyond Banking

The influence of finance has spread far beyond the banking sector. Since the 1970s, even non-financial companies have increasingly sought to boost revenues through financial tools and strategies. This process, known as financialization, has been driven by the idea that maximizing shareholder value should be the primary goal of business.

Mazzucato provides several examples of how this trend has impacted the broader economy:

1. Manufacturing companies like Ford making more money from car loans than from selling cars
2. Care homes and water companies in the UK being owned by private equity firms focused on extracting maximum profits
3. The rise of share buybacks as a way to boost stock prices and enrich executives, often at the expense of reinvestment in the company

This focus on short-term financial gains often comes at the expense of long-term value creation, innovation, and broader stakeholder interests.

The Innovation Economy and Value Extraction

Government's Role in Innovation

Mazzucato challenges the popular narrative that attributes most technological innovation to risk-taking entrepreneurs and venture capitalists. She argues that governments have played a crucial but often underappreciated role in driving innovation:

1. Funding basic research: Many breakthrough technologies, from the internet to GPS, were initially developed using public funds.
2. Early-stage financing: Government loans and grants often support startups in their earliest, riskiest stages before venture capital becomes involved.
3. Creating markets: Government procurement and regulations can help create initial markets for new technologies.

Despite this vital role, governments often fail to capture a fair share of the value created by the innovations they help spawn.

Monopolization and Value Extraction in Tech

Many successful tech companies have achieved near-monopoly status in their respective markets. Unlike traditional monopolies, however, these digital platforms face little regulation or public ownership. This allows them to extract significant value from the economy through various means:

1. Network effects that make it difficult for competitors to emerge
2. Accumulation and monetization of user data
3. Aggressive tax avoidance strategies

Mazzucato argues that the current system allows these companies to privatize the rewards of innovation while socializing many of the risks and costs.

The Pharmaceutical Industry and Patents

The pharmaceutical industry provides another clear example of how current economic structures can enable value extraction. Drug companies often justify high prices by citing the need to recoup research and development costs. However, Mazzucato points out several issues with this argument:

1. Much of the basic research is funded by public institutions before pharmaceutical companies become involved.
2. Patents grant temporary monopolies, allowing companies to charge prices far above production costs.
3. Demand for life-saving drugs is inelastic, meaning people will pay almost any price, further enabling high prices.

The result is a system where drug companies can extract enormous profits, often based on publicly-funded research, while limiting access to vital medications.

Rethinking the Role of Government

The Myth of Public Sector Inefficiency

A persistent theme in modern economic discourse is the idea that the private sector is inherently more efficient and productive than the public sector. This belief has led to widespread privatization and outsourcing of government services. However, Mazzucato argues that this view is both misguided and harmful:

1. GDP calculations are biased against the public sector, assuming government spending is unproductive by default.
2. Many vital public goods and services, from infrastructure to education, are not easily quantified in market terms.
3. The public sector often takes on high-risk, long-term projects that the private sector won't touch.

The Rise of Public-Private Partnerships

In an attempt to harness supposed private sector efficiency, many governments have turned to public-private partnerships (PPPs) for delivering services and infrastructure. In the UK, Private Finance Initiatives (PFIs) became popular in the 1990s and 2000s. However, Mazzucato argues that these arrangements often end up costing more than direct public investment:

1. Private companies demand guaranteed profit margins, increasing costs.
2. Complex contracts can lead to cost overruns and reduced flexibility.
3. The focus on short-term profits can compromise long-term quality and sustainability.

Reframing Government as an Investor

Rather than viewing government as a necessary evil or a drag on the economy, Mazzucato proposes reframing its role as a bold, entrepreneurial investor. This would involve:

1. Recognizing and valuing the public sector's contributions to innovation and economic growth
2. Ensuring that the public receives a fair share of the returns on its investments
3. Developing new metrics to better capture the value created by public spending

By changing how we think about government's role in the economy, we can create policies that promote genuine value creation and more equitable growth.

Towards a New Theory of Value

The Limitations of Price-Based Value

Throughout the book, Mazzucato emphasizes the problems with equating price with value. This approach, stemming from marginalist economics, has several drawbacks:

1. It fails to distinguish between value creation and value extraction
2. It ignores externalities – costs or benefits not reflected in market prices
3. It undervalues public goods and services that are not easily priced

Distinguishing Value Creation from Extraction

To build a more productive and equitable economy, Mazzucato argues that we need to develop better ways of identifying and rewarding genuine value creation. This involves:

1. Recognizing rent-seeking behavior and monopolistic practices as forms of value extraction
2. Valuing long-term investments in innovation and sustainability
3. Considering broader stakeholder interests, not just shareholder returns

Rethinking Economic Metrics

Given the limitations of GDP, Mazzucato suggests we need new ways of measuring economic progress and well-being. Some possibilities include:

1. Developing more nuanced national accounting systems that distinguish between value-creating and value-extracting activities
2. Incorporating measures of environmental sustainability and social progress
3. Better accounting for the value of public goods and services

Redefining Risk and Reward

A key part of building a new theory of value involves reconsidering how we allocate risks and rewards in the economy. Mazzucato argues for:

1. Ensuring that the public sector captures a fair share of the returns on its investments in research and innovation
2. Implementing tax policies that discourage rent-seeking and encourage productive investment
3. Developing new forms of public-private partnerships that share both risks and rewards more equitably

Conclusion: A Call for Change

In "The Value of Everything," Mariana Mazzucato presents a powerful critique of our current economic system and the theories that underpin it. She argues that by conflating price with value, we've created an economy that often rewards value extraction over genuine value creation. This has led to increased inequality, reduced innovation, and a misallocation of resources.

To address these issues, Mazzucato calls for a fundamental rethinking of how we define and measure value in the economy. This involves:

1. Recognizing the crucial role of government in driving innovation and economic growth
2. Developing new economic metrics that go beyond GDP to capture true value creation
3. Implementing policies that discourage rent-seeking and promote productive investment
4. Reframing the relationship between the public and private sectors to ensure a more equitable distribution of risks and rewards

By challenging our assumptions about value and reimagining the roles of different economic actors, Mazzucato argues that we can create a more innovative, sustainable, and equitable economy. This new approach would prioritize activities that genuinely improve people's lives and contribute to long-term prosperity, rather than simply maximizing short-term financial gains.

Ultimately, "The Value of Everything" is a call to action for economists, policymakers, and citizens alike. It urges us to question the stories we tell ourselves about the economy and to work towards a new economic paradigm that truly serves the common good. By putting value creation back at the center of economic thinking, Mazzucato offers a path towards a more prosperous and just future for all.