The Value of Everything Summary

Are the richest among us truly creating value, or are they simply extracting it from the rest of the economy?

1. Value Was Once Defined by Labor, Not Wealth

For early economists like François Quesnay, value came from tangible work, such as farming or mining. These activities were seen as productive because they created goods essential for society. Landlords, on the other hand, were considered unproductive since they merely extracted rent without contributing to production. This distinction between creating and extracting value shaped early economic thought.

Adam Smith expanded on this idea, emphasizing that manufacturers were the true drivers of economic growth. He argued that reinvesting profits into productive industries allowed workers to generate more wealth, benefiting society as a whole. However, he criticized landlords and aristocrats for hoarding wealth or spending it frivolously, which he believed drained the economy of its potential.

David Ricardo further refined this perspective by defining rent as profit derived from monopolizing scarce resources. He observed that landlords could charge higher rents simply because of competition among tenants, not because they added any value. This concept of rent extraction remains relevant today, as seen in industries like pharmaceuticals and oil.

Examples

• Quesnay’s “sterile class” of landlords extracted wealth without contributing to production.
• Smith’s free market ideal was one “free from rent,” emphasizing productive reinvestment.
• Ricardo’s theory of rent explains rising prices in monopolized industries like patented drugs.

2. The Shift to Consumer-Centered Value

In the late 19th century, economists moved away from the labor theory of value and embraced marginal utility, which focused on consumers. This theory argued that value depends on how much a consumer needs a product and how scarce it is. Unlike earlier theories, this approach made value subjective and variable.

Alfred Marshall, a key proponent of marginal utility, illustrated this concept with graphs showing how demand changes based on need and scarcity. For example, a candy bar’s value might be higher if you’re hungry and lower if you’re full. This shift in thinking equated value with price, making any paid work seem productive, even if it didn’t create tangible goods.

This redefinition blurred the line between value creation and extraction. Landlords charging high rents or businesses minimizing wages were now seen as productive because they maximized profits. The focus on price as the sole measure of value ignored whether the activity actually benefited society.

Examples

• Marginal utility explains why the last candy bar in a store might cost more than the first.
• Marshall’s graphs became foundational in modern economics, equating value with price.
• High rents and low wages are now considered productive under this framework.

3. GDP: A Flawed Measure of Wealth

Gross Domestic Product (GDP) is widely used to measure a country’s wealth, but its calculation is riddled with problems. For instance, GDP includes fictitious rental income for homeowners, assuming they rent their homes to themselves. This adds $1 trillion to the US GDP, even though no actual transaction occurs.

GDP also penalizes public services. Governments provide infrastructure and education at lower costs than private companies, which makes them appear inefficient in GDP terms. Additionally, the financial sector was excluded from GDP until the 1970s because it was seen as redistributing wealth rather than creating it. Its inclusion now inflates GDP without reflecting real economic growth.

By treating all paid activities as value-adding, GDP fails to distinguish between productive and extractive activities. This makes it an unreliable measure of a nation’s true wealth or well-being.

Examples

• Homeowners’ “fictitious rent” accounts for 6% of US GDP.
• Public services like roads and schools are undervalued in GDP calculations.
• The financial sector’s inclusion in GDP since the 1970s distorts economic growth figures.

4. The Financial Sector’s Growth Is Misleading

Since the 1970s, the financial sector has grown significantly, now accounting for 7% of GDP in the US and UK. This growth is often celebrated as a sign of economic success, but it primarily reflects the sector’s ability to extract value rather than create it.

Banks have shifted from funding businesses to developing complex financial products like derivatives. These products generate profits for the financial sector but don’t necessarily benefit the broader economy. In fact, the 2008 financial crisis highlighted how this extraction can destabilize the economy.

The financial sector’s growth outpaces overall GDP growth, indicating that it’s taking a larger share of the economy without contributing proportionally to economic expansion. This extraction mirrors rising bus fares: it’s not a sign of success but of inefficiency and exploitation.

Examples

• The financial sector’s share of GDP has risen to 7% in the US and UK.
• Complex products like derivatives prioritize profit over economic growth.
• The 2008 financial crisis showed the dangers of unchecked financial extraction.

5. Financialization Has Spread Across Industries

Financialization isn’t limited to banks; it has infiltrated other industries. For example, Ford made more money from car loans than car sales in the 2000s. This shift reflects a broader trend of businesses prioritizing financial tools over their core operations.

Milton Friedman’s 1970 article, “The Social Responsibility of Business Is to Increase its Profits,” encouraged companies to focus on maximizing shareholder value. This led to practices like share buybacks, which enrich executives and shareholders but don’t necessarily benefit employees or customers.

Even public services like care homes and water companies have adopted this profit-first mentality. Owned by private equity firms, these companies prioritize payouts to shareholders, often at the expense of service quality and affordability.

Examples

• Ford’s car loans outpaced car sales in profitability during the 2000s.
• Share buybacks increase executive pay while avoiding certain taxes.
• Private equity ownership of care homes prioritizes profits over public service.

6. Governments Enable Value Extraction

Governments play a significant role in enabling value extraction, especially in the innovation economy. Tech companies benefit from monopolies, low taxes, and public funding for foundational technologies like the internet and GPS.

Pharmaceutical companies also rely on government support. Patents grant them monopolies, allowing them to charge exorbitant prices for life-saving drugs. For instance, the hepatitis C drug Sovaldi costs $84,000 for a three-month course, despite costing less than $136 to produce.

Venture capitalists often take credit for funding startups, but it’s government loans that take the biggest risks in a company’s early stages. This public investment is rarely acknowledged, even though it’s essential for innovation.

Examples

• Tech monopolies like Facebook benefit from low taxes and minimal regulation.
• Sovaldi’s $84,000 price tag highlights the abuse of pharmaceutical patents.
• Government loans fund early-stage startups before venture capitalists step in.

7. The Public Sector Is Undervalued

The public sector is often dismissed as inefficient, but it plays a vital role in the economy. Public services like roads and education provide essential infrastructure for private businesses, yet they’re undervalued in GDP calculations.

Privatization and outsourcing have further eroded the public sector’s reputation. In the UK, private finance initiatives (PFIs) have cost the government far more than direct public investment would have. For example, 80 PFI contracts in Scotland were estimated to cost £5.7 billion but ended up costing £30.2 billion.

This bias against the public sector creates a self-fulfilling prophecy, where public services are underfunded and then criticized for underperforming. A more balanced approach would recognize the public sector’s contributions to the economy.

Examples

• Public roads and schools are essential but undervalued in GDP.
• Scottish PFIs cost five times their original estimate.
• Public services are penalized for providing affordable infrastructure.

8. Price Doesn’t Equal Value

Modern economics equates value with price, but this ignores whether an activity benefits society. For example, high drug prices reflect monopolistic rent-seeking, not value creation. Similarly, financial products that generate profits for banks don’t necessarily help the broader economy.

This conflation of price and value has led to a system that rewards extraction over creation. To fix this, we need to redefine value in a way that prioritizes activities that improve people’s lives and contribute to economic growth.

Examples

• Patented drugs like Sovaldi extract value without reinvesting in the economy.
• Financial products prioritize profit over societal benefit.
• Price-based value ignores the broader impact of economic activities.

9. A New Economic Story

Economics isn’t just about numbers; it’s about the stories we tell. The current narrative glorifies wealth extraction as productivity, but this wasn’t always the case. Until the 1970s, finance was excluded from GDP because it was seen as unproductive.

By redefining value, we can tell a new story that prioritizes activities benefiting society. This would involve rethinking GDP, recognizing the public sector’s contributions, and distinguishing between value creation and extraction.

Examples

• Finance was excluded from GDP until the 1970s.
• A new narrative could prioritize public investment and stakeholder value.
• Redefining value would challenge the glorification of wealth extraction.

Takeaways

1. Advocate for a new measure of economic success that distinguishes between value creation and extraction.
2. Support policies that recognize and invest in the public sector’s contributions to the economy.
3. Challenge the narrative that equates price with value by promoting stakeholder-focused business models.