Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

(All units are in billions of French livres; solid arrows indicate product flows, dashed arrows indicate money flows.) 18

Most significant is how the table neatly shows, from row to row, that as long as what is produced is greater than what is consumed, an amount will be left over at the end to be reinvested, thereby allowing the economy to continue reproducing itself. If any of the unproductive members of society take too much, reducing the amount the farmer can reinvest in production, the economy will grind to a halt. In other words, if value extraction by the unproductive members exceeds value creation by the productive members, growth stops.

Though he himself did not use the term, Quesnay’s theory of value incorporates a very clear production boundary, the first to be drawn with such precision, which makes it clear that the surplus the ‘productive’ sectors generate enables everyone else to live.

Other economists quickly weighed in with analysis and criticism of Quesnay’s classification. Their attack centred on Quesnay’s labelling of artisans and workers as ‘sterile’: a term that served Quesnay’s political ends of defending the existing agrarian social order, but contradicted the everyday experience of a great number of people. Refining Quesnay’s thinking, his contemporary A. R. J. Turgot retained the notion that all value came from the land, but noted the important role of artisans in keeping society afloat. He also recognized that there were other ‘general needs’ that some people had to fulfil – such as judges to administer justice – and that these functions were essential for value creation. Accordingly, he re-labelled Quesnay’s ‘sterile’ class as the ‘stipendiary’, or waged, class. And, since rich landowners could decide whether to carry out work themselves or hire others to do so using revenues from the land, Turgot labelled them the ‘disposable class’. He also added the refinement that some farmers or artisans would employ others and make a profit. As farmers move from tilling the land to employing others, he argued, they remain productive and receive profits on their enterprise. It is only when they give up on overseeing farming altogether and simply live on their rent that they become ‘disposable’ rent collectors. Turgot’s more refined analysis therefore placed emphasis on the character of the work being done, rather than the category of work itself.

Turgot’s refinements were highly significant. In them, we see the emergent categories of wages, profits and rents: an explicit reference to the distribution of wealth and income that would become one of the cornerstones of economic thought in the centuries to come, and which is still used in national income accounting today. Yet, for Turgot, land remained the source of value: those who did not work it could not be included in the production boundary. 19

Quesnay and Turgot’s almost complete identification of productivity with the agricultural sector had an overriding aim. Their restrictive production boundary gave the landed aristocracy ammunition to use against mercantilism, which favoured the merchant class, and fitted an agricultural society better than an industrial one. Given the physiocrats’ disregard for industry, it is hardly surprising that the most significant critique of their ideas came from the nation where it was already clear that value was not just produced in agriculture, but in other emerging sectors: a rapidly industrializing Britain. The most influential critic of all was Quesnay’s contemporary, a man who had travelled in France and talked at length with him: Adam Smith .

CLASSICAL ECONOMICS: VALUE IN LABOUR

As industry developed rapidly through the eighteenth and nineteenth centuries, so too did the ideas of a succession of outstanding thinkers like Adam Smith (1723–90), David Ricardo (1772–1823) and Karl Marx (1818–83), a German who did much of his greatest work in England. Economists started to measure the market value of a product in terms of the amount of work, or labour, that had gone into its production. Accordingly, they paid close attention to how labour and working conditions were changing and to the adoption of new technologies and ways of organizing production.

In The Wealth of Nations , first published in 1776 and widely regarded as the founding work of economics, Smith’s famous description of the division of labour in pin factories showed his understanding of how changes in the organization of work could affect productivity and therefore economic growth and wealth. Another enormously influential book, Ricardo’s On the Principles of Political Economy and Taxation , first published in 1817, contained a famous chapter called ‘On Machinery’, in which he argued that mechanization was reducing demand for skilled labour and would depress wages. And in Marx’s Capital , Volume 1 of which was first published in 1867, the chapter called ‘The Working Day’, which dealt with the development of the English Factory Acts governing working conditions, showed his fascination with production as the field on which the battle for workers’ rights, higher wages and better conditions was being fought.

Smith, Ricardo and others of the time became known as the ‘classical’ economists. Marx, a late outrider, stands somewhat apart from this collective description. The word ‘classical’ was a conscious echo of the status given to writers and thinkers of the ancient Greek and Roman worlds, whose works were still the bedrock of education when the term ‘classical economics’ began to be used in the later nineteenth century. The classical economists redrew the production boundary in a way that made more sense for the period they lived in: one which saw the artisan-craft production of the guilds still prominent in Smith’s time give way to the large-scale industry with huge numbers of urban workers – the proletariat – that Marx wrote about in the third quarter of the nineteenth century. Not for nothing was their emerging discipline called ‘political economy’. It did not seem odd to contemporaries that economics was intimately part of studying society: they would have found odd the idea, widespread today, that economics is a neutral technical discipline which can be pursued in isolation of the prevailing social and political context. Although their theories differed in many respects, the classical economists shared two basic ideas: that value derived from the costs of production, principally labour; and that therefore activity subsequent to value created by labour, such as finance, did not in itself create value. Marx, we will see, was more subtle in his understanding of this distinction.

Adam Smith: The Birth of the Labour Theory of Value

Born in 1723 into a family of customs officials in Kirkcaldy, in the county of Fife, Scotland, Adam Smith became Professor of Moral Philosophy at the University of Glasgow before turning his mind to what we now call economic questions, although at the time such questions were deeply influenced by philosophy and political thought.

With Britain well on the path to industrial capitalism, Smith’s The Wealth of Nations highlighted the role of the division of labour in manufacturing. His account of pin-manufacturing continues to be cited today as one of the first examples of organizational and technological change at the centre of the economic growth process. Explaining the immense increase in productivity that occurred when one worker was no longer responsible for producing an entire pin, but only for a small part of it, Smith related how the division of labour allowed an increase in specialization and hence productivity:

I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations. 20