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

These insights were original and profound. Smith was writing while the Industrial Revolution introduced machines into factories on a large scale. When harnessed to the division of labour, mechanization would radically increase productivity – the principal engine of economic growth. But even the simple reorganization of labour, without machinery, by which each worker specialized and developed skills in a specific area, enabled Smith to make this critical point.

Equally significant was Smith’s analysis of how the ‘market’ determines the way in which consumers and producers interact. Such interaction, he contended, was not down to ‘benevolence’ or central planning. 21Rather, it was due to the ‘invisible hand’ of the market:

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society … He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention. 22

Like Quesnay, Smith launched a more general attack on mercantilist policies which, he argued, restricted competition and trade. He also argued strongly for policies that would increase savings, and hence the amount of capital available for investment rather than unproductive consumption (say, on luxuries). But for Smith, industrial workers – not, as for Quesnay, farmers – were at the heart of the productive economy. Manufacturing labour, not land, was the source of value. 23The labour theory of value was born.

Smith has become the figurehead of much modern economic theory because of his ideas about how capitalism is founded on supposedly immutable human behaviour, notably self-interest, and competition in a market economy. His metaphor of the ‘invisible hand’ has been cited ad nauseam to support the current orthodoxy that markets, left to themselves, may lead to a socially optimal outcome – indeed, more beneficial than if the state intervenes.

Smith’s book is actually a collection of recipes for politicians and policymakers. Far from leaving everything to the market, he thinks of himself as giving guidance to ‘statesmen’ on how to act to ‘enrich both the people and the sovereign’ 24– how to increase the wealth of nations. This is where Smith’s value theory enters the picture. He was convinced that growth depended on increasing the relative share of ‘manufactures’ – factories employing formerly independent artisans or agricultural workers as dependent wage labourers – in the overall make-up of industry and believed that free trade was essential to bring this about. He felt that the enemies of growth were, first, the protectionist policies of mercantilists; second, the guilds protecting artisans’ privileges; and third, a nobility that squandered its money on unproductive labour and lavish consumption. For Smith (as for Quesnay), employing an overly large portion of labour for unproductive purposes – such as the hoarding of cash, a practice that still afflicts our modern economies – prevents a nation from accumulating wealth.

Value, Smith believed, was proportional to the time spent by workers on production. For the purposes of his theory, Smith assumed a worker of average speed. Figure 5 shows how he drew a clear line (the production boundary) between productive and unproductive labour. For him, the boundary lay between material production – agriculture, manufacturing, mining in the figure’s darker blob – and immaterial production in the lighter blob. The latter included all types of services (lawyers, carters, officials and so on) that were useful to manufactures, but were not actually involved in production itself. Smith said as much: labour, he suggested, is productive when it is ‘realized’ in a permanent object. 25His positioning of government on the ‘unproductive’ side of the boundary set the tone for much subsequent analysis and is a recurring theme in today’s debates about government’s role in the economy, epitomized by the Thatcher–Reagan reassertion in the 1980s of the primacy of markets in solving economic and social issues.

Figure 5.The production boundary according to Adam Smith

In Smith’s view, ‘how honourable, how useful, or how necessary soever’ a service may be, it simply does not reproduce the value used in maintaining (feeding, clothing, housing) unproductive labourers. Smith finds that even ‘the sovereign’, together with ‘all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers’. 26Priests, lawyers, doctors and performing artists are all lumped together as unproductive too.

What informs Smith’s classification is his conviction that some types of labour do not ‘reproduce’ the value needed to keep those workers alive at a subsistence level. In other words, if all the subsistence that was needed to keep a person alive was a certain amount of grain, then anyone who does not produce as much value as that amount of grain is by definition unproductive.

How, then, are those that do not produce this unit of value kept alive?

Smith’s answer lay in the concept of a ‘surplus’. Many productive workers produce the equivalent of more grain than they need to feed themselves to survive. A manufacturer makes things that, when exchanged, will yield more grain than needed to keep the productive workers alive. The surplus then sustains unproductive labourers, including the entourages of aristocrats, who kept ‘a profuse and sumptuous table’ with ‘a great number of menial servants, and a multitude of dogs and horses’.

This is where Smith addressed head-on how the wealth of nations could grow. It was in effect his policy advice. Instead of ‘wasting’ the surplus on paying for unproductive labour, he argued, it should be saved and invested in more production so that the whole nation could become richer. 27Smith was not criticizing the wealthy per se. But he was criticizing those who wasted their wealth on lavish consumption – ‘collecting books, statues, pictures’, or ‘more frivolous, jewels, baubles, ingenious trinkets’ – instead of productive investment. (This, after all, was the age of the Grand Tour, when young aristocrats travelled to the Continent to improve their education and returned laden with ancient artefacts.) Smith was particularly attracted to the prospect of investment in machines, then just beginning to be used in factories, because they improved workers’ productivity.

His emphasis on investment linked directly to his ideas about rent. Smith believed that there were three kinds of income: wages for labour in capitalist enterprises; profits for capitalists who owned the means of production; and rents from ownership of land. When these three sources of income are paid at their competitive level, together they determine what he called the ‘competitive price’. 28Since land was necessary, rent from land was a ‘natural’ part of the economy. But that did not mean rent was productive: ‘the landlords, like all other men, love to reap where they never sowed and demand a rent [from the earth] even for its natural produce’. 29Indeed, Smith asserted, the principle of rent from land could be extended to other monopolies, such as the right to import a particular commodity or the right to plead at the bar. Smith was well aware of the damage monopolies could do. In the seventeenth century, a government desperate for revenue had granted – often to well-placed courtiers – an extraordinary range of monopolies, from daily necessities such as beer and salt to mousetraps and spectacles. In 1621 there were said to be 700 monopolies, and by the late 1630s they were bringing in £100,000 a year to the Exchequer. 30But this epidemic of rent-seeking was deeply unpopular and was choking the economy: more than that, it was one of the proximate causes of the Civil War, which led to the execution of Charles I. Many Englishmen understood what Smith meant when he said that a free market was one free of rent.