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

Smith’s penetrating analysis of how advanced capitalist economies functioned won him many followers. Equally, his staunch advocacy of free trade, in an era in which mercantilist policies were beginning to be seen as old-fashioned (Smith, indeed, believed that merchants were unproductive because they only provided the ephemeral service of moving goods around, rather than producing anything of value), made his book a hit among the ‘free traders’ who eventually overturned England’s Corn Laws, which imposed heavy tariffs on imported corn to protect domestic landowners, and other protectionist measures. Armed with Smith’s ideas, free traders showed that nations could get richer even if there was no trade surplus and no gold accumulation. Amassing gold was unnecessary and insufficient for growth. Huge amounts of gold flowed to Spain from its colonies, but the kingdom did not become more productive.

The victory of the free traders over the mercantilists is better understood in terms of their rival conceptions of value. Mercantilists thought gold had inherent worth and that everything else could be valued in terms of how much gold it was exchanged for. Following Smith, free traders could trace value to labour, and the logic of value was thereby inverted. Gold, like all other things, was valued by how much labour it took to produce. 31

Smith’s theory was not immune to criticism. He had actually put forward at least two theories of value, which created confusion about both the production boundary and precisely who was productive – in particular, whether the provision of services in themselves created value. 32

In essence, Smith was confused about the distinction between material and immaterial production. For Smith, as we have seen, a servant ‘adds’ no value that could be used by the master on something other than, literally, keeping the servant alive. But he also argued that if a manufacturing worker earns £1 in turning a quantity of cotton, whose other inputs also cost £1, into a piece of cloth that sells for £3, then the worker will have repaid his service and the master has made a profit of £1. Here a definition of productivity, irrespective of whether what is produced is a solid product or a service, emerges. Adding value in any branch of production is productive; not adding value is unproductive. Following this definition, services such as cleaning or vehicle repair can be productive – thereby invalidating Smith’s own material–immaterial division of the production boundary. The debates about Smith’s theories of value rumbled on for centuries. Other of Smith’s ideas, such as free trade and the unproductive nature of government, have also left an enduring legacy.

But he is often misconstrued. His understanding of politics and philosophy was never sidelined in his economic reasoning. His Theory of Moral Sentiments and The Wealth of Nations were not contradictory but part of his deep analysis of what drives human behaviour and how societies organize themselves, and why some societies might grow in wealth more than others. Smith’s analysis of ‘free markets’ was closely tied to his understanding of production, and the need to limit rent-seeking behaviour.

David Ricardo: Grounding Smith’s Value Theory

In the 1810s, another towering figure of the English classical economic school used the labour theory of value and productiveness to explain how society maintains the conditions which enable it to reproduce itself. David Ricardo came from a Sephardic Jewish family which originated in Portugal and moved to Holland before settling in England. Ricardo followed his father as a London stockbroker, although he was later estranged from his family after becoming a Unitarian. He grew fabulously rich from his speculative activities, most notoriously by profiting from inaccurate information that was circulating on the Battle of Waterloo in 1815. He was said to have made £1 million (in 1815 value) from holding on to bonds while everyone else was selling (due to the false rumours that Wellington was losing against Napoleon), an almost unimaginable sum at the time, after which he promptly and wisely retired to the country, well away from London.

Ricardo was drawn to economics by reading Smith’s The Wealth of Nations , but was concerned with something that he felt was glaringly absent from Smith’s theory of value: how that value was distributed throughout society – or what we would today call income distribution. It need hardly be said that, in today’s world of growing inequality of income and wealth, this question remains profoundly relevant.

Smith had observed that the value produced by labour, when sold, is redistributed as wages, profits and rent; he had also seen that labour’s exact share of this value – wages – would vary. 33However, Smith had no coherent explanation for the way in which wages were apportioned, or why they differed between professions and countries or over time. 34Ricardo, by contrast, felt that the distribution of wages was, as he stressed in his magnum opus On the Principles of Political Economy and Taxation , the ‘principle problem’ in economics and ultimately regulates the growth and wealth of a nation.

Ricardo actually believed in the labour theory of value, and, unlike Smith, was at pains to point out that the value of a commodity was strictly proportional to the amount of labour time needed to produce it. Ricardo emphasized agriculture for a different reason from Quesnay. He wanted to explain the distribution of income, and for him productivity in agriculture was the hinge upon which that distribution turned. Workers, Ricardo believed, were paid a subsistence wage: in essence, they earned enough to pay for food and shelter. But food comes from agriculture, so the price of food regulates wages: a low price of food (or ‘corn’, as Ricardo wrote in the language of the day) will permit lower wages and therefore higher profits and incentives to invest in future production (for example in manufacturing) and promote economic growth. A high wage due to low productivity in agriculture will mean lower profits, and hence little investment in future production, which in turn leads to slower economic growth.

Ricardo inherited this ‘dismal theory’ of wages from his contemporary Thomas Malthus (1766–1834), another English writer on political economy, who proposed that whenever real wages are above subsistence level, the population will grow until it is so large that the demand for food will push up food prices enough to bring wages back to subsistence level. 35

In Ricardo’s view, then, wages depended heavily on the productivity of agriculture: if productivity rose and food became cheaper, wages would fall. And in manufacturing and the other branches of the economy, whatever did not have to be paid to the worker would flow to the capitalist as profit. Profits are the residual from the value that workers produce and do not need to consume for their own ‘maintenance’, as Ricardo put it, ‘to subsist and perpetuate their race’. 36

This in turn leads to Ricardo’s theory of growth and accumulation – increasing the stock of capital or wealth to help fuel subsequent further increases in wealth. As profits grow, so capitalists invest and expand production, which in turn creates more jobs and raises wages, thereby increasing the population, whose wages finally go back to subsistence level, and so on. The economy is a perpetual growth machine, with more and more people earning the subsistence wage.

But Ricardo’s theoretical genius really came to the fore in tackling his third class of society: landlords. Production in agriculture depends on two types of input: goods and services needed for production. One type can be scaled – increased in proportion to requirements. It includes labour, machinery, seeds and water. The other type cannot be scaled: good arable land. As Mark Twain is supposed to have said, ‘Buy land, they’re not making it any more.’