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

Significantly for our discussion, Ricardo singled out government as the ultimate example of unproductive consumption. Government, in his view, is a dangerous leech on the surplus. Most of government spending comes from taxes, and if it consumes – by spending on armies, for example – too large a share of the national income, ‘the resources of the people and the state will fall away with increasing rapidity, and distress and ruin will follow’. 45Ricardo believed that government is by nature unproductive.

At the time Ricardo was writing, such issues were uppermost. Only a few years earlier, the British government had had to raise unprecedented amounts of money from taxes and issuing bonds to wage the war against Napoleon, from which the nation emerged heavily in debt. Could it afford the immense military expenditure which Ricardo’s theory deemed unproductive? He found to his relief that the increase in value production by private companies more than compensated for the increase in unproductive government consumption. Unlike Smith, Ricardo did not write about that part of government expenditure which creates the conditions for productivity in the first place: infrastructure (bridges, roads, ports and so on), national defence and the rule of law. By omitting to discuss the role of government in productivity, he paved the way for generations of economists to be equally oblivious – with hugely significant consequences that we will look at in Chapter 8.

In essence, Ricardo’s theory of value and growth led to a production boundary that does not depend on a job or profession itself (manufacturer, farmer or vicar) or on whether the activity is material or immaterial. He believed that industrial production in general leads to surpluses, but for him the real question is how those surpluses are used. If the surpluses finance productive consumption, they are productive; if not, they are unproductive.

Ricardo focused on the ‘plight’ of capitalists and their struggle against landlords. However, he never addressed the awkward fact that labour creates value but the capitalists get the spoils – the surplus over and above the subsistence wages paid to labourers. In the course of the nineteenth century, as England industrialized, inequalities and injustices multiplied. The labour theory of value was to interpret production in a way that cast capitalists in a much less favourable light.

Karl Marx on ‘Production’ Labour

Ricardo’s appreciation of the dynamism of capitalism compared with past eras prefigures the emphasis Marx placed a generation later on the system’s unprecedented power to transform societies. Born in 1818, Marx grew up in the German city of Trier, one of nine children of Jewish parents, both lawyers. In his own legal studies at university, Marx was drawn to a critical version of Hegel’s philosophy of dialectics, propounded by Hegel’s disciples, which set out how intellectual thought proceeds via negation and contradiction, through a thesis, its antithesis, and then a synthesis. Marx was particularly interested in how history is shaped by contradictions between material forces – such as capital and labour – and by the resolution or synthesis of those contradictions. After being barred from taking a professorship at the University of Jena because of his radical political leanings, he became editor of a progressive newspaper, Rheinische Zeitung . Then in 1843 he moved to Paris, where he met Friedrich Engels, his future co-author and collaborator. Two years later Marx was expelled from France because of his socialist political activities and settled in Brussels. There in 1848 he published with Engels the Communist Manifesto . Marx wrote voluminously on politics for the rest of his life but it is remarkable that, despite being opposed to capitalism, he analysed it objectively in order to understand where it was taking humankind and what the alternatives might be.

Marx developed his own version of the labour theory of value. He emphasized how definitions of ‘productive’ activity depend on historical circumstances – the society of any given time. He also focused on the nature of productive activity within the capitalist system. Under capitalism, firms produce commodities – a general term for anything from nuts and bolts to complete machines. If commodities are exchanged – sold – they are said to have an exchange value. If you produce a commodity which you consume yourself it does not have an exchange value. Exchange value crystallizes the value inherent in commodities.

The source of that inherent value is the one special commodity workers own: their labour power, or – put another way – their capacity to work. Capitalists buy labour power with their capital. In exchange, they pay workers a wage. Workers’ wages buy the commodities such as food and housing needed to restore a worker’s strength to work. In this way, wages express the value of the goods that restore labour power.

This description of the source of value largely followed Ricardo. But Ricardo had tried unsuccessfully to find an external commodity that could serve as an ‘invariable standard of value’ by which the value of all other products could be determined. Marx solved this problem by locating this invariable measure in workers themselves. He was careful to distinguish labour expended in production from labour power, which is the capacity to work. Workers expend labour, not labour power. And in this distinction lies the secret of Marx’s theory of value. Humans can create more value than they need to restore their labour power. For instance, if a worker has to work five hours to produce the value needed to restore labour power per day, the labour power’s value is equivalent to the five hours of work. However, if the working day lasts ten hours, the additional five hours’ work will create value over and above that needed to restore labour power. Labour power creates surplus value.

The ingenuity of capitalism, according to Marx, is that it can organize production to make workers generate unprecedented amounts of this surplus value. In early societies of hunter-gatherers and subsistence farmers, people worked enough to create the value that would allow them to survive, but no surplus over and above that. Later, under feudalism, they could be forced to produce enough surplus to satisfy the (unproductive) consumption of the feudal lord, which, as Smith and Ricardo knew, could be substantial. But after the means of production were taken away from independent producers – mostly by violence and expropriation through property rights legislation, such as enclosures of common land in England by big landowners – they became workers, ‘free’ and without property.

Capitalists were able to purchase the workers’ labour power because workers lost their independent means of subsistence and needed a wage to survive. The trick is to get them to work longer than needed to produce value (wages) that they spend on their subsistence needs – again, food and housing. 46Workers, in other words, are exploited because capitalists pocket the surplus value workers produce over and above their subsistence requirements. And, unlike the feudal lords, capitalists will not squander all of the surplus on consumption, but will have incentives to reinvest part of it in expanding production to make yet more profits. However, Marx noted that there was a contradiction in the system. The drive to increase productivity would increase mechanization, which, in displacing labour (machines taking over human work), would then eventually reduce the key source of profits: labour power. He also foresaw the problem of growing financialization, which could potentially undermine industrial production. Throughout his analysis, his focus was on change, and the effects of change on the creation of value.