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

This normative and moral view of price, linked to cheating or criminal behaviour, began to fade after the seventeenth century – the time of Petty and King – but lingered on until firmly supplanted by the concept of individual utility, which held that it was not about good or bad but how common goals could be reached through each individual trying to maximize the benefit to him- or herself. In 1776 – the year that Adam Smith published The Wealth of Nations – the Englishman Jeremy Bentham argued that ‘the greatest happiness of the greatest number’ should be the ‘measure of right and wrong’. 5In other words, an action should be evaluated according to its consequences in a particular context: killing may be justified if it prevents more killing. This ‘utilitarian’ theory of ethics spilled over into ideas about production. In France, Jean-Baptiste Say (1767–1832), Smith’s contemporary and a hostile critic of Quesnay, argued in his 1803 book Treatise on Political Economy that the value of a commodity resides in its utility to a buyer and, therefore, that productive labour is labour which produces utility. In Say’s view, labour in services – which classical economists thought fell squarely into the ‘unproductive’ category, because they failed to produce ‘things’ – could in fact be reclassified as productive, so long as those services fetched a price and labour got paid a wage. 6

The most influential person in developing utility theory was the late-nineteenth-/early-twentieth-century British economist Alfred Marshall (1842–1924), Professor of Political Economy (as it was still called) at Cambridge. Significantly, he was trained as a mathematician. Marshall’s 1890 Principles of Economics diffused the new ideas to generations of students. The economics library in Cambridge is known simply as the Marshall Library; introductory economics textbooks still include diagrams he developed in the nineteenth century.

In many respects Marshall was a natural heir to the classical tradition. He accepted that the cost of production was important in determining a commodity’s value. But he and his followers shifted thinking about value from the study of broad quantities of capital, labour and technology inputs and their returns to that of small incremental quantities. Using mathematical calculus, they focused on how a small – or ‘marginal’ – change in one variable causes a change in another: for instance, how a small change in price affects the quantity of product demanded or supplied.

So what was the new value theory, marginalism, about? First, it is based on the notions of utility and scarcity and is subjective: the value of things is measured by their usefulness to the consumer. There is, therefore, no ‘objective’ standard of value, since utility may vary between individuals and at different times. Second, this utility decreases as the amount of a thing that is held or consumed increases. The first Mars Bar you eat in a day may provide a lot of utility or satisfaction and even happiness. It is enjoyable and maybe staves off hunger pangs. But as you go on eating Mars Bars they cease to be so enjoyable and may even make you feel ill. At some point the utility gained from eating them will decrease. 7In this way, the utility of the last bar is less, possibly much less, than that of earlier bars. This is ‘marginal utility’ – in the case of a Mars Bar, worth less to you than the previous one, ‘decreasing marginal utility’. By the same token, the scarcer a thing is, the more utility it gives you – ‘increasing marginal utility’. One Mars Bar on a desert island can give you more happiness than any number of bars bought from your corner shop.

THE RISE OF THE ‘NEOCLASSICALS’

Prices, then, reflect the utility that buyers get from things. The scarcer they are – the higher their marginal utility – the more consumers will be willing to pay for them. These changes in the marginal utility of a product came to be known as consumer ‘preference’. The same principle applies to producers. ‘Marginal productivity’ is the effect that an extra unit of produced goods would have on the costs of production. The marginal cost of each extra Mars Bar that rolls off the production line is lower than the cost of the previous one.

This concept of marginalism lies at the heart of what is known today as ‘neoclassical’ theory – the set of ideas that followed the classical theory developed by Smith and Ricardo and was extended by Marx. The term neo classical reflected how the new theorists stood on the shoulders of giants but then took the theory in new directions. Microeconomic theory, the theory of how firms, workers and consumers make choices, is based on the neoclassical theory of production and consumption which rests on the maximization of profits (firms), and utility (consumers and workers).

As a mathematician, Marshall used mathematical calculus, borrowed from Newtonian physics, to develop his theory of how an economy worked. In his model, the point at which a consumer’s money is worth more to him or her than the additional (marginal) unit of a commodity (that next Mars Bar) that their money would purchase, is where the system is in ‘equilibrium’, an idea reminiscent of Newton’s description of how gravity held the universe together. The smooth, continuous curves of these equilibrating and evolutionary forces depict a system that is peaceful and potentially ‘optimal’. The inclusion of concepts like equilibria in the neoclassical model had the effect of portraying capitalism as a peaceful system driven by self-equilibrating competitive mechanisms – a stark contrast to the ways in which the system was depicted by Marx, as a battle between classes, full of disequilibria and far from optimal, whose resulting revolutions would have been better described by Erwin Schrödinger’s concept of quantum leaps and wave mechanics.

So keen was Marshall to emphasize the equilibrating and evolutionary forces in economics, with their smooth, continuous curves that could be described by mathematical calculus, that the epigraph of his 1890 Principles of Economics was the Latin tag Natura non facit saltum , a nod to its use by Darwin in his 1859 On the Origin of Species to make the point that Nature, rather than progressing in leaps and bounds, evolves in incremental steps, building on previous changes.

The equilibrium concept had a lot of appeal at the start of the twentieth century, when the rise of socialism and trade unions in Europe threatened the old, often autocratic, order and the conventional wisdom was that capitalism was largely self-regulating and government involvement was unnecessary or even dangerous.

Equilibrium was predicated on the notion of scarcity, and the effect of scarcity on diminishing returns: the more you consume, the less you enjoy each unit of consumption after a certain amount (the maximum enjoyment); and the more you produce, the less you profit from each marginal unit produced (the maximum profit). It is this concept of diminishing returns that allows economists today to draw smooth curves in diagrams, using mathematical calculus, so that maxima and minima points (e.g., the bottom of a U-shaped curve showing how costs change with increased production) provide the equilibrium targets and utility maximization.

Nineteenth-century economists liked to illustrate the importance of scarcity to value by using the water and diamond paradox. Why is water cheap, even though it is necessary for human life, and diamonds are expensive and therefore of high value, even though humans can quite easily get by without them? Marx’s labour theory of value – naïvely applied – would argue that diamonds simply take a lot more time and effort to produce. But the new utility theory of value, as the marginalists defined it, explained the difference in price through the scarcity of diamonds. Where there is an abundance of water, it is cheap. Where there is a scarcity (as in a desert), its value can become very high. For the marginalists, this scarcity theory of value became the rationale for the price of everything, from diamonds, to water, to workers’ wages.