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

Yet drug prices are not falling. It seems that the industry’s value creation arguments have successfully neutralized criticism. Indeed, a high proportion of health care costs in the Western world has nothing to do with health care: these costs are simply the value the pharmaceutical industry extracts.

Or consider the way that entrepreneurs in the dot.comand IT industry lobby for advantageous tax treatment by governments in the name of ‘wealth creation’. With ‘innovation’ as the new force in modern capitalism, Silicon Valley’s do-gooders have successfully projected themselves as the entrepreneurs and garage tinkerers who unleash the ‘creative destruction’ from which the jobs of the future come. These new actors, from Google to Uber to Airbnb, are often described as the ‘wealth creators’.

Yet this seductive story of value creation leads to questionable broader tax policies by policymakers: for example, the ‘patent box’ policy that reduces tax on any products whose inputs are patented, supposedly to incentivize innovation by rewarding the generation of intellectual property. It’s a policy that makes little sense, as patents are already monopolies which should normally earn high returns. Policymakers’ objectives should not be to increase the profits from monopolies, but to favour investments in areas like research.

Many of the so-called wealth creators in the tech industry, like the co-founder of Pay Pal, Peter Thiel, often lambast government as a pure impediment to wealth creation. 9Thiel went so far as to set up a ‘secessionist movement’ in California so that the wealth creators could be as independent as possible from the heavy hand of government. When Eric Schmidt, CEO of Google, was quizzed about the way companies control our personal data, he replied with what he assumed was a rhetorical question: ‘Would you prefer government to have it?’ His reply fed a modern-day banality: entrepreneurs good, government bad.

Yet in presenting themselves as modern-day heroes, Apple and other companies conveniently ignore the pioneering role of government in new technologies. Apple has unashamedly declared that its contribution to society should not be sought through tax but through recognition of its great gizmos. But doesn’t the taxpayer who helped Apple create those products and the record profits and cash mountain they have generated deserve something back, beyond a series of undoubtedly brilliant gadgets? Simply to pose this question, however, underlines how we need a radically different type of narrative as to who created the wealth in the first place – and who has subsequently extracted it.

If there are so many wealth creators in industry, the inevitable conclusion is that at the opposite side of the spectrum featuring fleet-footed bankers, science-based pharmaceuticals and entrepreneurial geeks are the inert, value-extracting civil servants and bureaucrats in government. In this view, if private enterprise is the fast cheetah bringing innovation to the world, government is a plodding tortoise impeding progress – or, to invoke a different metaphor, a Kafkaesque bureaucrat, buried under papers, cumbersome and inefficient. Government is depicted as a drain on society, funded by obligatory taxes on long-suffering citizens. In this story, there is always only one conclusion: that we need more market and less state. The slimmer, trimmer and more efficient the state machine the better.

In all these cases, from finance to pharmaceuticals and IT, governments bend over backwards to attract these supposedly value-creating individuals and companies, dangling before them tax reductions and exemptions from the red tape that is believed to constrict their wealth-creating energies. The media heap wealth creators with praise, politicians court them, and for many people they are high-status figures to be admired and emulated. But who decided that they are creating value? What definition of value is used to distinguish value creation from value extraction, or even from value destruction?

Why have we so readily believed this narrative of good versus bad? How is the value produced by the public sector measured, and why is it more often than not treated simply as a more inefficient version of the private sector? What if there was actually no evidence for this story at all? What if it stemmed purely from a set of deeply ingrained ideas? What new stories might we tell?

The Greek philosopher Plato once argued that storytellers rule the world. His great work The Republic is in part a guide to educating the leader of his ideal state, the Guardian. Plato recognized that stories form character, culture and behaviour: ‘Our first business is to supervise the production of stories, and chose only those we think suitable, and reject the rest. We shall persuade mothers and nurses to tell our chosen stories to their children, and by means of them to mould their minds and characters rather than their bodies. The greater part of the stories current today we shall have to reject.’ 10

Plato disliked myths about ill-behaved gods. This book looks at a more modern myth, about value creation in the economy. Such myth-making, I argue, has allowed an immense amount of value extraction, enabling some individuals to become very rich and draining societal wealth in the process. Between 1975 and 2015 real US GDP – the size of the economy adjusted for inflation – roughly tripled from $5.49 trillion to $16.58 trillion. 11During this period, productivity grew by more than 60 per cent. Yet from 1979 onwards, real hourly wages for the great majority of American workers have stagnated or even fallen. 12In other words, for almost four decades a tiny elite has captured nearly all the gains from an expanding economy. You do not have to look far to see who is in that elite. Mark Zuckerberg dropped out of Harvard at the age of nineteen to launch Facebook. He is now in his early thirties. According to Forbes, 13Zuckerberg’s fortune increased by $18 billion in the year to mid-2016, making his current total estimated worth $70.8 billion. He is the fourth-richest man in the US and the fifth-richest in the world. 14

It defies reason to maintain, as the dominant narrative does, that the inequality that has increased in the US, and in many other economies, is due to very smart individuals doing particularly well in innovative sectors. While wealth is created through a collective effort, the massive imbalance in the distribution of the gains from economic growth has often been more the result of wealth extraction, whose potential scale globalization has greatly magnified.

At the end of the second quarter of 2016, Facebook had 1.71 billion monthly active users, almost one in every four people on the planet. The imbalance in the distribution of gains from economic growth is a primary cause of widening social inequalities in many mature economies, which in turn has deep political consequences – arguably including the UK’s referendum vote to leave the European Union. Many people who felt globalization had left them behind chose Brexit.

Economists must take a sizeable share of the blame for the lamentable outcomes of the prevailing story about value. We have stopped debating value – and, as a result, we have allowed one story about ‘wealth creation’ and ‘wealth creators’ to dominate almost unchallenged.

The purpose of this book is to change this state of things, and to do so by reinvigorating the debate about value that used to be – and, I argue, should still be – at the core of economic thinking. If value is defined by price – set by the supposed forces of supply and demand – then as long as an activity fetches a price (legally), it is seen as creating value. So if you earn a lot you must be a value creator. I will argue that the way the word ‘value’ is used in modern economics has made it easier for value-extracting activities to masquerade as value-creating activities. And in the process rents (unearned income) get confused with profits (earned income); inequality rises, and investment in the real economy falls. What’s more, if we cannot differentiate value creation from value extraction, it becomes nearly impossible to reward the former over the latter. If the goal is to produce growth that is more innovation-led (smart growth), more inclusive and more sustainable, we need a better understanding of value to steer us.