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

The idea of scarcity became so important to economists that in the early 1930s it prompted one influential British economist, Lionel Robbins (1898–1984), Professor of Economics at the London School of Economics, to define the study of economics itself in terms of scarcity; his description of it as ‘the study of the allocation of resources, under conditions of scarcity’ is still widely used. 8The emergence of marginalism was a pivotal moment in the history of economic thought, one that laid the foundations for today’s dominant economic theory.

The Marginal Revolution

The ‘marginal revolutionaries’, as they have been called, used marginal utility and scarcity to determine prices and the size of the market. In their view, the supply and demand of scarce resources regulates value expressed in money. Because things exchanged in a monetary market economy have prices, price is ultimately the measure of value. This powerful new theory explained how prices were arrived at and how much of a particular thing was produced. 9Competition ensures that the ‘marginal utility’ of the last item sold determines the price of that commodity. The size of the market in a particular commodity – that is, the number of items that need to be sold before marginal utility no longer covers the costs of production – is explained by the scarcity, and hence price, of the inputs into production. Price is a direct measure of value. 10We are, then, a long way from the labour theory of value.

But what this model gains in versatility – the notion that the preferences of millions of individuals determine prices, and hence value – it loses in its ability, or, rather, lack of ability, to measure what Smith called ‘the wealth of nations’, the total production of an economy in terms of value. As value is now merely a relative concept – we can compare the value of two things through their prices and how the prices may change – we can no longer measure the labour that produced the goods in the economy and by this means assess how much wealth was created.

Marginal utility and scarcity need a couple of additional assumptions for price determination to work as intended. First, all humans have to be one-dimensional utility calculators who know what’s best for themselves, what price to pay for what commodity and how to make an economically ‘rational’ choice. 11Second, there must be no interference, for example by monopolies, in price-setting. ‘Equilibrium’ with ‘perfect competition’ – in which supply and demand are exactly balanced, an idea Jean-Baptiste Say developed back in the early nineteenth century – became a necessary and central concept in economics. These assumptions, as we will see, bear heavily on today’s discussion of value creation.

The Production Boundary Becomes Malleable

The consequences of marginal thinking for the production boundary are dramatic. As we have seen, classical thinkers differed in their definition of who was and was not productive. For Quesnay only farmers were productive; Smith put services in the ‘unproductive’ bracket; and even Marx defined productive workers as those who were working in capitalist production. In marginal thinking, however, such classification was swept aside. What replaced it was the notion that it is only whatever fetches a price in the market (legally) that can be termed productive activity. Moreover, productivity will fluctuate with prices, because prices determine value, not vice versa. The utility theory therefore completely changes the concept of productive and unproductive labour. In fact, the distinction effectively falls away, since every sector that produces for the market exchanges its products – which means there are now few definitively unproductive sectors. The only part of the economy which clearly lies outside the production boundary and is unproductive, as in Figure 7, consists of those who receive income not earned in the market: the government by collecting taxes and the beneficiaries of government subsidies such as social security payments, and state entities like the armed forces.

In Marshall’s state of ‘equilibrium’, where prices are not distorted, everyone gets paid what they are worth – which may change if consumers alter their tastes or if technology advances. This has important consequences for how incomes are assessed and justified. What workers earn is reflected in their marginal productivity and their revealed preferences (marginal utility) for leisure versus work. There is no longer any room for the analytical distinctions that Ricardo or Marx made about a worker’s contribution to production, let alone the exploitation of that worker. You are valuable because what you provide is scarce. Because we are rational utility calculators in the face of scarcity, we don’t let things go to waste. Workers might choose unemployment because that gives them more marginal utility than working for that or a given wage. The corollary of this logic is that unemployment is voluntary. Voluntary unemployment arises from viewing economic agents as rationally choosing between work and leisure (i.e. ‘intertemporal maximization’ in modern theory). In other words, Marx’s concept of the ‘reserve army of labour’ disappears into thin air.

Figure 7.The marginalist revolution

As Lionel Robbins neatly put it,

In the first place, isolated man wants both real income and leisure. Secondly, he has not enough of either fully to satisfy his want of each. Thirdly, he can spend his time in augmenting his real income or he can spend it in taking more leisure. Fourthly, it may be presumed that, save in most exceptional cases, his want for the different constituents of real income and leisure will be different. Therefore he has to choose. He has to economize. 12

Inherent in equilibrium is the idea that everything is in everyone’s interest. In the 1940s the Russian-born British economist Abba Lerner (1903–82) formulated what he called the ‘first fundamental welfare theorem’, 13which basically states that competitive markets lead to ‘optimal’ outcomes for all. Once market exchange at equilibrium prices has taken place, no one can be made better off, or, in economic parlance, have their ‘welfare’ increased (for example, by accepting more work) without making someone else worse off.

Today, competitive markets where no one can be made better off without someone being made worse off are known as ‘Pareto-optimal’ – named after Walras’s successor in Lausanne, Vilfredo Pareto (1848–1923), who was the first to introduce the term ‘welfare maximization’. In his Manual of Political Economy (1906), Pareto studied economic equilibrium in terms of solutions to individual problems of ‘objectives and constraints’, and was the first economist to argue that utility maximization did not need to be cardinal (i.e., the exact amount that someone wanted something) just the ordinal amount (how much they wanted it more than something else – X versus Y). This made mathematical calculus even easier to use, and many welfare properties in economics today bear his name. He used his theories to argue for free trade in Italy, which did not make him popular with the Fascist government of the time, which was more protectionist.

But to get to these ‘optimal’ outcomes, we must ensure that equilibrium holds: all obstacles to equilibrium, such as an interfering government, monopolies, other rents arising from scarcity and so on, must be obliterated. Our problems, marginalism holds, derive solely from imperfections in, and inhibitions on, the smooth working of the capitalist machine. Rent is no longer seen as ‘unearned income’, as it was by the classical economists, but as an imperfection that can be competed away. Left to itself, capitalism can thus create maximal value for everyone, which is conveniently what everyone ‘deserves’ based on their marginal product. The contrast with the classical economists is glaring. For Marx, capitalists appropriate surplus value by paying a wage less than the value of labour. Smith and Ricardo held that value was created by effort that directly added up to the wealth of nations. But with marginal utility there are no longer classes, only individuals, and there is no objective measurement of value.