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

GDP: A SOCIAL CONVENTION

It is crucial to remember that all types of accounting methods are evolving social conventions, defined not by physical laws and definite ‘realities’ but reflecting the ideas, theories and ideologies of the age in which they are devised. 1The way in which a spreadsheet is constructed in itself reflects values. An interesting example is the Jesuit Order. Back in the 1500s, the newly founded Order devised an innovative accounting system which blended vision with finance. In order to align finance with the values of their order, they made sure that the cash box could only be opened with two keys: one operated by the person in charge of the finances (the procurator, today’s CFO) and another by the person in charge of the strategy (the rector, today’s CEO). 2As this instance shows, accounting is not neutral, nor is it set in stone; it can be moulded to fit the purpose of an organization and in so doing affect that organization’s evolution.

In this same way, the modern accounting concept of GDP is affected by the underlying theory of value that is used to calculate it. GDP is based on the ‘value added’ of a national economy’s industries. Value added is the monetary value of what those industries produce, minus the costs of material inputs or ‘intermediate consumption’: basically, revenue minus material input cost. Accountants call the intermediate inputs a ‘balancing’ item because they balance the production account: cost and value added equal the value of production. Value added, however, is a figure specifically calculated for national accounting: the residual difference (residual) between the resource side (output) and the use side (consumption).

The sum of all industry value-added residuals in the economy leads to ‘gross value added’, a figure equal to GDP, with some minor corrections for taxes. GDP can be calculated either through the production side, or through the income side, the latter by adding up the incomes paid in all the value-adding industries: all profits, rents, interest and royalties. As we will see below, there is a third way to calculate GDP: by adding up expenditure (demand) on final goods, whose price is equal to the sum of the value added along the entire production chain. So GDP can be looked at through production (all goods and services produced), income (all incomes generated), or demand (all goods and services consumed, including those in inventory).

So which industries add value? Following marginalist thinking, the national accounts today include in GDP all goods and services that fetch a price in the market. This is known as the ‘comprehensive boundary’. As we saw in Chapter 2, according to marginalism the only economic sectors outside the production boundary are government – which depends on taxes paid by the productive sectors – and most recipients of welfare, which is financed from taxation. Adopting this principle to calculate GDP might seem logical. But in fact it throws up some real oddities which call into question the rigour of the national accounting system and the way in which value is allocated across the economy. These oddities include how government services are valued; how investments in future capacity, such as R&D, are measured; how jobs earning high incomes, as in the financial sector, are treated; and how important services with no price (such as care) or no legal price (such as the black market) are dealt with. In order to explain how these oddities have arisen, and why the system seems to be so idiosyncratic, we need briefly to look at the way in which national accounting and the idea of ‘value added’ has developed over the centuries.

A Brief History of National Accounts

Value theory has been at the heart of national accounting for a very long time. The most significant early initiatives took place in late-eighteenth-century France, when there were at least eight attempts by different thinkers to estimate France’s national product based on Quesnay’s land theory of value. Because, as we have seen, for Quesnay the production boundary encompassed only agricultural output – everyone else being classed as living off transfers from the agricultural sector – manufacturing was placed on the unproductive side of the boundary, in the process ignoring dissenting voices such as that of Say, who, taking a broadly utilitarian approach, argued that productive labour is simply labour which produces utility. If the product is something people want to buy – has utility for them – then making it is productive.

Excluding manufacturing from the national product seemed as obvious to Quesnay’s followers as it is for us today to include everything that fetches a price. These early French estimators were illustrious figures. They included the writer Voltaire (1694–1778); Antoine Laurent Lavoisier (1743–94), one of the founders of modern chemistry; and his friend the mathematician Joseph Louis Lagrange (1736–1813), better known today for his work on mechanics and mathematical techniques which is still used by economists. Quesnay’s ideas proved remarkably durable: as late as 1878, one French estimate of national product was based on his reasoning. 3

Similarly influential were Adam Smith’s ideas of value production. His national income estimates defined only the production or income of agricultural and industrial labour, which produced material goods – actual stuff – and excluded all services, whether government or banking ones. Smith’s ideas even underpinned the first account of national product in revolutionary France when, in 1789, Napoleon commissioned Smith’s disciple Charles Ganilh (1758–1836) to provide an up-to-date and accurate picture of French national income. 4

In the late nineteenth century, marginal utility theory predominated. Although radically different from the thinking of earlier economists, it continued to underscore the importance of value theory in national accounting. Increasingly, under its influence, national accountants included everything bought with income: for them, the sum of revenue from market activity, irrespective of sector, added up to the national income. As income tax statistics became more readily available, it was easier to construct estimates based on income data and to analyse the personal distribution of income.

Alfred Marshall, the father of marginal utility theory in Britain, was the driving force behind its application to national income estimates. 5In his highly influential Principles of Economics he wrote explicitly about how the national product could be estimated. An earlier book, The Economics of Industry , co-authored with his wife Mary Paley Marshall (1850–1944), was clear on the utility basis of national income: ‘everything that is produced, in the course of a year, every service rendered, every fresh utility brought about is a part of the national income’. 6

Meanwhile, the labour theory of value which, fully developed by Marx, rooted productivity firmly in the concept of the production of ‘surplus value’, was either disputed or, increasingly, ignored altogether in assessments of national income. By the early twentieth century it was associated with a revolutionary programme and therefore could not, by definition, sit easily with official statistics in the very nations of which Marxists were so critical. Things were of course different in the countries where Communists came to power: first in the Soviet Union after the 1917 Bolshevik Revolution and later in Eastern Europe after the Second World War (though in justifying their construction of a ‘material product system’ that valued only material goods they should technically have been invoking Smith, not Marx). With the exception of these socialist states, the idea that assessments of national income should be based on the sum total of all incomes, thus forming a ‘comprehensive’ production boundary, spread rapidly to many countries. 7