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

In the first half of the twentieth century marginalists had become aware of their theory’s limitations, and began to debate the inclusion of non-market activities in national income accounting. One of Alfred Marshall’s students, the British economist Arthur Cecil Pigou (1877–1959), who succeeded him as Professor of Political Economy at Cambridge, argued that since market prices merely indicated the satisfaction (utility) gained from exchange, national income should in fact go further: it should measure welfare. Welfare, Pigou argued, is a measure of the utility that people can gain through money – in other words, the material standard of living. In his influential 1920 book The Economics of Welfare , Pigou further defined ‘the range of our inquiry’ as being ‘restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring-rod of money’. 8On the one hand, Pigou was saying that all activities which do not really improve welfare (recall the discussion of welfare principles from Pareto discussed in Chapter 2), should be excluded from national income, even if they cost money. On the other hand, he stressed, activities which do generate welfare should be included – even if they are not paid for. In these, he included free or subsidized government services.

One of Pigou’s most prominent disciples was the first person to provide an estimate of the fall in national income of the United States during the Great Depression. The Belarusian-born Simon Kuznets (1901–85), a Professor of Economics at Harvard, won the Nobel Prize in Economics in 1971 for his work on national accounts. Believing that they incurred costs without adding to final economic output, Kuznets, unlike Pigou, excluded from the production boundary all government activities that did not immediately result in a flow of goods or services to households – public administration, defence, justice, international relations, provision of infrastructure and so on. 9

Kuznets also believed that some household expenditure did not increase the material standard of living, but simply paid for the cost of modern life – in particular the ‘inflated costs of urban civilization’, such as having to maintain a bank account, pay trade union dues or the social obligation to be a member of a club. Kuznets estimated that between 20 and 30 per cent of consumer expenditure went on such services. 10However, he did argue that unpaid housework should be included, because it clearly improves economic welfare. Kuznets, then, drew the production boundary according to what he believed improved the material standard of living and what did not.

Perhaps Kuznets’s view would have had more traction in a peaceful world. But the exigencies of the Second World War, which forced governments to focus on the war effort, took economists down a different path: estimating output rather than concerning themselves with welfare. As a result, economists who believed that national product is the sum total of market prices prevailed.

The resulting ways in which estimates of output were used to calculate GDP appeared to follow marginal utility theory, but were in fact doubly out of sync with it. First, they ignored the idea of value as utility – the benefit it provided to the consumer – and included items that the Pigou–Kuznets welfare concept would have seen as ‘necessary’ for the creation of value. Rather than assess whether final consumption increased utility, they added any final consumption to national income. In Kuznets’s own words: ‘Many foods and drugs are worthless by scientific standards of nutrition and medication; many household appurtenances are irrelevant to any scientifically established needs for shelter and comfort; many service activities as well as commodities are desired for the sake of impressing foreigners or our fellow countrymen and could hardly measure up to ethical principles of behaviour in relation to the rest of mankind.’ 11From that perspective, the new national accounts overstated welfare.

Second, competition in economies is generally imperfect – a reality that has proven distinctively uncomfortable for national accountants trained in the neoclassical ideas of perfect competition and ‘equilibria’. By simply adding up market prices they ignored the fact that those prices would not always produce an equilibrium and be compatible with ‘perfect competition’; prices could therefore be higher or lower than if equilibrium prevailed, thereby giving a distorted impression of value creation. In short, during the war years practice became significantly detached from the prevailing theory – or, seen another way, the utility theory of value did not solve the urgent war-related problems of the time.

In many ways, the national accounts as we know them today stem from the trauma of the Great Depression of the 1930s, and the needs of the Second World War war effort. In this, as in so much else, the British economist John Maynard Keynes (1883–1946) was a pivotal figure. In his 1936 masterpiece The General Theory of Employment, Interest and Money , written during the Great Depression, Keynes assumed that workers would underestimate the purchasing power of their wages, and would therefore be willing to produce more than they needed to. In this way, workers’ involuntary overproduction would in turn create involuntary unemployment – fewer workers being needed to do the same amount of work – and the economy could find itself in a low-output equilibrium. This is a state in which forces in the economy, such as supply and demand, are in balance and there is no incentive to change them, even though the total output of the economy is low and wages and employment are depressed. Keynes used this idea to develop a theory of the macroeconomy – the economy as a whole – in which government spending could stabilize the business cycle when business was investing too little, and even raise the economy’s output.

In order to lift the economy out of the depression, governments needed information to measure how their policies were working. Up until then, they had flown mostly blind: they had no need for detailed statistics because the economy was supposed to be self-regulating. Keynes’s book How to Pay for the War , published in 1940, introduced the idea of recording national income in a set of accounts and completely changed the way in which governments used that data.

In the late 1930s and the 1940s national accountants took up Keynes’s ideas about how government could invigorate an economy, and came to view government spending as directly increasing output. For the first time in the history of modern economic thought, government spending became important – in stark contrast to Kuznets’s omission of many government services from the national income. This redefinition of government as a contributor to national product was a decisive development in value theory. Keynes’s ideas quickly gained acceptance and were among the main influences behind the publication of the first handbook to calculate GDP, the United Nations’ System of National Accounts (SNA): a monumental work that in its fourth edition now runs to 662 pages.

THE SYSTEM OF NATIONAL ACCOUNTS COMES INTO BEING

After the Second World War, formal international rules were drawn up, standardizing national accounting for production, income and expenditure. The first version of the SNA, compiled by the United Nations, appeared in 1953. 12The SNA describes itself as ‘a statistical framework that provides a comprehensive, consistent and flexible set of macroeconomic accounts for policymaking, analysis and research purposes’. 13It defines national accounting as measuring ‘what takes place in the economy, between which agents, and for what purpose’; at its heart ‘is the production of goods and services’. 14GDP is ‘[i]n simple terms, the amount of value added generated by production’. 15It is defined explicitly as a measure of value creation. It can therefore be said that the national accounts, too, have a production boundary.