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

The SNA’s emergence in the early post-war years owed much to recent economic, political and intellectual developments. The experience of depression and war weighed heavily on policymakers’ minds. Many countries saw wartime planning, which was based on unprecedented amounts of economic information, as a success. Political pressures were important too. In the US, the New Deal of the 1930s and full employment during the war led many voters to believe that government could intervene benignly and progressively in the economy. In Europe, the strength of left-wing parties after the war – exemplified by the Labour Party’s 1945 election victory in the UK – also changed, and marked a change in, people’s attitudes, and made fuller and more accurate national accounts essential. The crucial question was, and remains: on what theory of value were they based?

‘Simple’ national income estimates had to add up the price of production (minus intermediate goods) in the economy, or incomes, or the expenditure of all economic actors on final goods: National Production = National Income = National Expenditure . In order to carry out this estimate, we might have expected the SNA’s authors to use as their methodology the prevailing economic theory of value, marginal utility. But they didn’t – or, at least, not fully. In fact, the resulting model was, and is, a strange muddle in which utility is the major, but not the only, ingredient.

The SNA brings together various different ways of assessing the national income that had developed over centuries of economic thinking. Decisions about what gets included in the production boundary have been described as ‘ad hoc’, 16while national accountants admit that the SNA rules on production are ‘a mix of convention, judgment about data adequacy, and consensus about economic theory’. 17These include devising solutions based on ‘common sense’; making assumptions in the name of ‘computational convenience’ – which has important consequences for the actual numbers we come up with when assessing economic growth; and lobbying by particular economic interests.

In fairness, there have always been practical reasons for this ad hoc approach. Aspects of the economy, from R&D and housework to the environment and the black economy, proved difficult to assess using marginal utility. It was clear that a comprehensive national accounting system would have to include incomes from both market exchange and non-market exchange – in particular, government. With market-mediated activity lying at the heart of the marginalist concept of value, most estimators of national income wanted to adopt a broader approach. 18

National Income Accounting Gets it All Together

National income accounting, then, incorporates many different accounting methods. The system simultaneously allows an integrated view of the different aspects of the economy – both production (output) and distribution of income – and obliges national income accountants to link each commodity produced with someone’s income, thereby ensuring consistency. To maintain consistency between production, income and expenditure, the national accounts must record all value produced, income received, money paid for intermediate and finished goods and so on as transactions between actors in the economy – the government, or households or a particular sector – in which each actor has an account. This helps provide a detailed picture of the economy as a whole.

Expenditure on final goods must add up to GDP (as the price of intermediate goods goes into the price of the final goods). So it is possible to compute GDP from the expenditure side and, as we saw in Chapter 1, Petty used this method to estimate national output as early as the seventeenth century. Modern national accounts divide expenditure into the following categories:

GDP = Consumption by households (C) + Investment by companies and by residential investment in housing (I) + Government spending (G).

This can be expressed as: GDP = C + I + G.

For simplicity’s sake we will ignore the contribution of net exports. Two observations are in order: first, on the expenditure side, companies only appear as investors (demanding final investment goods from other companies). The remainder of spending (aggregate demand) is split between households and the government. Government expenditure is only what it spends itself; that is, excluding the transfers it makes to households (such as pensions or unemployment benefits). It is its collective consumption expenditure on behalf of the community. By focusing on government only in terms of the spending, it is by definition assumed to be ‘unproductive’ – outside the production boundary.

MEASURING GOVERNMENT VALUE ADDED IN GDP

In Chapter 8 we will see that government is rarely acknowledged as a creator of value – indeed, quite the reverse. Yet national accounting conventions have in fact been quietly tracking its value-added contribution for the last half century—and it’s not small! While Chapter 8 is fully dedicated to looking at the various ways in which economists, and those they advise, have considered government – as a value-creating entity or just a strain on the economy – in this chapter we focus on the relevance of this discussion to how GDP is calculated. The most striking thing to emerge from these analyses is that, contrary to the views of most economists, government certainly does add value to the economy,

Figure 8 below tracks US government value added and expenditure since 1930. During the Second World War the government bought an astonishing half of national output. In this figure we can see that government value added has hovered between 11 and 15 per cent of GDP for the post-war period. As a comparison, the finance industry adds some 4 per cent of GDP in the US and 8 per cent in the UK. But the chart reveals what looks like a strange discrepancy. It shows that government expenditure has been consistently higher than government value added, at between 20 and 25 per cent of GDP.

It is important to stress, however, that the difference between value added and final expenditure is not the government’s budget deficit. Rather, the deficit is government revenue (mainly taxes) minus expenses, including transfers of funds from the government to households, such as pensions and unemployment benefit – which, since households spend the money from pensions and benefits, are defined in national accounting as household, rather than government, spending (it’s the final expenditure that matters, remember). It is that household spending that counts towards final demand for the whole economy. So, what is going on?

Figure 8.US government expenditure and value added as a share of GDP, 1930–2014 19

Spending and Value

Before answering this question, we have to recognize that government value added cannot be computed in the same way as that of other industries and, as a result, is a complicated issue for national statistical institutes. A lot of government activities are not sold at market prices: that is, prices that pay for all production costs (including wages, rent, interest, royalties as well as inputs into production) and yield a profit for a private-sector business. Instead, government activities are provided at lower, ‘non-market’ prices – or even for free. Consider schools, state-funded universities, public healthcare, public transport, parks, recreation and the arts, police and fire services, the law courts, environmental protection such as flood prevention and so on. These goods are largely financed by taxes or debt.

Given these lower prices, the usual way of calculating value added for a business doesn’t work with government activities. Let’s recall that value added is normally the value of output minus costs of intermediate inputs used in production. The value added by a business is basically workers’ wages plus the business’s operating surplus, the latter broadly similar to gross operating profit in business accounting terms. So adding up the non-market prices of government activities is likely to show less value added, because they are set with a different, non-commercial objective: to provide a service to the public. If the non-market prices of the output are lower than the total costs of intermediate inputs, value added would even show up as negative – indeed, government activities would ‘subtract’ value. However, it makes no sense to say that teachers, nurses, policewomen, firefighters and so on destroy value in the economy. Clearly, a different measurement is needed. As the British economist Charles Bean, a former Deputy Governor for Economic Policy at the Bank of England, argues in his Independent Review of UK Economic Statistics (2016), 20the contribution to the economy by public-sector services has to be measured in terms of ‘delivering value’. 21But if this value is not profit, what is it?