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

National accountants have therefore long adopted the so-called ‘inputs = outputs’ approach. Once the output is defined, value added can be computed because the costs of intermediate inputs, such as the computers that employees use, are known. But since government’s output is basically intermediate inputs plus labour costs, its value added is simply equal to its employees’ salaries. One significant consequence of this is that the estimate of government value added – unlike that of businesses – assumes no ‘profit’ or operating surplus on top of wages. (In Figure 8 above, the dark-grey line shows the value added of government; it is equal – with slight adjustments – to the share of government employment income in GDP.) In a capitalist system in which earning a profit is deemed the outcome of being productive, this is important because it makes government, whose activities tend to be non-profit, seem unproductive.

But then what about the light-grey line, which represents government final consumption expenditure? We have already seen that pensions and unemployment benefits paid by government are part of household final consumption, not government spending. More broadly, it is not obvious why government should have any final consumption expenditure in the way that households do. After all, companies are not classed as being final consumers; their consumption is seen as intermediate, on the way to producing final goods for households. So why isn’t government spending likewise classed as intermediate expenditure? After all, there are, for example, billions of school students or medical patients who are consumers of government services.

Indeed, following this logic, government is also a producer of intermediate inputs for businesses. Surely education, roads, or the police, or courts of law can be seen as necessary inputs into the production of a variety of goods? But herein lies is a twist. If government spending were to increase, this would mean that government was producing more intermediate goods. Businesses would buy at least some of those goods (e.g. some public services cost money) with a fee; but because they were spending more on them (than if government was not producing anything, and therefore not buying supplies from businesses), their operating surplus and value added would inevitably fall. Government’s share of GDP would rise, but the absolute size of GDP would stay the same. This does, of course, run counter to Keynesian attempts to show how increases in government demand could lift GDP.

Many economists made exactly this argument in the 1930s and 1940s – in particular Simon Kuznets, who suggested that only government non-market and free goods provided to households should be allowed to increase GDP. Nevertheless, the convention that all government spending counts as final consumption arose during the Great Depression and the Second World War, when the US needed to justify its enormous government spending (the spike in the light-grey line in Figure 8 in the early 1940s). The spending was presented as adding to GDP, and the national accounts were modified accordingly. 22

Later in the twentieth century there were repeated attempts to clear up the confusion over whether certain kinds of government spending counted as intermediate or final consumption. This was done by identifying which government activities provided non-market and free services for households (for example, schools), as opposed to intermediate services for businesses (for example, banking regulation). The distinction is not easy to make. Governments build roads. But how much of their value accrues to families going on holiday and how much to a trucking company moving essential spare parts from factory to user? Neither family nor trucking company can build the road. But the family on holiday adds to total final demand; the trucking company is an intermediate cost for businesses.

In 1982, national accountants estimated that some 3 to 4 per cent of Swedish, German and UK GDP was government expenditure that, previously categorized as final consumption expenditure, should be reclassified as (intermediate) inputs for businesses. This had the effect of lowering government’s overall value added by between 15 to 20 per cent. 23To take an example of such reclassification, in 2017 the UK telecommunications regulator, Ofcom, compelled British Telecom (a private firm) to turn its broadband network operation Openreach into a separate company following repeated complaints from customers and other broadband providers that progress in rolling out broadband around the country had been too slow and that the service was inadequate. At least part of the cost of Ofcom could be seen as beneficial to the private telecommunications sector. Yet the convention that all government spending should count as final consumption has proved remarkably resistant to change.

Now we can see why government final consumption expenditure is bigger than its value added in Figure 8. The government’s value added only includes salaries. However, the government also purchases a lot of goods and services from businesses, from coffee to cars, from pencils to plane tickets, to the office rentals for regulating bodies such as Ofcom. The producers of these goods and services, not the government, take credit for the value added. Since government is treated as a final consumer, the purchase of goods and services increases its spending. Clearly, government expenditure can be higher than what it charges (e.g. fees for services) because it raises taxes to cover the difference. But need the value of government be undermined because of the way prices are set? By not having a way to capture the production of value created by government – and by focusing more on its ‘spending’ role – the national accounts contribute to the myth that government is only facilitating the creation of value rather than being a lead player. As we will see in Chapter 8, this in turn affects how we view government, how it behaves and how it can get ‘captured’ easily by those who confidently see themselves as wealth creators.

SOMETHING ODD ABOUT THE NATIONAL ACCOUNTS: GDP FACIT SALTUS!

Apart from this curious view of government, the national accounts expose a number of other accounting oddities. GDP, for instance, does not clearly distinguish a cost from an investment in future capacity, such as R&D; services valuable to the economy such as ‘care’ may be exchanged without any payment, making them invisible to GDP calculators; likewise, illegal black-market activities may constitute a large part of an economy. A resource that is destroyed by pollution may not be counted as a subtraction from GDP – but when pollution is cleaned up by marketed services, GDP increases. And then there’s the biggest oddity of all: the financial sector.

Does the financial sector simply facilitate the exchange of existing value, or does it create new value? As we will see in Chapters 4 and 5, this is the billion-dollar question: if it’s answered wrongly, it may be that the growing size of the financial sector reflects not an increase of growth, but rent being captured by some actors in the economy. First, however, there are some other inconsistencies to be considered.

Investment in Future Capacity

First, let’s look at how R&D is dealt with in the national accounts. Before 2008, the SNA considered in-house R&D to be an input into production 24– in other words, a company’s spending on R&D (research equipment, laboratories, staff and the like) was treated as a cost and subtracted from the company’s final output. However, in the 2008 version of the SNA, in-house R&D was reclassified as an investment in the company’s stock of knowledge, to be valued ‘on the basis of the total production costs including the costs of fixed assets used in production’. 25It became a final productive activity rather than just an intermediate cost towards that activity.