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

The SNA’s decision to reclassify R&D was justified less by value theory than by ‘common-sense’ reasoning: the contribution of ‘knowledge’ to production seemed to be significant, and should therefore be recognized. R&D was made productive because it was considered important.

As a result, since 2008 GDP has been enlarged by the annual cost of R&D, including the depreciation of fixed assets used. When in 2013 the US implemented this change, the value from R&D added $400 billion – 2.5 per cent of US GDP – to national income overnight. 26Of course, those sectors with the largest R&D contributions improved their share of GDP, making them look more important than others.

The Value of Housework … and the House

Then there’s housework. Feminists in particular have long objected to the lack of recognition given to housework’s contribution to the economy. The national accounts exclude all housework, and therefore a large part of women’s work, from production. The architect of the first and second editions of the SNA (1953 and 1968), the Nobel Prize-winning British economist Sir Richard Stone (1913–91) – sometimes called ‘the father of national income accounting’ – had decided views on the matter. Writing for the UN committee that drafted the first SNA evaluation of household production, Stone commented that it ‘is unnecessary to impute an income to family services or to the services of household equipment and may even prove an embarrassment to do so, since, not only are there very little data in this field, but the principles on which such imputations should be made are obscure’. 27He simply thought it was impossible to know how to do it – and even if a solution could be devised, doing so would be socially awkward.

Now, seventy years later, since there is still no theory – beyond ignorance or shame – that explains why housewives (and house husbands) should not be included in GDP, the SNA architects have come up with a different defence. They have expressed a ‘reluctance’ to include such work because, although it is equivalent to work done by servants, ‘By convention … only the wages of the domestic staff are treated as the value of output.’ 28The ‘convention’ here is ironically close to Marx’s value theory that only someone who produces a surplus for a capitalist generates surplus value. But Marx’s point was linked to his value theory and understanding of how capitalism works (or does not work), whereas in this instance the convention has been cherry-picked because it is convenient for the current system.

In explaining why housework is accounted as unproductive, national accountants are forced constantly to fall back on their ‘comprehensive’ production boundary, and are at pains to invoke ‘common sense’. Their explanations include: ‘the relative isolation and independence of these activities from markets, the extreme difficulty of making economically meaningful estimates of their values, and the adverse effects it would have on the usefulness of the accounts for policy purposes and the analysis of markets and market disequilibria’. 29

According to this awkward logic, a nation would increase its GDP if we paid our neighbours to look after our children and do our laundry, and they paid us to do theirs. 30Underlying this ‘common-sense’ approach to household work is the utility theory of value: what is valuable is what is exchanged on the market. The implicit production boundary is determined by whether money changes hands for the service. Therefore, there is ‘extreme difficulty’ in giving a value to work done by women (or men) who do not receive a wage in exchange for it.

By contrast, it is remarkable how national accountants go to great lengths to include inside the production boundary the house itself, the property in which the supposedly unproductive household work is done. In the national accounts, houses owned by their occupants generate services that are included in GDP. In the US, such ‘work’ contributes 6 per cent of GDP – that is, a cool $1 trillion – even though none of these dollars actually exist.

How do the statisticians come up with such an absurdity? They impute a rent to everyone who lives in their own home. A market rent is estimated for a property which the owner-occupier then pays herself as lessor for the services the house provides. Since the imputed rent is regarded as income, it is also recorded in the national accounts as production. Accountants justify this with the argument that ‘both international and inter-temporal comparisons of the production and consumption of housing services could be distorted if no imputation were made for the value of own-account housing services’. 31

How might this work? Let’s contrast two countries. In one, there are only renters paying owners such as real-estate companies (in Switzerland in 2014 more people lived in rented homes than in owner-occupied homes). In the other, all houses are owned (in the US and UK a larger percentage of people own than rent). Since real estate adds value and income (rent) from the actual rent charged (as opposed to the ‘imputed rent’ calculated), the first country would have an unfairly high GDP compared to the other, at least in terms of the percentage of GDP deriving from property.

From a different perspective – one that sees no greater value in renting over owning a house, especially when there is no rent control – we could equally well ask why real-estate rents should add value in the first place. Another valid question is why a hike in rent should increase the value produced by real-estate agencies, especially if the quality of the rental service is not improving. London and New York City tenants, for example, know only too well that property management services do not improve even though rents rise – in London’s case, rapidly in recent years. 32

It’s also worth noting that the national accounts treat property and real estate (both residential and commercial) as comparable to a firm. Buying a house or factory building is called an ‘investment’. It is assumed that the owner goes on ‘servicing’ the building, investing in its upkeep or improvement, so their income is ‘payment for a service’ and not just rent. Capital gains on buying and selling property are treated like those that apply to a business or a financial asset – although the extent to which a building is ‘productive’ is debatable. Capital gains from holding property arise out of increases in land value, which itself are determined by collective investment (in roads, schools, etc.) – little to do with the effort of the property owner.

As with the absurdity of neighbours paying each other to do their housework, it is as if the statisticians are saying that a nation of owner-occupiers could artificially amplify GDP by swapping homes with their neighbours and paying rent to one another. Statisticians have fiercely defended their treatment of income from property. But when real-estate prices appreciate rapidly, as in the US and the UK before 2007 and in hot-spots such as London even after the financial crisis, there are alarming implications for measuring. Rising house prices mean rising implicit rentals, and hence rising incomes when the implicit rental is included. The paradoxical result is that a house price bubble, perhaps caused by low interest rates or relaxed lending conditions, will show up as an acceleration of GDP growth. Why? Because households’ services to themselves – as their own landlords, charging themselves implicit rentals – are suddenly rising in value, and that is counted as income which adds to GDP. By the same token, if you strip out those imputed rentals, GDP can be shown to have risen more slowly in the years before the financial crash than after 2009. 33

Prostitution, Pollution and Production