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

So national accountants’ approach to valuation affects the production boundary, sometimes in intriguing ways. In the Netherlands, where prostitution is legal and regulated, the tax authorities have asked sex workers to declare their earnings, which count towards national income. In other countries, such as the UK, earnings from prostitution are not included in national income, except perhaps in estimates of the black economy.

Equally importantly, the boundary loops around the issue of the environment. Consider a river polluted by industrial waste. When the polluter pays to clean it up, the expenditure is treated as a cost which reduces profits and GDP. But when the government pays another company to clean up the river, the expenditure adds to GDP because paying workers adds value. If the cost of cleaning up pollution is borne by someone other than the polluter it is called an externality – the cost is ‘outside’ the polluter’s profit-and-loss account – and increases GDP. Kuznets argued that such a calculation should be balanced by the ‘disservice’ that has been created by pollution, and therefore that the cost of that ‘disservice’ be taken out of the ‘net’ calculation of value added. But national accounts do not do that: instead, they state that it is not ‘appropriate’ or ‘analytically useful’ for ‘economic accounts to try to correct for presumed institutional failures of this kind by attributing costs to producers that society does not choose to recognize’. 34

National accountants present this question of whether something is ‘analytically useful’ or not as a vague argument, without reference to value. To be fair, they also rightly caution that it would be extremely difficult comprehensively to cost such externalities – negative or positive ‘side effects’ of production – which are not priced. All of which just highlights the difficulties of being consistent and drawing a clear production boundary.

So while Marshall claimed that Nature does not make jumps (recall the discussion of natura non facit saltus in Chapter 2), national income, it appears, can do so! If self-employment (referred to as own-account production for small farming or sex workers, for example) grows in importance, or if a way can be found to cost externalities, national income will jump when the statisticians decide to include it.

The Black Economy Gets into the SNA

Something similar happens with the black or – to use the official euphemism – ‘informal’ economy when countries decide that it has grown so large that they must start to include estimates of it in national accounting. Consider Italy, a ‘developed’ country. The Group of 7 (G7), the international club of the biggest economies, estimates that in 2015 the informal economy made up 12.6 per cent of Italy’s GDP. 35That calculation excludes illegal activities, which Italian statisticians decided to leave out of their GDP measures. Since the Great Recession which began in 2008, many more unemployed Italians have taken up informal production. The Organization for Economic Cooperation and Development (OECD), the grouping of mainly high-income countries, estimated that in 2013 Italy’s black market (including illegal activities – around 1 per cent of GDP) was a massive 21 per cent of GDP. 36The same study found that, across other European countries, informal activities comprised between 7 per cent and 28 per cent of GDP – activities which were incorporated in the national accounts upon the recommendation of the 1993 and 2008 SNA.

All this begs the question: where does one start and stop? What is, or is not, to be included in the national accounts? The very fact that these questions are so difficult to answer illustrates the idiosyncrasies and vagaries of the accounting system. And the biggest oddity of all has turned out to be the so-called ‘banking problem’: how to estimate the productiveness of finance.

More than any other sector, finance highlights the arbitrary way in which modern national accounting decides where to draw the production boundary. When the financial sector was small (before its boom in the 1970s), there was little difficulty in excluding it; interest was as much a question of morality (positions against usury) as of economics. But as the size of the financial sector grew it became more awkward to exclude it from national output. The tension between economists’ – and indeed society’s – long-held views of banks as unproductive and the steady post-war growth of the sector gave rise to what is known as the banking problem.

Until the 1970s, one of the principal sources of banks’ profits – net interest payments, which are the difference between the interest that banks charge for loans they make and the interest they pay on deposits – was excluded from output in the national accounts. The only part of banks’ income which was included was fees for services people actually paid for, such as the cost of opening or closing a bank account or getting mortgage advice.

Yet next came an extraordinary change. From being perceived as transferring existing value and ‘rent’ in the sense of ‘unearned income’, finance was transformed into a producer of new value. This seismic shift was justified by labelling commercial bank activities as ‘financial intermediation’, and investment bank activities as ‘risk-taking’. It was a change that co-evolved with the deregulation of the sector, which also swelled its size even further. As this part of the story – how finance has been ‘accounted’ for – is too big to treat in this chapter, the next two will be devoted to it.

Profits versus Rents

As we saw in Chapter 2, the discussion about which parts of society were productive or unproductive was much less explicit before the arrival of marginal utility theory. And as we have seen in this chapter, moreover, as long as products and services fetch a price on the market, they are deemed worthy of being included in GDP; whether they contribute to value or extract it is ignored. The result is that the distinction between profits and rents is confused and value extraction (rent) can masquerade as value creation.

The complexity of assessing government value added pales in comparison with this glaring weakness in the SNA: a confusion between profits and rents. Disentangling the two is fundamental to understanding value. As we saw earlier, classical value theory held that income from activities outside the production boundary was unearned. Rent – which was regarded as unearned income – was classified as a transfer from the productive to the unproductive sector, and was therefore excluded from GDP. But if, as marginal utility holds, the ‘services’ of a landlord or hedge fund manager are treated as productive, they magically become part of GDP.

The SNA generally links what people earn with the industries which pay them. Steel workers are paid by steel makers, shop workers are paid by retailers, insurance workers are paid by insurance companies, and so on. But income from property, dividends and lending, for example, is different because the people receiving it are not necessarily directly linked to its source (rent, dividends, loan interest etc.). If a steel firm rents an office, the rent it pays could go to firms in other sectors, to the government or even to households. A rich investor can derive income from dividends paid by any number of productive companies. A creditor – such as a bank – can lend money to several businesses or households and receive income as interest from them. All these types of income cannot be pinned down easily in the product account.

Although the SNA 2008 tried to deal with this difficulty, it did not state that, for example, property income is a reward for production, merely that ‘Property income accrues when the owners of financial assets and natural resources put them at the disposal of other institutional units.’ 37