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

PATCHING UP THE NATIONAL ACCOUNTS ISN’T ENOUGH

So while, in theory, balancing the national accounts between income and expenditure requires a clear sense of where the production boundary lies – where value is created – in practice the boundary is far from clear. National accounts as they stand are certainly much better than nothing and, among their merits, do permit consistent comparison between countries and over time. But despite all the effort that has gone into developing it, the SNA lacks a coherent and rigorous underlying value theory.

Government agencies such as the Bureau of Economic Analysis (BEA) in the United States and the Office of National Statistics (ONS) in the United Kingdom employ armies of people to estimate GDP, making decisions about what is producing new value that enlarges the wealth of a country. We are mesmerized into seeing this as the domain of a highly specialized profession that uses sophisticated modern statistical methods to provide precise parameters for the value that our society produces. The growth rate of our economies is forecast years in advance using complicated mathematics, with potential ‘outputs’ measured and GDP estimated to a tenth of a percentage every quarter.

In reality, the national accounts have been subjected to repeated attempts to patch them up and make them more relevant to changing needs and economies. Accounting for environmental damage has been mentioned. Accounting for happiness is another case. Lest the idea seems impossible, or at least nothing to do with economics, it’s worth recalling something basic: there is no point to the economy unless it helps people to lead better lives – and that quite reasonably means, at least in part, happier lives. The American economist James Tobin (1918–2002), who won the Nobel Prize in Economics in 1981 and was a Professor of Economics at Yale University for many years, wrote:

The whole purpose of the economy is the production of goods and services for consumption now or in the future. I think the burden of proof should always be on those who would produce less, rather than more, on those who would leave idle men or machines or land that could be used. It is amazing how many reasons can be found to justify such waste: fear of inflation, balance-of-payments deficits, unbalanced budgets, excessive national debt, loss of confidence in the dollar. 38

Making decisions about which goods and services to include in GDP involves returning to the concept of the production boundary at the centre of classical economic thought – distinguishing productive from unproductive activities – and the theory of value that justifies such a distinction. Is a theory just assumed, as in the work of Petty and King? Or is it spelled out, as in Marx? And how can national accountants be persuaded that an activity that was previously seen as a transfer of existing value is actually creating new value? And above all, what do we mean by growth?

The way we define and measure growth is of course affected by our theory of value. And the resulting growth figures may guide the activities that are deemed important. And in the process possibly distort the economy.

GDP is worrying citizens and politicians everywhere: is it going up? Falling? And by how much? Understanding how GDP is constructed is thus crucial.

Unlike statisticians at the time of Smith or Marshall, modern governments have a wealth of data and a sophisticated system of national accounts that tracks the economy and the growth of each of its sectors. On the one hand, this makes it possible to see in great detail who does what in the economy – who is a ‘value creator’ and just how much everyone contributes to the national product. On the other hand, because of the way in which these accounts are set up, they are no more an objective metric of value than Quesnay’s categorizations, or Smith’s, or Marx’s.

In essence, we behave as economic actors according to the vision of the world of those who devise the accounting conventions. The marginalist theory of value underlying contemporary national accounting systems leads to an indiscriminate attribution of productivity to anyone grabbing a large income, and downplays the productivity of the less fortunate. In so doing, it justifies excessive inequalities of income and wealth and turns value extraction into value creation.

Put bluntly, any activity that can be exchanged for a price counts as adding to GDP. The accountants determine what falls into this category. But what criteria do they use? The answer is a hodge-podge which combines marginal utility with statistical feasibility and some sort of common sense that invites lobbying rather than reasoning about value. It is this that determines where the production boundary is drawn in the national accounts.

The next chapter focuses on the most egregious case of boundary-hopping: that of the financial sector, formerly seen as unproductive, now a creator of value.

4

Finance: A Colossus is Born

If the UK financial system thrives in the post-Brexit world, which is the plan, it will not be ten times GDP, it will be fifteen to twenty times GDP in another quarter of a century.

Mark Carney, Governor of the Bank of England, 3 August 2017

A large and growing financial sector has long been presented as a sign of UK and US success, credited with mobilizing capital to drive their economic development and generating exports at a time when manufacturing and farming had declined into net import. In the 1990s, comparable financial-sector expansion became an ambition for other countries seeking to follow the development path of these early industrializers, and to lessen dependence on the import of capital and services from the world’s ‘financial centres’ located in the UK and the US. Underpinning this expansion is the belief that a country benefits from an ever-growing financial sector, in terms of its growing contribution to GDP and exports, and as total financial-sector assets (bank loans, equities, bonds and derivatives) become an ever-larger multiple of GDP.

The celebration of finance by political leaders and expert bankers is, however, not universally shared among economists. It clashes with the common experience of business investors and households, for whom financial institutions’ control of the flow of money seems to guarantee the institutions’ own prosperity far more readily than that of their customers. For those without large fortunes and for many with ‘assets under management’, the notion of finance adding value has rung increasingly hollow in the long shadow of the global financial crisis that began in 2008. This required governments around the world to rescue major banks whose ‘net worth’ had turned out to be fictitious; with the bailouts continuing to impose heavy social costs, ten years on, in the form of squeezed public budgets, heavy household debt and negative real returns for savers.

But for much of recent human history, in stark contrast to the current enthusiasm for financial-sector growth as a sign of (and spur to) prosperity, banks and financial markets were long regarded as a cost of doing business. Their profits reflected added value only to the extent that they improved the allocation of a country’s resources, and cross-subsidized a reliable payments system. Recurrent financial crises exposed the regularity with which they threw resources in unproductive directions (basically to other parts of the financial sector itself), ultimately disrupting the flow of money and goods in the real economy. The fastest-growing financial activities in 1980–2008 were asset management (making more money by investing in liquid financial assets and property, for the segment of the population earning enough to save) and lending to households, rather than to businesses. Finance also diverted many highly trained scientists and engineers away from work in direct production, by offering them on average 70 per cent more pay than other sectors could afford. The improbable level to which financial-sector profits rose, before and after the latest crisis, reflects a deliberate decision during the twentieth century to redraw the production boundary, so that previously excluded financial institutions were now included within it – and, having redesignated finance as productive, to strip away the regulations that had previously kept its charging and risk-taking under control.