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

This is not an abstract debate. It has far-reaching consequences – social and political as well as economic – for everyone. How we discuss value affects the way all of us, from giant corporations to the most modest shopper, behave as actors in the economy and in turn feeds back into the economy, and how we measure its performance. This is what philosophers call ‘performativity’: how we talk about things affects behaviour, and in turn how we theorize things. In other words, it is a self-fulfilling prophecy.

If we cannot define what we mean by value, we cannot be sure to produce it, nor to share it fairly, nor to sustain economic growth. The understanding of value, then, is critical to all the other conversations we need to have about where our economy is going and how to change its course.

Introduction: Making versus Taking

The barbarous gold barons – they did not find the gold, they did not mine the gold, they did not mill the gold, but by some weird alchemy all the gold belonged to them.

Big Bill Haywood, founder of the Unites States’ first industrial union 1

Bill Haywood expressed his puzzlement eloquently. He represented men and women in the US mining industry at the start of the twentieth century and during the Great Depression of the 1930s. He was steeped in the industry. But even Haywood could not answer the question: why did the owners of capital, who did little but buy and sell gold on the market, make so much money, while workers who expended their mental and physical energy to find it, mine it and mill it, make so little? Why were the takers making so much money at the expense of the makers ?

Similar questions are still being asked today. In 2016 the British high-street retailer BHS collapsed. It had been founded in 1928 and in 2004 was bought by Sir Philip Green, a well-known retail entrepreneur, for £200 million. In 2015 Sir Philip sold the business for £1 to a group of investors headed by the British businessman Dominic Chappell. While it was under his control, Sir Philip and his family extracted from BHS an estimated £580 million in dividends, rental payments and interest on loans they had made to the company. The collapse of BHS threw 11,000 people out of work and left its pension fund with a £571 million deficit, even though the fund had been in surplus when Sir Philip acquired it. 2A report on the BHS disaster by the House of Commons Work and Pensions Select Committee accused Sir Philip, Mr Chappell and their ‘hangers-on’ of ‘systematic plunder’. For BHS workers and pensioners who depended on the company for a decent living for their families, this was value extraction – the appropriation of gains vastly out of proportion to economic contribution – on an epic scale. For Sir Philip and others who controlled the business, it was value creation.

While Sir Philip’s activities could be viewed as an aberration, the excesses of an individual, his way of thinking is hardly unusual: today, many giant corporations are also guilty of confusing value creation with value extraction. In August 2016, for instance, the European Commission, the European Union’s (EU) executive arm, sparked an international row between the EU and the US when it ordered Apple to pay €13 billion in back taxes to Ireland. 3

Apple is the world’s biggest company by stock market value. In 2015 it held a mountain of cash and securities outside the US worth $187 billion 4– about the same size as the Czech Republic’s economy that year 5– to avoid paying the US taxes that would be due on the profits if they were repatriated. Under a deal with Ireland dating back to 1991, two Irish subsidiaries of Apple received very generous tax treatment. The subsidiaries were Apple Sales International (ASI), which recorded all the profits earned on sales of iPhones and other Apple devices in Europe, the Middle East, Africa and India; and Apple Operations Europe, which made computers. Apple transferred development rights of its products to ASI for a nominal amount, thereby depriving the US taxpayer of revenues from technologies, embodied in Apple products, whose early development the taxpayer had funded. The European Commission alleged that the maximum rate payable on those profits booked through Ireland which were liable for tax was 1 per cent, but that in 2014 Apple paid tax at 0.005 per cent. The usual rate of corporation tax in Ireland is 12.5 per cent.

What is more, these ‘Irish’ subsidiaries of Apple are in fact not resident for tax purposes anywhere. This is because they have exploited discrepancies between the Irish and US definitions of residence. Almost all the profits earned by the subsidiaries were allocated to their ‘head offices’, which existed only on paper. The Commission ordered Apple to pay the back taxes on the grounds that Ireland’s deal with Apple constituted illegal state aid (government support that gives a company an advantage over its competitors); Ireland had not offered other companies similar terms. Ireland, the Commission alleged, had offered Apple ultra-low taxes in return for the creation of jobs in other Apple businesses there. Apple and Ireland rejected the Commission’s demand – and of course Apple is not the only major corporation to have constructed exotic tax structures.

But Apple’s value extraction cycle is not limited to its international tax operations – it is also much closer to home. Not only did Apple extract value from Irish taxpayers, but the Irish government has extracted value from the US taxpayer. Why so? Apple created its intellectual property in California, where its headquarters are based. Indeed, as I argued in my previous book, The Entrepreneurial State , 6and discuss briefly here in Chapter 7, all the technology that makes the smartphone smart was publicly funded. But in 2006 Apple formed a subsidiary in Reno, Nevada, where there is no corporate income or capital gains tax, in order to avoid state taxes in California. Creatively naming it Braeburn Capital, Apple channelled a portion of its US profits to the Nevada subsidiary instead of reporting it in California. Between 2006 and 2012, Apple earned $2.5 billion in interest and dividends reported in Nevada to avoid Californian tax. California’s infamously large debt would be significantly reduced if Apple fully and accurately reported its US revenues in that state, where a major portion of its value (architecture, design, sales, marketing and so on) originated. Value extraction thus pits US states against each other, as well as the US against other countries.

It is clear that Apple’s highly complex tax arrangements were principally designed to extract the maximum value from its business by avoiding paying substantial taxes which would have benefited the societies in which the company operated. Apple certainly creates value, of that there is no doubt: but to ignore the support taxpayers have given it, and then to pit states and countries against each other, is surely not the way to build an innovative economy or achieve growth that is inclusive, that benefits a wide section of the population, not only those best able to ‘game’ the system.

There is yet another dimension to Apple’s value extraction. Many such corporations use their profits to boost share prices in the short term instead of reinvesting them in production for the long term. The main way they do this is by using cash reserves to buy back shares from investors, arguing that this is to maximize shareholder ‘value’ (the income earned by shareholders in the company, based on the valuation of the company’s stock price). But it is no accident that among the primary beneficiaries of share buy-backs are managers with generous share option schemes as part of their remuneration packages – the same managers who implement the share buy-back programmes. In 2012, for example, Apple announced a share buy-back programme of up to a staggering $100 billion, partly to ward off ‘activist’ shareholders demanding that the company return cash to them to ‘unlock shareholder value’. 7Rather than reinvest in the business, Apple preferred to transfer cash to shareholders.