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

Such questions are not new. Back in 1925, Winston Churchill, then Chancellor of the Exchequer, had begun to get itchy about the way in which finance was changing. He famously claimed that he would ‘rather see finance less proud and industry more content’. 6The suspicion troubling policymakers (and their newly emerging economic advisers) was that financiers were positioned in relation to industrial producers in the same way as pre-industrial landowners related to agricultural producers – extracting a significant share of the revenue, without playing any active part in the process of production. Investors who passively collected interest on loans and dividends from shares were ‘rentiers’ in the classic sense, exploiting their (often inherited) control over large sums of money to generate unearned income, which – if not used for conspicuous consumption – added to their wealth, especially in an age of low taxation.

The profits extracted by lenders and stock market investors could not be used for investment in industrial expansion and modernization. This was a growing concern, especially in the UK, whose inexorable fall behind the industrial power of Germany and America (especially in industries that could convert to military use) had been the subject of increasingly anxious parliamentary enquiries since the late nineteenth century. The inclination of British-based banking families and trusts to channel funds abroad in search of higher returns, while foreign-based investors brought British assets through its stock market, amplified these concerns as more of the country’s colonies began to agitate for independence, and the storm clouds that had heralded the First World War began to gather again. Churchill’s Chancellorship had also alerted him to rent-seeking behaviour – lobbying government for rules and entry barriers that would enhance financial profit, and making loans to investors who expected to repay out of share price gains – which was soon to rebound internationally in the Wall Street Crash of 1929.

Yet at the time he wrote, the financial sector in the UK was only 6.4 per cent of the entire economy. 7Finance trundled along at the same pace in the first thirty years after the Second World War. Then, after a process of deregulation begun during the 1970s, and the shifts in the production boundary reviewed in the previous chapter, it powered ahead of the real economy – manufacturing and the non-financial services provided by private-sector companies, voluntary organizations and the state. By reclassifying them from collectors of rent to creators of financial ‘value added’, the newly ignited bundle of finance, insurance and real estate (FIRE) was transformed into a productive sector at which economists of the eighteenth, nineteenth and even the first half of the twentieth century would have marvelled.

In the US, from 1960 to 2014, finance’s share of gross value added more than doubled, from 3.7 to 8.4 per cent; over the same period, manufacturing’s share of output fell by more than half, from 25 per cent to 12 per cent. The same happened in the UK: manufacturing’s share fell from over 30 per cent of total value added in 1970 to 10 per cent in 2014, while that of finance and insurance rose from less than 5 per cent to a peak of over 9 per cent in 2009, dropping slightly to 8 per cent in 2014. 8So in the three decades following deregulation, the financial sector comprehensively outpaced the ‘real’ economy. This can be seen clearly for the UK in Figure 14.

As regulations started to be lifted in the early 1980s, US private-sector financial corporations’ profits as a share of total corporate profits – stable at around 10–15 per cent in the first forty years after the Second World War – rose to over 20 per cent, peaking at 40 per cent at the beginning of the twenty-first century (Figure 15).

Figure 14.Gross value added, UK 1945–2013 (1975 = 100) 9

Figure 15.US financial corporate profits as share of domestic total profits 10

The proportion of wages that goes to financial-sector workers also illustrates the sector’s growth. Until 1980, finance’s share of employment and income was almost identical (the ratio is 1). After that, the ratio spiked: by 2009 it had almost doubled to 1.7 (Figure 16). 11

The financial sector’s profits were fabulous, especially in the UK and US with their global financial hubs in London and New York City, and were contributing an increasing share of GDP. It was hardly surprising that the public went along with ‘financial innovation’. People spent. From London to Hong Kong the retail and leisure sectors of the world’s financial centres were doing a roaring trade.

Figure 16.Finance employee compensation share of national employment share 12

From the 1980s onwards the financial sector was on a mission to convince governments that it was productive. In the minds of policymakers, finance had become an increasingly productive industry, an idea they were keen to convey to the public.

Strange as it might seem now, policymakers largely ignored the danger of financial turmoil. Only a few years after his 2004 Mansion House speech, in which he paid fulsome tribute to the productivity of the City of London’s financial and business elite, then Labour Chancellor of the Exchequer Gordon Brown voiced the hubris which financiers, regulators, politicians and many economists shared when the economy was still apparently robust. In his 2007 Budget Statement, months before the first signs of the coming crash appeared on the horizon, Brown solemnly declared (not for the first time): ‘We will not return to the old boom and bust.’

How could Brown – and so many others – have got it so horribly wrong? The key to this catastrophic misjudgement lies in their losing sight of one crucial factor: the distinction between ‘price’ and ‘value’, which over the previous decades had been lost from sight. The marginalist revolution that had changed the centuries-old theory of value to one of price had exposed marginalism’s ultimate tautology: finance is valuable because it is valued, and its extraordinary profits are proof of that value.

So when the global financial crisis arrived in 2007 it blew apart the ideology that had promoted financialization above all else. Yet the crisis did not fundamentally change how the sector is valued: two years later the head of Goldman Sachs could still keep a straight face when arguing that his bankers were the most productive in the world. And the fact that ex-Goldman Sachs employees were abundant in both the Obama and Trump administrations shows the power of the ‘story’ of the value created by Goldman Sachs across political parties.

In modern capitalism, the financial sector has greatly diversified as well as grown in overall size. Asset management in particular is a sector which has risen rapidly and secured influence and prominence; it comprises the banks which have traditionally been at the centre of the value debate but also, now, a broad range of actors. Hyman Minsky argued it was reshaping the economy into what he called ‘money manager capitalism’. But how much value does it actually create?

During the three decades after the Second World War, Western economies grew robustly, in the process accumulating massive savings. These ‘thirty golden years’, better known by their French name of the trente glorieuses , also saw a huge rise in pension commitments as people lived longer and were able to save more. The wealth built up in savings and pensions had to be managed. Investment management developed to meet the demand and gave an enormous fillip to the size and profits of the financial sector as a whole. Individual investors, who had made up a significant part of stock market activity, gave way to massive institutions run by professional fund managers, many of whom shared the attitudes and remuneration of the executives running the companies in which the fund managers invested their clients’ money.