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

But it did. VW wilfully designed a system to reduce emissions during testing but not during driving, and has paid fines of $20 billion and lost roughly $100 billion of stock market capitalization as a result. Half a century earlier, Ford incurred similar financial and reputational damage when top managers very deliberately calculated that the cost of fixing a fatal flaw in its Pinto model exceeded the cost of paying compensation for the customers it killed. 38At VW, a hidden design flaw (potentially just as injurious to life and health) arose less through cynical calculation at the top than through pressures placed on subordinates to promote financial performance. The problem seems to have been a culture of competitiveness and fear which drove some engineers to take desperate measures to drive sales and many others to remain quiet about what they knew was a deception. There was long-term thinking at the top – but only about increasing market share, not about reputation. The unspoken but clear message to the employees who could have refused to comply was that failure to pass emissions tests was unacceptable, so it was preferable to cheat than admit defeat. In short, the VW scandal tells us that corporate governance structures and rules are unlikely to work unless corporate values are aligned with public values (a concept we will visit in Chapter 8).

CONCLUSION

Sky-rocketing rewards for the lucky few have widened social divisions and increased inequality in much of the Western world, notably in the US, the home of financialization.

This state of affairs can be – and is – attacked on moral grounds. Inequality reveals what we think of millions of our fellow humans. The economic issue with value extraction is not normative, however. As we have seen, in a capitalist economy some rent is necessary: there is an unavoidable price tag to maintaining the circulation of capital in the economic system. But the scale of the financial sector and of financialization generally has increased value extraction to the point where two critical questions must be answered: where is value created, extracted and even destroyed? And how can we steer the economy away from excessive financialization towards true value creation? Proposals such as taxing away very high incomes and accumulations of wealth may treat some of the symptoms of excessive finance. They do not, however, treat the causes, which lie deep in a system of value extraction which has grown up over the last forty years or so.

If the objective is long-term growth, the private sector must be rewarded for making decisions that target the long-term over the short-term. While some companies might be focusing on boosting their stock prices through share buy-backs, aimed at increasing stock prices and hence stock options (through which executives are paid), others may be taking on the difficult investments to increase the training needed for workers, introduce risky new technology, and investment in R&D, eventually leading, with luck, to new technology and more likely leading to nowhere. Companies could be rewarded for doing more of the latter and less of the former.

Executive pay should be kept in check through an understanding that there are many other stakeholders who are critical to value creation, from workers and the state to civil society movements. Reinvestment of profits back into the real economy – rather than hoarding or engaging in share buy-backs – should be a condition attached to any type of government support, whether through subsidies or government grants and loans.

The British-Venezuelan scholar Carlota Perez has argued that the decoupling of finance from the real economy is not ‘natural’ but an artefact of deregulation and excess belief in the power of free markets. Her groundbreaking work has identified a pattern of intense financialization followed by its reversal in each technological revolution. 39She shows that the early decades of each of the five revolutions to date (from the steam engine to the IT revolution) have been times of financial mania and increasing inequality. But after the financial bubbles collapse, and amid the ensuing recession and social turmoil, governments have tended to rein in finance and promote a period that favours the expansion of production, benefiting society more broadly and making finance serve its real purpose. But if and when government does not step in and play its part, financialization can have no end. 40

The next chapter turns to the world of innovation, a glamorous arena of inspired inventors and fearless entrepreneurs where ‘wealth creation’ is not all it is claimed to be.

7

Extracting Value through the Innovation Economy

First, only invest in companies that have the potential to return the value of the entire fund.

Peter Thiel, Zero to One: Notes on Startups, or How to Build the Future (2014)

STORIES ABOUT VALUE CREATION

The epicentre of a still-unfolding technological revolution, Silicon Valley is the most dynamic industrial district in the world for high-tech start-ups. Since the 1980s it has made millionaires of many thousands of founders, early-stage employees, executives and venture capitalists – and billionaires of a significant number too. The ingenuity of these people has undoubtedly been instrumental in changing how we communicate, transact business and live our lives. Their products and services epitomize our contemporary idea of progress.

Silicon Valley’s entrepreneurs are often viewed as heroic do-gooders. Indeed, Google’s stated mission is Do No Evil . In April 2016 a front cover of the Economist showed the Facebook founder Mark Zuckerberg dressed like a Roman emperor under the headline ‘Imperial Ambition’. Meanwhile, innovation is seen as the new force in modern capitalism, not just in Silicon Valley but globally. Phrases like the ‘new economy’, ‘the innovation economy’, ‘the information society’ or ‘smart growth’ encapsulate the idea that it is entrepreneurs, garage tinkerers and their patents that unleash the ‘creative destruction’ from which the jobs of the future come. We are told to welcome the likes of Uber and Airbnb because they are the forces of renewal that sweep away the old incumbents, whether black cabs in London or ‘dinosaur’ hotel chains like Hilton.

The success of some of the companies has been extraordinary. Google’s share of the global desktop search engine market is more than 80 per cent, 1while just five US companies (Google, Microsoft, Amazon, Facebook and IBM) own most of the world’s data, with China’s Baidu being the only foreign company coming close. This market share also results in immense wealth: Apple’s cash pile was over $250 billion in 2017.

These companies’ huge profits, and their domination of their respective markets, are claimed to be justified in terms of the value they create: such profits and such domination are simply a reflection of their enormous wealth-creating power. Similarly, big pharmaceutical companies have justified the enormous increase in drug prices – where cures for diseases like hepatitis C can cost up to a million dollars –through stories about their extraordinary innovation capability and associated costs, or – when those costs are revealed to be much lower and/or actually picked up by the taxpayer – through the notion of ‘value’-based pricing.

This chapter takes a critical look at the innovation economy and the stories around it. It explores how the dominant narratives about innovators and the reasons for their success fundamentally ignore the deeply collective and cumulative process behind innovation. This failure to recognize these processes has in turn led to a problematic distribution of the rewards for innovation, and to policies which, in the name of innovation, have enabled a few companies to extract value from the economy.