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

WHY VALUE THEORY MATTERS

First, the disappearance of value from the economic debate hides what should be alive, public and actively contested. 17If the assumption that value is in the eye of the beholder is not questioned, some activities will be deemed to be value-creating and others will not, simply because someone – usually someone with a vested interest – says so, perhaps more eloquently than others. Activities can hop from one side of the production boundary to the other with a click of the mouse and hardly anyone notices. If bankers, estate agents and bookmakers claim to create value rather than extract it, mainstream economics offers no basis on which to challenge them, even though the public might view their claims with scepticism. Who can gainsay Lloyd Blankfein when he declares that Goldman Sachs employees are among the most productive in the world? Or when pharmaceutical companies argue that the exorbitantly high price of one of their drugs is due to the value it produces? Government officials can become convinced (or ‘captured’) by stories about wealth creation, as was recently evidenced by the US government’s approval of a leukemia drug treatment at half a million dollars, precisely using the ‘value-based pricing’ model pitched by the industry – even when the taxpayer contributed $200 million dollars towards its discovery. 18

Second, the lack of analysis of value has massive implications for one particular area: the distribution of income between different members of society. When value is determined by price (rather than vice versa), the level and distribution of income seem justified as long as there is a market for the goods and services which, when bought and sold, generate that income. All income, according to this logic, is earned income: gone is any analysis of activities in terms of whether they are productive or unproductive.

Yet this reasoning is circular, a closed loop. Incomes are justified by the production of something that is of value. But how do we measure value? By whether it earns income. You earn income because you are productive and you are productive because you earn income. So with a wave of a wand, the concept of unearned income vanishes. If income means that we are productive, and we deserve income whenever we are productive, how can income possibly be unearned? As we shall see in Chapter 3, this circular reasoning is reflected in how national accounts – which track and measure production and wealth in the economy – are drawn up. In theory, no income may be judged too high, because in a market economy competition prevents anyone from earning more than he or she deserves. In practice, markets are what economists call imperfect, so prices and wages are often set by the powerful and paid by the weak.

In the prevailing view, prices are set by supply and demand, and any deviation from what is considered the competitive price (based on marginal revenues) must be due to some imperfection which, if removed, will produce the correct distribution of income between actors. The possibility that some activities perpetually earn rent because they are perceived as valuable, while actually blocking the creation of value and/or destroying existing value, is hardly discussed.

Indeed, for economists there is no longer any story other than that of the subjective theory of value, with the market driven by supply and demand. Once impediments to competition are removed, the outcome should benefit everyone. How different notions of value might affect the distribution of revenues between workers, public agencies, managers and shareholders at, say, Google, General Electric or BAE Systems, goes unquestioned.

Third, in trying to steer the economy in particular directions, policymakers are – whether they recognize it or not – inevitably influenced by ideas about value. The rate of GDP growth is obviously important in a world where billions of people still live in dire poverty. But some of the most important economic questions today are about how to achieve a particular type of growth . Today, there is a lot of talk about the need to make growth ‘smarter’ (led by investments in innovation), more sustainable (greener) and more inclusive (producing less inequality). 19

Contrary to the widespread assumption that policy should be directionless, simply removing barriers and focusing on ‘levelling the playing field’ for businesses, an immense amount of policymaking is needed to reach these particular objectives. Growth will not somehow go in this direction by itself. Different types of policy are needed to tilt the playing field in the direction deemed desirable. This is very different from the usual assumption that policy should be directionless, simply removing barriers so that businesses can get on with smooth production.

Deciding which activities are more important than others is critical in setting a direction for the economy: put simply, those activities thought to be more important in achieving particular objectives have to be increased and less important ones reduced. We already do this. Certain types of tax credits, for, say, R&D, try to stimulate more investment in innovation. We subsidize education and training for students because as a society we want more young people to go to university or enter the workforce with better skills. Behind such policies may be economic models that show how investment in ‘human capital’ – people’s knowledge and capabilities – benefits a country’s growth by increasing its productive capacity. Similarly, today’s deepening concern that the financial sector in some countries is too large – compared, for example, to manufacturing – might be informed by theories of what kind of economy we want to be living in and the size and role of finance within it.

But the distinction between productive and unproductive activities has rarely been the result of ‘scientific’ measurement. Rather, ascribing value, or the lack of it, has always involved malleable socio-economic arguments which derive from a particular political perspective – which is sometimes explicit, sometimes not. The definition of value is always as much about politics, and about particular views on how society ought to be constructed, as it is about narrowly defined economics. Measurements are not neutral: they affect behaviour and vice versa (this is the concept of performativity which we encountered in the Preface).

So the point is not to create a stark divide, labelling some activities as productive and categorizing others as unproductive rent-seeking. I believe we must instead be more forthright in linking our understanding of value creation to the way in which activities (whether in the financial sector or the real economy) should be structured, and how this is connected to the distribution of the rewards generated. Only in this way will the current narrative about value creation be subject to greater scrutiny, and statements such as ‘I am a wealth creator’ measured against credible ideas about where that wealth comes from. A pharmaceutical company’s value-based pricing might then be scrutinized with a more collective value-creation process in mind, one in which public money funds a large portion of pharmaceutical research – from which that company benefits – in the highest-risk stage. Similarly, the 20 per cent share that venture capitalists usually get when a high-tech small company goes public on the stock market may be seen as excessive in light of the actual, not mythological, risk they have taken in investing in the company’s development. And if an investment bank makes an enormous profit from the exchange rate instability that affects a country, that profit can be seen as what it really is: rent.

In order to arrive at this understanding of value creation, however, we need to go beyond seemingly scientific categorizations of activities and look at the socio-economic and political conflicts that underlie them. Indeed, claims about value creation have always been linked to assertions about the relative productiveness of certain elements of society, often related to fundamental shifts in the underlying economy: from agricultural to industrial, or from a mass-production-based economy to one based on digital technology.