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

The second major consequence of the dynamics of innovation is about how value is created, how this is measured, and how and by whom this value is extracted. If we go by national accounts, the contribution of Internet platforms to national income (as measured for example by GDP) is represented by the advertisement-related services they sell to firms. It is not very clear why advertisements should contribute to the real national product, let alone social well-being, which should be the aim of economic activity. But national accounts, in this respect, are consistent with standard neoclassical economics, which tends to interpret any voluntary market-based transaction as signalling the production of some kind of output – whether financial services or advertising, as long as a price is received, it must be valuable. 75That is misleading: if online giants contribute to social well-being, they do it through the services they provide to users, not through the accompanying advertisements.

The classical economists’ approach appears much more fruitful for analysing these new digital markets. As discussed in Chapter 1, they distinguished between ‘productive’ labour, which contributes to an increase in the value of what is produced, and ‘unproductive’ labour, which does not. The activities which make profits for online platforms – advertising and analyses of users’ private information and behaviour – do not increase the value of what is produced, which is services to users such as posting a message on Facebook or making a search on Google. Rather, these activities help firms competing against one another to appropriate, individually, a larger share of the value produced. 76The confused and misleading approach to the concept of value that is currently dominating economics is generating a truly paradoxical result: unproductive advertising activities are counted as a net contribution of online giants to national income, while the more valuable services that they provide to users are not.

The rise of big data is often talked about as a win-win opportunity for both producers and consumers. But this depends on who owns the data and how it is ‘governed’. The fact that IPR has become wider and stronger, and more upstream, is due to the way it is governed – or not. Markets of any type must be actively shaped in order for knowledge to be governed in ways that produce the market outcomes that we as a society want. Indeed, regulation is not about interference, as is commonly perceived, but about managing a process that produces the results that are best for society as a whole. In the case of big data, the ‘big five’ – Facebook, Google, Amazon, IBM and Microsoft – virtually monopolize it. But the problem is not just a question of competition – the size and number of firms in the sector. It could be argued that a few large companies can achieve the economies of scale required to drive down costs and make data cheaper – not a bad thing given falling real incomes.

The key issue is the relationship between the Internet monopolies and these falling incomes. The privatization of data to serve corporate profits rather than the common good produces a new form of inequality – the skewed access to the profits generated from big data. Merely lowering the price monopolists charge for access to data is not the solution. The infrastructure that companies like Amazon rely on is not only publicly financed (as discussed, the Internet was paid for by tax dollars), but it feeds off network effects which are collectively produced. While it is of course OK for companies to create services around new forms of data, the critical issue is how to ensure that the ownership and management of the data remains as collective as its source: the public. As Morozov argues, ‘Instead of us paying Amazon a fee to use its AI capabilities – built with our data – Amazon should be required to pay that fee to us.’ 77

SHARING RISKS AND REWARDS

Acknowledging the collective nature of innovation should result in more sharing of the rewards that accrue from the process of innovation. And yet ignoring the collective story, and only giving credit to a narrow group of individuals, has affected thinking about who should own IPR, how high a medicine’s price can acceptably be, who should or should not retain equity in a new firm or a new technological advance, and the fair share of tax contributions. It is this gap between the collective distribution of risk-taking in innovation and the more individualized, privatized way in which the returns are distributed that is the most modern form of rent.

Current stories about value, wealth creation and risk-taking that privilege the contribution of individual inventors and capitalists lead to ways of thinking whereby it is acceptable to divide up the fruits of innovation between them – the concept of ‘just deserts’. The term comes from the English philosopher John Locke (1632–1704). His concept of individual entitlement – ‘just deserts’ – to the product of work was based on a production system where individual labour was more important, and was easier to identify, than it is today when collective contributions have been central to technology-driven growth. This point was made by Herbert Simon (1916–2001), who made his name in the study of organizational decision-making, and who won the Nobel Prize in Economics in 1978. ‘If we are generous with ourselves,’ Simon considered, ‘I suppose that we might claim that we “earned” as much as one-fifth of our income. The rest of the patrimony [is] associated with being a member of an enormously productive social system, which has accumulated a vast store of physical capital, and an even larger store of intellectual capital – including knowledge, skills, and organizational know-how held by all of us.’ 78Ignoring this collectively produced social system, certain individuals feel justified in earning a much higher proportion of a nation’s income than their own contribution warrants. But, more specifically, it has affected policies on taxes, patents and prices, thus fuelling the dynamics of inequality.

The question is: what can we do about it?

Policymaking should start from understanding that innovation is a collective process. Given the immense risks the taxpayer takes when the government invests in visionary new areas like the Internet, couldn’t we construct ways for rewards from innovation to be just as social as the risks taken? These ways might include: capping prices of publicly developed medicines; attaching conditions to public support, such as the requirement that profits be reinvested back into production rather than spent on speculative share buy-backs; allowing public agencies to retain equity or royalties in technologies for which they provided downstream funding; or by making income-contingent loans to businesses as we do for students.

As is the nature of early-stage investment in technologies with uncertain prospects, some investments are winners, but many are losers. For every Internet (a success story of US government financing), there are many Concordes (a white elephant funded by the British and French governments). Consider the twin tales of Solyndra and Tesla Motors. In 2009, Solyndra, a solar-power-panel start-up, received a $535 million guaranteed loan from the US Department of Energy; that same year, Tesla, the electric-car manufacturer, got approval for a similar loan, of $465 million. In the years afterwards, Tesla was wildly successful, and the firm repaid its loan in 2013. Solyndra, by contrast, filed for bankruptcy in 2011, and among fiscal conservatives became a byword for the government’s sorry track record when it comes to picking winners. Of course, if the government is to act like a venture capitalist, it will necessarily encounter many failures. The problem, however, is that governments, unlike venture capital firms, are often saddled with the costs of the failures while earning next to nothing from the successes. Taxpayers footed the bill for Solyndra’s losses – yet got hardly any of Tesla’s profits. Strangely, the US government had put in a claim for 3 million shares into Tesla only if it did not pay back the loan – almost as if the US government has an interest in owning a part of failed companies! Tesla did pay back the loan in 2013, and so had the US government taken a stake in Tesla as a success rather than as a failure, it would have been able to more than cover its losses from Solyndra. The year Tesla received its government loan, the company went public at an opening price of $17 a share; that figure had risen to $93 by the time the loan was repaid. Today shares in Tesla trade above $200.