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

As discussed in the previous chapter, government policy has been crucial to envisioning and funding key technologies such as the Internet, critical to Silicon Valley’s success. In the process, government has given life to new markets that have sprung from these technologies (the dot.comeconomy).

This historical and institutional view of markets’ relationship with government contrasts sharply with the current prevailing orthodoxy and is not to be found in mainstream economics. Here – to get technical for a moment – you only find government as a player in the macroeconomic models that look at the effect of regulation or the effect of a stimulus programme on GDP (through the multiplier which we discuss later in the chapter). But government is totally missing from what in microeconomics is known as the ‘production function’: the relationship between the quantity of outputs of a good and the quantity of inputs needed to make it, or, to put it simply, the analysis of how firms behave. And thus it is assumed that it is only in firms that value is created. Government is left outside the production boundary.

Some theories go further. Government, they argue, is innately corrupt and liable to ‘capture’ by vested interests. Because government is inherently unproductive, if we can restrict what it does we can reduce unproductive activities, thereby improving conditions for productive ones, steering economies towards growth. The logical conclusion is that government should be curbed, stripped back: perhaps by budget cuts, privatization of public assets, or outsourcing. In contemporary parlance, ‘austerity’.

This chapter will argue that the prevailing view of government is wrong, that it is more the product of ideological bias than anything else. The stories told about government have undermined its confidence, limited the part it can play in shaping the economy, undervalued its contribution to national output, wrongly led to excessive privatization and outsourcing, ignored the case for the taxpayer sharing in the rewards of a collective – public – process of value creation, and enabled more value extraction. Yet these stories have become accepted as ‘common sense’ – always a term to be treated circumspectly. We have become accustomed to much talk about the pros and cons of austerity. The debate about government, though, should not be about its size or its budget. The real question is what value government creates – because to ask about the role of government in the economy is inevitably to question its intrinsic value. Is it productive or unproductive? How do we measure the value of government activities?

THE MYTHS OF AUSTERITY

After the 2008 financial crash – a crisis chiefly brought about by private, not public, debt – governments saved the capitalist system from breakdown. Not only did they pump money into the financial system: they took over private assets. A few months after Lehman Brothers collapsed, the US government was in charge of General Motors and Chrysler, the British government was running high street banks and, across the OECD, governments had committed the equivalent of 2.5 per cent of GDP to rescuing the system.

And yet, even though the crisis was caused by a combination of high private debt and reckless financial-sector behaviour, the extraordinary policy conclusion was that governments were to blame – despite the fact that, through bailouts and counter-cyclical stimulus, they had saved the financial system from crumbling. Instead of being seen as the heroes that stepped in to fix the mess created by private finance, they became the villains. Of course there had been failings on all sides – abnormal interest rates had contributed to the rise in debt – but the narrative became twisted out of all recognition. This distortion was enabled by a view held since the 1970s that somehow the public sector is less able to engineer growth than the private sector. What followed was a drive towards austerity across Europe. And tragically, instead of being allowed to invest their way back to pre-recessionary levels of output and employment, weaker European countries were repeatedly told by the ‘troika’ (the IMF, European Central Bank and European Commission) to cut public spending to the bone. Any country whose budget deficits rose beyond the level stipulated in the Maastricht Treaty were penalized severely, with conditions placed on bailouts that even the pro-austerity IMF later admitted were self-defeating.

In a nutshell, austerity assumes that public debt is bad for growth, and that the only way to reduce it is to cut government spending and debt by running a budget surplus, irrespective of the possible social cost. With debt down to an unspecified level and government finances ‘sound’, the private sector will be freed to reignite prosperity.

The politics of ‘austerity’ has framed the policies of successive UK Chancellors of the Exchequer and European finance ministers for almost a decade. In the US, from Newt Gingrich in the 1990s to the legally mandated spending cuts – sequestration – after the last financial crisis, Congress has threatened periodically to shut down the Federal government unless lower budget targets are met.

But this fixation on austerity to reduce debt misses a basic point: what matters is long-run growth, its source (what is being invested in), and its distribution (who reaps the rewards). If, through austerity, cuts are made to essential areas that create the capacity for future growth (education, infrastructure, care for a healthy population), then GDP (however ill defined) will not grow. Moreover, the irony is that just cutting the deficit may have little effect on the debt/GDP if the denominator of the ratio is being badly affected. And if the cuts cause more inequality – as the Institute for Fiscal Studies has shown was the case with the UK austerity measures of the last years – consumption can only grow through debt (e.g. credit cards), which maintains purchasing power. Instead, if public investment is made in areas like infrastructure, innovation, education and health, giving rise to healthy societies and creating opportunities for all, tax revenues will most likely rise and debt fall relative to GDP.

It is crucial to understand that economic policy is not scientifically ordained. You can impose austerity and hope the economy grows, even though such a policy deprives it of demand; or you can focus on investing in areas like health, training, education, research and infrastructure with the belief that these areas are critical for long-run growth in GDP. In the end, the choice of policy depends heavily on one’s perspective on the role of government in the economy – is it key to creating value, or at best a cheerleader on the sidelines?

Magic Numbers

The current debate about austerity has avoided any mention of public value. Neither budget doves nor budget hawks have seriously questioned the theory of value that underpins much ‘common-sense’ understanding of market processes. A major reason for this lack of curiosity is that both camps seem to have been in thrall to the so-called ‘magic’ numbers which have framed the debate.

When, in 1992, European integration came into being through the Maastricht Treaty, there were various obligations that the signatory countries signed up to, one of which was to keep spending in check. Total public debt was to be limited to 60 per cent of GDP, with annual deficits (debt is the accumulation of deficits) not larger than 3 per cent of GDP. These numbers purport to set objective limits to government indebtedness. But where do they come from? You might imagine they are arrived at through some kind of scientific process – but if so, you’d be wrong. These numbers are taken out of thin air, supported by neither theory nor practice.

Let’s start with debt. In 2010 the American Economic Review published an article by two top economists, professors at Harvard University: Carmen Reinhart, ranked the following year by the Bloomberg Markets magazine among the ‘Most Influential 50 in Finance’; and Kenneth Rogoff, a former chief economist of the IMF. 4In this piece the pair claimed that when the size of government debt (as a proportion of GDP) is over 90 per cent (much higher than the 60 per cent of the Maastricht Treaty, but still lower than that of many countries), economic growth falls. The results showed that rich countries whose public debt exceeded that percentage experienced a sharp drop in growth rate for the period 1946–2009. This was a very important finding, as so many countries’ public debt levels are close to or exceed this percentage. According to IMF data the US debt/GDP ratio stood at 64 per cent in 2007, and 105 per cent in 2014. For the UK the equivalent numbers were 44 per cent and 81 per cent; for the European Union 58 per cent and 88 per cent, and for the Eurozone 65 per cent and 94 per cent.