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

Adam Smith, meanwhile, devoted the fifth book of his The Wealth of Nations to the role of government in the economy. His aim was not only to explain the prosperity of the nation, but also ‘to supply the state or commonwealth with a revenue sufficient for the public services’. 17Like Quesnay, Smith believed the state was necessary. Indeed, he was convinced that national wealth could only be increased through division of labour in ‘a well-governed society’, 18in which he singled out three crucial functions of government: the military, the judiciary and other public services such as provision of infrastructure. 19These are public goods – producers cannot exclude anyone from consuming them. For Smith, such public goods had to be paid for by the state; 20some sort of taxation was therefore necessary.

David Ricardo was perhaps the most anti-government of the classical economists. Although the title of his The Principles of Political Economy and Taxation contains a key activity of government (taxation), he never considered how taxation could allow government spending to encourage production and hence value creation. For Ricardo, taxes are the ‘portion of the produce of land and labour, placed at the disposal of government’ to spend on areas such as education. 21If these expenditures are too high, he writes, the capital of the country is diminished, and ‘distress and ruin will follow’. 22Ricardo never asks, as Smith did, whether some taxes are necessary to help capitalists carry out production. He assumes infrastructure – the judiciary and so on – as a given. In effect, Ricardo narrows the production of economic value strictly to the private sphere. Admiring Ricardo’s rigorous analytical arguments, in comparison with Smith’s more fluid and interdisciplinary philosophical and political approach, economists followed him and excluded government from the productive sector.

Marx’s view of government, meanwhile, derived from his materialist view of history, whereby the organization of society (including government structures) reflects the economic system (which he called the mode of production) and the underlying social relations: the interaction between classes. So, in his view, under the capitalist ‘mode of production’ – based on surplus value generated from exploitation of labour – government and law reflected the needs of capitalists. Marx ridiculed some followers of Smith and Ricardo for haranguing state officials as ‘parasites on the actual producers’, then realizing that they were after all necessary to support the capitalist system. Nevertheless Marx, like Smith before him, while stressing the necessity of some functions of the state, placed state officials in the category of unproductive labourers outside the production boundary. The capitalist class had an interest in maintaining the state in a position strong enough to guarantee the rule of law and advance their class interests – but nothing more than that: ‘The executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie.’ 23The question concerning Marx was what constituted the ‘right’ size of government to provide the necessary services without taking away any additional profits.

While the neoclassical economists broke with the labour theory of value, they did not depart from their predecessors’ view that government was necessary but unproductive. Marginal utility, as we have seen, locates value in the price of any transaction that takes place freely in the market. According to this perspective, government produces nothing: it cannot create value. And government’s main source of income is taxes, which are a transfer of existing value created in the private sector.

The immensely influential Alfred Marshall was quite nuanced in his discussion of economic life in his Principles , but still recommended that economics should avoid ‘as far as possible’ the discussion of matters associated with government. 24He believed that government interference in, or regulation of, the market would often happen in response to attempts by vested interests to rig the market in their favour (i.e. government would be ‘captured’ by such interests) – thus only hurting a particular competitor rather than benefiting society as a whole. 25

KEYNES AND COUNTER-CYCLICAL GOVERNMENT

To the humble citizen, however, it might not be so obvious that government does not create value. We have already seen three ways in which it does so: bailing out the banks; investing in infrastructure, education and basic science; and funding radical, innovative technologies which are transforming our lives.

The crucial point is that many of these activities involve taking risks and investing – exactly what austerity doesn’t do – and in so doing they create value. But that value is not easily visible, for the simple reason that much of it goes into the pockets of the private sector. One man at least partly understood this problem: John Maynard Keynes.

When in 1929 the global economic crisis struck, recovery seemed elusive. The Great Depression shattered the idea of unbounded economic progress because, contrary to the prevailing theoretical consensus, the economy did not recover by itself. Keynes’s explanation for this was a radical departure from the conventional wisdom of the time. 26Markets, he claimed, are inherently unstable and, in a recession, may remain ‘in a chronic condition of sub-normal activity for a considerable period without any marked tendency, either towards recovery or towards complete collapse’. 27In these circumstances, he stressed, the role of government is crucial: it is the ‘spender of last resort’.

Let’s remind ourselves that Keynes was concerned in his General Theory to explain how an economy might find itself in a state of ‘involuntary unemployment’ due to insufficient demand – that is, workers who wanted work would not be able to find it. This, he argued, would produce a low level of GDP, compared to a situation in which the economy would be running at full capacity (and full employment). Neoclassical economic theory is ill suited to explain this situation because it assumes that people choose what they prefer, including how much labour they ‘supply’ to the market at a given price (the wage), and that the market makes sure to sort things out so that everyone gets the maximum utility out of it. In such a view, unemployment becomes voluntary.

Keynes disposed of the assumption that supply creates its own demand. He argued instead that producers’ expectations of demand and consumption determine their investment, and consequently the employment and production that follow from it; 28therefore, low expectations could lead to underemployment. This he called the ‘principle of effective demand’: investment can fall as a result of expectations or bets on the future – and we know, not least from the 2008 financial crisis, that such bets can go horribly wrong.

On the back of this theory, Keynes proposed a new role for government. When the private sector cuts production in times of downbeat expectations about demand, he argued, government could intervene positively, increasing demand through additional spending, which in turn would lead to more positive expectations of future consumption and induce the private sector to invest, with higher GDP as a result.

In Keynes’s macroeconomics, therefore, government creates value in that it allows the economy to produce more goods and services than it would without government involvement . This was a pivotal shift in the way we regard government’s role in the economy. For Keynes, government was in fact essential because it could create value by reviving demand – precisely when demand might be low, as in recessions, or when business confidence is low.