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

THE STRUCTURE OF THE BOOK

In Chapters 1 and 2 I look at how economists from the seventeenth century onwards have thought about steering growth by increasing productive activities and reducing unproductive ones, something they conceptualized by means of a theoretical production boundary. The production boundary debate, and its close relationship to ideas of value, has influenced government measures of economic growth for centuries; the boundary, too, has changed, influenced by fluctuating social, economic and political conditions. Chapter 2 delves into the biggest shift of all. From the second half of the nineteenth century onwards, value went from being an objective category to a more subjective one tied to individual preferences. The implications of this revolution were seismic. The production boundary itself was blurred, because almost anything that could get a price or could successfully claim to create value – for example, finance – suddenly became productive. This opened the way to increased inequality, driven by particular agents in the economy being able to brag about their extraordinary ‘productivity’.

As we will see in Chapter 3, which explores the development of national accounts, the idea of the production boundary continues to influence the concept of output. There is, however, a fundamental distinction between this new boundary and its predecessors. Today, decisions about what constitutes value in the national accounts are made by blending different elements: anything that can be priced and exchanged legally; politically pragmatic decisions, such as accommodating technological change in the computer industry or the embarrassingly large size of the financial sector; and the practical necessity of keeping the accounting manageable in very big and complex modern economies. This is all very well, but the fact that the production boundary debate is no longer explicit, nor linked openly to ideas about value, means that economic actors can – through sustained lobbying – quietly place themselves within the boundary. Their value-extracting activities are then counted in GDP – and very few notice.

Chapters 4, 5 and 6 examine the phenomenon of financialization: the growth of the financial sector and the spread of financial practices and attitudes into the real economy. In Chapter 4 I look at the emergence of finance as a major economic sector and its transition from being considered largely unproductive to becoming accepted as largely productive. As late as the 1960s, national accountants viewed financial activity not as generating value but as simply transferring existing value, which placed it outside the production boundary. Today, this view has changed fundamentally. In its current incarnation, finance is seen as earning profits from services reclassified as productive. I look at how and why this extraordinary redefinition took place, and ask if financial intermediation really has undergone a transformation into an inherently productive activity.

In Chapter 5 I explore the development of ‘asset manager capitalism’: how the financial sector expanded beyond the banks to incorporate an increasingly large number of intermediaries dedicated to managing funds (the asset management industry), and ask whether the role of these intermediaries, and the actual risks they take on, justify the rewards they earn. In doing so, I question the extent to which fund management and private equity have actually contributed to the productive economy. I ask, too, whether financial reform can be tackled today without a serious debate over whether activities in the financial sector are properly classified – are they what should be seen as rents, rather than profits? – and how we can go about making this distinction. If our national accounting systems are really rewarding value extraction as though it is value creation, maybe this can help us understand the dynamics of value destruction that characterized the financial crisis.

Building on this acceptance of finance as a productive activity, Chapter 6 examines the financialization of the whole economy. In seeking a quick return, short-term finance has affected industry: companies are run in the name of maximizing shareholder value (MSV). MSV arose in the 1970s as an attempt to revitalize corporate performance by invoking what was claimed to be the main purpose of the company: creating value for shareholders. I will argue, however, that MSV has been detrimental to sustained economic growth, not least because it encourages short-term gain for shareholders at the expense of long-term gains for the company – a development closely linked to the increasing influence of fund managers seeking returns for their clients and for themselves. Underlying MSV is the notion of shareholders as the biggest risk takers, meriting the large rewards they often obtain.

Risk-taking is often the justification for the rewards investors reap, and Chapter 7 continues to look at other types of value extraction carried out in its name. Here I consider the kind of risk-taking required for radical technological innovation to occur. Innovation is without doubt one of the most risky and uncertain activities in capitalism: most attempts fail. But who takes it on? And what sort of incentives must be created? I explore the biased view of the current innovation narrative: how public-sector risk-taking is ignored, the state being seen as merely facilitating and ‘de-risking’ the private sector. The result has been policies, including reforms to the intellectual property rights (IPR) system, which have strengthened the power of incumbents, limiting innovation and creating ‘unproductive entrepreneurship’. 20Building on my previous book The Entrepreneurial State , I will show how entrepreneurs and venture capitalists have been hyped up to represent the most dynamic part of modern capitalism – innovation – and have presented themselves as ‘wealth creators’. I will unpick the wealth-creating narrative to show how, ultimately, it is false. Claiming value in innovation, most recently with the concept of ‘platforms’ and the related notion of the sharing economy, is less about genuine innovation and more to do with facilitating value extraction through the capture of rents.

Picking up on the false innovation narrative, Chapter 8 will ask why the public sector is always described as slow, boring, bureaucratic and unproductive. Where did this depiction come from and who is benefiting from it? I will argue that, in the same way and at the same time that finance was made productive, the public sector has been made to appear unproductive. Modern economic thought has relegated government to just fixing market failures rather than actively creating and shaping markets. The value-creating role of the public sector, I contend, has been underestimated. The dominant view, which originated in the backlash against government in the 1980s, fundamentally affects how government sees itself: hesitant, cautious, careful not to overstep in case it should be accused of crowding out innovation, or accused of favouritism, ‘picking winners’. In questioning why public-sector activities are ignored in GDP accounting, I ask why this should matter, and outline what a different view of public value might look like.

It is, I conclude in Chapter 9, only through an open debate about value – its sources and the conditions that foster it – that we can help steer our economies in a direction that will produce more genuine innovation and less inequality, and which will also transform the financial sector into one that is truly focused on nurturing value creation in the real economy. It is not enough to critique speculation and short-term value extraction, and to argue for a more progressive tax system that targets wealth. We must ground those critiques in a different conversation about value creation, otherwise programmes for reform will continue to have little effect and will be easily lobbied against by the so-called ‘wealth creators’.