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

Today, these ways of thinking could significantly benefit many crucial institutions which are neither fully private nor fully public. Universities could proudly promote the pursuit of knowledge, without having to worry about generating immediately profitable patents and spin-off companies. Medical research institutes could expect strong funding, with much less pressure to fight for attention. Think tanks could shake off the taint of lobbying, once they present their work as being supportive of common values. And co-operative, mutual and other not-for-profit enterprises could flourish without having to decide which side of the great private–public divide they are really on.

In the new discourse, there would certainly be no more talk of the public sector interfering with or rescuing the private sector. Instead, it would be widely accepted that the two sectors, and all the institutions in between, nourish and reinforce each other in pursuit of the common goal of economic value creation. The sectors’ interactions would be less marked by hostility, and more infused with mutual respect.

Once the story telling about value creation is corrected, changes can embolden private institutions as well as their public partners. The private sector can be transformed by the simple but profound expedient of replacing shareholder value with stakeholder value. This idea has been around for decades, most countries continue to have companies run by shareholder value focused on maximizing quarterly returns. Stakeholder value recognizes that corporations are not really the exclusive private property of one group of providers of profit-sharing financial capital. As social entities, companies must take into account the good of employees, customers and suppliers. They benefit from the shared intellectual and cultural heritage of the societies in which they are embedded and from their governments’ provision of the rule of law, not to mention the state-funded training of educated workers and valuable research; they should in return deliver benefit to all these constituencies. Of course, there is no easy way to agree on the right balance, but a lively discussion is far preferable to the current practice of maximizing profits for shareholders. Indeed, the presence of co-operatives run on a stakeholder understanding of value creation, such as John Lewis in the UK or Mondragon in Spain, should serve as evidence that there is more than one way to govern a business. And governments that want to achieve innovation-led growth should ask themselves whether employees are more likely to share great ideas in businesses in which they are valued, or in ones where they are simply appendages to a profit-making machine that is then siphoned off to a few shareholders.

This is no easy task, but one that will not even begin without a new positioning of all actors as being central to the collective value creation process.

In sum, it is only by thinking big and differently that government can create value – and hope.

9

The Economics of Hope

The global financial crisis, which began in 2008 and whose repercussions will continue to echo round the world for years to come, has triggered myriad criticisms of the modern capitalist system: it is too ‘speculative’; it rewards ‘rent-seekers’ over true ‘wealth creators’; and it has permitted the rampant growth of finance, allowing speculative exchanges of financial assets to be compensated more than investments that lead to new physical assets and job creation. Debates about unsustainable growth have become louder, with concerns not only about the rate of growth but also its direction .

Recipes for serious reforms of this ‘dysfunctional’ system include making the financial sector more focused on long-run investments; changing the governance structures of corporations so they are less focussed on their share prices and quarterly returns; taxing quick speculative trades more heavily; legally and curbing the excesses of executive pay.

In this book, I have argued that such critiques are important but will remain powerless – in their ability to bring about real reform of the economic system – until they become firmly grounded in a discussion about the processes by which economic value is created. It is not enough to argue for less value extraction and more value creation. First, ‘value’, a term that once lay at the heart of economic thinking, must be revived and better understood.

Value has gone from being a category at the core of economic theory, tied to the dynamics of production (the division of labour, changing costs of production), to a subjective category tied to the ‘preferences’ of economic agents. Many ills, such as stagnant real wages, are interpreted in terms of the ‘choices’ that particular agents in the system make, for example unemployment is seen as related to the choice that workers make between working and leisure. And entrepreneurship – the praised motor of capitalism – is seen as a result of such individualized choices rather than of the productive system surrounding entrepreneurs – or, to put it another way, the fruit of a collective effort. At the same time, price has become the indicator of value: as long as a good is bought and sold in the market, it must have value. So rather than a theory of value determining price, it is the theory of price that determines value.

Along with this fundamental shift in the idea of value, a different narrative has taken hold. Focused on wealth creators, risk taking and entrepreneurship, this narrative has seeped into political and public discourse. It is now so rampant that even ‘progressives’ critiquing the system sometimes unintentionally espouse it. When the UK Labour Party lost the 2015 election, leaders of the party claimed they had lost because they had not embraced the ‘wealth creators’. 1And who did they think the wealth creators were? Businesses and the entrepreneurs leading them. Feeding the idea that value is created in the private sector and redistributed by the public sector. But how can a party that has the word ‘labour’ in its title not see workers and the state as equally vital parts of the wealth creation process?

Such assumptions about the generation of wealth have become entrenched, and have gone unchallenged. As a result, those who claim to be wealth creators have monopolised the attention of governments with the now well-worn mantra of: give us less tax, less regulation, less state and more market.

By losing our ability to recognize the difference between value creation and value extraction, we have made it easier for some to call themselves value creators and in the process extract value. Understanding how the stories about value creation are around us everywhere – even though the category itself is not – is a key concern of the book, and essential for the future viability of capitalism.

To offer real change we must go beyond fixing isolated problems, and develop a framework that allows us to shape a new type of economy: one that will work for the common good. The change has to be profound. It is not enough to redefine GDP to encompass quality-of-life indicators, including measures of happiness, 2the imputed value of unpaid ‘caring’ labour and free information, education and communication via the Internet. 3It is also not enough to tax wealth. While such measures are important in themselves, they do not address the greatest challenge: defining and measuring the collective contribution to wealth creation, so that value extraction is less able to pass for value creation. As we have seen, the idea that price determines value and that markets are best at determining prices has all sorts of nefarious consequences. To sum up, four stand out.

First, this narrative emboldens value extractors in finance and other sectors of the economy. Here, the crucial questions – which kinds of activities add value to the economy and which simply extract value for the sellers – are never asked. In the current way of thinking, financial trading, rapacious lending, funding property price bubbles are all value-added by definition, because price determines value: if there is a deal to be done, then there is value. By the same token, if a pharma company can sell a drug at a hundred or a thousand times more than it costs to produce, there is no problem: the market has determined the value. The same goes for chief executives who earn 340 times more than the average worker (the actual ratio in 2015 for companies in the S&P 500). 4The market has decided the value of their services – there is nothing more to be said. Economists are aware that some markets are not fair, for example when Google has something close to a monopoly on search advertising; but they are too often enthralled by the narrative of market efficiency to worry whether the gains are actually justly earned profits, or merely rents. Indeed, the distinction between profits and rents is not made.