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

Scholars and politicians of the time who argued that accumulating precious metals was the route to national power and prosperity are called mercantilists (from mercator , the Latin word for merchant), because they espoused protectionist trade policies and positive trade balances to stimulate the inflow, and prevent the outflow, of gold and silver. The best-known English advocate of mercantilism was a merchant and director of the East India Company called Sir Thomas Mun (1571–1641). In his influential book England’s Treasure by Forraign Trade , Mun summed up the mercantilist doctrine: we must, he said, ‘sell more to strangers yearly than wee consume of theirs in value’. 4

Mercantilists also defended the growth of national government as necessary to fund wars and expeditions to keep trade routes open and to control colonial markets. In England, Holland and France, mercantilists advocated shipping Acts, such as England’s Navigation Act of 1651, which forced their countries’ and colonies’ trade exclusively into ships flying the national flag.

As mercantilist thinking developed, and people started to conceive of wealth production in national terms, the first estimates of national income – the total amount everyone in the country earned – started to appear. Seventeenth-century Britain saw two groundbreaking attempts to quantify national income. One was by Sir William Petty (1623–87), an adventurer, anatomist, physician and Member of Parliament, who was a tax administrator in Ireland under Oliver Cromwell’s Commonwealth government. 5The other was by the herald Gregory King (1648–1712), a genealogist, engraver and statistician whose work on enacting a new tax on marriages, births and burials provoked his interest in national accounting.

Petty and King were ingenious in their use of incomplete and messy data to generate surprisingly detailed income estimates. They had to work with rudimentary government tax figures, estimates of population and patchy statistics on the consumption of basic commodities such as corn, wheat and beer. What their estimates lacked, however, was a clear value theory: Petty and King were concerned only with calculating the nation’s output, not with how that output came about. Nevertheless, their attempts at national accounting were unprecedented and laid the foundations for modern national accounts.

In the 1660s, as Petty worked on his income studies, England was emerging from its experiment with republicanism, and was struggling with Holland and France for supremacy at sea. Petty wanted to find out whether England had the resources to survive these threats to its security: as he put it, to ‘prove mathematically that the [English] State could raise a much larger revenue from taxes to finance its peace and wartime needs’, 6because he believed the country was richer than commonly thought.

Petty made a decisive breakthrough. He realized that income and expenditure at the national level should be the same. He understood that, if you treat a country as a closed system, each pound one person spends in it is another person’s income of one pound. It was the first time anyone had grasped and worked with this fundamental insight. To make up for the lack of available statistics, Petty worked on the assumption that a nation’s income is equal to its expenditure (omitting savings in good times, although he was aware of the potential discrepancy). 7That meant he could use expenditure per person, multiplied by population, to arrive at the nation’s income. In so doing he started, implicitly, to impose a production boundary, including within it only money spent on the production of ‘Food, Housing, Cloaths, and all other necessaries’. 8All other ‘unnecessary expenses’, as defined by Petty, were omitted.

In this way, by extension, Petty came to see any branch of the economy that did not produce those necessities as unproductive, adding nothing to national income. As he worked, his idea of the production boundary began to crystallize further, with ‘Husbandmen, Seamen, Soldiers, Artizans and Merchants … the very Pillars of any Common-Wealth’ on one side; and ‘all the other great Professions’ which ‘do rise out of the infirmities and miscarriages of these’ on the other. 9By ‘great professions’ Petty meant lawyers, clergymen, civil servants, lords and the like. In other words, for Petty some ‘great professions’ were merely a necessary evil – needed simply for facilitating production and for maintaining the status quo – but not really essential to production or exchange. Although Petty did not believe that policy should be focused on controlling imports and exports, the mercantilists influenced him heavily. ‘Merchandise’, he argued, was more productive than manufacture and husbandry; the Dutch, he noted approvingly, outsourced their husbandry to Poland and Denmark, enabling them to focus on more productive ‘Trades and curious Arts’. 10England, he concluded, would also benefit if more husbandmen became merchants. 11

In the late 1690s, after the first publication of Petty’s work Political Arithmetick , Gregory King made more detailed estimates of England’s income. Like Petty, King was concerned with England’s war-making potential and compared the country’s income with those of France and Holland. Drawing on a wide variety of sources, he meticulously calculated the income and expenditure of some twenty different occupation groups in the country, from the aristocracy to lawyers, merchants to paupers. He even made forecasts, for example of population, predating the arrival of the forecasting ‘science’ some 250 years later, and estimated the crop yield of important agricultural items.

As in Petty’s work, an implicit production boundary began to emerge when King assessed productivity, which he defined as income being greater than expenditure. King thought merchant traders were the most productive group, their income being a quarter more than their expenditure, followed by the ‘temporal and spiritual lords’, then by a variety of prestigious professions. On the boundary were farmers, who earned almost no more than they spent. Firmly on the ‘unproductive’ side were seamen, labourers, servants, cottagers, paupers and ‘common soldiers’. 12In King’s view, the unproductive masses, representing slightly more than half the total population, were leeches on the public wealth because they consumed more than they produced.

Figure 2 shows that there were discrepancies between the ‘productive’ professions Petty and King identified. Almost all the professions Petty deemed unproductive King later saw as productive, while several of those producing value for Petty – seamen, soldiers and unskilled labourers – did not make the cut in King’s analysis. Their different views may have stemmed from their backgrounds. A man of humble origins and republican instincts, Petty started out serving Oliver Cromwell; moving in aristocratic and court circles, King was perhaps less inclined to think that Petty’s ‘great professions’ were unproductive. Both, however, classed ‘vagrants’ as unproductive, an analysis that has parallels today with people receiving welfare from governments financed by taxes on the productive sectors.

Some of Petty’s and King’s ideas have proved remarkably durable. 13Perhaps most importantly, in what they both called ‘Political Arithmetick’ they laid the basis for what we today call the ‘national accounts’ to calculate GDP, the compass by which countries attempt to steer their national economic ships.

Figure 2.The production boundary in the 1600s

Mercantilist ideas still resonate in current economic practices. Modern ‘management’ of exchange rates by governments, trying to steal a competitive advantage for exports and accumulate foreign exchange reserves, harks back to mercantilist notions of boosting exports to accumulate gold and silver. Tariffs, import quotas and other measures to control trade and support domestic enterprises are also reminiscent of these early ideas about how value is created. There is basically nothing new in the calls to protect Western steel producers from Chinese imports or to subsidize domestic low-carbon energy generation to substitute for imports of oil, gas and coal. The emphasis by populist politicians on the negative effect of free trade, and the need to put up different types of walls to prevent the free movement of goods and labour, also gestures back to the mercantilist era, with emphasis more on getting the prices right (including exchange rates and wages) than on making the investments needed to create long-run growth and higher per capita income.