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

Mariana Mazzucato

THE VALUE OF EVERYTHING Making and Taking in the Global Economy

Contents

Preface: Stories About Wealth Creation

Introduction: Making versus Taking

Common Critiques of Value Extraction

What is Value?

Meet the Production Boundary

Why Value Theory Matters

The Structure of the Book

1. A Brief History of Value

The Mercantilists: Trade and Treasure

The Physiocrats: The Answer Lies in the Soil

Classical Economics: Value in Labour

2. Value in the Eye of the Beholder: The Rise of the Marginalists

New Times, New Theory

The Eclipse of the Classicals

From Objective to Subjective: A New Theory of Value Based on Preferences

The Rise of the ‘Neoclassicals’

The Disappearance of Rent and Why it Matters

3. Measuring the Wealth of Nations

GDP: A Social Convention

The System of National Accounts Comes into Being

Measuring Government Value Added in GDP

Something Odd About the National Accounts: GDP Facit Saltus!

Patching Up the National Accounts isn’t Enough

4. Finance: A Colossus is Born

Banks and Financial Markets Become Allies

The Banking Problem

Deregulation and the Seeds of the Crash

The Lords of (Money) Creation

Finance and the ‘Real’ Economy

From Claims on Profit to Claims on Claims

A Debt in the Family

5. The Rise of Casino Capitalism

Prometheus (with a Pilot’s Licence) Unbound

New Actors in the Economy

How Finance Extracts Value

6. Financialization of the Real Economy

The Buy-back Blowback

Maximizing Shareholder Value

The Retreat of ‘Patient’ Capital

Short-Termism and Unproductive Investment

Financialization and Inequality

From Maximizing Shareholder Value to Stakeholder Value

7. Extracting Value through the Innovation Economy

Stories about Value Creation

Where Does Innovation Come From?

Financing Innovation

Patented Value Extraction

Unproductive Entrepreneurship

Pricing Pharmaceuticals

Network Effects and First-mover Advantages

Creating and Extracting Digital Value

Sharing Risks and Rewards

8. Undervaluing the Public Sector

The Myths of Austerity

Government Value in the History of Economic Thought

Keynes and Counter-cyclical Government

Government in the National Accounts

Public Choice Theory: Rationalizing Privatization and Outsourcing

Regaining Confidence and Setting Missions

Public and Private Just Deserts

From Public Goods to Public Value

9. The Economics of Hope

Markets as Outcomes

Take the Economy on a Mission

A Better Future for All

Notes

Bibliography

Acknowledgements

Follow Penguin

For Leon, Micol, Luce and Sofia

Preface: Stories About Wealth Creation

We often hear businesses, entrepreneurs or sectors talking about themselves as ‘wealth-creating’. The contexts may differ – finance, big pharma or small start-ups – but the self-descriptions are similar: I am a particularly productive member of the economy, my activities create wealth, I take big ‘risks’, and so I deserve a higher income than people who simply benefit from the spillovers of this activity. But what if, in the end, these descriptions are simply just stories? Narratives created in order to justify inequalities of wealth and income, massively rewarding the few who are able to convince governments and society that they deserve high rewards, while the rest of us make do with the leftovers.

In 2009 Lloyd Blankfein, CEO of Goldman Sachs, claimed that ‘The people of Goldman Sachs are among the most productive in the world.’ 1Yet, just the year before, Goldman had been a major contributor to the worst financial and economic crisis since the 1930s. US taxpayers had to stump up $125 billion to bail it out. In light of the terrible performance of the investment bank just a year before, such a bullish statement by the CEO was extraordinary. The bank laid off 3,000 employees between November 2007 and December 2009, and profits plunged. 2The bank and some its competitors were fined, although the amounts seemed small relative to later profits: fines of $550 million for Goldman and $297 million for J. P. Morgan, for example. 3Despite everything, Goldman – along with other banks and hedge funds – proceeded to bet against the very instruments which they had created and which had led to such turmoil.

Although there was much talk about punishing those banks that had contributed to the crisis, no banker was jailed, and the changes hardly dented the banks’ ability to continue making money from speculation: between 2009 and 2016 Goldman achieved net earnings of $63 billion on net revenues of $250 billion. 4In 2009 alone they had record earnings of $13.4 billion. 5And although the US government saved the banking system with taxpayers’ money, the government did not have the confidence to demand a fee from the banks for such high-risk activity. It was simply happy, in the end, to get its money back.

Financial crises, of course, are not new. Yet Blankfein’s exuberant confidence in his bank would have been less common half a century ago. Until the 1960s, finance was not widely considered a ‘productive’ part of the economy. It was viewed as important for transferring existing wealth, not creating new wealth. Indeed, economists were so convinced about the purely facilitating role of finance that they did not even include most of the services that banks performed, such as taking in deposits and giving out loans, in their calculations of how many goods and services are produced by the economy. Finance sneaked into their measurements of Gross Domestic Product (GDP) only as an ‘intermediate input’ – a service contributing to the functioning of other industries that were the real value creators.

In around 1970, however, things started to change. The national accounts – which provide a statistical picture of the size, composition and direction of an economy – began to include the financial sector in their calculations of GDP, the total value of the goods and services produced by the economy in question. 6This change in accounting coincided with the deregulation of the financial sector which, among other things, relaxed controls on how much banks could lend, the interest rates they could charge and the products they could sell. Together, these changes fundamentally altered how the financial sector behaved, and increased its influence on the ‘real’ economy. No longer was finance seen as a staid career. Instead, it became a fast track for smart people to make a great deal of money. Indeed, after the Berlin Wall fell in 1989, some of the cleverest scientists in Eastern Europe ended up going to work for Wall Street. The industry expanded, grew more confident. It openly lobbied to advance its interests, claiming that finance was critical for wealth creation.

Today the issue is not just the size of the financial sector, and how it has outpaced the growth of the non-financial economy (e.g. industry), but its effect on the behaviour of the rest of the economy, large parts of which have been ‘financialized’. Financial operations and the mentality they breed pervade industry, as can be seen when managers choose to spend a greater proportion of profits on share buy-backs – which in turn boost stock prices, stock options and the pay of top executives – than on investing in the long-term future of the business. They call it value creation but, as in the financial sector itself, the reality is often the opposite: value extraction.

These stories of value creation are not limited to finance. In 2014 the pharmaceutical giant Gilead priced its new treatment for the life-threatening hepatitis C virus, Harvoni, at $94,500 for a three-month course. Gilead justified charging this price by insisting that it represented ‘value’ to health systems. John LaMattina, former President of R&D at the drugs company Pfizer, argued that the high price of speciality drugs is justified by how beneficial they are for patients and for society in general. In practice, this means relating the price of a drug to the costs that the disease would cause to society if not treated, or if treated with the second-best therapy available. The industry calls this ‘value-based pricing’. It’s an argument refuted by critics, who cite case studies that show no correlation between the price of cancer drugs and the benefits they provide. 7One interactive calculator ( www.drugabacus.org), which enables you to establish the ‘correct’ price of a cancer drug on the basis of its valuable characteristics (the increase in life expectancy it provides to patients, its side effects, and so on), shows that for most drugs this value-based price is lower than the current market price. 8