In Lady Windemere's Fan Oscar Wilde has one of his characters define a cynic as someone who 'knows the price of everything and the value of nothing'. This much quoted aphorism provides the title of Mariana Mazzucato's recent book, The Value of Everything: Making and taking in the global economy.
Mazzucato is an academic economist, born in Italy, educated in the USA and currently working at University College, London. Her central concern is, how does value get created in modern economies? In an earlier book, The Entrepreneurial State, she examines the often overlooked role of government in creating valuable and even game-changing innovations. This book repeats some of that, but focuses mainly on the position of the financial industry. Does this industry create value, or simply extract it?
The problem, she says, is that economists, and hence the rest of us, are confused about what value actually is. The classical economists - Adam Smith, David Ricardo, Karl Marx - made a distinction between value creation and rent. Creators of value were those who produced new things or improved existing things. Value extractors were those who used monopolisation of certain resources (like land) to extract income (rent) from the system without creating anything new. This led to the idea of the 'production boundary' - inside the boundary is productive activity, outside is unproductive. Different economists placed the boundary in different places but typically both government and finance were considered 'unproductive'.
Of course, not all 'unproductive' things are therefore bad or unnecessary. For instance, government is essential to provide a framework of law and key infrastructure, a finance industry is needed to provide loans and to facilitate transactions between players. However, if these things are not in themselves productive, there is a strong impetus to keep their costs and their profits to minimum - to not allow them to extract more 'rent' than is necessary.
This discussion was, however, superseded by neo-classical economics which equated value with price. According to this view, anything which people are prepared to pay for has value, anything they do not pay for has no value. Price and value become the same thing, so if you make profit from something, you have added value to the economy. This view pervades modern economics and is the basis, more or less, for how we measure Gross Domestic Product (GDP).
This has two consequences. The first is that government continues to be defined as unproductive, because it doesn't make profits. The second, the main focus of The Value of Everything, is that various financial transactions which add no value to the economy are counted as productive. This means that we continue to view government as a drag on our wellbeing while we have relaxed regulations and allowed the finance 'industry' to grow massively over the past few decades. Does this make us better off? For most, the answer is no.
In some cases, such activity makes us obviously worse off. For instance, retail banks make lots of small housing loans backed by mortgages. They then package up these mortgages by the thousand and on-sell them, raising money to make more loans and raking off a handy profit. In 2007, when many of these mortgages were shown to be overvalued, the problem was not confined to the original lenders but rippled through the global financial system, sending it into meltdown. We have still not recovered from the effects.
Other cases are less well known but just as damaging. For instance the share market was originally designed to allow people to invest in particular companies, giving the company access to capital and the investor a chance to share in the profits. However, shares are now traded with increasing frequency and seen as commodities in themselves, divorced from the value of the companies they represent. Corporate strategies increasingly revolve around boosting share value in the short term, rather than boosting company value on the longer term. This means, for instance, that company executives will invest surplus money in share buy-backs rather than new projects, increasing the value of shares (and hence the incomes of the senior managers who are paid partly in shares and share options) but not the overall value of the company. Even worse, private equity companies will buy whole companies, temporarily boost their profits and share price by drastically cutting costs and firing staff, then sell at a profit, leaving the company in tatters.
All this is, of course, value extraction, not value creation. It makes certain executives and big shareholders rich but suppresses wages and leads to greater unemployment. As a result income inequality has grown steadily in rich countries since the 1970s. It also leaves 'unproductive' government to pick up the tab when things go wrong - for instance in the GFC governments shelled out to rescue big banks (even those that had broken the law) and spent large sums on economic stimulus packages to stave off depression. Ironically the resulting deficits are now seen as problematic and many of the worst-effected countries are now being pressured by bodies like the International Monetary Fund and the Bank of Europe to cut their spending to reduce deficits. This strategy cuts services to the most disadvantaged in society and at the same time deepens the countries' economic woes.
Which leads neatly to the other process of value extraction - private appropriation of the profits of public investment. A classic example is in pharmaceuticals, where the most important research is funded by government and carried out by public institutions but private companies use the results to develop specific drugs which they then patent and sell (often to the public health system) for exorbitant prices. Government doesn't share in the profit from its investment, and pays over the odds for the resulting product. Similarly with the current tech boom. The key aspects of this technology - the internet, GPS technology and the touch screen - were all developed by public entities. Yet the profits from their use go exclusively to private entrepreneurs like Apple, Facebook and Uber.
The analysis is fascinating, but like so many books of this type, I was left wanting more. For a start, what should we do about it? She talks briefly about solutions - rethinking financial regulation and taxation, reshaping intellectual property law, rejigging how we measure economic outputs and reappropriating the positive view of government advocated by Keynes and his followers after World War 2. Interesting ideas, but barely developed, at least in this book.
It also left me dissatisfied at a more fundamental level. Her critique of financial extraction and her defence of government as a positive contributor made a lot of sense. Yet despite her diagnosis that the problem lies in our definition of value, I couldn't really get a sense of what she thinks 'value' actually is. It seems tempting to revert to considering it in terms of 'making things' - food, houses, technology, etc. This is of course essential, as the many people around the world who are hungry or homeless will testify. Yet once these needs are satisfied, so much of what we value is ephemeral and unquantifiable. Good family and friend relationships, peaceful communities, enjoyment of beauty in nature and culture, the chance to express ourselves and learn new things. It's almost as if we should give up trying to rejig the economy and get on with something more useful.
Bill Clinton apparently had a sign on his desk which said, 'It's the economy, stupid'. It was meant to bring him back on track when he strayed off into less essential issues. Maybe those signs should be binned and replaced with signs which say 'it's humans, stupid'.
Mazzucato is an academic economist, born in Italy, educated in the USA and currently working at University College, London. Her central concern is, how does value get created in modern economies? In an earlier book, The Entrepreneurial State, she examines the often overlooked role of government in creating valuable and even game-changing innovations. This book repeats some of that, but focuses mainly on the position of the financial industry. Does this industry create value, or simply extract it?The problem, she says, is that economists, and hence the rest of us, are confused about what value actually is. The classical economists - Adam Smith, David Ricardo, Karl Marx - made a distinction between value creation and rent. Creators of value were those who produced new things or improved existing things. Value extractors were those who used monopolisation of certain resources (like land) to extract income (rent) from the system without creating anything new. This led to the idea of the 'production boundary' - inside the boundary is productive activity, outside is unproductive. Different economists placed the boundary in different places but typically both government and finance were considered 'unproductive'.
Of course, not all 'unproductive' things are therefore bad or unnecessary. For instance, government is essential to provide a framework of law and key infrastructure, a finance industry is needed to provide loans and to facilitate transactions between players. However, if these things are not in themselves productive, there is a strong impetus to keep their costs and their profits to minimum - to not allow them to extract more 'rent' than is necessary.
This discussion was, however, superseded by neo-classical economics which equated value with price. According to this view, anything which people are prepared to pay for has value, anything they do not pay for has no value. Price and value become the same thing, so if you make profit from something, you have added value to the economy. This view pervades modern economics and is the basis, more or less, for how we measure Gross Domestic Product (GDP).
This has two consequences. The first is that government continues to be defined as unproductive, because it doesn't make profits. The second, the main focus of The Value of Everything, is that various financial transactions which add no value to the economy are counted as productive. This means that we continue to view government as a drag on our wellbeing while we have relaxed regulations and allowed the finance 'industry' to grow massively over the past few decades. Does this make us better off? For most, the answer is no.
In some cases, such activity makes us obviously worse off. For instance, retail banks make lots of small housing loans backed by mortgages. They then package up these mortgages by the thousand and on-sell them, raising money to make more loans and raking off a handy profit. In 2007, when many of these mortgages were shown to be overvalued, the problem was not confined to the original lenders but rippled through the global financial system, sending it into meltdown. We have still not recovered from the effects.
Other cases are less well known but just as damaging. For instance the share market was originally designed to allow people to invest in particular companies, giving the company access to capital and the investor a chance to share in the profits. However, shares are now traded with increasing frequency and seen as commodities in themselves, divorced from the value of the companies they represent. Corporate strategies increasingly revolve around boosting share value in the short term, rather than boosting company value on the longer term. This means, for instance, that company executives will invest surplus money in share buy-backs rather than new projects, increasing the value of shares (and hence the incomes of the senior managers who are paid partly in shares and share options) but not the overall value of the company. Even worse, private equity companies will buy whole companies, temporarily boost their profits and share price by drastically cutting costs and firing staff, then sell at a profit, leaving the company in tatters.
All this is, of course, value extraction, not value creation. It makes certain executives and big shareholders rich but suppresses wages and leads to greater unemployment. As a result income inequality has grown steadily in rich countries since the 1970s. It also leaves 'unproductive' government to pick up the tab when things go wrong - for instance in the GFC governments shelled out to rescue big banks (even those that had broken the law) and spent large sums on economic stimulus packages to stave off depression. Ironically the resulting deficits are now seen as problematic and many of the worst-effected countries are now being pressured by bodies like the International Monetary Fund and the Bank of Europe to cut their spending to reduce deficits. This strategy cuts services to the most disadvantaged in society and at the same time deepens the countries' economic woes.
Which leads neatly to the other process of value extraction - private appropriation of the profits of public investment. A classic example is in pharmaceuticals, where the most important research is funded by government and carried out by public institutions but private companies use the results to develop specific drugs which they then patent and sell (often to the public health system) for exorbitant prices. Government doesn't share in the profit from its investment, and pays over the odds for the resulting product. Similarly with the current tech boom. The key aspects of this technology - the internet, GPS technology and the touch screen - were all developed by public entities. Yet the profits from their use go exclusively to private entrepreneurs like Apple, Facebook and Uber.
The analysis is fascinating, but like so many books of this type, I was left wanting more. For a start, what should we do about it? She talks briefly about solutions - rethinking financial regulation and taxation, reshaping intellectual property law, rejigging how we measure economic outputs and reappropriating the positive view of government advocated by Keynes and his followers after World War 2. Interesting ideas, but barely developed, at least in this book.
It also left me dissatisfied at a more fundamental level. Her critique of financial extraction and her defence of government as a positive contributor made a lot of sense. Yet despite her diagnosis that the problem lies in our definition of value, I couldn't really get a sense of what she thinks 'value' actually is. It seems tempting to revert to considering it in terms of 'making things' - food, houses, technology, etc. This is of course essential, as the many people around the world who are hungry or homeless will testify. Yet once these needs are satisfied, so much of what we value is ephemeral and unquantifiable. Good family and friend relationships, peaceful communities, enjoyment of beauty in nature and culture, the chance to express ourselves and learn new things. It's almost as if we should give up trying to rejig the economy and get on with something more useful.
Bill Clinton apparently had a sign on his desk which said, 'It's the economy, stupid'. It was meant to bring him back on track when he strayed off into less essential issues. Maybe those signs should be binned and replaced with signs which say 'it's humans, stupid'.
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