Redefining value creation, setting a new economic agenda
Review of The Value of Everything - Making and Taking in the Global Economy by Mariana Mazzucato
Economics is a far more fluid field than most of us imagine. Not only does Prof. Mazzucato’s book provide an analysis and evaluation of economic theory within historical context, but it goes to the heart of one of its most important debates: how should we judge value creation? What activities should be promoted? What requires more regulation? What role should government fill? What should the private sector do?
Mazzucato’s principal idea is that "value creation" is distinct from "value extraction" in the overall economy. The value creators, she argues, are investing in the long term, backed by a vision for society. They also acknowledge the importance of maintaining the public sector, perhaps even sharing their profits with government, and using it for ambition societal ends. Because there are no objective measures of right and wrong – that is, only goals and policies to negotiate – they are willing to set priorities with openly political criteria.
In contrast, value takers seek "rents", either to benefit from monopoly advantages, or prop up stock values in the short term (or create financial gimmicks in their favor). They demand weak regulation and minimal government. They (the 1%) extract value at the direct expense of all others (the 99%). Finally, they tend to under-invest in productive undertakings or public programs that hold the greatest potential for the future.
The historical sections treat the stages of economic theory, which she uses to sketch out the logic behind her arguments. It is a brilliant guide to understanding current economic debates. First, there were the classical economists. They were called “political economists” because they addressed the problem of who were unproductive collectors of “rent”. Adam Smith condemned aristocratic landowners as benefiting from a monopolistic advantage, praising instead individuals and labor as the authentic adders of value. Ricardo extended this reasoning to “entrepreneurs”, but regarded government as an unproductive “leech”, a net destroyer of value; he wrote during the crucial time when manufacturing industries were gaining economic precedence over farming. For his part, Marx focused on labor and class issues, whereby the proletariat – the real creators of value, in his view – were exploited by capitalists and merchants that monopolized the incredible new surpluses of the urban industrial economy. What they all had in common was a concern for how wealth was both how wealth was created by investment and how it was distributed.
Second were the “marginalists”, who imposed a more rigorous mathematical conception on economics as a “science”. They did so by measuring the “utility” and self-interest of the individual, in technical terms the price one was willing to pay for the next unit of production. As this marginal utility represented individual preference, they could then be “aggregated” (or added up) to gain a statistical picture of the entire economy; this aggregation is roughly what the Gross Domestic Product, or GDP, came to embody. In addition, at the point when individuals no longer wished to buy another increment, the market should achieve its “optimum equilibrium”, a kind of sweet spot at which the entire economy was operating as it should. To be honest, though these notions are taken from physics, I always found the talk of equilibrium rather nebulous.
The marginalists’ policy implications included: 1) the equilibrium was self-generating; 2) government was not just unnecessary, but deleterious in that it hindered this optimum equilibrium from emerging; 3) there was no difference between the productivity of outputs (labor, goods, finance, etc.), hence the question of “rents” could be ignored as an useless concept; 4) all unemployment was voluntary – all that workers needed to do was accept jobs at the price offered for things to get going again after an economic crisis. Supply created its own demand.
This reasoning was based on two assumptions: first that all humans made rational decisions with perfect information, i.e., they calculated the marginal utility of their every decision; second that competition in this case was “perfect” and not “monopolistic”. The only need for government to intervene was to correct “market failures”; undesirable byproducts, like pollution or deforestation, were “externalities” that could normally be borne at public expense or taxed to provide “disincentives” to their further production. All of this, Mazzucato argues, lacks a coherent theory of value: anything that added expenditure could be counted as productive and appear in the GDP. To put it mildly, this was not only Panglossian but nakedly self-serving to the capitalist class and their apologists in government.
Third, there was the Keynesian revolution: he advocated for a government role to generate demand (that is, spend money on projects) in order to stimulate investment by business, reigniting production and thereby increasing employment. His reasoning – for the deficit-led economic recovery – went like this: businesses based their investments on their expectations of demand, i.e. if they expected consumers to spend, they would invest to increase supply, so all government had to do was spend more. Government, in his view, should not intervene where the private sector operates, but where no one is doing anything or at least, not doing enough.
Mazzucato spends the majority of the book applying and extending these notions. In a nutshell, she argues that modern capitalism should be seen as having developed into a semi-unproductive global economy, in which the financial sector, high tech, and even traditional manufacturing corporations are shifting to rent-seeking techniques that extract rather than create value. I agree virtually without caveat. Her criticisms – of financialization of the economy, IPOs, intellectual property and a myriad of other subjects – are essential reading, though it requires serious discipline to get through it.
The remedies she offers are as necessary as they are politically challenging to implement, let alone convince neo-liberals of their validity. Taking note of Keynes, she advocates for government to return to the idea of directing resources into “missions”, i.e. a productive direction to both enhance growth (hence employment) and fulfill a deeper societal vision, such as “greening” the economy. In technical terms, this means: 1) to stop confusing price with value, i.e. to clearly separate value-extracting rents from value-adding production and investment; 2) given that the debate is skewed in favor of the private sector, we need to reassess the long-term value created by public institutions, such as the NIH and DARPA; 3) to question the assumption that “market mechanisms” always result in optimal productivity and distribution of the fruits of our economy; 4) to change the confusing way that GDP is measured, lately in that it creates the impression that the rise of the financial sector is a good thing among many other issues.
Markets, in her view, are not objective entities to be left to do their magic, but intimately shaped by government action. It is a question of political priorities, just as it was for the classical economists and Keynes.
This is a great, if challenging, read. The only big issue I disagreed with was whether the mission-oriented projects could be enough to reboot our economies, at least in the sense of restoring growth to what it was up until the 1970s: it could be the case that the developed capitalist economies have reached a point of development where technology may no longer suffice to instill dynamism or create full employment. But to be fair, that was not the question Prof. Mazzucato set out to answer.
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