What do we value?
The value of Everything: Making and Taking in the Global Economy
Public Affairs Books, UK, 2018.
Do you know the feeling when you learn a new word and then you suddenly start hearing it everywhere? Or when you break a leg, and on crutches you suddenly realise how many stairs there are in an environment where you previously hadn’t noticed them? That’s what happened to me this summer with this book (and no, I haven’t broken a leg). Suddenly, “everybody” was talking about it. By the time a conversation with a Dutch colleague I appreciate very much started – in Milan – with the words of “Have you already read The Value of Everything”, it was the last drop. I realised this book was something I just had to read.
This book is very timely now, because it shows that what we value in an economic sense, is very tied to the society we have around us. It also shows that as we are currently undergoing big societal changes, our thinking of how we perceive value might also need to change. If it would happen, it wouldn’t be the first time in history to do so.
The book starts off with a historic review of different theories of value in economics. It shows how value can be defined in different ways, simplified as the production of new goods and services. How these outputs are produced (production), how they are shared across the economy (distribution) and what is done with the earnings that are created from their production (reinvestment) are key questions in defining economic value, and have changed over time. Mazzucato, in other words, shows how value is subjective and how what we consider value has changed over time.
I assume many readers are familiar with, or have at least heard about, these theories, but Mazzucato is good at tying the different theories to the historical context around us. She also shows very convincingly how every era has had their own value system, and how the early decades of each of the five revolutions to date (from the steam engine to the IT revolution) have been times of financial mania and increasing inequality. To me, this means that if we think the world is changing now, we are most likely also heading for a new way of measuring value. This I find extremely intriguing. If we are heading for a new value system what should it be? And what do we find valuable today and in the near future?
The book first looks at the early Mercantilism, which prevailed during the time of European quest for colonialism and protection of newly established trade routes. The mercantilist doctrine was exemplified by Thomas Mun (1571- 1641) who said that we must sell more to strangers yearly than what we consume of theirs in value.
The following wave was the Physiocrats, who believed that land was the source of all value. Nature produced new value; crops grew from seeds and trees out of saplings. By contrast, humans could not produce value. They could only transform it; bake bread from seeds, produce timber out of wood. Francois Quesnay (1694-1774) claimed that the” productive class” was anyone bringing nature’s bounty to society, like farmers, fishermen and hunters. All other sectors of the economy, like government, services and industry, were considered “unproductive”. This classification shifted the mercantilist view of exchange of goods (and gold as the way to measure it) as value creation to the physiocrats view that it was production that created value. As long as what is produced is greater than what is consumed, an amount will be left over to be reinvested, thereby allowing the economy to constantly reproduce themselves.
Adam Smith (1723-1790) soon critiqued Quesnay’s theory showing that it was not only production in agriculture that created value, but industry. Smith also showed how the division of labour, and changes in the organisation of work, could affect productivity and therefore economic growth and wealth. Smith, David Riccardo (1772-1823), and others became known as the “classical” economists. According to the classical economists’ value derived from the cost of production, mostly labour. Smith also believed that there were three kinds of income: wages for labour in capitalist enterprises, profits for capitalists who owned the means of production, and rents from ownership of land.
Riccardo added to Smith’s theory by thinking about income distribution. He claimed that the distribution of wages was the “principle problem” in economics and ultimately regulated the growth and wealth of a nation. Many of his ideas of rent, and of the notion that the (mainly unskilled) workers hold the loosing ticket, are still relevant discussions today. Riccardo was positive about the “productive capitalists”, which were those who spent their profits on more labour, that again increased profits. He was very critical about “unproductive capitalists”, which were those who spent their profits on luxury and personal extravagance, that in no way reproduced their profits.
A generation later, Karl Marx (1818-1883) developed his own version of the labour theory of value. His fundamental insight was that capitalism is dynamic and constantly changing, and dependent on historical circumstances. When harnessed to the division of labour, mechanization would radically increase productivity – the principal engine of economic growth. Smith had praised the merits of individual pursuit of happiness and profit, and Ricardo had made the capitalist entrepreneur the hero of the economy, Marx was much more critical of both.
Mazzucato continues her story by showing how the classical economists lost their crown to a new dynasty, the neoclassicals. The neoclassical approach to rent, which largely prevails today, lies at the heart of the rest of the book. If value derives from price, as neoclassical theory holds, income from rent must be productive. Today, the concept of unearned income has therefore disappeared.
Marginal utility is today a major influence on the measurement of economic activity and growth. It has an effect on the rationale for the kinds of economic activities that are considered productive, which is basically anything that fetches a (legal) price in the market. Mazzucato is very critical to some of these theories, claiming that marginal utility theory has failed to account for one of the key problems in modern capitalism: the extractive activities of the financial sector.
Mazzucato says that for centuries, income earned by charging interest had been viewed as a subtraction from productive enterprise rather than a symbol of it. This was both a moral and an economic judgement. John Maynard Keynes (1883-1946) stressed the difference between this kind of speculation (value extraction) and finance for actual productive investment (value creation). The crash of 2008 made the warnings of Keynes, Hyman Minsky (1919-1996), and others, about the dangers of excessive financialization come to life.
In the economic crash of 2008, Governments had to come and rescue the banking sector. For Keynes, government was essential because it could create value by reviving demand precisely when demand might be low, as in recessions, or when business confidence is low. However, Keynes only went part of the way. He changed our thinking about how government can create value in the bad times, through counter-cyclical policies; but he, and his followers, had much less to say about how it can do so in good times as well.
The fact that governments interact in the time of crisis, like with the banking sector, is widely accepted, but Mazzucato asks for the governments to take a bigger role and to be more courageous for new thinking also when there is no crisis. As is the nature of early-stage investment in technologies with uncertain prospects, some investments are winners, but many are losers. For every Internet (a success story of US government financing), there are many Concordes (a white elephant funded by the British and French governments).
So why has the economy stagnated? Mazzucato admits that the answer is complicated, but in part it is the result of inadequate investment in areas that raise Gross Domestic Product (GDP), such as vocational training, new technology and R&D. If public investment is made in areas like infrastructure, innovation, education and health, giving rise to healthy societies and creating opportunities for all, tax revenues will most likely rise and debt fall relative to GDP.
The crucial point is that many of these activities involve taking risks and investing – exactly what austerity doesn’t do – and in so doing they create value. Currently state agencies can often fund basic science, but not downstream applications.
She claims that there would almost certainly be more European high-tech successes if there existed greater interaction between innovation systems and public procurement policies. This would require new types of contracts between public and private actors (as well as the third sector and civil society) in order to foster symbiotic relationships, sharing the kinds of investments that will be needed to redirect economies away from high material content and energy based on fossil fuels. It is only by thinking big and differently that government can create value – and hope.
However, to recognize that the public sector creates value we must first find ways to assess that value, including the spill-overs from this sort of ambitions public funding. The value that government businesses do add is currently not shown in official statistics, nor is the value that education or health generate. The point here is that zero government return on investment is a political choice, not a scientific inevitability. Mazzucato calls for metrics that would favour long-run investments and innovation.
Mazzucato is hence very critical about the current marginalist theory of value, underlying contemporary national accounting systems, which she claims leads to an indiscriminate attribution of productivity to anyone grabbing a large income, and downplays the productivity of the less fortunate. In so doing, it justifies excessive inequalities of income and wealth and turns value extraction into value creation.
In a time of change, those moving first and fast are often the winners of the game, before the system settles and structures such as regulation are in place. A few companies are able to reap monopolistic advantages through economies of scale and the fact that customers using the network get locked in. Facebook, Amazon, and similar, are shown as examples of this.
She reminds us that all types of accounting methods are evolving social conventions, defined not by physical laws and definite realities but reflecting the ideas, theories and ideologies of the age in which they are devised. What you measure is what you get: Accounting oddities create odd results. As an example of such she shows how we today calculate GDP (Gross Domestic Product). GDP, according to her, does not clearly distinguish a cost from an investment in future capacity, such as R& D; and services valuable to the economy such as care may be exchanged without any payment, making them invisible to GDP calculators.
According to this awkward logic, a nation would increase its GDP if we paid our neighbours to look after our children and do our laundry, and they paid us to do theirs. Underlying this common-sense approach to household work is the utility theory of value: what is valuable is what is exchanged on the market. Or consider a river polluted by industrial waste. When the polluter pays to clean it up, the expenditure is treated as a cost which reduces profits and GDP. But when the government pays another company to clean up the river, the expenditure adds to GDP because paying workers adds value.
Mazzucato admits that national accounts have been subjected to repeated attempts to patch them up and make them more relevant to changing needs and economies. Accounting for environmental damage has been mentioned. Accounting for happiness is another case. She reminds us that lest the idea seems impossible, or at least nothing to do with economics, it’s worth recalling something basic: there is no point to the economy unless it helps people to lead better lives and that quite reasonably means, at least in part, happier lives.
Rather than speculating with interest rates Mazzucato suggests we should focus on mission-driven innovation.
Innovation is a collective process, with long lead-times: what might appear as a radical discovery today is actually the fruit of decades of hard work by different researchers. Given the lengthy and cumulative process of innovation, understanding which actors enter the innovation process, how they do it and at what point is key. In the early days, returns are low due to the very high risks; then, if the innovation proves successful, returns increase, often exponentially, before flattening out.
Mazzucato asks how we could use mission-oriented innovation to battle societal and technological grand challenges like climate change or social care. She urges us to learn lessons from historical periods in which bold ambitions were set to tackle difficult technological problems. A classic example of this was the sixties mission of getting a man on the moon – a historical event we have all been celebrating the 50thanniversary of this summer.
The focus of that quest was not on subsidising a sector (aeronautics) but on solving problems together, which required many sectors and different types of public and private actors to collaborate – even those in low-tech sectors like textiles. The Apollo project included ambition, organization, planning, bottom-up experimentation, public-private risk-sharing and sense of purpose and urgency.
Achieving innovation-led growth and innovation of a particular type (e.g. green innovation) will require a different policy mindset and the ability to explore, experiment and strategically deliberate also inside the public sector. To offer real change we should 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 greatest challenge will, according to Mazzucato, be defining and measuring the collective contribution to wealth creation, so that value extraction is less able to pass for value creation.
Green transformation requires not only green infrastructure but a clear vision of what living a green life means. It means transforming all sectors, including traditional ones like steel to lower its material content. The question of growth should focus less on the rate of growth and more on its direction, according to Mazzucato.
Mazzucato says that the concept of “public value” has existed for millennia, debated in philosophy and society at least from the time of Aristotle’s Nicomachean Ethics. And still it is a Cinderella subject as far as the study of economics is concerned, as the term “public value” doesn´t even currently exist in economics, she says.
With this book she is opening this dialogue, by showing that the creation of value is collective, that policy can be more active around co-shaping and co-creating markets, and that real progress requires a dynamic division of labour focused on the problems that twenty-first-century societies are facing.
She is asking us to think big and to play a part in the great transformations to come, squaring up to the issues of climate change, ageing populations and the need for twenty-first-century infrastructure and innovation.
Mazzucato convincingly shows that reasoning on value has changed over time and is changing again. To me, her argumentation is an excellent starting point, but it also leaves out at least one of the most interesting questions. Yes, we need a new value system that would take sustainability more in consideration and allow for risk diversification and governments taking a more forward-looking stance. But what then? What kind of a value system would we want to have? What are the things we would want to measure, and how?
This question points to one of our biggest challenges – are we able to define what it is that we actually want and value? This is very similar to the discussions about future Artificial Intelligence (AI), and even Artificial General Intelligence (AGI), discussed in the books by Tegmark and Lee. They questioned if we know what we would like a future artificial intelligence to do. What kind of moral judgements should algorithms do? The question after Mazzucato’s book is similar, what kind of a value system do we actually want?
I think this train of thought is super-interesting, and I hope the book by Mazzucato will make you think of the different options we have in front of us. In the end of her book she calls for the creation of a new economics: an economics of hope. She says that if we cannot dream of a better future and try to make it happen, then there is little reason to care about value. Maybe we have the chance to change our world and how we perceive it? This book made me think seriously about our future, imagine possibilities and think of alternatives, which I think is the first step in changing it. How about you?