I was recently given a review (from Palladium Governance Futurism) of Mariana Mazzucato’s book ‘The Value of Everything : Making and Taking in the Global Economy’ in which she challenges the view of what ‘value’ is in an economy. She refers to ex Goldman Sachs CEO Lloyd Blankfein’s quote
‘The people of Goldman Sachs are among the most productive in the world.’
Goldman Sachs was one of the many investment banks that had to be bailed out after the GFC but how do we value their productivity?
Privatise reward and socialise risk
It seems that the investment banks were happy to privatise the reward but socialise the risk – when it all “turns to custard” they need to be bailed because they are too big to fail. The question that people are now asking is what is the vulnerable asset class? Mortgage-backed securities was the cause in 2008. For a lot of these companies a large payout is a sign of success in that they are too big to fail and leave the government no alternative. However where is the value generation from this?
Value – historical perspective
- French physiocrats – value was produced from the land
- Adam Smith – saw landlords as rentier class
- Marx – labour is the source of value
Today economics is more focused on a subjective, utility-focused approach and therefore sidestepping the historic debate about value which is undermining the discipline of economics. This new approach, according to Mazzucato, has weakened neoliberal economies to innovate. Key to understanding the the value debate is what is considered production in our GDP. The informal economy is a part of all economies but is not included in the national accounts. As is someone building their own house. So what is considered to be real wealth/value? Rather than focusing on how wealth was created and what counted as wealth, economists began to ask how utility was satisfied on the margin. This allowed for the mathematical approaches to be used in modern economics.
Thomas Aquinas stressed the need for a ‘just price’. It was immoral for a supplier to raise his price when consumers are in great need of a specific good (inelastic demand). The price should cover the cost of production and the maintenance of the worker and his family. Today value is in the eye of the consumer and price, in turn, reflects utility gained by a consumer from an additional unit go goods or services.
Finance and productive value
Finance’s case is founded on the notion that it is a necessary part of production by allocating capital to businesses. However Banks direct their revenues into interest payments and the share price. This fuels speculative bubbles which are refinanced through the securitisation food chain and therefore inflating assets without investment.
Australian bank Macquarie acquired utility company Thames Water – increased its debt to US$10.05 bn over 6 years, therefore leveraging the privatised assets they had acquired into increasing debt. By doing this they saved their own revenues for interest payments and shareholder distributions – hard to make the case for privatising public assets. Mazzucato also points out that since the GFC the finance sector has focused on debt deflation and unemployment and wage reduction so corporate profits could be maintained at the expense of employee earnings. So the financial sector continues to make contributions to GDP in the money it generates but firms in the tech sector and natural resources can’t contribute to the money supply the way commercial banks can, and can’t easily hedge parts of the economy.
The book also gives examples of factors that contribute to GDP but they don’t actually produce anything.
- Ford – 2000’s – they made more money from selling loans for cars than by selling cars themselves
- General Electric – finance arm of the business made around 50% of the whole group’s earnings.
On a more positive side Welsh Water was a company with the lowest ratio of debt to equity and the highest credit rating. It is mutually owned and operated as a not-for-profit operation.
Two great myths – Innovation and Public Sector
She points out that the world’s biggest companies have built themselves on the legacy of state backed, publicly funded innovation. EG:
- Nearly all major parts on smartphones were developed in university-based research facilities using public money.
- Defence Advanced Research Projects Agency – developed the Internet and SIRI
- US Navy – GPS system used by phones and computers.
- National Science Foundation grant – created the algorithm behind Google.
- Pharmaceutical drugs – 2/3 of the most innovative drugs trace their research to funding by the US National Institutes of Health.
Keynes was seen as the last supporter of government investment. He recommended state intervention during downturns in order to stimulate growth and spending. This intervention is intended to shock the economy into greater output
According to Mazzucato the public sector is the true creator of economic value – value which could not just be created by private counterparts. Vital to this is the rebuilding of the public sector’s funding for innovation. Her clear goal is that economists and governments alike to cease viewing value as a purely subjective and individualistic measure.