Are you ready to challenge the conventional wisdom about the true value creators in our economy? Does the narrative of private sector dominance and public sector inefficiency need a rethink? How can we redefine value creation in the 21st-century economy? Dive into the fascinating debate around value, its evolution, and its implications on economic growth, innovation, and the role of public and private sectors.

The Value of Everything: Making and Taking in the Global Economy

For centuries, the idea of value has intrigued economists. Adam Smith, in "The Wealth of Nations," distinguished between productive and unproductive labor, setting the stage for an evolving understanding of economic growth. 

In earlier times, prosperity was not a given, and the driving forces behind economic expansion were elusive. As Europe transitioned into the early modern era, dynamic changes spurred new thinking about value and productivity, driven by the needs of nation-states, wars, and industrialization.

Adam Smith's insights laid the groundwork, but it was the mercantilists who first linked national prosperity to the accumulation of gold and silver through trade. Sir Thomas Mun's work championed the idea of maintaining a positive trade balance to accumulate wealth. Yet, despite their significant contributions, mercantilists lacked a clear theory of value.

Enter the Physiocrats, led by François Quesnay, who argued that true value stemmed from agriculture. Through his "Tableau Économique," Quesnay illustrated how value flowed from the productive activities of farmers, contrasting sharply with mercantilist beliefs. This marked a pivotal shift in economic thought, emphasizing production over mere trade.

Adam Smith then expanded on this by introducing the labor theory of value, suggesting that value derived from labor, especially in manufacturing. His famous pin factory example demonstrated how the division of labor could exponentially increase productivity. David Ricardo built on Smith's ideas, focusing on the distribution of income between wages, profits, and rents. He introduced the notion of economic rent, highlighting the unproductive nature of certain monopolistic gains.

Karl Marx further refined the labor theory of value, emphasizing the exploitation inherent in capitalist systems. He argued that surplus value, created by labor, was appropriated by capitalists, fueling economic growth but also leading to social inequalities. Marx's analysis extended beyond mere economic transactions, diving into the social dynamics of capitalism and the role of different types of capital.

These foundational theories have left a lasting legacy, influencing modern economic thought and policies. Understanding the evolution of value theories helps us grasp the complexities of economic growth and the factors that propel or hinder it.

How Did Adam Smith and Karl Marx Revolutionize Our Understanding of Economic Value?

Marx's labor theory of value was a powerful critique of the Industrial Revolution, questioning why laborers remained in poverty while financiers grew rich. As socialism gained momentum, thinkers sought new theories to justify the capitalist system. 

Enter the neoclassicals, with key figures like Leon Walras, William Stanley Jevons, and Carl Menger, who introduced the idea of "marginal utility" - the notion that value is subjective and based on an item's usefulness to the consumer.

This shift from objective to subjective value theory was revolutionary. It posited that all income is a reward for productive undertakings, aligning well with the era's industrial investments. Prices, according to this theory, reflect the utility derived from goods and their scarcity. This approach, known as marginalism, became central to neoclassical economics, emphasizing equilibrium where supply meets demand.

Alfred Marshall further cemented these ideas, using mathematical calculus to describe economic equilibrium, presenting capitalism as a self-regulating system. This perspective starkly contrasted with Marx's view of capitalism as rife with class struggles and exploitation.

The marginalist revolution redefined value, making it subjective and rooted in individual preferences, effectively sidelining the labor theory of value. This new framework influenced government policies and economic institutions, emphasizing minimal intervention and competition. The idea that all participants in the economy are rational utility calculators became foundational, though it faced critiques from economists like Joan Robinson and Piero Sraffa.

Ultimately, this shift in value theory had profound implications, affecting how we measure national wealth and understand economic dynamics, leading to the dominance of neoclassical economics in contemporary thought.

From Marx to Marginalism: How Walras, Jevons, and Menger Revolutionized Economic Theory

How we measure wealth shapes our decisions. GDP, the primary measure of a nation's economic health, can dictate political fortunes. But is it truly a reliable measure?

Marginal utility theory, which ties value to price, influences GDP calculations. High salaries imply high productivity, but this doesn't always reflect true economic contribution. For instance, a rise in financial sector incomes boosts GDP, but does it signify real growth or just inflated profits?

GDP calculations can be complex. They include market-priced goods and services, but often overlook non-market contributions, like unpaid childcare, and overvalue others, like polluting industries.

An example from history: the Jesuit Order's dual-key accounting system in the 1500s balanced financial and strategic priorities. Similarly, GDP is influenced by the values underlying its calculation. GDP can be measured through production, income, or demand, but each method has its quirks.

Government value is particularly tricky. Unlike businesses, governments provide many services at low or no cost, funded by taxes. This non-market pricing means traditional value-added calculations don't apply. For instance, government value added is often equated to employee salaries, ignoring broader contributions like infrastructure and education.

Moreover, GDP doesn't always account for investments in future capacity, such as R&D, consistently. Only recently has in-house R&D been recognized as an investment, not just a cost, adding significant value to GDP. 

Housework, largely performed by women, is another blind spot. Despite its economic importance, it's excluded from GDP. On the other hand, owner-occupied housing is included through imputed rent, adding a fictional $1 trillion to US GDP.

The treatment of pollution cleanup also highlights GDP's oddities. If a company pays for pollution cleanup, it's a cost; if the government pays, it's added value. This inconsistency ignores the true economic impact of environmental damage.

Finally, the financial sector poses the biggest challenge. Once seen as unproductive, it now significantly inflates GDP through financial intermediation and risk-taking, obscuring the line between profit and rent.

Understanding GDP's construction is crucial. It shapes our view of economic health and influences policy decisions. Yet, it remains a social convention, reflecting the values and theories of its time.

Is GDP Truly Reflective of Economic Health or Just a Flawed Historical Measure?

The UK financial system is set to grow significantly post-Brexit, potentially reaching fifteen to twenty times GDP in the next 25 years, according to Mark Carney, Governor of the Bank of England. This expansion reflects a longstanding belief in the benefits of a large financial sector, which is seen as a key driver of economic development and exports, especially in the UK and the US. 

However, this belief is not universally accepted. Many economists question the true value added by the financial sector, especially in light of the 2008 global financial crisis, which revealed the fragility and potential for fictitious value within the system.

Historically, banks and financial markets were viewed as necessary but costly parts of doing business, rather than creators of value. The rapid growth of finance between 1980 and 2008 was fueled by asset management and household lending, often diverting talent away from productive sectors. Deregulation played a significant role in this growth, with political decisions to recognize finance as a value-adding sector in national accounts driving further deregulation and expansion.

Despite the 2008 crash, policymakers continued to support the financial sector, leading to further growth and entrenchment. The IMF, in 2015, concluded that financial sector expansion was generally positive, although its benefits might diminish at high levels of GDP per capita.

The banking problem arises from the difficulty in national accounting of activities that appear to add value without a clear output price. Traditional banking profits from interest differentials are justified as rewards for waiting or taking risks. Yet, the true value created by banks is often debated, with many services provided by banks, such as maturity transformation and liquidity, being essential but not necessarily productive.

The financial sector's contribution to GDP has grown, partly due to changes in accounting practices that treat financial intermediation services as value-added. This has led to a situation where the financial sector's growth is celebrated, even when it may not be truly productive. The sector's expansion has also been driven by the development of new financial instruments like derivatives and securitizations, which have significantly increased financial transactions and profitability.

The deregulation of banks and financial markets in the 1970s and beyond, including the introduction of offshore currencies and the repeal of restrictive regulations like the Glass-Steagall Act, has allowed the financial sector to grow unchecked. This growth has been accompanied by increased risk-taking and speculative activities, often leading to financial crises.

The rise of financial markets and the increasing complexity of financial instruments have transformed finance into a powerful force, capable of influencing economic growth and driving inequality. The financial sector's ability to create money and the resulting increase in household and private sector debt have further entrenched its position.

The financialization of the economy has had profound effects, contributing to rising inequality and creating a system where finance appears to extract value rather than create it. Despite attempts to regulate and control the financial sector post-2008, financialization remains strong, with banks and financial institutions finding ways to circumvent new regulations and continue their growth.

Ultimately, the challenge is to transform finance into a genuinely value-creating sector, focusing on long-term growth and innovation rather than short-term gains. This requires a reevaluation of the role of finance in the economy and the implementation of policies that promote sustainable and productive financial practices.

Mark Carney Predicts Post-Brexit Boom for UK's Financial Sector

The concept of "casino capitalism" describes the shift from conservative financial strategies to speculative and often risky financial activities, as noted by Hyman Minsky in 1992. 

Traditional bank lending has been overshadowed by shadow banking, which includes entities like payday lenders, investment banks, and mobile payment systems. This sector grew from $26 trillion in 2004 to $80 trillion in 2014. The asset management industry, including hedge funds and private equity, has also expanded significantly.

The financial sector's growth has led to it dominating the economy, often prioritizing profit over genuine economic contribution. Only 15% of funds generated by the financial sector go to non-financial industries, with most money being traded within the sector itself. This phenomenon, termed 'money manager capitalism' by Minsky, indicates money making money without contributing to the real economy.

Historical figures like Winston Churchill expressed concerns about finance overshadowing industry. Churchill likened financiers to pre-industrial landowners who extracted revenue without contributing to production.

Post-WWII saw robust economic growth and significant savings accumulation, leading to the rise of the asset management industry. The wealth accumulated needed managing, and this gave rise to professional fund managers. Regulation changes in the 1970s allowed pension funds to invest in riskier assets, further boosting the financial sector.

Despite the rise of asset management, the real economy hasn't necessarily benefited. Fund managers often charge high fees without providing proportional value. The financial sector's monopoly and oligopoly allow it to extract significant rents, contributing to income inequality.

The financial crisis of 2007-2008 exposed the dangers of an over-leveraged financial sector. Instruments like mortgage-backed securities and credit default swaps contributed to the crisis. Despite this, the financial sector's influence remains strong, often extracting value rather than creating it.

Reform is possible through regulation that rewards long-term investments and reduces rent-seeking behaviors. Financial actors should earn money but in a way that reflects real value creation. Public investment in infrastructure and innovation, as suggested by John Maynard Keynes, could stabilize the economy and promote sustainable growth. Financialization has also pressured non-financial industries to prioritize financial returns over productive investment.

Has Casino Capitalism Made the Financial Sector a Risky Game of Chance?

Jack Welch, former CEO of General Electric, famously called shareholder value "the dumbest idea in the world." Over the past three decades, financialization has infiltrated not only the financial sector but also the real economy, including manufacturing and non-financial services in the US and UK. The shift towards prioritizing financial gains has had profound impacts, as illustrated by companies like Ford and GE.

Ford, for instance, made more money selling car loans than cars, while GE Capital contributed half of GE’s earnings. This trend signifies a broader economic shift where companies prioritize financial metrics, often at the expense of long-term value creation.

A prime example of this is the practice of share buy-backs, prevalent in top US companies. William Lazonick's research shows that between 2003 and 2012, companies in the S&P 500 spent $2.4 trillion on buy-backs, using 54% of their earnings. This practice boosts earnings per share (EPS), making executives look successful and inflating their pay, but it detracts from capital investment and long-term growth.

The origins of this ideology trace back to Milton Friedman’s 1970 article, which argued that a corporation's sole responsibility is to increase profits. This spawned the shareholder value movement, further developed by theorists like Michael Jensen and William Meckling. They advocated that aligning managers' interests with shareholders' through financial incentives would ensure companies are run efficiently.

However, this focus on maximizing shareholder value (MSV) has led to short-termism, downsizing, and distributing profits to shareholders rather than reinvesting in the business. Private equity (PE) firms, for example, often push companies into short-term strategies to quickly increase their value for resale, sometimes to the detriment of the business and its stakeholders.

The financialization of essential services like care homes and water utilities in the UK shows how this trend can negatively impact society. PE-owned businesses in these sectors have increased debt and financial engineering, prioritizing profits over service quality, often leading to complex ownership structures and reduced transparency.

Despite the theoretical alignment of managers' and shareholders' interests, the reality is a widening gap between executives’ and workers’ pay, increased inequality, and a focus on short-term gains. Keynes warned against the stock market becoming a short-term game, a prophecy that seems to have come true as average holding times for shares have plummeted.

To address these issues, there’s a growing call to shift from MSV to stakeholder value, recognizing that companies should create value for all stakeholders, including employees, customers, and the community. This approach emphasizes long-term success and sustainable growth over short-term profits. Initiatives like public banks in Germany and stakeholder-inclusive corporate governance models offer promising alternatives.

In short, the financialization of the economy has led to significant value extraction, benefiting a lucky few at the expense of many. Addressing this requires rethinking corporate goals, rewarding long-term investments, and ensuring that all stakeholders, not just shareholders, share in the value created.

Jack Welch's Verdict: The Downfall of Shareholder Value and the Rise of Stakeholder Capitalism

Silicon Valley, the heart of the tech revolution, is known for creating immense wealth and transforming our way of life. Its success stories, like Google's global dominance and Apple's massive profits, epitomize modern progress. However, beneath these success stories lies a complex narrative about innovation and value creation.

Innovation is often seen as the work of lone geniuses, but in reality, it is a deeply collective and cumulative process. Innovations like the personal computer and the Internet built on decades of prior investments, often funded by public institutions. This collective effort raises questions about the fair distribution of rewards from innovation.

The financial sector, particularly venture capital (VC), plays a crucial role in funding innovation. However, VCs often enter the scene after the riskiest investments have been made by public funds, reaping significant rewards while public investors see little return. This disparity in rewards versus risks taken by public versus private investors highlights a major issue in the innovation economy.

Patents, intended to protect and incentivize inventors, have evolved into tools for blocking innovation and extracting value. The expansion of patentability, longer protection periods, and strategic patenting have created an environment where innovation is stifled, and monopolies are reinforced. This shift has led to higher prices for products, particularly in the pharmaceutical industry, where the cost of drugs is often justified by their "value" rather than their production costs.

The rise of digital giants like Google and Facebook demonstrates how network effects and first-mover advantages can lead to monopolistic dominance. These companies extract value by commodifying personal data and leveraging their market power to impose conditions on users and firms. Their business models, while providing valuable services, often prioritize profit over the public good.

To address these issues, we need policies that recognize the collective nature of innovation and ensure that rewards are shared more equitably. This could involve capping prices on publicly developed medicines, attaching conditions to public support, and allowing public agencies to retain equity or royalties in publicly funded technologies. By doing so, we can foster an innovation economy that benefits society as a whole, rather than a select few.

Is Silicon Valley's Wealth Built on Public Investments and Unfair Rewards?

In 1926, John M. Keynes emphasized the unique role of government in doing what isn't done at all, rather than just improving on what individuals already do. Fast forward to 2010, and The Economist warned against the dangers of big government, suggesting it should set rules and then step aside for businesses to innovate. This view, that government is necessary but unproductive, has long been echoed in economic thought.

Yet, history tells a different story. Government has been pivotal in creating markets and fostering innovation, from funding the Internet to supporting technological revolutions. Karl Polanyi, during WWII, argued that markets aren't natural but are crafted by government policies. He suggested that without the state, there would be no market.

Despite its contributions, government is often seen as a mere facilitator rather than a creator of value. This view was starkly evident after the 2008 financial crash, where despite governments saving the capitalist system, they were blamed for the crisis. Austerity measures followed, under the belief that public debt hinders growth, ignoring the social impacts of such cuts.

Economists like Keynes argued that in times of crisis, government spending can boost demand and spur growth, challenging the idea that markets self-correct. His theories, applied post-WWII, led to decades of prosperity. However, later economic thought, particularly from the Chicago school, pushed for minimal government intervention, equating it with inefficiency and corruption.

Public Choice theory further fueled privatization and outsourcing, claiming government failure as a greater threat than market failure. This ideology led to widespread privatizations, often resulting in monopolies and higher costs for public services, as seen with the NHS and infrastructure projects in the UK.

Yet, the narrative that government is inherently inefficient overlooks its successes and the value it creates. Bold government missions, like the Apollo program, showcase the potential for public value creation. Despite this, the focus remains on privatization, often leaving the public sector with 'bad' assets while privatizing profitable ones.

To reclaim its role, government must regain confidence and embrace its capacity to innovate and create value. This involves moving beyond viewing public spending as mere costs and recognizing the collective value it generates. By aligning risks and rewards between the public and private sectors, governments can ensure that the benefits of innovation are shared, fostering inclusive growth.

Ultimately, redefining public value and embracing a mission-oriented approach can transform the role of government, making it a key player in shaping a prosperous and equitable future.

Revisiting Keynes and Polanyi: The Vital Role of Government in Innovation and Markets

The global financial crisis of 2008 exposed the flaws of modern capitalism, sparking debates about unsustainable growth and the need for reform. Critics argue that the system rewards speculative exchanges over genuine wealth creation and suggest serious reforms such as focusing on long-term investments, changing corporate governance, and taxing speculative trades. However, these critiques often lack a robust understanding of economic value.

Value, once central to economic theory, has shifted from being tied to production to being tied to individual preferences and prices. This shift has led to misconceptions, such as equating price with value and viewing entrepreneurship as an individual effort rather than a collective process. Consequently, the narrative around wealth creation has become skewed, favoring private sector actors and marginalizing the contributions of the public sector and workers.

This misrepresentation influences policymakers and public perception, reinforcing the idea that markets are the best determinants of value. It neglects the collective value creation process, where contributions from government, educational institutions, and civil society play a crucial role. To address this, we need a new framework that distinguishes between value creation and value extraction, ensuring that activities genuinely contributing to the economy are rewarded.

Redefining value involves understanding markets as outcomes of societal processes, not standalone entities. Government policies should be seen as shaping and co-creating competitive markets, not just intervening in them. True private-public partnerships should emulate mutualistic ecosystems rather than parasitic ones, fostering collaboration across sectors for the common good.

The future of the economy should focus on creating long-term growth through strategic investments, not just maximizing GDP or fiscal probity. This requires ambitious, problem-solving missions, such as a green transformation, that involve multiple sectors and actors working together. A new economic perspective, centered on collective value creation and societal objectives, can lead to more fulfilling jobs, reduced pollution, better care, and more equal pay.

Ultimately, the goal is to reignite the debate on value, placing it at the heart of economic reasoning. This involves recognizing the collective nature of value creation, encouraging active policy-making, and fostering a dynamic division of labor to tackle the challenges of the 21st century. By dreaming of a better future and striving to make it happen, we can build an economics of hope.

Can We Reshape Modern Capitalism by Redefining Economic Value?

Economic value has intrigued economists for centuries, evolving from Adam Smith's distinction between productive and unproductive labor. The mercantilists emphasized national prosperity through trade, while the Physiocrats focused on agriculture as the source of value. Adam Smith and David Ricardo highlighted labor's role in value creation, with Marx critiquing capitalist exploitation. 

The neoclassicals introduced subjective value through marginal utility, revolutionizing economic thought and emphasizing equilibrium where supply meets demand. This shift influenced GDP calculations, often overlooking non-market contributions and overvaluing sectors like finance.

The financial sector's growth, driven by deregulation and speculative activities, has raised questions about its true value. Critics argue financialization has led to inequality and value extraction rather than creation. The focus on shareholder value has prioritized short-term gains over long-term investments, impacting essential services and the real economy.

Government's role in creating markets and fostering innovation is often undervalued, despite historical successes. Public investment and mission-oriented approaches can drive inclusive growth. Reclaiming government's innovative capacity and redefining public value are crucial for a prosperous future.

The 2008 financial crisis highlighted capitalism's flaws, calling for reforms that recognize collective value creation. A new framework distinguishing value creation from extraction can ensure genuine economic contributions are rewarded. Emphasizing long-term growth through strategic investments and active policy-making can address contemporary challenges and build a hopeful economic future.

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The Value of Everything: Making and Taking in the Global Economy

Mariana Mazzucato

Are you ready to challenge the conventional wisdom about the true value creators in our economy?

Does the narrative of private sector dominance and public sector inefficiency need a rethink?

How can we redefine value creation in the 21st-century economy?

Dive into the fascinating debate around value, its evolution, and its implications on economic growth, innovation, and the role of public and private sectors.

Key Ideas

#1