Abstract
Mariana Mazzucato’s previous works have shown that the great innovations we see around us – smart phones, social media, new pharmaceuticals, electric vehicles and much more – are not the products of brilliant ideas by individual entrepreneurs alone, but the outcomes of collective processes spread over long time periods. Entrepreneurs are important, but so too are many lesser-known figures laying the groundwork, often in public sector research labs. This book goes further, asking not only who does the creating but also who benefits from innovation, or from productive economic activity in general, and why some of the beneficiaries receive such enormous rewards.
The answers, she suggests, are obscured in orthodox, neoclassical economics by its theory of value creation. For these economists, assuming that markets are functioning as they should, the price of anything reflects its contribution to social well-being and anyone who receives an income must have made a corresponding contribution to value creation. This can imply that public sector research, selling nothing but laying foundations for a private company’s innovations, is not productive. On the other hand, someone in a bank who profits with healthy bonuses after correctly betting on whether someone else will default on their debts – one of many strange activities within the financial sector that contributed to the 2008 financial crisis – deserves the title of a ‘wealth creator’, because they can become extraordinarily wealthy. This seems intuitively wrong. The former case appears productive while the latter may have contributed nothing to general social well-being.
Mazzucato considers inadequate the arguments of Joseph Stiglitz (2012) who starts from the neoclassical vision of a functioning market system and then documents the ways in which lobbying, monopolies and special interests have distorted that market system to produce and accentuate extremes of inequality. The implication would be that ‘fewer impediments’ to economic competition would lead to less inequality (p. 5). In fact, Stiglitz sees the need for considerable state activity in regulating markets, but Mazzucato’s important point is that we need to go further, to understand what value is, who creates it and who extracts it, these last two not necessarily being the same people. Without addressing this theoretical challenge, we will continue to misunderstand economic processes and to propose inadequate policy solutions.
She does not claim to have produced a complete answer. She repeats several times that her aim is only ‘to stir a new debate’ (p. 279), putting value back at the centre of economic thinking. She remains imprecise in defining the key terms; value is about the production of new goods and services; value creation is about how different types of resources interact to produce those goods and services; value extraction is about moving around existing resources and outputs rather than producing new ones (p. 6). There is no attempt to provide a basis for exact quantification of different inputs, something which neoclassical economics does with its comfortable assumption that rewards reflect contributions. It remains much easier to say that someone – an entrepreneur, a researcher, the state – has contributed to value creation, than to say exactly how much of the value of a final product is the result of their contribution. That is maybe an inevitable reflection of a reality in which value creation is a collective process requiring collaboration among diverse actors.
Her approach to value theory is based in a discussion of past thinking, following through the contributions of classical economists. In discussing the book, she names Schumpeter, Keynes and ‘a little bit of Marx’ as her major influences (Knowledge@Wharton radio show on SiriusXM http://knowledge.wharton.upenn.edu/article/measure-economic-performance/). Where value theory is concerned, Marx appears to be the most important. In his theory, value is the product of human labour, but the producer receives only part of the value, leaving a surplus value which can be shared between capitalists – although if also managers they could be contributing with their labour to value creation – landowners, financiers and others not directly involved in production. For Mazzucato this theory is inadequate. Marx’s surplus value does include value extraction going to unproductive members of society, but there are also essential functions performed by recipients of part of the surplus value. She therefore avoids drawing a hard boundary between a productive and unproductive sphere and remains less precise in defining terms than earlier theoreticians.
Nevertheless, her basic argument that value creation should be a subject for deeper discussion is amply justified by, among others, discussion of problems in the measurement of GDP, evaluation of the contribution of the finance sector, financialisation and success criteria for private corporations, identifying who benefits from innovations and the need for greater recognition of the role of the public sector.
Taking the first of these, it is well known that GDP is not a precise measure of what is produced in a society, still less of social well-being. Apart from other problems, it concentrates on activities where money is involved, thereby leaving out housework and domestic production. It includes public sector activities, such as education, but these are valued by the costs of inputs, rather than by the value of outputs, which are the avowed basis for evaluating the contribution of commercial activities. This treatment of public services is a pragmatic choice by statisticians, but it has no theoretical justification. In fact, she argues, and despite its frequent denigration, the public sector is often willing to take the greatest risks, for example supporting fundamental research with no guaranteed commercial uses and financing long-term infrastructure investment.
Finance is included in GDP calculation, but up to around 1970 was recognised only as an ‘intermediate input’, making a minor contribution to real value creation. Banks were seen not as creators of wealth, but only as agencies moving around the money derived from wealth created by others. As the activities of the finance sector expanded and as the political weight of finance increased, so their activities, whatever they might be, came to be counted as productive and incorporated into GDP figures.
Banks do perform essential roles for society. They are central to the system of payments and transactions and to providing credits to businesses and households. However, a large part of their profits comes from deals and speculation that, as she demonstrates, look much more like value extraction than value creation.
Overall, this book is successful in demonstrating that ignoring the issue of how value is created and extracted leads to a poor understanding of how economies function, to absurd overvaluation of the real contribution of many activities and to undervaluation of others. This leads to many specific recommendations, especially in relation to innovation policy. However, the theoretical issues at the heart of the work remain to be clarified. Mazzucato insists that she is not arguing one value theory is better than another (p. 279). Much of what she writes implies that it is possible to identify activities that ‘help deliver true value’ (p. 276), but it remains to be seen how this can be done.
She promised at the start to go beyond Piketty (2014), who she sees as ending up advocating no more than higher taxes on wealth and inheritance, and Stiglitz (2012), who she sees advocating only the removal of impediments to the proper functioning of markets. Her theoretical contribution does take us into themes that those authors do not address and does point to different policy approaches. However, by showing that high incomes do not accurately reflect contributions to society, she also provides even stronger grounds for much higher tax rates on wealth and high incomes – perhaps even back to levels of before the 1970s when financial activities were not considered automatically as productive – and for regulating to limit unproductive activities. Indeed, such higher taxation would make it easier for states to finance the education, training, research and other spending that could lay the foundations for future innovations.