Between 1975 and 2017 real US GDP – the size of the economy adjusted for inflation – roughly tripled, from $5.49 trillion to $17.29 trillion. During this period, productivity grew by about 60 percent. Yet from 1979 onwards, real hourly wages for the great majority of American workers have stagnated or even fallen. In other words, for almost four decades a tiny elite has captured nearly all the gains from an expanding economy. Is this because they are particularly productive members of society?
From finance, big pharma or big tech, narratives are created to order to justify inequalities of wealth and income, massively rewarding the few who are able to convince governments and society that they deserve high rewards, while the rest make do with the leftovers. In the book The Value of Everything – Making and Taking in the Global Economy, Mazzucato questions the effect these stories are having on the ability of the few to extract more from the economy in the name of wealth creation. She questions the stories we are being told about who the wealth creators are in modern-day capitalism, and the stories about which activities are productive as opposed to unproductive, and thus where value creation comes from.
A case in point is financial industry. In 2009, Lloyd Blankfein, CEO of Goldman Sachs, claimed that “The people of Goldman Sachs are among the most productive in the word.” Yet, just the year before, Goldman had been a major contributor to the worst financial and economic crisis since the 1930s. The real story was a wave of deregulation of the financial sector around 1970s, together with the national accounts make-up changes to include the financial sector in their GDP calculations – both factors fundamentally altered how the financial sector behaved, and increased its influence on the ‘real’ economy. No longer was finance seen as a staid career, instead, it became a fast track for smart people to make a great deal of money. After Berlin Wall fell in 1989, some of the cleverest scientists in Eastern Europe ended up going to work for Wall Street. The industry expanded and openly lobbied to advance its interests, claiming that finance was critical for wealth creation. Today, the issue is not just the size of the financial sector, and how it has outpaced the growth of the non-financial economy, but also its effect on the behavior of the rest of the economy, large parts of which have been ‘financialized’.
Similar things happened in pharmaceutical arena. In 2014 the pharmaceutical giant Gilead priced its new treatment for the life-threatening hepatitis C virus, Harvoni, at $94,500 for a three-month course. Gilead justified charging this price by insisting that it represented ‘value’ to health systems. The industry calls this ‘value-based pricing’. In practice, this means relating the prices of a drug to the costs that the disease would cause to society if not treated, or if treated with the second-best therapy available. It is an argument refuted by critics, who cite case studies that show no correlation between the price of cancer drugs and the benefits they provide. That is why a high proportion of health care costs in the Western world has nothing to do with health care: these costs are simply the value the pharmaceutical industry extracts.
Or consider the stories in the tech industry. In the name of favoring entrepreneurship and innovation, companies in the IT industry have often lobbied for less regulation and advantageous tax treatments. They projecting themselves as ‘innovation’ and entrepreneurial force behind wealth creation – unleashing the ‘creative destruction’ from which the jobs of the future come. These arguments has led to lower rates of capital gains tax for the venture capitalists funding the tech companies, and questionable tax policies like the ‘patent box’, which reduces tax n profits from the sale of products whose inputs re patented, supposedly to incentivize innovation by rewarding the generation of intellectual property. It is a policy that makes little sense, as patents are already instruments that allow monopoly profits for twenty years, thus earning high returns. Policymakers’ objectives should not be to increase the profits from monopolies, but to favor the reinvestment of those profits in areas like research. Many of the so-called wealth creators in the tech industry, like the co-founder of Pay Pal, Peter Thiel, often lambast government as a pure impediment to wealth creation. And Eric Schmidt, CEO of Google, has repeatedly claimed that citizens’ data is safer with Google than with government. This stance feeds a modern-day banality: entrepreneurs good, government bad – or inept.
Yet in presenting themselves as modern-day heroes, and justifying their record profits and cash mountains, Apple and other companies conveniently ignore the pioneering role of government in new technologies. Apple has unashamedly declared that its contribution to society should not be sought through ta x but through recognition of its great gizmos. But where did the smart tech behind those gizmos come from? Public funds. The Internet, GPS, touchscreen, SIRI and the algorithm behind Google – all were funded by public institutions. Shouldn’t the taxpayer thus get something back, beyond a series of undoubtedly brilliant gadgets? A simple question like this underlines how we need a radically different type of narrative as to who created the wealth in the first place – and who has subsequently extracted it.
In all these cases, governments bend over backwards to attract these supposedly value-creating individuals and companies, dangling before them tax reductions and exemptions from the red tapes that is believed to constrict their wealth-creating energies. The media heap wealth creators with praise, politicians court them, and for many people they are high-status figures to be admired and emulated. In all the claims, one of the key actor is ignored – the state, which has been the investors’ first resort. Our governments as well as the public are confusing value creation with value extraction.
What is wealth and where does value come from? Are we sure that much of what is passing for value creation is not just value extraction in disguise? But what definition of value is used to distinguish value creation from value extraction, or even from value destruction? How is the value produced by the public sector measured, and why is it more often than not treated simply as a more inefficient version of private sector? Mazzucator claimed these stemmed purely from a set of deeply ingrained ideas. She advocates for a public debates about values that used to be, and should still be, at the core of economic thinking.
Mazzuato define “Value Creation” as the ways in which different types of resources (human, physical and intangible) are established and interact to produce new goods and services. How these outputs are produced (production), how they are shared across the economy (distribution) and what is done with the earning that are created from their production (investment) are key questions in defining economic value. Also crucial is whether what is being created is useful: are the products and services being created increasing or decreasing the resilience of the productive system? (for example, it might be that a new factory is produced that is valuable economically, but if it pollutes so much to destroy they system around it, it could be seen as not valuable.)
If value is defined by price – set by the supposed forces of supply and demand – then as long as an activity fetches a price, it is seen as creating value (this is our current GDP is calculated). Mazzucato argues that the way the word ‘ value’ is used in modern economics has made it easier for value-extracting activities to masquerade as value-creating activities. The disappearance of value from the economic debate hides what should be public and actively contested. If the assumption that value is in the eye of the beholder is not questioned, some activities will be deemed to be value-creating and others will not simply because someone – usually someone with a vested interest- says so, perhaps more eloquently than others If bankers, estate agents and bookmakers claim to create value rather than extract it, mainstream economics offers no basis on which to challenge them, even though the public might view their claims with skepticism. And in the process rents (unearned income) get confused with profits (earned income); inequality thus rises, and investment in the real economy falls.
What is more, if we cannot differentiate value creation from value extraction, it becomes nearly impossible to reward the former over the latter. The lack of analysis of value has massive implications for one particular area: the distribution of income between different members of society. When value is determined by price (rather than vice versa), the level and distribution of income seem justified as long as there is a market for the goods and services which, when bought and sold, generate that income. All income, according to this logic, is earned income: gone is any analysis of activities in terms of whether they are productive or unproductive.
If the goal is to produce growth that is more innovation-led (smart growth), more inclusive and more sustainable, we need a better understanding of value to steer us. Mazzucato points out that innovation is a collective process, with different types of public institutions playing a pivotal role. Because that role is ignored, so our theory of value creation is flawed. This is a major reason for wealth often being distributed in dysfunctional ways.