Putting public value back into the heart of economic policy
by Mariana Mazzucato | @MazzucatoM
After the 2008 financial crisis there was an opportunity to learn from the sickness that caused the crisis: a financial sector that was funding itself, and a real economy that had been overly financialised, focussed on short-term returns rather than long-run sustainable growth. And yet so little has changed and we are back at the same levels of private debt (to disposable income) that existed just before the crisis — exactly what caused its implosion.
In The Value of Everything: making and taking in the global economy I argue that the only way to fix this dysfunctional economic system is to reinvigorate the debate about value, asking difficult questions that would allow us to differentiate value creation from value extraction, and profits from rent. Indeed, most of the financial sector did not even get counted in GDP until the 1970s: it was seen as a simple transfer of existing wealth.
Lloyd Blankfein, the outgoing CEO of Goldman Sachs (poised for $85m payout when he leaves), claimed in 2009 that his staff were “among the most productive in the world” — just one year after Goldman had been a major contributor to financial crisis. What kind of ‘value’ was he referring to?
His statement shows how the word “value” can being used to masquerade value-extracting activities. Value-extracting creates nothing new: it simply moves money around. It does not grow the economy, it does not lead to innovation, and it contributes to greater inequality. Indeed, Adam Smith argued that the free market was free from rent (not free from the state as most who quote him believe). But if we don’t know what value is, more rent-seeking filters into the economy.
In Economics, there were different theories of value that were based on production, whether it was farm labour (for the physiocrats) or factory labour (the ‘classicals’ Smith, Ricardo and Marx). Regardless of whether those theories were right or wrong, the extraordinary shift has been to go from a system where price was determined by value, to one where value is determined by price. 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. If you earn a lot you must be a value creator.
If we look at the current health innovation system as an example, are the pharmaceutical companies selling drugs at disproportionate, and in some case predatory, prices creating value? This idea of “value-based pricing” — where it is based on how much someone is willing to pay — becomes perverse when you apply it to life-saving drugs.
To bring value back to the heart of economic policy, it is not about calling finance predatory but rather asking how the financial sector can be transformed to actually fund areas in the real economy, rather than other parts of the financial sector (FIRE: finance, insurance and real estate). It means transforming the tax system to reward long-termism over short-termism, and to also create new institutions, such as public banks, that can foster the patient investments that innovation requires. And regulation should not be seen as intervention into the activities of the supposed wealth creators, but in terms of actively shaping and co-creating markets that better serve citizens. Value is created collectively so the rewards should also be shared collectively. Facebook exists because of the taxpayer-funded internet, and it makes money from data of citizens. Policy should not be only about taxing the digital companies but thinking how society can better benefit from the publicly funded technology and public data. And instead of Universal Basic Income (UBI), which is a ‘handout’ that the Silicon Valley wealth creators like to support, how about a dividend for users who helped create the wealth in the first place?
Watch Professor Mazzucato speak on The Value of Everything in her lecture as part of our British Library Series ‘Rethinking Public Value and Public Purpose in 21st Century Capitalism’.
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