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Shortlisted for the FT & McKinsey Business Book of the Year Award
A scathing indictment of our current global financial system, The Value of Everything rigorously scrutinizes the way in which economic value has been accounted and reveals how economic theory has failed to clearly delineate the difference between value creation and value extraction. Mariana Mazzucato argues that the increasingly blurry distinction between the two categories has allowed certain actors in the economy to portray themselves as value creators, while in reality they are just moving around existing value or, even worse, destroying it.
The book uses case studies-from Silicon Valley to the financial sector to big pharma-to show how the foggy notions of value create confusion between rents and profits, reward extractors and creators, and distort the measurements of growth and GDP. In the process, innovation suffers and inequality rises.
The lesson here is urgent and sobering: to rescue our economy from the next inevitable crisis and to foster long-term economic growth, we will need to rethink capitalism, rethink the role of public policy and the importance of the public sector, and redefine how we measure value in our society.
Preface: Stories About Wealth Creation
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.1 During this period, productivity grew by about 60 per cent. Yet from 1979 onwards, real hourly wages for the great majority of American workers have stagnated or even fallen.2 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?
The Greek philosopher Plato once argued that storytellers rule the world. His great work The Republic was in part a guide to educating the leader of his ideal state, the Guardian. This book questions the stories we are being told about who the wealth creators are in modern-day capitalism, stories about which activities are productive as opposed to unproductive, and thus where value creation comes from. It 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.
These stories are everywhere. The contexts may differ–finance, big pharma or big tech–but the self-descriptions are similar: I am a particularly productive member of the economy, my activities create wealth, I take big ‘risks’, and so I deserve a higher income than people who simply benefit from the spillovers of this activity. But what if, in the end, these descriptions are simply just stories? Narratives created in 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. Consider some of these stories, first in the financial sector.
In 2009 Lloyd Blankfein, CEO of Goldman Sachs, claimed that ‘The people of Goldman Sachs are among the most productive in the world.’3 Yet, just the year before, Goldman had been a major contributor to the worst financial and economic crisis since the 1930s. US taxpayers had to stump up $125 billion to bail it out. In light of the terrible performance of the investment bank just a year before, such a bullish statement by the CEO was extraordinary. The bank laid off 3,000 employees between November 2007 and December 2009, and profits plunged.4 The bank and some its competitors were fined, although the amounts were small relative to later profits: fines of $550 million for Goldman and $297 million for J. P. Morgan, for example.5 Despite everything, Goldman–along with other banks and hedge funds–proceeded to bet against the very instruments which they had created and which had led to such turmoil.
Although there was much talk about punishing those banks that had contributed to the crisis, no banker was jailed, and the changes hardly dented the banks’ ability to continue making money from speculation: between 2009 and 2016 Goldman achieved net earnings of $63 billion on net revenues of $250 billion.6 In 2009 alone they had record earnings of $13.4 billion.7 And although the US government saved the banking system with taxpayers’ money, the government did not have the confidence to demand a fee from the banks for such high-risk activity. It was simply happy, in the end, to get its money back.
Financial crises, of course, are not new. Yet Blankfein’s exuberant confidence in his bank would have been less common half a century ago. Until the 1960s, finance was not widely considered a ‘productive’ part of the economy. It was viewed as important for transferring existing wealth, not creating new wealth. Indeed, economists were so convinced about the purely facilitating role of finance that they did not even include most of the services that banks performed, such as taking in deposits and giving out loans, in their calculations of how many goods and services are produced by the economy. Finance sneaked into their measurements of Gross Domestic Product (GDP) only as an ‘intermediate input’–a service contributing to the functioning of other industries that were the real value creators.
In around 1970, however, things started to change. The national accounts–which provide a statistical picture of the size, composition and direction of an economy–began to include the financial sector in their calculations of GDP, the total value of the goods and services produced by the economy in question.8 This change in accounting coincided with the deregulation of the financial sector which, among other things, relaxed controls on how much banks could lend, the interest rates they could charge and the products they could sell. Together, these changes 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. Indeed, after the Berlin Wall fell in 1989, some of the cleverest scientists in Eastern Europe ended up going to work for Wall Street. The industry expanded, grew more confident. It 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 (e.g. industry), but its effect on the behaviour of the rest of the economy, large parts of which have been ‘financialized’. Financial operations and the mentality they breed pervade industry, as can be seen when managers choose to spend a greater proportion of profits on share buy-backs–which in turn boost stock prices, stock options and the pay of top executives–than on investing in the long-term future of the business. They call it value creation but, as in the financial sector itself, the reality is often the opposite: value extraction.
But these stories of value creation are not limited to finance. 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. John LaMattina, former President of R&D at the drugs company Pfizer, argued that the high price of speciality drugs is justified by how beneficial they are for patients and for society in general. In practice, this means relating the price 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. The industry calls this ‘value-based pricing’. It’s an argument refuted by critics, who cite case studies that show no correlation between the price of cancer drugs and the benefits they provide.9 One interactive calculator (www.drugabacus.org), which enables you to establish the ‘correct’ price of a cancer drug on the basis of its valuable characteristics (the increase in life expectancy it provides to patients, its side effects, and so on), shows that for most drugs this value-based price is lower than the current market price.10
Yet drug prices are not falling. It seems that the industry’s value creation arguments have successfully neutralized criticism. Indeed, 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 favouring entrepreneurship and innovation, companies in the IT industry have often lobbied for less regulation and advantageous tax treatments. With ‘innovation’ as the new force in modern capitalism, Silicon Valley has successfully projected itself as the entrepreneurial force behind wealth creation–unleashing the ‘creative destruction’ from which the jobs of the future come.
This seductive story of value creation has lead 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 on profits from the sale of products whose inputs are patented, supposedly to incentivize innovation by rewarding the generation of intellectual property. It’s 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 favour 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.11 Thiel went so far as to set up a ‘secessionist movement’ in California so that the wealth creators could be as independent as possible from the heavy hand of government. 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 tax 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? Simply to pose this question, however, 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.
And yet–where does government fit into these stories of wealth creation. If there are so many wealth creators in industry, the inevitable conclusion is that at the opposite side of the spectrum featuring fleet-footed bankers, science-based pharmaceuticals and entrepreneurial geeks are the inert, value-extracting civil servants and bureaucrats in government. In this view, if private enterprise is the fast cheetah bringing innovation to the world, government is a plodding tortoise impeding progress–or, to invoke a different metaphor, a Kafkaesque bureaucrat, buried under papers, cumbersome and inefficient. Government is depicted as a drain on society, funded by obligatory taxes on long-suffering citizens. In this story, there is always only one conclusion: that we need more market and less state. The slimmer, trimmer and more efficient the state machine the better.
In all these cases, from finance to pharmaceuticals and IT, governments bend over backwards to attract these supposedly value-creating individuals and companies, dangling before them tax reductions and exemptions from the red tape 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. But who decided that they are creating value? What definition of value is used to distinguish value creation from value extraction, or even from value destruction?
Why have we so readily believed this narrative of good versus bad? 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 the private sector? What if there was actually no evidence for this story at all? What if it stemmed purely from a set of deeply ingrained ideas? What new stories might we tell?
Plato recognized that stories form character, culture and behaviour: ‘Our first business is to supervise the production of stories, and chose only those we think suitable, and reject the rest. We shall persuade mothers and nurses to tell our chosen stories to their children, and by means of them to mould their minds and characters rather than their bodies. The greater part of the stories current today we shall have to reject.’12
Plato disliked myths about ill-behaved gods. This book looks at a more modern myth, about value creation in the economy. Such myth-making, I argue, has allowed an immense amount of value extraction, enabling some individuals to become very rich and draining societal wealth in the process.
The purpose of this book is to change this state of things, and to do so by reinvigorating the debate about value that used to be–and, I argue, should still be–at the core of economic thinking. 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. So if you earn a lot you must be a value creator. I will argue 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. And in the process rents (unearned income) get confused with profits (earned income); inequality rises, and investment in the real economy falls. What’s more, if we cannot differentiate value creation from value extraction, it becomes nearly impossible to reward the former over the latter. 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.
In other words, this is not an abstract debate but one with far-reaching consequences–social and political as well as economic–for everyone. How we discuss value affects the way all of us, from giant corporations to the most modest shopper, behave as actors in the economy and in turn feeds back into the economy, and how we measure its performance. This is what philosophers call ‘performativity’: how we talk about things affects behaviour, and in turn how we theorize things. In other words, it is a self-fulfilling prophecy.
Oscar Wilde famously captured the value problem when he said that a cynic is one who knows the price of everything but the value of nothing. He was right–and indeed economics is known as the cynical science. But it is exactly for this reason that change in our economic system must be underpinned by bringing value back to the centre of our thinking–we need a revived ability to contest the way the word value is used, keeping alive the debate, and not allowing simple stories to affect who we think is productive and who is unproductive. Where do those stories come from–in whose interests are they told? If we cannot define what we mean by value, we cannot be sure to produce it, nor to share it fairly, nor to sustain economic growth. The understanding of value, then, is critical to all the other conversations we need to have about where our economy is going and how to change its course. And only then can economics go from being a cynical science to a hopeful one.
Introduction: Making versus Taking
The barbarous gold barons–they did not find the gold, they did not mine the gold, they did not mill the gold, but by some weird alchemy all the gold belonged to them.
Big Bill Haywood, founder of the Unites States’ first industrial union, 19291
Bill Haywood expressed his puzzlement eloquently. He represented men and women in the US mining industry at the start of the twentieth century and during the Great Depression of the 1930s. He was steeped in the industry. But even Haywood could not answer the question: why did the owners of capital, who did little but buy and sell gold on the market, make so much money, while workers who expended their mental and physical energy to find it, mine it and mill it, make so little? Why were the takers making so much money at the expense of the makers?
Similar questions are still being asked today. In 2016 the British high-street retailer BHS collapsed. It had been founded in 1928 and in 2004 was bought by Sir Philip Green, a well-known retail entrepreneur, for £200 million. In 2015 Sir Philip sold the business for £1 to a group of investors headed by the British businessman Dominic Chappell. While it was under his control, Sir Philip and his family extracted from BHS an estimated £580 million in dividends, rental payments and interest on loans they had made to the company. The collapse of BHS threw 11,000 people out of work and left its pension fund with a £571 million deficit, even though the fund had been in surplus when Sir Philip acquired it.2 A report on the BHS disaster by the House of Commons Work and Pensions Select Committee accused Sir Philip, Mr Chappell and their ‘hangers-on’ of ‘systematic plunder’. For BHS workers and pensioners who depended on the company for a decent living for their families, this was value extraction–the appropriation of gains vastly out of proportion to economic contribution–on an epic scale. For Sir Philip and others who controlled the business, it was value creation.
While Sir Philip’s activities could be viewed as an aberration, the excesses of an individual, his way of thinking is hardly unusual: today, many giant corporations are also guilty of confusing value creation with value extraction. In August 2016, for instance, the European Commission, the European Union’s (EU) executive arm, sparked an international row between the EU and the US when it ordered Apple to pay €13 billion in back taxes to Ireland.3
Apple is the world’s biggest company by stock market value. In 2015 it held a mountain of cash and securities outside the US worth $187 billion4–about the same size as the Czech Republic’s economy that year5–to avoid paying the US taxes that would be due on the profits if they were repatriated. Under a deal with Ireland dating back to 1991, two Irish subsidiaries of Apple received very generous tax treatment. The subsidiaries were Apple Sales International (ASI), which recorded all the profits earned on sales of iPhones and other Apple devices in Europe, the Middle East, Africa and India; and Apple Operations Europe, which made computers. Apple transferred development rights of its products to ASI for a nominal amount, thereby depriving the US taxpayer of revenues from technologies, embodied in Apple products, whose early development the taxpayer had funded. The European Commission alleged that the maximum rate payable on those profits booked through Ireland which were liable for tax was 1 per cent, but that in 2014 Apple paid tax at 0.005 per cent. The usual rate of corporation tax in Ireland is 12.5 per cent.
What is more, these ‘Irish’ subsidiaries of Apple are in fact not resident for tax purposes anywhere. This is because they have exploited discrepancies between the Irish and US definitions of residence. Almost all the profits earned by the subsidiaries were allocated to their ‘head offices’, which existed only on paper. The Commission ordered Apple to pay the back taxes on the grounds that Ireland’s deal with Apple constituted illegal state aid (government support that gives a company an advantage over its competitors); Ireland had not offered other companies similar terms. Ireland, the Commission alleged, had offered Apple ultra-low taxes in return for the creation of jobs in other Apple businesses there. Apple and Ireland rejected the Commission’s demand–and of course Apple is not the only major corporation to have constructed exotic tax structures.
But Apple’s value extraction cycle is not limited to its international tax operations–it is also much closer to home. Not only did Apple extract value from Irish taxpayers, but the Irish government has extracted value from the US taxpayer. Why so? Apple created its intellectual property in California, where its headquarters are based. Indeed, as I argued in my previous book, The Entrepreneurial State,6 and discuss briefly here in Chapter 7, all the technology that makes the smartphone smart was publicly funded. But in 2006 Apple formed a subsidiary in Reno, Nevada, where there is no corporate income or capital gains tax, in order to avoid state taxes in California. Creatively naming it Braeburn Capital, Apple channelled a portion of its US profits to the Nevada subsidiary instead of reporting it in California. Between 2006 and 2012, Apple earned $2.5 billion in interest and dividends reported in Nevada to avoid Californian tax. California’s infamously large debt would be significantly reduced if Apple fully and accurately reported its US revenues in that state, where a major portion of its value (architecture, design, sales, marketing and so on) originated. Value extraction thus pits US states against each other, as well as the US against other countries.
It is clear that Apple’s highly complex tax arrangements were principally designed to extract the maximum value from its business by avoiding paying substantial taxes which would have benefited the societies in which the company operated. Apple certainly creates value, of that there is no doubt: but to ignore the support taxpayers have given it, and then to pit states and countries against each other, is surely not the way to build an innovative economy or achieve growth that is inclusive, that benefits a wide section of the population, not only those best able to ‘game’ the system.
There is yet another dimension to Apple’s value extraction. Many such corporations use their profits to boost share prices in the short term instead of reinvesting them in production for the long term. The main way they do this is by using cash reserves to buy back shares from investors, arguing that this is to maximize shareholder ‘value’ (the income earned by shareholders in the company, based on the valuation of the company’s stock price). But it is no accident that among the primary beneficiaries of share buy-backs are managers with generous share option schemes as part of their remuneration packages–the same managers who implement the share buy-back programmes. In 2012, for example, Apple announced a share buy-back programme of up to a staggering $100 billion, partly to ward off ‘activist’ shareholders demanding that the company return cash to them to ‘unlock shareholder value’.7 Rather than reinvest in the business, Apple preferred to transfer cash to shareholders.
The alchemy of the takers versus the makers that Big Bill Haywood referred to back in the 1920s continues today.
COMMON CRITIQUES OF VALUE EXTRACTION
The vital but often muddled distinction between value extraction and value creation has consequences far beyond the fate of companies and their workers, or even of whole societies. The social, economic and political impacts of value extraction are huge. Prior to the 2007 financial crisis, the income share of the top 1 per cent in the US expanded from 9.4 per cent in 1980 to a staggering 22.6 per cent in 2007. And things are only getting worse. Since 2009 inequality has been increasing even more rapidly than before the 2008 financial crash. In 2015 the combined wealth of the planet’s sixty-two richest individuals was estimated to be about the same as that of the bottom half of the world’s population–3.5 billion people.8
So how does the alchemy continue to happen? A common critique of contemporary capitalism is that it rewards ‘rent seekers’ over true ‘wealth creators’. ‘Rent-seeking’ here refers to the attempt to generate income, not by producing anything new but by overcharging above the ‘competitive price’, and undercutting competition by exploiting particular advantages (including labour), or, in the case of an industry with large firms, their ability to block other companies from entering that industry, thereby retaining a monopoly advantage. Rent-seeking activity is often described in other ways: the ‘takers’ winning out over the ‘makers’, and ‘predatory’ capitalism winning over ‘productive’ capitalism. It’s seen as a key way–perhaps the key way–in which the 1 per cent have risen to power over the 99 per cent.9 The usual targets of such criticism are the banks and other financial institutions. They are seen as profiting from speculative activities based on little more than buying low and selling high, or buying and then stripping productive assets simply to sell them on again with no real value added.
More sophisticated analyses have linked rising inequality to the particular way in which the ‘takers’ have increased their wealth. The French economist Thomas Piketty’s influential book Capital in the Twenty-First Century focuses on the inequality created by a predatory financial industry that is taxed insufficiently, and by ways in which wealth is inherited across generations, which gives the richest a head start in getting even richer. Piketty’s analysis is key to understanding why the rate of return on financial assets (which he calls capital) has been higher than that on growth, and calls for higher taxes on the resultant wealth and inheritance to stop the vicious circle. Ideally, from his point of view, taxes of this sort should be global, so as to avoid one country undercutting another.
Another leading thinker, the US economist Joseph Stiglitz, has explored how weak regulation and monopolistic practices have allowed what economists call ‘rent extraction’, which he sees as the main impetus behind the rise of the 1 per cent in the US.10 For Stiglitz, this rent is the income obtained by creating impediments to other businesses, such as barriers to prevent new companies from entering a sector, or deregulation that has allowed finance to become disproportionately large in relation to the rest of the economy. The assumption is that, with fewer impediments to the functioning of economic competition, there will be a more equal distribution of income.11
I think we can go even further with these ‘makers’ versus ‘takers’ analyses of why our economy, with its glaring inequalities of income and wealth, has gone so wrong. To understand how some are perceived as ‘extracting value’, siphoning wealth away from national economies, while others are ‘wealth creators’ but do not benefit from that wealth, it is not enough to look at impediments to an idealized form of perfect competition. Yet mainstream ideas about rent do not fundamentally challenge how value extraction occurs–which is why it persists.
In order to tackle these issues at root, we need to examine where value comes from in the first place. What exactly is it that is being extracted? What social, economic and organizational conditions are needed for value to be produced? Even Stiglitz’s and Piketty’s use of the term ‘rent’ to analyse inequality will be influenced by their idea of what value is and what it represents. Is rent simply an impediment to ‘free-market’ exchange? Or is it due to their positions of power that some can earn ‘unearned income’–that is, income derived from moving existing assets around rather than creating new ones?12 This is a key question we will look at in Chapter 2.
WHAT IS VALUE?
Value can be defined in different ways, but at its heart it is the production of new goods and services. How these outputs are produced (production), how they are shared across the economy (distribution) and what is done with the earnings that are created from their production (reinvestment) are key questions in defining economic value. Also crucial is whether what it is that 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 the system around it, it could be seen as not valuable.
A finalist for the FT & McKinsey Business Book of the Year Award
"A stimulating analysis of the underlying causes of inequality and growth which forces us to confront long-held beliefs about how economies work and who benefits"
—Martin Wolf, Financial Times
"Mazzucato's mission is to overturn the now dominant neoclassical theory of value."
—George Eaton for New Statesman
"Mariana Mazzucato offers an exposé of how value extractors and rent-seekers have been masquerading as value creators in the global economy. And, furthermore, how the conventional wisdom has indulged them in this."
—Fran Boait for Prospect
- "[Mazzucato's] passionate call to empower policymakers to understand that the state's role is not secondary to the private sector is infectious."—PROSPECT
- "Mazzucato is fast emerging as one of the world's leading public intellectuals... [she] has offered the left a positive vision of growth based on innovation and profit-sharing, rather than sterile and counter-productive analysis based on the politics of resentment and expropriation."—SPECTATOR
- "Mazzucato sides with the actual makers, those who struggle in an economy tilted in favor of the ultrawealthy... she expresses specific incredulity about the banking sector's self-serving statements about wealth creation... She is especially eloquent when commenting on arrogant tech-giant billionaires such as Peter Thiel, who claims that his wealth accumulation occurred in spite of, rather than because of, government presence."—KIRKUS REVIEWS
- "Mazzucato's trenchant analysis is a compelling call to reinvent value as a key concept to help us achieve the world we all want."—NATURE
- "A fresh look at the meaning of value to the economy...This organized and easy-to-read book will appeal to curious readers as well as those interested in economics, investing, and public policy."—Booklist
- "A fundamental re-think of what constitutes real value in the economy."—Stephen Denning, Forbes.com
- "Mariana Mazzucato's insights into the current state of the economy, and how to think differently about it, are essential. Her new book, The Value of Everything, is outstanding."—Tim O'Reilly, author of WTF?: What's the Future and Why It's Up to Us
- On Sale
- May 12, 2020
- Page Count
- 384 pages