The Value of Everything

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.