What is economic value, and who creates it? | Mariana Mazzucato

Summary

In this lecture, the speaker challenges the contemporary understanding of value creation, arguing that modern economics has lost its way by focusing on subjective measures of value, like price, rather than the objective conditions of production. By revisiting historical economic thought, she critiques how value extraction is often mislabeled as value creation, especially in the financial sector. She emphasizes the need to rethink our measures of economic output and highlights the importance of reinvestment in productive activities, drawing on historical examples like the Moon landing and Bell Labs to illustrate the potential of collaborative value creation.

Takeaways

• 💡 The concept of 'value creation' and 'wealth creation' needs re-evaluation; we must distinguish between value creation and value extraction.
• 📉 The financial crisis of 2008 exposed flaws in how we perceive and measure value and productivity, especially in the financial sector.
• 🌾 Historically, the Physiocrats saw agricultural labor as the source of value, while classical economists focused on industrial labor.
• 🔄 Neoclassical economics shifted the focus from objective conditions of production to subjective individual decision-making and equilibrium prices.
• 📊 This shift has significant implications for how we measure economic growth, output, and value, often leading to a narrow focus on price as a determinant of value.
• 👩‍⚕️ Feminist and environmental economists criticize GDP for not accounting for unpaid work and negative externalities like pollution.
• 🏦 The financial sector's growth and inclusion in GDP post-1970s has led to finance financing itself, rather than contributing to the real economy.
• 📉 Business investment as a percentage of GDP has fallen, with profits increasingly used for share buybacks rather than reinvestment in production.
• 💊 In industries like pharmaceuticals, prices are set based on market tolerance, ignoring the collective value creation involving public funding.
• 🌍 To tackle modern challenges like climate change, we need to rethink value creation, emphasizing reinvestment and collaborative innovation beyond just financial metrics.

Q & A

What does the speaker suggest about the current understanding of 'value creation'?

The speaker suggests that the current understanding of 'value creation' is weak, lazy, and easily captured. This understanding has become less contested and more superficial compared to earlier economic theories.

Who were the Physiocrats and what was their view on value creation?

The Physiocrats were economists in the 18th century who believed that value creation was centered on agricultural labor. They created the 'Tableau Economique' to simulate economic scenarios and to understand how value was produced and distributed in society.

How did Adam Smith and other classical economists view value creation?

Classical economists like Adam Smith viewed value creation through industrial labor and the division of labor. Smith illustrated this with the example of a pin factory, showing how specialization and investment in human capital could significantly increase productivity.

What major shift occurred with the advent of neoclassical economics?

Neoclassical economics shifted the focus from objective conditions of production to subjective conditions. It emphasized individual decision-making, such as workers maximizing leisure vs. work, consumers maximizing utility, and firms maximizing profits. Prices and supply-demand curves became central, with prices revealing value.

How does the current economic system measure growth and output?

The current economic system primarily measures growth and output using GDP, which only includes activities with explicit prices. This method has several shortcomings, such as excluding unpaid work and considering pollution cleanup as economic growth.

What is the significance of finance in GDP, according to the speaker?

The speaker highlights that until 1970, most of the financial sector was not included in GDP. This changed when financial intermediation and risk-taking activities were added, despite finance primarily financing itself rather than the real economy.

What issue does the speaker raise regarding the reinvestment of profits in the industrial sector?

The speaker raises the issue of declining reinvestment of profits back into production, human capital training, and R&D. Instead, profits are often used for share buybacks, which boosts executive compensation but doesn't contribute to long-term economic growth.

How does the price system affect the pharmaceutical industry, according to the speaker?

In the pharmaceutical industry, prices often do not reflect the collective effort in creating value. For example, public funding plays a significant role in medical research, but the price system allows companies to set high prices based on market potential, not production costs.

What alternatives to GDP does the speaker mention?

The speaker mentions alternatives like gross national happiness indicators used in New Zealand and Bhutan, which focus on well-being and happiness rather than just economic output.

What lesson does the speaker draw from the Moon landing regarding value creation?

The speaker suggests that the Moon landing demonstrates the importance of collective investment in innovation and value creation, beyond immediate economic calculations. It involved public and private sector collaboration and focused on long-term goals, not just short-term profits.