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.

Outlines

00:00

💡 The Importance of Understanding Value Creation

The speaker emphasizes the significance of the terms 'value creation' and 'wealth creation,' highlighting the need for a proper theory of value. They criticize the lack of distinction between value creators and others, using the example of Goldman Sachs claiming high productivity shortly after the financial crisis. This claim is contested given the role financial institutions played in causing economic hardship. The speaker suggests revisiting historical economic theories to better understand value creation and its implications.

05:00

🏭 Historical Perspectives on Value: From Agricultural to Industrial Labor

The speaker explores the evolution of economic thought on value creation. Starting with the Physiocrats, who focused on agricultural labor as the source of value, they developed the 'Tableau Economique' to analyze value distribution. The classical economists, including Adam Smith and David Ricardo, shifted the focus to industrial labor during the Industrial Revolution. They emphasized the importance of reinvestment in production and innovation. The speaker notes that this historical contestation of value is crucial for understanding modern economic challenges.

10:02

📈 The Shift to Neoclassical Economics and Its Impact on Value Perception

The speaker explains the transition to neoclassical economics, which introduced a subjective approach to understanding economic behavior. This paradigm focuses on individual decision-making and the aggregation of choices into supply and demand curves, leading to equilibrium prices that purportedly reveal value. The speaker critiques this shift, arguing that it overlooks the objective conditions of production and leads to flawed measures of economic output. Examples such as GDP calculations and the inclusion of financial sector activities illustrate the consequences of this change.

15:03

💼 The Problem of Financialization and Its Effects on the Real Economy

The speaker discusses the increasing financialization of the economy, where finance grows faster than other sectors and often serves itself rather than the real economy. This trend is evident in the rise of financial intermediation and the prioritization of shareholder value over productive reinvestment. The speaker highlights the issue of share buybacks and the decline in business investment, which negatively impacts job creation and economic growth. They call for a reassessment of how value is created and measured in the economy, advocating for a focus on long-term investment and innovation.

Keywords

💡Value Creation

Value creation refers to activities that increase the worth of goods, services, or business. In the video, the speaker emphasizes the need to distinguish between genuine value creation and value extraction, highlighting the misapplication of the term by financial sectors like Goldman Sachs after the 2008 crisis.

💡Wealth Creation

Wealth creation is the process of generating economic value or prosperity. The speaker questions who the real wealth creators are and suggests that contemporary society often conflates wealth creation with value extraction, leading to economic mismanagement.

💡Value Extraction

Value extraction involves taking value out of a system rather than adding to it. The video critiques how financial sectors, particularly during and after the 2008 crisis, were more focused on extracting value through mechanisms like mortgage-backed securities rather than creating new value.

💡Physiocrats

The Physiocrats were 18th-century economists who believed that agricultural labor was the source of all value. The speaker references their work to illustrate how past economic theories focused on different sectors, such as farming, to understand value creation.

💡Classical Economists

Classical economists, including Adam Smith and Karl Marx, believed industrial labor created value. The video discusses how they differentiated between productive and unproductive labor and focused on reinvesting value to sustain economic growth.

💡Neoclassical Economics

Neoclassical economics shifts the focus from objective conditions to subjective decision-making by individuals. The speaker criticizes this shift for oversimplifying value by equating it with prices determined by supply and demand.

💡Financial Intermediation

Financial intermediation refers to the process by which financial institutions like banks facilitate the channeling of funds from savers to borrowers. The video criticizes how the financial sector's growing share of GDP post-1970 led to finance financing itself, rather than contributing to the real economy.

💡Share Buybacks

Share buybacks occur when a company repurchases its own shares to reduce the number available on the open market. The speaker argues that excessive buybacks in the industrial sector divert funds from productive investments, like R&D and employee training, harming long-term economic health.

💡Gross National Happiness

Gross National Happiness (GNH) is an alternative measure of economic success that prioritizes well-being over financial metrics. The speaker highlights New Zealand and Bhutan's use of GNH as an example of rethinking how we measure economic output and societal progress.

💡Moon Landing

The Moon landing is used as an example of successful value creation through public and private sector collaboration. The speaker argues that ambitious, collective investments in projects like the Moon landing generate significant innovation and value, challenging narrow economic calculations focused solely on immediate financial returns.

Highlights

The speaker emphasizes the need for a proper theory of value to differentiate between value creation and value extraction.

2009 financial crisis context: The CEO of Goldman Sachs claimed their workers were the most productive, despite the bank's role in the crisis.

Historical perspective: 300 years ago, the Physiocrats focused on farm labor as the source of value in an agricultural society.

The Tableau Economique by François Quesnay was one of the first economic models to analyze value distribution in society.

The Industrial Revolution shifted focus to industrial labor as the source of value, with figures like Adam Smith and Karl Marx contributing to this perspective.

The classical economists distinguished between productive and unproductive activities, raising questions about the allocation of resources.

Neoclassical economics introduced a subjective approach, focusing on individual decision-making and price as a measure of value.

The inclusion of finance in GDP measurements only began in the 1970s, highlighting a shift in how value is perceived.

Finance has increasingly focused on self-financing, with a significant portion of financial activity not contributing to the real economy.

The issue of share buybacks in the industrial sector reflects a lack of reinvestment into productive activities.

Mechanization and automation require reinvestment into production to ensure job creation and economic growth.

The pharmaceutical industry's price-setting mechanisms often overlook the collective contributions to value creation, such as public funding for research.

Alternative measures of economic success, like gross national happiness in New Zealand and Bhutan, challenge traditional GDP-focused metrics.

The importance of long-term investment and patient finance in fostering innovation and sustainable growth.

The speaker highlights the collective effort and investment needed for significant achievements, using the Moon landing as an example of value creation beyond just price.

Transcripts

Value creation.

Wealth creation.

These are really powerful words.

Maybe you think of finance, you think of innovation,

you think of creativity.

But who are the value creators?

If we use that word, we must be implying that some people aren't creating value.

Who are they?

The couch potatoes?

The value extractors?

The value destroyers?

To answer this question, we actually have to have a proper theory of value.

And I'm here as an economist to break it to you

that we've kind of lost our way on this question.

Now, don't look so surprised.

What I mean by that is, we've stopped contesting it.

We've stopped actually asking really tough questions

about what is the difference between value creation and value extraction,

productive and unproductive activities.

Now, let me just give you some context here.

2009 was just about a year and a half after

one of the biggest financial crises of our time,

second only to the 1929 Great Depression,

and the CEO of Goldman Sachs said

Goldman Sachs workers are the most productive in the world.

Productivity and productiveness, for an economist,

actually has a lot to do with value.

You're producing stuff,

you're producing it dynamically and efficiently.

You're also producing things that the world needs, wants and buys.

Now, how this could have been said just one year after the crisis,

which actually had this bank as well as many other banks --

I'm just kind of picking on Goldman Sachs here --

at the center of the crisis, because they had actually produced

some pretty problematic financial products mainly but not only related to mortgages,

which saw many thousands of people actually lose their homes.

In 2010, in just one month, September,

120,000 people lost their homes through the foreclosures of that crisis.

Between 2007 and 2010,

8.8 million people lost their jobs.

The bank also had to then be bailed out by the US taxpayer

for the sum of 10 billion dollars.

We didn't hear the taxpayers bragging that they were value creators,

but obviously, having bailed out

one of the biggest value-creating productive companies,

perhaps they should have.

What I want to do next is kind of ask ourselves

how we lost our way,

how it could be, actually,

that a statement like that could almost go unnoticed,

because it wasn't an after-dinner joke; it was said very seriously.

So what I want to do is bring you back 300 years in economic thinking,

when, actually, the term was contested.

It doesn't mean that they were right or wrong,

but you couldn't just call yourself a value creator, a wealth creator.

There was a lot of debate within the economics profession.

And what I want to argue is, we've kind of lost our way,

and that has actually allowed this term, "wealth creation" and "value,"

to become quite weak and lazy

and also easily captured.

OK? So let's start -- I hate to break it to you --

300 years ago.

Now, what was interesting 300 years ago

is the society was still an agricultural type of society.

So it's not surprising that the economists of the time,

who were called the Physiocrats,

actually put the center of their attention to farm labor.

When they said, "Where does value come from?"

they looked at farming.

And they produced what I think was probably the world's first spreadsheet,

called the "Tableau Economique,"

and this was done by François Quesnay, one of the leaders of this movement.

And it was very interesting,

because they didn't just say, "Farming is the source of value."

They then really worried about what was happening to that value

when it was produced.

What the Tableau Economique does --

and I've tried to make it a bit simpler here for you --

is it broke down the classes in society into three.

The farmers, creating value, were called the "productive class."

Then others who were just moving some of this value around

but it was useful, it was necessary,

these were the merchants;

they were called the "proprietors."

And then there was another class that was simply charging the farmers a fee

for an existing asset, the land,

and they called them the "sterile class."

Now, this is a really heavy-hitting word if you think what it means:

that if too much of the resources are going to the landlords,

you're actually putting the reproduction potential of the system at risk.

And so all these little arrows there were their way of simulating --

again, spreadsheets and simulators, these guys were really using big data --

they were simulating what would actually happen under different scenarios

if the wealth actually wasn't reinvested back into production

to make that land more productive

and was actually being siphoned out in different ways,

or even if the proprietors were getting too much.

And what later happened in the 1800s,

and this was no longer the Agricultural Revolution

but the Industrial Revolution,

is that the classical economists,

and these were Adam Smith, David Ricardo, Karl Marx, the revolutionary,

also asked the question "What is value?"

But it's not surprising that because they were actually living

through an industrial era with the rise of machines and factories,

they said it was industrial labor.

So they had a labor theory of value.

But again, their focus was reproduction,

this real worry of what was happening to the value that was created

if it was getting siphoned out.

And in "The Wealth of Nations,"

Adam Smith had this really great example of the pin factory where he said

if you only have one person making every bit of the pin,

at most you can make one pin a day.

But if you actually invest in factory production and the division of labor,

new thinking --

today, we would use the word "organizational innovation" --

then you could increase the productivity

and the growth and the wealth of nations.

So he showed that 10 specialized workers

who had been invested in, in their human capital,

could produce 4,800 pins a day,

as opposed to just one by an unspecialized worker.

And he and his fellow classical economists

also broke down activities into productive and unproductive ones.

(Laughter)

And the unproductive ones weren't --

I think you're laughing because most of you are on that list, aren't you?

(Laughter)

Lawyers! I think he was right about the lawyers.

Definitely not the professors, the letters of all kind people.

So lawyers, professors, shopkeepers, musicians.

He obviously hated the opera.

He must have seen the worst performance of his life

the night before writing this book.

There's at least three professions up there

that have to do with the opera.

But this wasn't an exercise of saying, "Don't do these things."

It was just, "What's going to happen

if we actually end up allowing some parts of the economy to get too large

without really thinking about how to increase the productivity

of the source of the value that they thought was key,

which was industrial labor.

And again, don't ask yourself is this right or is this wrong,

it was just very contested.

By making these lists,

it actually forced them also to ask interesting questions.

And their focus, as the focus of the Physiocrats,

was, in fact, on these objective conditions of production.

They also looked, for example, at the class struggle.

Their understanding of wages

had to do with the objective, if you want, power relationships,

the bargaining power of capital and labor.

But again, factories, machines, division of labor,

agricultural land and what was happening to it.

So the big revolution that then happened --

and this, by the way, is not often taught in economics classes --

the big revolution that happened with the current system

of economic thinking that we have,

which is called "neoclassical economics,"

was that the logic completely changed.

It changed in two ways.

It changed from this focus on objective conditions to subjective ones.

Let me explain what I mean by that.

Objective, in the way I just said.

Subjective, in the sense that all the attention went to

how individuals of different sorts make their decisions.

OK, so workers are maximizing their choices of leisure versus work.

Consumers are maximizing their so-called utility,

which is a proxy for happiness,

and firms are maximizing their profits.

And the idea behind this was that then we can aggregate this up,

and we see what that turns into,

which are these nice, fancy supply-and-demand curves

which produce a price,

an equilibrium price.

It's an equilibrium price, because we also added to it

a lot of Newtonian physics equations

where centers of gravity are very much part of the organizing principle.

But the second point here is that that equilibrium price, or prices,

reveal value.

So the revolution here is a change from objective to subjective,

but also the logic is no longer one of what is value,

how is it being determined,

what is the reproductive potential of the economy,

which then leads to a theory of price

but rather the reverse:

a theory of price and exchange

which reveals value.

Now, this is a huge change.

And it's not just an academic exercise, as fascinating as that might be.

It affects how we measure growth.

It affects how we steer economies to produce more of some activities,

less of others,

how we also remunerate some activities more than others.

And it also just kind of makes you think,

you know, are you happy to get out of bed if you're a value creator or not,

and how is the price system itself if you aren't determining that?

I mentioned it affects how we think about output.

If we only include, for example, in GDP,

those activities that have prices,

all sorts of really weird things happen.

Feminist economists and environmental economists

have actually written about this quite a bit.

Let me give you some examples.

If you marry your babysitter, GDP will go down, so do not do it.

Do not be tempted to do this, OK?

Because an activity that perhaps was before being paid for is still being done

but is no longer paid.

(Laughter)

If you pollute, GDP goes up.

Still don't do it, but if you do it, you'll help the economy.

Why? Because we have to actually pay someone to clean it.

Now, what's also really interesting is what happened to finance

in the financial sector in GDP.

This also, by the way, is something I'm always surprised

that many economists don't know.

Up until 1970,

most of the financial sector was not even included in GDP.

It was kind of indirectly, perhaps not knowingly,

still being seen through the eyes of the Physiocrats

as just kind of moving stuff around, not actually producing anything new.

So only those activities that had an explicit price were included.

For example, if you went to get a mortgage, you were charged a fee.

That went into GDP and the national income and product accounting.

But, for example, net interest payments didn't,

the difference between what banks were earning in interest

if they gave you a loan and what they were paying out for a deposit.

That wasn't being included.

And so the people doing the accounting started to look at some data,

which started to show that the size of finance

and these net interest payments

were actually growing substantially.

And they called this the "banking problem."

These were some people working inside, actually, the United Nations

in a group called the Systems of National [Accounts], SNA.

They called it the "banking problem,"

like, "Oh my God, this thing is huge, and we're not even including it."

So instead of stopping and actually making that Tableau Economique

or asking some of these fundamental questions

that also the classicals were asking about what is actually happening,

the division of labor between different types of activities in the economy,

they simply gave these net interest payments a name.

So the commercial banks, they called this "financial intermediation."

That went into the NIPA accounts.

And the investment banks were called the "risk-taking activities,"

and that went in.

In case I haven't explained this properly,

that red line is showing how much quicker

financial intermediation as a whole was growing

compared to the rest of the economy, the blue line, industry.

And so this was quite extraordinary,

because what actually happened, and what we know today,

and there's different people writing about this,

this data here is from the Bank of England,

is that lots of what finance was actually doing

from the 1970s and '80s on

was basically financing itself:

finance financing finance.

And what I mean by that is finance, insurance and real estate.

In fact, in the UK,

something like between 10 and 20 percent of finance

finds its way into the real economy, into industry,

say, into the energy sector, into pharmaceuticals,

into the IT sector,

but most of it goes back into that acronym, FIRE:

finance, insurance and real estate.

It's very conveniently called FIRE.

Now, this is interesting because, in fact,

it's not to say that finance is good or bad,

but the degree to which,

by just having to give it a name,

because it actually had an income that was being generated,

as opposed to pausing and asking, "What is it actually doing?" --

that was a missed opportunity.

Similarly, in the real economy, in industry itself, what was happening?

And this real focus on prices and also share prices

has created a huge problem of reinvestment,

again, this real attention that both the Physiocrats and the classicals had

to the degree to which the value that was being generated in the economy

was in fact being reinvested back in.

And so what we have today is an ultrafinancialized industrial sector

where, increasingly, a share of the profits and the net income

are not actually going back into production,

into human capital training, into research and development

but just being siphoned out in terms of buying back your own shares,

which boosts stock options, which is, in fact, the way

that many executives are getting paid.

And, you know, some share buybacks is absolutely fine,

but this system is completely out of whack.

These numbers that I'm showing you here

show that in the last 10 years, 466 of the S and P 500 companies

have spent over four trillion on just buying back their shares.

And what you see then if you aggregate this up at the macroeconomic level,

so if we look at aggregate business investment,

which is a percentage of GDP,

you also see this falling level of business investment.

And this is a problem.

This, by the way, is a huge problem for skills and job creation.

You might have heard there's lots of attention these days

to, "Are the robots taking our jobs?"

Well, mechanization has for centuries, actually, taken jobs,

but as long as profits were being reinvested back into production,

then it didn't matter: new jobs appeared.

But this lack of reinvestment is, in fact, very dangerous.

Similarly, in the pharmaceutical industry, for example, how prices are set,

it's quite interesting how it doesn't look at these objective conditions

of the collective way in which value is created in the economy.

So in the sector where you have lots of different actors --

public, private, of course, but also third-sector organizations --

creating value,

the way we actually measure value in this sector

is through the price system itself.

Prices reveal value.

So when, recently,

the price of an antibiotic went up by 400 percent overnight,

and the CEO was asked, "How can you do this?

People actually need that antibiotic.

That's unfair."

He said, "Well, we have a moral imperative

to allow prices to go what the market will bear,"

completely dismissing the fact that in the US, for example,

the National Institutes of Health spent over 30 billion a year

on the medical research that actually leads to these drugs.

So, again, a lack of attention to those objective conditions

and just allowing the price system itself to reveal the value.

Now, this is not just an academic exercise,

as interesting as it may be.

All this really matters [for] how we measure output,

to how we steer the economy,

to whether you feel that you're productive,

to which sectors we end up helping, supporting

and also making people feel proud to be part of.

In fact, going back to that quote,

it's not surprising that Blankfein could say that.

He was right.

In the way that we actually measure production, productivity

and value in the economy,

of course Goldman Sachs workers are the most productive.

They are in fact earning the most.

The price of their labor is revealing their value.

But this becomes tautological, of course.

And so there's a real need to rethink.

We need to rethink how we're measuring output,

and in fact there's some amazing experiments worldwide.

In New Zealand, for example, they now have a gross national happiness indicator.

In Bhutan, also, they're thinking about happiness and well-being indicators.

But the problem is that we can't just be adding things in.

We do have to pause,

and I think this should be a moment for pause,

given that we see so little has actually changed

since the financial crisis,

to make sure that we are not also confusing

value extraction with value creation,

so looking at what's included, not just adding more,

to make sure that we're not, for example, confusing rents with profits.

Rents for the classicals was about unearned income.

Today, rents, when they're talked about in economics,

is just an imperfection towards a competitive price

that could be competed away if you take away some asymmetries.

Second, we of course can steer activities into what the classicals called

the "production boundary."

This should not be an us-versus-them,

big, bad finance versus good, other sectors.

We could reform finance.

There was a real lost opportunity in some ways after the crisis.

We could have had the financial transaction tax,

which would have rewarded long-termism over short-termism,

but we didn't decide to do that globally.

We can. We can change our minds.

We can also set up new types of institutions.

There's different types of, for example, public financial institutions worldwide

that are actually providing that patient, long-term, committed finance

that helps small firms grow, that help infrastructure and innovation happen.

But this shouldn't just be about output.

This shouldn't just be about the rate of output.

We should also as a society pause

and ask: What value are we even creating?

And I just want to end with the fact that this week we are celebrating

the 50th anniversary of the Moon landing.

This required the public sector, the private sector,

to invest and innovate in all sorts of ways,

not just around aeronautics.

It included investment in areas like nutrition and materials.

There were lots of actual mistakes that were done along the way.

In fact, what government did was it used its full power of procurement,

for example, to fuel those bottom-up solutions,

of which some failed.

But are failures part of value creation?

Or are they just mistakes?

Or how do we actually also nurture the experimentation,

the trial and error and error and error?

Bell Labs, which was the R and D laboratory of AT and T,

actually came from an era where government was quite courageous.

It actually asked AT and T that in order to maintain its monopoly status,

it had to reinvest its profits back into the real economy,

innovation

and innovation beyond telecoms.

That was the history, the early history of Bell Labs.

So how we can get these new conditions around reinvestment

to collectively invest in new types of value

directed at some of the biggest challenges of our time,

like climate change?

This is a key question.

But we should also ask ourselves,

had there been a net present value calculation

or a cost-benefit analysis done

about whether or not to even try to go to the Moon and back again

in a generation,

we probably wouldn't have started.

So thank God,

because I'm an economist, and I can tell you,

value is not just price.

Thank you.

(Applause)