The Value of Everything: A Review
Not long ago, I finished one of the most talked-about books among economists: “The Value of Everything: Making and Taking in the Global Economy” by Mariana Mazzucato. In my view, through this book, Mazzucato attempts to provide a critique of capitalism (or, more broadly, the “marginalist view”) without declaring capitalism a failed system.
The language she uses is fairly accessible. If you are reasonably familiar with economics, you will likely connect with the direction of her argument right away. If you are not, the opening chapters may be a bit confusing. That said, beyond her critique of how Gross Domestic Product (GDP) is calculated, the subsequent chapters are, in my opinion, quite digestible. Her critiques about who is productive (a value creator) and who is a value extractor – where she takes aim at financial services, the innovation process, and state ownership – are accessible to most readers.
In this review, I want to briefly discuss three points that I found most illuminating. Unfortunately, I cannot recall many of the book’s finer details (names, dates, companies, etc.), and I can no longer open the book because it was borrowed and I have already returned it. LOL. By the way, my friend’s name is Wannaphon Durongkaveroj and he wrote his review here if you are interested. It is a great review.
Back to my three points.
Critique of GDP: Does Productivity = GDP?
It is easy to forget the original purpose of a nation when we have been using a single indicator as the benchmark of success for too long. GDP has seemingly become the primary objective for government officials from the lowest ranks up to the President. No matter what happens, GDP must always grow! Sometimes I wonder: we are so preoccupied with asking why GDP is not growing that we forget to ask whether GDP is even the right indicator. Why are we so desperate to raise GDP? How much are we sacrificing for it?
For those of us too accustomed to using GDP, the historical journey of searching for the meaning of value is easy to overlook. The question of what constitutes value is a journey that predates GDP. Since ancient times, this question has been debated since well before Adam Smith. Some occupations were deemed productive because they generated goods and services (e.g., farmers), while others were considered unproductive, i.e., value extractors (e.g., landowners). Every era, every thinker, had their own somewhat subjective definition. Or, as this book puts it, objective – because value was not determined by market participants.
The debate was eventually settled by those Mazzucato calls “the marginalists,” who held that the value of an occupation is determined by how much consumers are willing to pay for it (yes! this is the foundation of modern economics that we all learn in school!). For marginalists, an activity has a different “value” for each person. These differences are hard to generalize because they are subjective to individual preferences. Ultimately, this sacrifice is measured by the “price” of a good: those who value it less will not buy or will make it themselves, while those who value it more will buy and perhaps even tip. From price emerged the idea of calculating GDP. Thus, value = price, productivity = GDP.
Calculating with prices means that an activity or good only has “value” if it has a price. The activity of “caring for a child” is considered valueless if done by a mother. But hand it over to a child care service, and suddenly that activity has value. If you raise catfish for your own consumption, your catfish have no value. By that logic, your work as a catfish farmer is considered pointless. Better to go to an office and earn a wage from a capital owner.
This creates problems when calculating GDP. Two households will have low GDP if each parent raises their own children. But if the mother in household A entrusts her child to household B, and household B’s mother entrusts her child to household A, each charging 100 thousand rupiah per day, suddenly the combined economy of A+B grows by 200 thousand. GDP grows!
This is a classic GDP measurement problem. But what makes this truly prone to bias is the inclusion of imputed rent for owner-occupied housing in GDP. If we use our own labor to raise catfish or mind our children and it does not count toward GDP, why should “renting” a house to ourselves count? GDP is very sensitive to methodological changes. A sensitive GDP leads to sensitive policy. To boost GDP, the state will focus on activities that have prices.
Price Volatility
We once learned that a commodity can serve as a medium of exchange only if its value is stable, enduring through time. On the other hand, we need a commodity that is highly liquid, easily divisible, and usable at any time. Hence we ended up using gold as payment, then shifted to money “backed by central banks.” Ironically, this highly liquid value seems to produce commodities with highly volatile values.
How do we value a company? If the company is publicly listed, perhaps the best way to assess whether it is valuable is through its share price. A company that performs very well (i.e., is productive) will have shares that many people want, and its price rises. Sounds great, right?
Mazzucato demonstrates in this book how easy it is to conjure a company into appearing “highly productive.” By shuffling “liabilities” and “assets” around, booking profits by cutting production capacity in the short term, the company can appear tremendously valuable to an inattentive buyer. The act of conjuring the books effectively becomes a productive activity because it adds value to the company (raising the share price). Shares that should reflect long-term value suddenly become instruments of short-term speculation – or what the movies call “short selling.”
The CEO of Goldman Sachs once said that Goldman Sachs employees are the most productive employees in the world. Mazzucato says the CEO was delusional. I am inclined to agree.
The Forgotten Government
Nowadays, entrepreneurs and startups are treated as the gods of innovation. Big tech companies like Google, Apple, or Facebook are hailed as cool and innovative. It is only fair they are as rich as they are, right? CEOs and startup founders take bold steps, investing in activities and products with uncertain returns. For Mazzucato, this is a myth.
The technologies “developed” by startups and entrepreneurs are typically the product of military or university research funded by the state. This applies to most of the technologies used by these capitalist giants, from tech to pharmaceuticals. These technologies had already been proven to have a very high probability of success. Yet when these technologies are commercialized, these capitalists act like the proverbial ungrateful nut that forgets its shell. They patent all sorts of things, making it hard for new entrepreneurs to enter. They set up subsidiaries and shift transactions to countries that charge as little tax as possible. The value “created” by these companies is not 100% self-made; rather, part of it is “extracted” from government. From public money. From you and me. (Well, actually from American taxpayers. LOL.)
Beyond that, she also critiques the supposed superiority of entrepreneurs by providing examples of state-owned enterprises that were privatized, where privatization did not improve performance and in some cases made things worse.
Highly Recommended!!
There are many more interesting points in the book, including some history lessons. But the three points above are what stuck with me the most. Mazzucato does not offer concrete solutions beyond urging us to think more carefully about value – the fundamental determinant of productivity – rather than merely price, which is so fragile (in the case of stocks, it can change in a matter of seconds). She also urges us to temper our delusions about startups and entrepreneurship, and to better appreciate the role of government in the economy. Think Scandinavian countries: still capitalism, but a mixed economy.
I highly recommend this book. It offers many insights into thinking beyond the theories taught in economics textbooks. I also strongly recommend it to anyone who likes debating capitalism vs. socialism vs. whatever other system. The arguments are well-structured and much easier to digest than cracking open books on free market theory and market failure, let alone digging into empirical evidence. Mazzucato presents it all beautifully.
