“Try not to become a man of success, but rather try to become a man of value”

Albert Einstein

This month we want to share with you a review of the book THE VALUE OF EVERYTHING.

This book was published in 2018 by Mariana Mazzucato, an American-Italian economist. Mariana Mazzucato is currently professor in Economics of Innovation, as well as Director of the Institute for Innovation and Public Purpose at the University College London and Dean of Economics of Innovation at the University of Sussex. In 2013, the American magazine The New Republic named Mariana as one of the top three thinkers of innovation in the world. The book that we are going to comment on was nominated as the Best Business Book 2018 by the Financial Times and the consulting firm McKinsey.

The Value of Everything analyzes the so-called classical and neoclassical currents of economic thought, the differentiation and importance of productive work against unproductive work, the traditional ways of measuring wealth at the national level, the role of the financial sector, whose inclusion in the system of National Accounts began in the 1970s, and the way in which the extraction of income from certain sectors of the population has contributed to the growing global inequality.

According to economists considered as part of the classical school, such as Adam Smith, David Ricardo and Carlos Marx, the value of goods produced resided in the labor invested in creatinig said good, such as the production of food or the manufacturing of clothing. However, in the early 19th century, neoclassical economists developed the Marginal Utility Theory, which focused on the consumer rather than the worker, relating the value of a good to the number of people who need it and its relative scarcity. One of the main economists who subscribed to this theory was the British Alfred Marshal: A very simple example to understand this theory is to ask how much money you would be willing to pay for a bottle of water when you are thirsty versus when you are not, this being different depending on the consumer’s need. With the entry of neoclassical economic thought, the value of labor took a back seat and priority was given to the subjective utility of the product or service from the consumer point of view.

Moving on to a macroeconomic level, the author comments on the most widely used and standardized method to measure wealth in a country: the Gross Domestic Product (GDP). The history of the use of GDP dates back to the post-war era when the United Nations developed the System of National Accounts to calculate GDP, which includes principles of the Marginal Utility Theory. Despite being an indicator widely used worldwide, the methodology to calculate it includes concepts that may be inconsistent once analyzed in detail. The issue of income generated by real estate rentals stands out, in which if a person owns the property they live in, the metric considers that a rent is being paid for said property even if this does not happen in reality. It is also important to emphasize that the GDP metric does not identify which services really add value to the economy and which ones extract value. Neither GDP captures the activity of the informal economy, reflects the level of equality or well-being with which citizens live, nor does it reflect more specific details of productivity, for example, how many vacations do workers take, what is the quality of basic services, or how many hours you have to work on average per day.

The author makes a very interesting analysis of the growth of the financial sector in the economy of developed countries since the 1970s, and concludes that the growth of the financial sector is not necessarily synonymous with positive economic development. Traditionally, the financial sector generated value for the economy by capturing savings and investing them in various productive projects and consequently generating economic growth for the general economy. However, today companies in the financial sector offer a wide range of services that go far beyond savings and loans. These companies have diversified into products that are much more sophisticated but also risky, such as the derivatives market or asset management, which do not necessarily generate wealth for the economy as a whole. For example, in the case of the United States or the United Kingdom, the financial sector has grown enormously since the 1970s, to the extent of accounting for 7% of GDP. The author considers that the excessive growth of the financial sector has contributed to inequality in our societies, by facilitating or encouraging the extraction of income from one sector of the population to another.

The economy of developed countries has become much more dependent on the financial sector in recent years, and as an example the author comments on companies that did not belong to the sector but that entered and generated a lot of value for their shareholders this way. She mentions the case of Ford Motor Company, which obtained higher profits by originating auto loans rather than by selling its own cars during the 2000s. She highlights the influence of the article by economist Milton Friedman, called “The Social Responsibility of Business is to Increase Profits” which was published in the New York Times, in which profit maximization is highlighted as the main objective of any business. Another issue discussed in the book is the case of companies with a high content of innovation, for example pharmaceutical or technology businesses, which end-up operating as monopolies, with little government regulation, low tax rates and even using financing from taxpayer money. The author shows concern for a system that encourages innovation but does not ensure that the wealth created by said innovation is distributed equitably in society, and therefore these innovative entities end-up being extractors of income from a sector of the population in favor of another, maximizing inequality.

The case of pharmaceutical companies realistically exemplifies the author’s comments on extraction of value. Companies in this sector have experienced a patent boom in recent times, which has allowed them to obtain millionaire profits, remaining shielded against competitors and keeping their prices high due to the perfectly inelastic demand that their medicines have (consumers will pay any price because there are simply no substitute products). Patents are used to extract value from the economy, as evidenced by the extremely high prices of some of these medical products. In other words, both pharmaceutical and technology start-ups benefit from scientific research that is often financed with public money. However, these start-ups are eventually acquired by private investors, who obtain high returns from the commercialization of the intellectual property produced through scientific research. The author calls for a reconsideration of the government’s role in correcting these issues.

Returning to the topic of GDP, the contribution of the public sector in its calculation is valued at almost zero, and even economists and politicians prefer not to calculate returns on investment in infrastructure works, as is the case of highways. Over the years, society has assimilated the paradigm that everything public is negative while what is private is positive. Obviously, there was a long history of nepotism, corruption and bad investments that have made the government sector many times synonymous with inefficiency. However, the author calls for rethinking what the role of government in the economy should be, not as an entity totally opposed to the private sector, but as a complementary entity, with whom one can work collaboratively and productively for the good of society.

One strong conclusion of the book is that we need to think more about the value of things rather than just their price. Since the emergence of the Marginal Utility Theory, value has largely been determined by price. As an example, when a pharmaceutical company receives billions for a patented drug, we should question ourselves: Is this generating value for society as a whole? If that money is not reinvested in the society, the answer is probably no. We have stopped distinguishing between value creation and value extraction, and that prevents us from making appropriate decisions.

I think that one of the most attractive points of this book is to think about the paradigms with which we have lived in the last 40 years, many of them linked to the so-called neoliberalism, and that have been taken as a favorite villain by many politicians in Latin America recently. The question about the role of the government is fundamental. While we cannot consider going back to a fully nationalized economic model, we are also discovering that the market cannot solve all problems, and a strong, fair, transparent referee is required to address the distortions that the market cannot fix. But that referee called government has to be efficient, transparent, highly technological, institutional, democratic and sustainable. Today, most governments in Latin America do not meet these characteristics. The pursuit of prosperity in the 21st century will have much to do with how to find the correct balance between the public and the private, how to better distribute wealth so that inequality gaps are reduced, and how to build institutional governments that do not depend of a single caudillo or a totalitarian state party to function properly.

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