Friday, May 18, 2018

Who creates a nation's economic value?

Mariana Mazzucato has a new book coming out, The Value of Everything: Who Makes and Who Takes from the Real Economy. Who is Mariana Mazzucato? You should know her. She is one of the most interesting and creative economists writing about contemporary capitalism.
Her earlier book, The Entrepreneurial State, made quite a splash. In that book, she argued that the role of the state is not just to supply public goods the private sector ignores but needs (though this is very important) but also to be an entrepreneurial agent investing in areas that are far off the private sector’s radar screen because of extreme uncertainty in economic returns. This is particularly the case with fundamental knowledge generation and very early investments in new technological sectors. Current theories of economic growth assign such innovation a key role in economic growth and it is the “entrepreneurial state” in Mazzucato’s phrase who can afford—and is willing--to bear the inherently immeasurable risks of such innovation.
This has been the case in the United States where pretty much all research underlying the internet and modern computing was funded and initially capitalized by the US state. For example, the immensely profitable Apple corporation’s signature products, like the iphone and ipad, rest on fundamental innovations developed by government funding . This includes everything from the internet to GPS to touch screens to Siri voice recognition. In other words, no entrepreneurial state, no Apple.
More generally, a Brookings Institution study found that 18 of the 25 most important breakthroughs in computer technology in the seminal 1946-65 period were underwritten by the federal government . And it’s not just information technology where the role of the state has been critical: between 1971 and 2006, 77 out of the 88 most important innovations outside of computing/communications , as rated by R&D Magazine, were heavily dependent on government support, especially in their earliest developmental stages.
The role of the entrepreneurial state has been critical to growth in the past and there is no reason to think it will not be critical in the future. Progress in such emerging fields as biotechnology, nanotechnology and, of paramount importance, green technology will continue to depend on the entrepreneurial state being willing to provide support in areas where the private sector sees only unknowable risks. And without such progress both the quantity and quality of economic growth will fall well short of potential.
In her new book, she extends her critique of contemporary capitalism to the ways elements of the private sector extract value, rather than create it. As summarized by Martin Wolf in an excellent essay on her book in the Financial Times:
"Who creates value? Who extracts value? Who destroys value? If we mistake those who do the second or third for those who do the first, or mistake those who do the first for those who do the second or third, we will end up with impoverished and unhappy societies, in which plunderers rule.
Many advanced western countries, in particular the US and Britain, have already reached that state, according to Mariana Mazzucato. The consequences of this, including soaring inequality and declining growth are already visible, argues the author, a professor at University College London and sometime adviser to political parties and international institutions.
We need to change course, she insists, in this challenging and stimulating book. Among other things, we need to re-think the relationship between markets and governments; make a clear distinction between creators of wealth and those who merely extract it; embrace bolder collective ambitions, notably a shift to a greener economy; and spend on the future, instead of embracing a sterile and counterproductive austerity....
This book’s big point is that it is far too easy for those operating in the market economy to get rich by extracting economic value from those who add it, not by adding it themselves.
An obvious example is the way the financial sector generated a huge increase in household debt in the years leading to the financial crisis of 2007-09. This funded zero-sum competition to buy the existing housing stock at soaring prices. Its legacy included a huge crisis, a debt overhang, weak growth and political disenchantment. Yet, for those who created, manipulated and sold this debt, it was a gold mine. This represented value extraction and destruction.
Much the same picture can be seen in asset management, with its excessive trading, exorbitant fees, lack of transparency, poor stewardship and conflicts of interest. This financial sector, together with the “shareholder value maximisation” that economists have promoted, has had a malign effect on the corporate sector as a whole, argues Mazzucato, by encouraging excessive pay and also, partly to that end, manipulation of stock prices in preference to long-term investment.
That it is hard to see much wider economic benefit from the massive increase in the relative size and influence of finance over the past half century seems self-evident. Today, many western economies are, after all, burdened by high levels of private debt, high inequality and low rate of productivity growth. If this is success, what might failure look like?"
What indeed? The book looks like an essential read. I've got it on order.
A challenging analysis that forces us to reconsider how our economies work — and who it works for
FT.COM

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