With her book, ‘The Value of Everything’, Mazzucato is very successful in bringing the value debate back into the spotlight. What is value? How has its definition change through the course of time? Who creates and extracts value in an economy? These are all fundamental questions that Mazzucato believes are not currently given the attention they deserve.

Currently, most governments and economists use Gross Domestic Product growth to assess how much value is created in an economy. The ‘price times quantity’ way of looking at value, she believes, is greatly flawed. Money spent in rent seeking behaviour, unproductive investment where there is no demand for it and other destructive activities such as ones contributing to global warming all have a positive effect on GDP while extracting value from the economy.

Clearly, the current approach is not perfect, but it has come a long way. Quesnay, a French economist, was one of the first ones to define a production boundary – a clear distinction between economic activities that are productive (value creating) and those that are unproductive (value extracting). In ‘Tableau économique’, Quesnay claims that all value lies in the soil, nothing is created by humans themselves. Value lies in the resources available to us. Therefore, the activities that extract these resources for use are the only ones that create value, in his view. This includes farming, mining, and other primary sector activities. Everything else, he argues, lies outside the production boundary as it only involves refinement, trade, and use of those natural materials. These activities help use the value already created, but don’t create value themselves. Adam Smith disagreed, arguing that value comes from labour, and that secondary sector workers involved in production and manufacturing should also be included within the production boundary.

However, economic thinking took a huge turn with the ‘Marginal Revolution’. The ‘marginal revolutionaries’ defined value completely differently. They said that value is determined by the marginal utility that each product gives us. In other words, how much satisfaction each additional unit of a good would give the consumer. This, in turn determines the demand for the good and therefore the price. Therefore, the value of a product should be directly reflected in its price, and by extension every single transaction, sale or trade of any good creates value. This view on value theory is what gave birth to Neoclassical Economics in the early 1900s.

That is why GDP is used as a measure of value creation even today, but Mazzucato distances herself slightly from this approach. Mazzucato’s analysis of value creation in the economy focuses on three main sectors: finance, innovation and government (public sector). While all three are, overall, extensive value creators, Mazzucato points out a number of flaws in their functions.

Finance was seen as a value extracting activity for much of our economic history. Lenders who took interest payments were looked down upon. However, this all changed after the 1970s. Opinion gradually shifted towards the idea that government intervention was highly inefficient in the economy. People began to believe, for example, that market pressures would mean equilibrium prices are reached naturally. Thus, negative externalities from government policies would be avoided in a free market. In the finance sector, which was heavily regulated before the 1970s, deregulation was surprisingly rapid. Pension funds could participate in private equity and partner with hedge funds, increasing the availability of capital which could be invested, taxes on financial activities were reduced and financial investment took take place on a much greater scale, greatly fuelling innovation and value creation.

The initial success of the finance industry gave it much more lobbying power, allowing them to push for further tax cuts and pushing legislation that made it difficult for new players to enter the finance sector. This encouraged monopoly behaviour and allowed banks to control a very large share of the market. This meant they would inevitably have to be bailed out by the government in a financial crisis, which allowed them to become reckless.

The rapid buying and selling of mortgage bonds, for example, had become a common practice in the 2000s. This allowed banks to make real estate loans without worrying too much about defaults. The false perception that these bonds were low risk meant that banks purchased them without looking too closely at the underlying mortgages. Such lax lending standards fuelled a housing bubble and loan defaults eventually went through the roof. This was a major cause of the 2008 financial crisis.

Another aspect of finance, Mazzucato argues, is the fact that supposed wealth creation doesn’t actually end up creating value. This is due to the speculative nature of financial markets. Private Equity firms often buy a company, inflate its market cap through share buy-backs and sell it to another private equity firm, which would sell it to another and so on. Such activity means that the incentive is only to increase share prices in the short term, rather than invest in innovation and the business itself for long term value creation. CEOs worldwide are more often put under more pressure to deliver good performance on the stock market than expanding the business itself, which is counterproductive. Here, the opportunity to create value is lost due to financial pressure.

Innovation, on the other hand, consistently creates value but not nearly as much as its potential. This is partly due to value extracting activities from the finance sector, which invests at relatively late stages in companies, but receive rewards way out of proportion with the risks they took. If a greater proportion of profit stayed with companies, it is much more likely to be invested back into the company for productive future growth instead of in speculative, unproductive financial activities, Mazzucato argues.

Value extraction also takes place in patents. Originally intended to increase incentives for innovation by giving temporary monopoly power to its creators, patents achieve the opposite. These days, they are granted for a huge range of things, which restricts further advancements in research and development in their respective fields by prohibiting the use of the new patented technology. Another way value extraction occurs in innovation is when products are heavily overpriced. This is a common practice in the pharmaceuticals industry, where drug treatments can cost in the hundreds of thousands of dollars by simply exploiting their monopoly power. Often, these drugs are patented with exclusivity protection.

The public sector, Mazzucato believes, however, is given less credit than it deserves. Good education and infrastructure are part of the collective environment that allow value creating activities such as innovation to happen in the first place. Effective laws and enforcement of contracts provided by the government are also essential for a successful economy.

Furthermore, governments provide extensive research funding and investment to different sectors of the economy. Such funding gave rise to technologies like the internet and GPS, without which companies such as Google and Apple wouldn’t be nearly as big as they are today (since those innovations would then have come later). Yet, governments are not rewarded for the risk they take in investing in such tech startups and technologies, as much of the profits are taken by private equity firms at later stages.

The impression that all government intervention in the economy is bad and should be limited does not help either, as it demotivates the public sector from participating more in potentially value creating activities, instead becoming victims of corporate lobbying. A decrease in capital gains tax, for example, doesn’t actually increase investment in shares much (those investments would likely happen anyway) but does reduce government tax revenue greatly, lowering potential reinvestment of such revenue into value creating activities.

In conclusion, most economic activity is indeed value creating, as defined by the marginalists, but this theory has a great number of flaws which are exposed by Mazzucato. Therefore, there is much room for improved efficiency in the economy with a better understanding of value and the production boundary. And that is all that Mazzucato hopes for – popularising the value creation debate once again! This would then allow us to restructure the economy over time by introducing reform where it is needed.

Altogether, ‘The Value of Everything’ promises to be a very interesting read and will change the way you view different sectors of the economy. It puts you on a stage to think critically for yourself and enables you to form your own opinion of the true production boundary in economics.