Picking up on the false innovation narrative, Chapter 8 will ask why the public sector is always described as slow, boring, bureaucratic and unproductive. Where did this depiction come from and who is benefiting from it? I will argue that, in the same way and at the same time that finance was made productive, the public sector has been made to appear unproductive. Modern economic thought has relegated government to just fixing market failures rather than actively creating and shaping markets. The value-creating role of the public sector, I contend, has been underestimated. The dominant view, which originated in the backlash against government in the 1980s, fundamentally affects how government sees itself: hesitant, cautious, careful not to overstep in case it should be accused of crowding out innovation, or accused of favouritism, ‘picking winners’. In questioning why public-sector activities are ignored in GDP accounting, I ask why this should matter, and outline what a different view of public value might look like.
It is, I conclude in Chapter 9, only through an open debate about value – its sources and the conditions that foster it – that we can help steer our economies in a direction that will produce more genuine innovation and less inequality, and which will also transform the financial sector into one that is truly focused on nurturing value creation in the real economy. It is not enough to critique speculation and short-term value extraction, and to argue for a more progressive tax system that targets wealth. We must ground those critiques in a different conversation about value creation, otherwise programmes for reform will continue to have little effect and will be easily lobbied against by the so-called ‘wealth creators’.
This book does not try to argue for one correct theory of value. Rather, it aims to bring back value theory as a hotly debated area, relevant to the turbulent economic times in which we find ourselves. Value is not a given thing, unmistakably either inside or outside the production boundary; it is shaped and created. In my view, today finance nurtures not the industries for which it is meant to ‘grease’ the wheels of commerce, but rather other parts of the financial sector itself. It thus lies outside the boundary, even though it is formally counted as being inside. But this does not have to be the case: we can shape financial markets so that they do indeed belong inside the boundary. This would include both new financial institutions dedicated to lending to those organizations interested in long-term high-risk investments that can help foster a more innovative economy, as well as changing measures in the tax code that reward long-term investments over short-term ones. Similarly, as I discuss in Chapter 7, changes to the current unhelpful use of patents could help them stimulate innovation rather than stifle it.
To create a fairer economy, one where prosperity is more broadly shared and is therefore more sustainable, we need to reinvigorate a serious discussion about the nature and origin of value. We must reconsider the stories we are telling about who the value creators are, and what that says to us about how we define activities as economically productive and unproductive. We cannot limit progressive politics to taxing wealth, but require a new understanding of and debate about wealth creation so that it is more fiercely and openly contested. Words matter: we need a new vocabulary for policymaking. Policy is not just about ‘intervening’. It is about shaping a different future: co-creating markets and value, not just ‘fixing’ markets or redistributing value. It’s about taking risks, not only ‘de-risking’. And it must not be about levelling the playing field but about tilting it towards the kind of economy we want.
This idea that we can shape markets has important consequences. We can create a better economy by understanding that markets are outcomes of decisions that are made – in business, in public organizations and in civil society. The eight-hour working day has formed markets – and that was the result of a fight held in labour organizations. And perhaps the reason there is so much despair across the globe – despair now leading to populist politics – is that the economy is presented to us simply as ‘made’ by trade rules, technocrats and neoliberal forces. Indeed, as the book will show, ‘value’ theory itself is presented as a sort of objective force determined by supply and demand, rather than deeply embedded in particular ways of seeing the world. The economy can indeed be made and shaped – but it can be done either in fear or in hope.
The specific challenge I pose here is to move beyond Oscar Wilde’s cynic, who knows the price of everything but the value of nothing, towards an economics of hope, where we are better empowered to question the assumptions of economic theory and how they are presented to us. And to choose a different path among the many that are available.
1
A Brief History of Value
There is one sort of labour which adds to the value of the subject upon which it is bestowed: there is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour.
Adam Smith, The Wealth of Nations (1776)
Today we take increasing prosperity for granted. We assume that by and large the next generation will be better off than the last. But it was not always so. For most of human history people had no such expectations and, partly because living standards improved at best very slowly, few thinkers devoted much time to asking why some economies grow and others do not. In the early modern period, the pace of change quickened. Previously static economies became dynamic. Movement was in the air. The rise of the nation state in Europe, the need to finance war, colonization, machinery, factories and coal, combined with expanding populations to stimulate new thinking across many fields. Governments and people of all stations in life wanted to know what was causing unprecedented movement and how it could be managed. What taxes can we raise? Why are my wages so low compared with the profits of capitalists? How sure can one be of the future when investing now? What creates value?
Understanding the nature of production is key to answering such questions. Once productive activities have been identified, economic policy can try to steer an economy, devoting a greater share of capital and effort to productive activities which propel and sustain economic growth. But the distinction between what is or is not productive has varied depending on economic, social and political forces. Ever since economists began to explore the changing conditions of production some 300 years ago they have struggled to provide a rationale for labelling some activities productive and others unproductive. After all, economists are creatures of their time like everyone else; in terms of understanding value, what’s important is to distinguish durable principles from transitory ones – and also, as we will see, the way that ideological positions develop.
This chapter explores how theories of value evolved from roughly the mid-seventeenth century to the mid-nineteenth century. The thinkers of the seventeenth century focused on how to calculate growth according to the needs of the time: fighting wars, or increasing competitiveness relative to another country – for example, England against its commercial and naval rival, Holland. The mercantilists focus on trade and the needs of merchants (selling things). From the mid-eighteenth to the late nineteenth century, economists saw value as arising from the amount of labour that went into production, at first farm labour (the physiocrats) and then industrial labour (the classicals). This value, they believed, therefore determined the price of what was finally sold. Their theories of value – of how wealth was created – were dynamic, reflecting a world being transformed socially and politically as well as economically. These economists focused on objective forces: the effects of changes in technology and the division of labour on how production and distribution are organized. Later, as we will see in the next chapter, they were superseded by another perspective – that of the neoclassicals – focused less on objective forces of production and more on the subjective nature of the ‘preferences’ of different actors in the economy.
THE MERCANTILISTS: TRADE AND TREASURE
Since ancient times, humanity has divided its economic activity into two types: productive and unproductive, virtuous and vile, indus
trious and lazy. The touchstone was generally what kind of activity was thought to further the common good. In the fourth century BC, Aristotle distinguished a variety of more or less virtuous jobs, depending on the class (citizen or slave) of the ancient Greek polis dweller.1 In the New Testament, the apostle Matthew reported that Jesus said it was ‘easier for a camel to go through the eye of a needle than for a rich man to enter into the Kingdom of God’.2 During the Middle Ages, the Church disparaged and even denounced moneylenders and merchants who ‘bought cheap and sold dear’;3 while they may not have been lazy, they were considered unproductive and vile.
Pre-modern definitions of what work was or was not useful were never clear-cut. With the onset of colonialism in the sixteenth century these definitions became even more blurred. European colonial conquest and the protection of trade routes with newly annexed lands were expensive. Governments had to find the money for armies, bureaucracies and the purchase of exotic merchandise. But help seemed to be at hand: extraordinary amounts of gold and silver were discovered in the Americas, and a vast treasure poured into Europe. As these precious metals represented wealth and prosperity, it seemed that whoever bought, owned and controlled the supply of them and the currencies minted from them was engaged in productive activities.
Scholars and politicians of the time who argued that accumulating precious metals was the route to national power and prosperity are called mercantilists (from mercator, the Latin word for merchant), because they espoused protectionist trade policies and positive trade balances to stimulate the inflow, and prevent the outflow, of gold and silver. The best-known English advocate of mercantilism was a merchant and director of the East India Company called Sir Thomas Mun (1571–1641). In his influential book England’s Treasure by Forraign Trade, Mun summed up the mercantilist doctrine: we must, he said, ‘sell more to strangers yearly than wee consume of theirs in value’.4
Mercantilists also defended the growth of national government as necessary to fund wars and expeditions to keep trade routes open and to control colonial markets. In England, Holland and France, mercantilists advocated shipping Acts, such as England’s Navigation Act of 1651, which forced their countries’ and colonies’ trade exclusively into ships flying the national flag.
As mercantilist thinking developed, and people started to conceive of wealth production in national terms, the first estimates of national income – the total amount everyone in the country earned – started to appear. Seventeenth-century Britain saw two groundbreaking attempts to quantify national income. One was by Sir William Petty (1623–87), an adventurer, anatomist, physician and Member of Parliament, who was a tax administrator in Ireland under Oliver Cromwell’s Commonwealth government.5 The other was by the herald Gregory King (1648–1712), a genealogist, engraver and statistician whose work on enacting a new tax on marriages, births and burials provoked his interest in national accounting.
Petty and King were ingenious in their use of incomplete and messy data to generate surprisingly detailed income estimates. They had to work with rudimentary government tax figures, estimates of population and patchy statistics on the consumption of basic commodities such as corn, wheat and beer. What their estimates lacked, however, was a clear value theory: Petty and King were concerned only with calculating the nation’s output, not with how that output came about. Nevertheless, their attempts at national accounting were unprecedented and laid the foundations for modern national accounts.
In the 1660s, as Petty worked on his income studies, England was emerging from its experiment with republicanism, and was struggling with Holland and France for supremacy at sea. Petty wanted to find out whether England had the resources to survive these threats to its security: as he put it, to ‘prove mathematically that the [English] State could raise a much larger revenue from taxes to finance its peace and wartime needs’,6 because he believed the country was richer than commonly thought.
Petty made a decisive breakthrough. He realized that income and expenditure at the national level should be the same. He understood that, if you treat a country as a closed system, each pound one person spends in it is another person’s income of one pound. It was the first time anyone had grasped and worked with this fundamental insight. To make up for the lack of available statistics, Petty worked on the assumption that a nation’s income is equal to its expenditure (omitting savings in good times, although he was aware of the potential discrepancy).7 That meant he could use expenditure per person, multiplied by population, to arrive at the nation’s income. In so doing he started, implicitly, to impose a production boundary, including within it only money spent on the production of ‘Food, Housing, Cloaths, and all other necessaries’.8 All other ‘unnecessary expenses’, as defined by Petty, were omitted.
In this way, by extension, Petty came to see any branch of the economy that did not produce those necessities as unproductive, adding nothing to national income. As he worked, his idea of the production boundary began to crystallize further, with ‘Husbandmen, Seamen, Soldiers, Artizans and Merchants … the very Pillars of any Common-Wealth’ on one side; and ‘all the other great Professions’ which ‘do rise out of the infirmities and miscarriages of these’ on the other.9 By ‘great professions’ Petty meant lawyers, clergymen, civil servants, lords and the like. In other words, for Petty some ‘great professions’ were merely a necessary evil – needed simply for facilitating production and for maintaining the status quo – but not really essential to production or exchange. Although Petty did not believe that policy should be focused on controlling imports and exports, the mercantilists influenced him heavily. ‘Merchandise’, he argued, was more productive than manufacture and husbandry; the Dutch, he noted approvingly, outsourced their husbandry to Poland and Denmark, enabling them to focus on more productive ‘Trades and curious Arts’.10 England, he concluded, would also benefit if more husbandmen became merchants.11
In the late 1690s, after the first publication of Petty’s work Political Arithmetick, Gregory King made more detailed estimates of England’s income. Like Petty, King was concerned with England’s war-making potential and compared the country’s income with those of France and Holland. Drawing on a wide variety of sources, he meticulously calculated the income and expenditure of some twenty different occupation groups in the country, from the aristocracy to lawyers, merchants to paupers. He even made forecasts, for example of population, predating the arrival of the forecasting ‘science’ some 250 years later, and estimated the crop yield of important agricultural items.
As in Petty’s work, an implicit production boundary began to emerge when King assessed productivity, which he defined as income being greater than expenditure. King thought merchant traders were the most productive group, their income being a quarter more than their expenditure, followed by the ‘temporal and spiritual lords’, then by a variety of prestigious professions. On the boundary were farmers, who earned almost no more than they spent. Firmly on the ‘unproductive’ side were seamen, labourers, servants, cottagers, paupers and ‘common soldiers’.12 In King’s view, the unproductive masses, representing slightly more than half the total population, were leeches on the public wealth because they consumed more than they produced.
Figure 2 shows that there were discrepancies between the ‘productive’ professions Petty and King identified. Almost all the professions Petty deemed unproductive King later saw as productive, while several of those producing value for Petty – seamen, soldiers and unskilled labourers – did not make the cut in King’s analysis. Their different views may have stemmed from their backgrounds. A man of humble origins and republican instincts, Petty started out serving Oliver Cromwell; moving in aristocratic and court circles, King was perhaps less inclined to think that Petty’s ‘great professions’ were unproductive. Both, however, classed ‘vagrants’ as unproductive, an analysis that has parallels today with people receiving welfare from governments financed by taxes on the productive sectors.
Some of Petty’s and King’
s ideas have proved remarkably durable.13 Perhaps most importantly, in what they both called ‘Political Arithmetick’ they laid the basis for what we today call the ‘national accounts’ to calculate GDP, the compass by which countries attempt to steer their national economic ships.
Figure 2. The production boundary in the 1600s
Mercantilist ideas still resonate in current economic practices. Modern ‘management’ of exchange rates by governments, trying to steal a competitive advantage for exports and accumulate foreign exchange reserves, harks back to mercantilist notions of boosting exports to accumulate gold and silver. Tariffs, import quotas and other measures to control trade and support domestic enterprises are also reminiscent of these early ideas about how value is created. There is basically nothing new in the calls to protect Western steel producers from Chinese imports or to subsidize domestic low-carbon energy generation to substitute for imports of oil, gas and coal. The emphasis by populist politicians on the negative effect of free trade, and the need to put up different types of walls to prevent the free movement of goods and labour, also gestures back to the mercantilist era, with emphasis more on getting the prices right (including exchange rates and wages) than on making the investments needed to create long-run growth and higher per capita income.
Petty and King were seminal figures in these early forays into the question of how and where value is created. Yet, ultimately, both could label productive and unproductive occupations however they chose. Their work was purely descriptive. It did not attempt to quantify or model relations between different groups and individuals in the economy,14 or to quantify how the system reproduced itself and maintained the conditions for future production. In short, their work was not linked to an underlying theory of what constitutes wealth and where it comes from: a value theory. Any policy for economic growth was therefore idiosyncratic because it was unclear what generated it. But during the following century, this would start to change.
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