One of the world's foremost economists, Mariana Mazzucato, looks at the crisis in modern capitalism and how we might reform it.
We often hear businesses, entrepreneurs or sectors talking about themselves as ‘wealth-creating’. The contexts may differ – finance, big pharma or small start-ups – but the self-descriptions are similar: I am a particularly productive member of the economy, my activities create wealth, I take big ‘risks’, and so I deserve a higher income than people who simply benefit from the spillovers of this activity. But what if, in the end, these descriptions are simply just stories? Narratives created in order to justify inequalities of wealth and income, massively rewarding the few who are able to convince governments and society that they deserve high rewards, while the rest of us make do with the leftovers.
In 2009 Lloyd Blankfein, CEO of Goldman Sachs, claimed that ‘The people of Goldman Sachs are among the most productive in the world.’ Yet, just the year before, Goldman had been a major contributor to the worst financial and economic crisis since the 1930s. US taxpayers had to stump up $125 billion to bail it out. In light of the terrible performance of the investment bank just a year before, such a bullish statement by the CEO was extraordinary. The bank laid off 3,000 employees between November 2007 and December 2009, and profits plunged. The bank and some its competitors were fined, although the amounts seemed small relative to later profits: fines of $550 million for Goldman and $297 million for J. P. Morgan, for example. Despite everything, Goldman – along with other banks and hedge funds – proceeded to bet against the very instruments which they had created and which had led to such turmoil.
Although there was much talk about punishing those banks that had contributed to the crisis, no banker was jailed, and the changes hardly dented the banks’ ability to continue making money from speculation: between 2009 and 2016 Goldman achieved net earnings of $63 billion on net revenues of $250 billion. In 2009 alone they had record earnings of $13.4 billion. And although the US government saved the banking system with taxpayers’ money, the government did not have the confidence to demand a fee from the banks for such high-risk activity. It was simply happy, in the end, to get its money back.
Until the 1960s, finance was not widely considered a ‘productive’ part of the economy
Financial crises, of course, are not new. Yet Blankfein’s exuberant confidence in his bank would have been less common half a century ago. Until the 1960s, finance was not widely considered a ‘productive’ part of the economy/pull quote. It was viewed as important for transferring existing wealth, not creating new wealth. Indeed, economists were so convinced about the purely facilitating role of finance that they did not even include most of the services that banks performed, such as taking in deposits and giving out loans, in their calculations of how many goods and services are produced by the economy. Finance sneaked into their measurements of Gross Domestic Product (GDP) only as an ‘intermediate input’ – a service contributing to the functioning of other industries that were the real value creators.
In around 1970, however, things started to change. The national accounts – which provide a statistical picture of the size, composition and direction of an economy – began to include the financial sector in their calculations of GDP, the total value of the goods and services produced by the economy in question. This change in accounting coincided with the deregulation of the financial sector which, among other things, relaxed controls on how much banks could lend, the interest rates they could charge and the products they could sell. Together, these changes fundamentally altered how the financial sector behaved, and increased its influence on the ‘real’ economy. No longer was finance seen as a staid career. Instead, it became a fast track for smart people to make a great deal of money. Indeed, <after the Berlin Wall fell in 1989, some of the cleverest scientists in Eastern Europe ended up going to work for Wall Street/pull quote>. The industry expanded, grew more confident. It openly lobbied to advance its interests, claiming that finance was critical for wealth creation.
Today the issue is not just the size of the financial sector, and how it has outpaced the growth of the non-financial economy (e.g. industry), but its effect on the behaviour of the rest of the economy, large parts of which have been ‘financialized’. Financial operations and the mentality they breed pervade industry, as can be seen when managers choose to spend a greater proportion of profits on share buy-backs – which in turn boost stock prices, stock options and the pay of top executives – than on investing in the long-term future of the business.
They call it value creation but, as in the financial sector itself, the reality is often the opposite: value extraction.
More about the author
Who really creates wealth in our world? And how do we decide the value of what they do? At the heart of today's financial and economic crisis is a problem hiding in plain sight.
In modern capitalism, value-extraction is rewarded more highly than value-creation: the productive process that drives a healthy economy and society. From companies driven solely to maximize shareholder value to astronomically high prices of medicines justified through big pharma's 'value pricing', we misidentify taking with making, and have lost sight of what value really means. Once a central plank of economic thought, this concept of value - what it is, why it matters to us - is simply no longer discussed.
Yet, argues Mariana Mazzucato in this penetrating and passionate new book, if we are to reform capitalism - radically to transform an increasingly sick system rather than continue feeding it - we urgently need to rethink where wealth comes from. Which activities create it, which extract it, which destroy it? Answers to these questions are key if we want to replace the current parasitic system with a type of capitalism that is more sustainable, more symbiotic - that works for us all. The Value of Everything will reignite a long-needed debate about the kind of world we really want to live in.