Professor Mariana Mazzucato is everywhere. According to the Wikipedia, she teaches Economics of Innovation and Public Value at University College London, she chairs the WHO Council on the Economics of Health for All, is member of the Scottish Government's Council of Economic Advisers, the South African President's Economic Advisory Council, and the United Nations' High-Level Advisory Board on Economic and Social Affairs. She has been advisor of the Italian, Swedish, and Brazilian governments, the British Labour Party, the OECD, the World Economic Forum, and the European Union, among others. Apart from a number of books, she publishes her opinions in The New York Times, the Guardian and the Financial Times. In 2022 she was a speaker at the World Trade Organization in Geneva and the World Economic Forum in Davos.
She has received the Leontief Award For Advancing the Frontiers of Economic Thought, an All European Academies Award, the von Neumann Award, the Grand Ufficiale Ordine al Merito della Repubblica Italiana, and honorary doctorates from many universities (among them the Argentine Universidad de San Martín).
And Pope Francis cites her work with admiration.
Nevertheless professor Mazzucato defines herself as outside the mainstream (?). She advocates a bigger role of governments in the economy, which perhaps is music not entirely disagreeable to the institutions she advises.
In books like The Entrepreneurial State and Rethinking Capitalism she describes government as a main source of technological innovation and prosperity ―she even condemns outsourcing tasks to private companies. In her latest book Mission Economy she writes that governments must shrug off traditional budgetary parsimony and assume missions modeled on the Apollo moon landing. She selects three main tasks for a government's mission: a Green New Deal, health care, and narrowing “the digital divide”.
The root of all problems (according to Mazzucato)
But it is in her book The Value of Everything that Mazzucato deals with the deeper source of all the failures she attributes to modern capitalism: the very concept of economic value. She is convinced that without challenging mainstream notions about value all efforts will lack substance and will end in mere patches.
The first chapters of the book set the scene for the rest. There Mazzucato tells the history of the various theories about economic value, starting with the oldest and finishing with the marginalists, the modern theory of value.
Mazzucato tells us “This book does not try to argue for any theory of value” (p. 18). Nevertheless she makes a very positive description of Marx's theory and a very negative account of those who succesfully challenged it, the marginalists. What is more, in her treatment of Marx's theory of value she omits obvious objections to it and does not even mention well known refutations, like the famous one written by Bohm-Bawerk (one of the ten greatest economists in history according to Joseph Schumpeter). On the other hand, the chapter Mazzucato dedicates to the marginalists is full of disparaging remarks. In subsequent chapters she connects marginalism with the subprime mortgage crisis of 2008, the growth of what she calls “casino capitalism”, excessive salaries for managers, and growing inequalities of wealth.
Already in the Introduction Mazzucato writes that “I will argue that the way the word ‘value’ is used in modern economics has made it easier for value-extracting activities to masquerade as value-creating activities. And in the process rents (unearned income) get confused with profits (earned income); inequality rises, and investment in the real economy falls”. Along the book she castigates modern capitalism and puts the blame on the modern theory of value.
Nevertheless, she says that her purpose is not to defend any theory but to promote debate. In spite of such disclaimers, it is perplexing to find that someone writes a whole book on the theories of economic value, blames the modern one for all sorts of calamities, but declares to have no definite preference for any theory. Worse, for someone who just wants to revive debate, it is odd that Mazzucato omits references to views that oppose her own. That approach is not limited to this book. For instance, as we will see later, Matt Ridely's book How Innovation Works makes significant objections to the role Mazzucato assigns to governments concerning innovation. The author and the book are very well known. Still, in her most recent book and in her many speeches on the Web Mazzucato does not even mention them.
She follows the same tactic in her treatment of the subprime mortage crisis of 2008, for which she blames the private financial sector. She does not mention the many authors that point out the part of the blame that corresponds to governments.
The marginalists as defenders of privilege
Mazzucato puts the emergence of the modern (or "marginalist") theory of value in what she considers to be its historical context and purpose. She writes that by the end of the XIX century socialists became more and more influential, Marx and Engels challenged those who “had no proper analysis of why things were going wrong”. Unions grew stronger. In Britain, the Labour Party was founded, in Germany the Socialist Workers' Party, and in France the Federation of Socialist Workers. Then she writes “Faced with these threats to the status quo, the powers that be needed a new theory of value that cast them in a more favourable light” (p. 58) . In case those words were not enough to prepare the reader for the arrival of the new theory, on the same page Mazzucato adds “Above all, perhaps, the rising power of capitalists in a society long dominated by aristocratic landowners and local gentry meant that a new analysis of capitalism was required to justify their standing”.
Then Mazzucato proceeds to describe the theories of the economists that would pop up around 1870 to satisfy that need, Leon Walras in Switzerland, Stanley Jevons in Britain, and Carl Menger in Austria. Mazzucato follows the standard procedure of lumping together these three economists, although they show differences that are not limited to the use of mathematics. That unfortunate starting point is followed by more confusion. Mazzucato links the new theory ―marginalism― to a long tradition in which she includes the medieval theory of the “just price” and Jeremy Bentham's utilitarian principle of the greatest good for the greatest number (ps. 60-61).
Now to clarify: although Jevons cites Bentham with admiration, neither the medieval “just price” nor utilitarianism has anything to do with marginalism and in many respects both are incompatible with the new theory. At the center of the marginalist revolution is the idea that individuals are the ones who judge and get value from goods, that there is no such thing as a collective utility to be decided by a coterie of experts. Certainly, a bridge may be valuable to a large number of people both directly and indirectly, but then that is all the value it has. A bridge that serves nobody apart from “the fatherland” and some government's notion of prestige has no economic value.
But Mazzucato does something worse than provide erroneous historical influences, she reverses the meaning of what the marginalists actually wrote. Through the book she repeats again and again that according to marginalist theory “price determines value, not vice versa” (p. 66). Already in the Introduction Mazzucato says that the modern theory was “a swing from value determining price to price determining value” (p. 7, similar statements in pages 8, 271, 272, 273).
Actually, the new theorists said the opposite of what Mazzucato attributes to them. Carl Menger wrote in one of the most famous books in economics history that “the price of a good is a consequence of its value to economizing men, and the magnitude of its price is always determined by the magnitude of its value” (Menger Principles, p. 173).
What really was the new theory?
The new theory rejected that value is a property of goods themselves, like the amount of labour employed on them. Instead the marginalists related the value of goods to the people who supposedly are to use or enjoy them. They wrote that when men realize that a good or a number of them are necessary for their well-being, and when they perceive that such goods are scarce, i.e. that losing one or more would mean that some needs won't be satisfied, then they economize such goods, which for that reason are ―unlike air― economic goods. Or in other words, that they have economic value.
As Carl Menger wrote in 1871 “Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs” (Principles p. 115). Then value is necessarily value for some individual, and changes with an individual's circumstances and needs. Lost in a desert he would value a bottle of water as his most valuable good, but he would not care about it if he is close to an abundant fountain.
The word “marginalist” thought traditionally used to name the new theory is somewhat confusing because it refers to a corollary of the theory and not to the central theses mentioned above. For that reason sometimes the name “subjective” theory is used in order to stress that value is always value for an individual subject. Unfortunately “subjective” suggest caprice and arbitrariness which according to Menger is not part of the theory ―although some other thinkers would say so. Certainly abundance of goods may allow people to become capricious consumers and there is always the possibility of error in the appreciation of the usefulness of goods. But the central point is that value is always value to individuals in individual circumstances as they are able (or not) to recognize. It doesn't make sense to consider the value of goods in the abstract unrelated to persons, their needs, and their choices. That was the mistake of the old theories.
The marginal theory of value does not assume that people have perfect knowledge and always make correct judgments. That is a straw-man often used to make the task of its adversaries ―like Mazzucato― easier. Carl Menger even treats the case of fake remedies and love potions, and more fundamentally dedicated a whole section of his Principles to “Time and Error” where he analyzed various production processes and said that economic judgment often requires thinking about the future, which is always uncertain.
It is true that economists have occasionally pondered about the advantages of perfect knowledge, perfect competition, and other imaginary situations. They concluded that if we were perfect thinking machines with infinite knowledge about the present and the future, we would make perfect decisions. That is at best a tautology that adds nothing to our understanding and in no way is required by the marginalist theory of value. Nor does it serve to advocate more government intervention, unless we think that ministers and councils have infinite knowledge of present and future.
Who started the debate about value?
Piling more bad consequences against the new marginalist theory, Mazzucato says that because of it economists have ceased to discuss value, which used to be at the core of economic thinking (Preface XVIII). But in fact the marginalists were the ones that initiated the debate about value ―and they won it. Before them the labour theory of value had been accepted without any serious challenge. Indeed, I suspect that it was adopted by Malthus and Smith almost by accident in their commendable but misguided effort to limit the notion of economic value. Carl Menger traces back that wrong turn in Malthus, a turn that might have seemed to solve a theoretical mistake but created another one that had lasting consequences.
In 1820 Malthus published the first edition of his book “Principles of Political Economy” in which he defined wealth as “those material objects which are necessary, useful, or agreeable to mankind”. That definition was both too narrow and too broad. Too narrow because it excluded services, and too broad because it included non-economic goods like air. Nobody denies that air is useful, indeed indispensable to life, but it does not need economizing. We don't need to care about how much air we breath and so, although valuable in a broad sense, air has no economic value. Seven years later Malthus tried to correct that second mistake ―although he persisted in the first one, in limiting value to objects.
In his book “Definitions in Political Economy” Malthus assigned value to “the material objects, necessary, useful or agreeable to man, which required some portion of human exertion to appropriate or produce”. In the second edition of his “Principles” Malthus wrote that “the latter part was added, in order to exclude air, light, rain, etc”. Menger tells us that Malthus himself recognized that this way of restricting the definition was unsatisfactory and that he tried other paths in later books, but failing again to elaborate a correct definition (Menger Principles p. 291). Leon Walras, another pioneer of the modern theory of value at the second half of the XIX century, tells us that Adam Smith too, like Malthus, offered only hesitant remarks that put labour as the sole source of value but contradicted those remarks when he included land along labour as social wealth (Leon Walras Elements of Theoretical Economics, parag. 158).
That is why I think that the labour theory of value first appeared as an unfortunate effort to mend a definition that was too broad but without much debate or analysis of the issue. Later on, Karl Marx saw in it an opportunity, a bedrock on which to build his theory of exploitation. Still, he never considered alternatives, never dared question whether the foundation he found ready-made by Smith was solid. The marginalists Jevons, Menger and Walras were the ones that independently of each other challenged those assumptions and analyzed the whole issue. And now, more than a century later Mariana Mazzucato blames them for the lack of debate about the source of economic value (ps. 12, 76). Sure, the same way Copernicus is to blame for the lack of debate about whether the sun goes around the earth or the earth around the sun.
Collective creation does not require collective direction
Mazzucato writes that value is a collective creation and so it is the innovation that promotes progress. (ps. 160, 184, 185, 191, 222). From that she argues for a fairer collective distribution of profits and an entrepreneurial State.
Once again Mazzucato confuses the real question, which leads her to the wrong answers. Staunch defenders of free markets have always recognized that valuable goods are the result of collective efforts. What they deny is that this effort is or should be collectively directed.
We must recall here the instructive story of how a pencil is made. It was first told in an essay by Leonard Read and it has been fondly repeated by Milton Friedman and many other champions of economic freedom. In the story, a pencil tells us: nobody knows how to make me. Those who fell trees to get the wood from which I am partly made know nothing about mining lead. And neither miners nor lumberjacks know or care about how the paint that covers my body is made. None of them have the faintest idea about the work of those who make the rubber tip attached on me as eraser. Or about the construction of the trains and the ships that carry those raw materials from the place where they are produced to the place where I will be assembled.
It is no news to tell defenders of free markets that production, even of humble pencils, involve collective efforts. What Leonard Read and Milton Friedman tried to show is that the process is not directed and that precisely is what makes it efficient, even possible.
The story of the pencil should prove to everybody something that is seen everywhere in reality but nevertheless looks counter-intuitive. How is it possible that a complex production process works when nobody directs it? Indeed, how is it that the absence of direction is what makes it possible?
Mazzucato is not interested in these questions and has no time for a humble pencil. It was Carl Menger who in 1883 posed those questions in his book Investigations into the Method of the Social Sciences with Special Reference to Economics. There he showed how money and markets originated in the past without any direction from above. So Menger wasn't simply one of the earliest in challenging wrong theories of value, he was a pioneer in revealing the pervasive presence of spontaneous order in the economy. Later on, Friedrich Hayek and Ludwig von Mises followed in his tracks.
Mazzucato chooses to skip all that. She goes on to apply her collectivistic approach to innovation and from there she ―again― castigates high private profits and argues for more government. Here too the true question is not whether technical and scientific innovation are collective efforts but whether they are or should be collectively directed. Matt Ridley has written a book, How Innovation woks, and Why it Flourishes in Freedom, were he describes how ideas combine in unexpected ways to foster innovation without a central direction. Ridley says that as in the pencil story “One person may make a technological breakthrough, another work out how to manufacture it and a third how to make it cheap enough to catch on. All are part of the innovation process and none of them knows how to achieve the whole innovation” (p. 256).
In chapter 9 Ridley makes objections to Mazzucato's views on innovation. First, if government plays a central role in it, how is that the Industrial Revolution took place at a time when government had a negligible role in research and technical innovation? Ridley admits that “In the second half of the twentieth century, the state did become a sponsor of innovation on a large scale, but that is hardly surprising given that it went from spending 10 per cent of national income to 40 per cent in almost all Western countries. As Mingardi put it: ‘With such extraordinary growth, it is improbable that public spending wouldn’t end up in the neighborhood of innovation-producing business at one point or another.’ So it is not a matter of whether the state has caused some innovation. The question is whether it is better at doing so than other actors, and whether it does so in a directed fashion” (p. 276)
Secondly, Ridley points out that “Mazzucato’s examples of government-funded innovation are mostly cases of ‘spillover’, rather than direction. Nobody has claimed that government set out deliberately to create a global internet when it funded the Defense Advanced Research Projects Agency’s computer networking. Indeed, the internet only took off when it eventually escaped the clutches of the Defense Department and was embraced by universities and businesses” (ps. 276-277).
Moreover, says Ridley, the Soviet Union was a clear case of entrepreneurial state that founded a great deal of research and allowed virtually no private entreprise. The result was dismal lack of innovation in almost all sectors.
Ridley's book was published in 2020. The same year, McCloskey and Mingardi published a direct challenge to Mazzucato's theses “The Myth of the Entrepreneurial State”. However, when in 2021 Mazzucato published a new book “Mission Economy. A Moonshot Guide to Changing Capitalism” she gave no answer to any of these objections, she didn't even mention these authors. As said, for someone who claims to have a vivid interest in fostering public debate, Mazzucato has an odd tendency to avoid any reference to different views.
The political theory of value
When Mazzucato writes that value is a collective creation she does not mean merely that, as in the pencil story, lots of people intervene in the production of valuable things and services. She means that the creation of value must be politically directed. And at times it seems she also means that the very concept of economic value is a collective creation. At the beginning of the book she writes “The definition of value is always as much about politics, and about particular views on how society ought to be constructed, as it is about narrowly defined economics” (p. 14). But then, what should we believe, politics or economics? For my part I would say that the labour theory of value was as wrong in Adam Smith's time as it was in ancient Egypt. No matter their political convictions, at no time people asked how much labour a thing had demanded in order to establish its usefulness. If someone digs a hole in search for water and finds none, he would not be able to sell the hole by pointing out that it demanded a lot of work. That was true in ancient Egypt as it is today. That is what modern theory of value says and it has nothing to do with politics.
As we noted before, one of the problems with Mazzucato's book is that it contains disclaimers that she immediately discards. She says that she is not arguing for one theory of value (p. 18). Well no, only arguing that Marx's theory was extraordinary in its insight that capitalism is dynamic, that Marx is the first to give capital a social dimension (p. 49), that Marx “introduced a powerful new idea which has informed thinking ever since: class struggle” (p. 51), that Marx was “acute in his understanding of the capacity of technology to transform society” (p. 52), that “In Marx's hands, value theory became a powerful tool for analysing society” (p. 57). All glowing marks for Marx.
As we saw, when Mazzucato turns to those who challenged Marx, she introduces them by saying that the powers that be needed a justification for their privileges. Not a brilliant presentation. Then she goes on in many chapters blaming the new theory for almost all economic troubles, theoretical inaccuracies, and social injustice. It would have been much more useful if Mazzucato had disclosed her views and defended a theory of value openly.
In another disclaimer Mazzucato declares that “the point is not to create a stark divide, labelling some activities as productive and categorizing others as unproductive rent-seeking”. But then she immediately adds “I believe we must instead be more forthright in linking our understanding of value creation to the way in which activities (whether in the financial sector or the real economy) should be structured, and how this is connected to the distribution of the rewards generated. Only in this way will the current narrative about value creation be subject to greater scrutiny, and statements such as ‘I am a wealth creator’ measured against credible ideas about where that wealth comes from” (p. 14). If she won't label some to be inside and others outside the “production boundary” how would she know which sector needs “structuring”? And how does she “subject to greater scrutiny” claims about value creation if she won't categorize some as falling on the wrong side of the boundary? Indeed, she does exactly what she says she won't do when she writes that today the financial sector lies outside the production boundary (p. 19).
Besides, if Mazzucato doesn't want a stark divide, why is she concerned that the marginalists blurred a production boundary so neatly established before them? (p. 15).
Is economic value to be defined by referendum, or by committee, or by each individual?
Mazzucato says that people should publicly debate who creates value in the economy, thus making everyone participate in a controversy that before was limited to experts. We must assume that she means debate not just for the sport of it but to adopt decisions.
Any country that follows that advice (and it seems that there are many people in high positions eager to adopt it) will have to establish a political procedure to decide questions about value. Maybe a referendum with a form where people would tick what sectors in the economy they see as value creators. Then governments would have to decide the fate of those left outside. Or, what is more likely, a council of experts would advice ministers and legislators where to trace the “production boundary” and its consequences. Or perhaps the question would be deferred to international organizations that would issue regulations to member countries. In any case, it would then be a political decision about what is economic value.
That would be a regression to ancient times. In modern times politicians do not decide what professions are worthy of respect, who produces valuable things, and who must be seen as leechers extracting value from the masses of toilers. Not even majorities are asked to decide such things. Concerning economic value, each adult is his sovereign, and the 51 percent does not rule over the 49 percent. Where that principle is lost, there is no longer economic freedom.
Note: book pages refer to Kindle editions of the books I cite, except for Menger Principles, in which case I cite the Mises Institute paper edition. Kindle pagination should correspond to that of the paper edition but there might be slight differences.
