Book Review: The Value of Everything by Mariana Mazzucato

Mariana Mazzucato’s "The Value of Everything: Making and Taking in the Global Economy" is an essential read for anyone with an interest in economics, offering a fresh perspective on how we define and understand value in today’s global economy. Mazzucato challenges the conventional wisdom that price alone determines value, arguing that this flawed perception has contributed to growing wealth inequality in Western nations.

The Core Premise

Mazzucato begins the book by building on her previous research which had been focused on debunking myths about entrepreneurs, startups, and the private sector in driving value-creation in the economy. You might be familiar with her book ‘The Entrepreneurial State’ which highlighted the often-overlooked role of the state as a key driver of innovation (in one of my personal favourite chapters of The Entrepreneurial State, she reveals that every technology that makes the iPhone so ‘smart’ was government funded: the Internet, GPS, its touch-screen display and the voice-activated Siri).

In ‘The Value of Everything’, Mazzucato asserts that our current economic theory is flawed due to its exclusion of the state’s contributions, leading to a skewed understanding of value creation versus value extraction. She argues that we are measuring growth, development, and even the fundamental nature of what it actually means to make economic progress, incorrectly. And not only are our current measurements incorrect, they are actively driving worsening wealth inequality across the world.

The book explores the historical evolution of the “production boundary,” a concept defining what activities are considered productive and thus value-creating (you might, as a student of economics, recognise this as a derivative of the idea of a PPF). Historically, this boundary distinguished wealth creators from rent seekers—those who benefit from monopolistic practices or redistribute wealth without creating new value. Mazzucato argues that over time, particularly post-World War II, this boundary has blurred, allowing activities like financial services to be misclassified as value creation.

She’s ever so slightly critical of the financial sector…

In the book, chapters 4 to 6 take a closer look into the way that the financial sector's public image has been transformed in to one of the main drivers of the global economy (and will a great deal of truth!), and Mazzucato highlights the political and economic forces that facilitated this shift. Mazzucato critiques the sector’s role in ‘value extraction’ which she defines as their use of complex financial instruments and lobbying efforts that have reclassified traditionally unproductive activities as contributors to GDP. She questions the legitimacy of the financial sector’s lucrative rewards, arguing that they often stem from such value extraction rather than genuine value creation. If you look back at the 2007-08 financial crash, then you can see where Mazzucato is coming from! [A quick refresher: financial institutions bundled up ‘junk bonds’ that ratings agencies thought were poor value into ‘Credit Default Swaps’ which were such complex financial instruments that, some would argue, ratings agencies just gave them the thumbs up without proper due diligence… and I’m sure you know the rest!]

Innovation and Risk-Taking

In discussing innovation, Mazzucato emphasises how technological advancements are very seldom the work of a single entrepreneur or private enterprise, but that there is often a significant, though often incredibly overlooked, role of the public sector in driving innovation. She criticises the narrative that glorifies private equity and venture capital firms as the primary drivers of innovation, pointing out that many so-called innovations are more about capturing value through patents and intellectual property rather than creating new value and improving economic welfare.

The Public Sector’s Role

The book also addresses the chronic undervaluation of the public sector, which has historically been a major driver of technological advancements, such as GPS and the internet. Mazzucato calls for a reevaluation of the public sector’s role, advocating for it to be recognised as a vital value creator rather than merely a facilitator for private enterprise. Perhaps if we placed more value on public enterprise, we wouldn’t be facing such issues with underfunding!

Policy Recommendations

Mazzucato concludes with a set of bold policy recommendations aimed at rectifying the shortcomings of the current economic system. She suggests forming more strategic public-private partnerships, reforming patent laws to encourage genuine innovation, and implementing new tax systems for tech giants benefiting from public infrastructure. Additionally, she advocates for substantial public investment in green technologies to address climate change.

Mazzucato’s call for a more equitable and sustainable economic model is both timely and compelling, making this book a vital read for anyone passionate about understanding and shaping the future of our global economy!

From the Team

Overview of the Australia Federal Budget 2024

Australia, under Anthony Albanese’s labour party (https://www.alp.org.au/), recently announced their 2024 federal budget on the 14th May, and whilst Australia remains in deficit, with Government debt currently running at 34.9 percent of GDP, this budget aims to achieve a budget surplus of AUD $9.3 billion. 

A major aim of the budget is measures to ease the cost-of-living, with the focus on stage-three tax cuts for Australians, worth AUD $359 billion, which take place over the next ten years, benefitting 84% of taxpayers, according to the government. There will be additional funding for social and affordable housing infrastructure to support productivity, as the government encourages workers to live closer to their place of work. 

Moreover, there has been an extension of the energy bill relief fund by AUD $3.5 billion from 2025-2026, which allows all Australian households to claim a non-means tested AUD $300 handout to help manage energy prices (https://www.energy.gov.au/energy-bill-relief-fund). Additionally, there is an AUD $13 billion initiative headlined as “Future Made in Australia '' to fund tax incentives for the production of clean energy and critical materials through to 2034. 

Education sees federal funding for public schooling rising by 15.1 percent, whilst funding for private and Catholic schools will increase by 16.2%, with a significant proportion allocated towards teachers' salaries. The Government has also committed to wiping AUD $3 billion of tertiary debt, known as HECS (Higher Educartion Contribution Scheme) debt, this also means the government will collect AUD $239.7 million less per anum until 2027-28 (https://www.theguardian.com/australia-news/article/2024/may/05/labor-to-wipe-3bn-from-hecs-and-help-debts-through-indexation-changes). Finally, there has been a general policy announced that will cap the number of international students studying in Australia, however, there has been no details on the size of the cap.

What does Australia think?

Housing and Energy

Despite the major expansionary fiscal policy, out of a survey of 1528 renters, homeowners, and people without stable accommodation, 58 percent were spending almost a third of their household budget on housing, resulting in housing stress. Australians still feel the pressure of the housing crisis, and, in the opinion of select Australians, the ALP’s budget has arguably only taken a small step forward towards the solution. (https://www.theaustralian.com.au/breaking-news/australians-skipping-doctors-appointments-heating-amid-housing-crisis/news-story/a7de671f10450abe4828c5aac4c4ed9c)

Inflation

The ALP’s budget features billions of dollars in government spending, yet a major downside is the inflationary pressure and tax burden it creates. Concurrently, the Reserve Bank of Australia has kept the 12-year high interest rate of 4.35%. The cost of living crisis, which many nations are experiencing, combined with inflation at 3.6 percent (after a high of 7.8 in the fourth quarter of 2022) sees Australia outside their 2-3% inflation target range, thereby increasing anxiety for Australians nation-wide.

(https://www.theaustralian.com.au/business/economics/costello-warns-against-new-super-tax/news-story/77ab2111df2291897af49d56dd46b867)

School and Community

Despite the increase in government education spending, the Community Council for Australia, Fundraising Institute of Australia, and the Australian Council for International Development say that Albanese’s government’s critical work to support vulnerable Australians is weak without a robust cybersecurity framework to protect information, specifically for those donating to charities.

Furthermore, Teacher unions and parent groups have complained about the neglect of public school children and their fundamental needs. They argue that despite a commitment to increase spending, which will be mitigated against inflation, many sectors like education are still left unsupported and underfunded. 

Thanks for reading! See you in the next issue - Erin McGurk