value creation wealth creation these are
really powerful words maybe you think of
finance you think of innovation you
think of creativity but who are the
value creators if we use that word we
must be implying that some people aren't
creating value who are they
the couch potatoes the value extractors
the value destroyers to answer this
question we actually have to have a
proper kind of theory of value and I'm
here as an economist to break it to you
that we've kind of lost our way on this
question I don't look so surprised now
what I mean by that is we've stopped
contesting it we've stopped actually
asking really tough questions about what
is the difference between value creation
and value extraction productive and
unproductive activities now let me just
give you some context here 2009 was just
about a year and a half after one of the
biggest financial crises of our time
second only to the 1929 Great Depression
and the CEO of goldman sachs ed goldman
sachs workers are the most productive in
the world now productivity and
productiveness for an economist actually
has a lot to do with value you're
producing stuff you're producing it
dynamically and efficiently you're also
producing things that the world needs
wants and buys now how this could have
been said just one year after the crisis
which actually had this Bank as well as
many other banks I'm just kind of
picking on goldman sachs here at the
center of the crisis because they had
actually produced some pretty
problematic financial products mainly
but not only related to mortgages which
saw many thousands of people actually
lose their homes into in 2010 and just
one month September 120,000 people lost
their homes through the foreclosures of
that crisis between 2007 2010 8 point 8
million people lost their jobs now the
bank also had to then be bailed out by
the US taxpayer for the sum of ten
billion dollars we didn't hear the
taxpayers bragging that they were value
creators but obviously having bailed out
one of the biggest value creating
productive companies perhaps they should
have
now what I want to do next is kind of
ask ourselves how we lost our way how it
could be actually that a statement like
that could almost go unnoticed because
it wasn't an after-dinner joke it was
said very seriously so what I want to do
is bring you back 300 years in economic
thinking when actually the term was
contested it doesn't mean that they were
right or wrong but you could have just
called yourself a value creator a wealth
creator there was a lot of debate within
the economics profession and what I want
to argue is we kind of lost our way and
that has actually allowed this term
wealth creation and value to become
quite weak and lazy and also easily
captured ok so let's start
I hate to break it to you 300 years ago
now what was interesting 300 years ago
as the society was still in agricultural
type of society so it's not surprising
that the economists of the time who were
called the physiocrats actually put the
center of their attention to farm labor
when they said where does value come
from they looked at farming and they
produced what I think was probably the
world's first spreadsheet called the
table low economic and this was done by
Francois kanae one of the leaders of
this movement and it was very
interesting because they didn't just say
farming is the source of value they then
really worried about what was happening
to that value when it was produced so
what the tableau economic does and I've
tried to make it a bit simpler here for
you is it broke down the classes and
society into three the farmers creating
value were called the productive class
and then others who were just moving
some of this value around but it was
useful it was necessary these were the
merchants they were called the
proprietors and then there was another
class that was simply charging the
farmers a fee for an existing asset the
land and they call them the sterile
class now this is a really heavy-hitting
word if you think what it means that if
too much of the resources are going to
the landlord's you're actually putting
the reproduction potential of the system
at risk and so all these little arrows
there were their way of simulating
against spreadsheets and simulators
these guys were really using big data
they were simulating what would actually
happen under different scenarios if the
wealth actually wasn't reinvested back
into production to make that land more
productive
and actually being siphoned out in
different ways or even if the
proprietors were getting too much and
what later happened in the 1800s and
this was no longer than Terkel chiral
revolution but the Industrial Revolution
is that the classical economists and
these were Adam Smith David Ricardo Karl
Marx the revolutionary also asked the
question what is value but it's not
surprising that because they were
actually living through an industrial
era with the rise of machines and
factories they said it was industrial
labor so they had a labor theory of
value but again their focus was
reproduction this real worry of what was
happening to the value that was created
if it was getting siphoned out and in
the wealth of nations Adam Smith had
this really great example of the pin
factory where he said if you only have
one person making every bit of the pin
at most you can make one pin a day but
if you actually invest in factory
production and the division of labor new
thinking think of it today we would use
the word organizational innovation then
you could increase the productivity and
the growth and the wealth of nations so
he showed that ten specialized workers
who had been invested in in their human
capital could produce 4,800 pins a day
as opposed to just one by an
unspecialized worker and he and his
fellow possibly economist also broke
down activities into productive and
unproductive ones and the unproductive
ones weren't I think you're laughing
because most of you are up on that list
aren't you now lawyers I think he was
right about the lawyers definitely not
the professor's the letters of all kind
people
so lawyers professors shopkeepers
musicians he obviously hated the Opera
he must have seen the worst performance
of his life the night before writing
this book is there's at least three
professions up there that have to do
with the Opera but this wasn't an
exercise of saying don't do these things
it was just what's going to happen if we
actually end up allowing some parts of
the economy to get too large without
really thinking about how to increase
the productivity of the source of the
value that they thought was key which
was industrial labour and again don't
ask yourself as this writer is this
wrong it was just very contested by
making these lists it actually forced
them also to ask interesting questions
and their focus as the folk
so the physiocrats was in fact on these
objective conditions of production they
also looked for example the class
struggle their understanding of wages
had to do with the objective if you want
power of relationships the bargaining
power of capital and labor
but again factories machines division of
labor agricultural land what was
happening to it so the big revolution
that then happened in this by the way
it's not often taught in economics
classes the big revolution that happened
with the current system of economic
thinking that we have which is called
neoclassical economics was that the
logic completely changed it changed in
two ways
it changed from this focus on objective
conditions to subjective ones and let me
just explain what I mean by that
objective in the way just said
subjective in the sense that all the
attention went to how individuals of
different sorts make their decisions
okay so workers are maximizing their
choices of leisure versus where
consumers are maximizing their so-called
utility which is a proxy for happiness
and firms are maximizing their profits
and the idea behind this was that then
we can aggregate this up and we see what
that turns into which are these nice
fancy supply and demand curves which
produce a price an equilibrium price
it's an equilibrium price because we
also added to it a lot of Newtonian
physics equations where centers of
gravity are very much part of the
organizing principle but the second
point here is that that equilibrium
price or price says reveal value so the
revolution here is a change from
objective to subjective but also the
logic is no longer one of what is value
how is it being determined what is the
reproductive a potential of the economy
which then leads to a theory of price
but rather the reverse a theory of price
in exchange which reveals value now this
is a huge change and it's not just an
academic exercise as fascinating as that
might be it affects how we measure
growth it affects how we steer economies
to produce more of some activities less
of others how we also remunerated ease
more than others and it also just kind
of makes you think you know are you
happy to get out of bed if you're a
value creator or not and how is the
price system itself if you want
determining that
so now I mentioned it affects how we
think about output if we only include
for example in GDP those activities that
have prices all sorts of really weird
things happen and feminist economist and
environmental economists have actually
written about this quite a bit let me
just give you some examples if you marry
your babysitter GDP will go down so do
not do it do not be tempted to do this
okay because an activity that perhaps
was before being paid for is still being
done but is no longer paid if you
pollute GDP goes up still don't do it
but if you do it you'll help the economy
why because we have to actually pay
someone to clean it now what's also
really interesting is what happened to
finance in the financial sector in GDP
and this also by the way something that
I'm always surprised that many
economists don't know up until 1970 most
of the financial sector was not even
included in GDP it was kind of
indirectly perhaps not knowingly still
being seen through the eyes of the
physiocrats as just kind of moving stuff
around not actually producing and
anything new so only those activities
that had an explicit price were included
for example if you went to get a
mortgage you were charged a fee that
went into GDP and the national income
and product accounts but for example net
interest payments didn't the difference
between what banks were earning an
interest if they gave you a loan and
what they were paying out for a deposit
that wasn't being included and so the
people doing the accounting started to
look at some data which started to show
that the size of finance and these net
interest payments were actually growing
substantially and they kind of called
this the banking problem these were some
people working inside actually the
United Nations in a group called the
systems of national accounting sna they
called it the banking problem like oh my
god this thing is huge and we're not
even including it so instead of stopping
and actually making that tableaux
economic or asking some of these
fundamental questions that also the
classical's were asking about what is
actually happening the division of labor
between different types of activities
and the economy they simply gave these
net interest payments a name so the
commercial banks they called this
financial intermediation that went into
the NEPA accounts and the investment
banks were called the risk-taking
activities and that went in and by the
way in case I haven't explained this
properly that red line is showing
how much quicker financial
intermediation as a whole was growing
compared to the rest of the economy the
blue line kind of industry and so this
was quite extraordinary because what
actually then happened and what we know
today and there's different people
writing about this and this data here's
from the Bank of England is that lots of
what finance was actually doing from the
1970s and 80s on was basically financing
itself finance financing finance and in
fact rainy by that is finance insurance
and real estate in fact in the UK
something like between 10 and 20 percent
of Finance finds its way into the real
economy into industry say into the
energy sector into pharmaceuticals into
the IT sector but most of us goes back
into that acronym fire finance insurance
and real estate it's very conveniently
called fire now this is interesting
because in fact it's not to say that
finance is good or bad but the degree to
which by just having to give it a name
because it actually had an income that
was being generated as opposed to
pausing and asking what is it actually
doing that was a missed opportunity
similarly in the real economy and
industry itself what was happening and
this real is a focus on prices and also
share prices has created a huge problem
of reinvestment again this real
attention that both the physiocrats and
the classical's had to the degree to
which the value that was being generated
in the economy was in fact being
reinvested back in and so what we have
today is an ultra financialized
industrial sector where increasingly a
share of the profits and the net income
are not actually going back into
production into human capital training
into research and development but just
being siphoned out in terms of buying
back your own shares which boost stock
options which is in fact the way that
many executives are getting paid and you
know some share buybacks is absolutely
fine but this system is completely out
of whack these numbers that I'm showing
you here show that in the last 10 years
466 of the S&P 500 companies have spent
over four trillion on just buying back
their shares and what you see then if
you aggregate this up at the
macroeconomic level so if we look at
aggregate business investments
which is a percentage of GDP you also
see this falling level of business
investment and this is a problem this by
the way is a huge problem for skills and
job creation you might have heard
there's lots of attention these days to
are the robots taking our jobs well
mechanization has for centuries actually
taken jobs but as long as profits were
being reinvested back into production
then it didn't matter new jobs appeared
but this lack of reinvestment is in fact
very dangerous similarly in the
pharmaceutical industry for example how
prices are set it's quite interesting
how it it doesn't look at these
objective conditions of the collective
way in which value is created in the
economy so in a sector where you have
lots of different actors public private
of course but also third sector
organisations creating value the way we
actually measure value in the sector is
in fact through the price system itself
prices reveal value so when recently the
price of an antibiotic went up by 400
percent overnight
and the CEO was asked how can you do
this people actually need that
antibiotic that's unfair he said well we
have a moral imperative to allow prices
to go what the market will bear
completely dismissing the fact that in
the US for example the National
Institutes of Health spent over a 30
billion a year on the medical research
that actually leads to these drugs so
again a lack of attention to those
objective conditions and just allowing
the price system itself to reveal the
value now this is not just an academic
exercise as interesting as it may be all
this really matters to how we measure
output how we steer the economy to
whether you feel that you're productive
to which sectors we end up helping
supporting and also making people feel
proud to be part of in fact going back
to that quote it's not surprising
actually that blank fene could say that
he was right in the way that we actually
measure production productivity and
value in the economy of course goldman
sachs workers are the most productive
they are in fact earning the most the
price of their labor is revealing their
value but this becomes tautological of
course and so there's a real need to
rethink we need to rethink how we're
measuring output and in fact there's
some amazing experiments worldwide so in
New Zealand for example they now have a
national happiness indicator in Bhutan
also they're thinking about happiness
and well-being indicators but the
problem is that we can't just be adding
things in we do have to pause and I
think there should be a moment for pause
given that we see so little has actually
changed since the financial crisis to
make sure that we asked that we are not
all so confusing value extraction with
value creation
so looking actually what's included not
just adding more to make sure that we're
not for example confusing rents with
profits rents for the classical's was
about unearned income today rents when
they're talked about in economics it's
just an imperfection towards a
competitive price that can be competed
away if you take away some asymmetries
second we of course can steer activities
into what the classical is called the
production boundary this should not be
an us-versus-them
big bad finance versus good other
sectors we can reform finance there was
a real lost opportunity in some ways
after the crisis we could have had the
financial transaction tax which would
have in fact reward and long-term ism
over short termism but we didn't decide
to do that globally we can we can change
our minds we can also set up new types
of institutions there's different types
of for example public financial
institutions worldwide that are actually
providing that patient long-term
committed finance that help small firms
grow that help infrastructure in
innovation happen but this shouldn't
just be about output this shouldn't just
be about the rate of output we should
also say society pause and ask what
value are we even creating and I just
want to end with the fact that this week
we are celebrating the 50th anniversary
of the moon landing this required the
public sector the private sector to
invest in innovate in all sorts of ways
not just around aeronautics it included
investment in areas like nutrition and
materials there was lots of actual
mistakes that were done along the way in
fact what government did was it used its
full power of procurement for example to
fuel those bottom-up solutions of which
some failed but our failures part of
value creation or they just mistakes or
how do we actually also nurture the
experimentation the trial and error and
air and error Bell Labs which is the R&D
laboratory of 18
it actually came from an era where
government was quite courageous it
actually asked AT&T that in order to
maintain its monopoly status
it had to reinvest its profits back into
the real economy innovation and
innovation beyond telecoms that was the
history the early history of Bell Labs
so how we can get these new conditions
around reinvestment to collectively
invest in new types of value directed at
some of the biggest challenges of our
time like climate change this is a key
question but we should also ask
ourselves had there been a net present
value calculation or cost-benefit
analysis done about whether or not to
even try to go to the moon and back
again and the generation we probably
wouldn't have started so thank God
because I'm an economist and I can tell
you value is not just price thank you