Takers and Makers: Who Are the Real Value Creators?

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By Mariana Mazzucato, Professor of the Economics of Innovation at the Science Policy Research Unit of the University of Sussex. Author of The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Twitter: @MazzucatoM. Adapted from The Value of Everything by Mariana Mazzucato. Copyright © 2018 by Penguin Random House UK. ; originally published at Evonomics

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.

If value is defined by price – set by the supposed forces of supply and demand – then as long as an activity fetches a price (legally), it is seen as creating value. So if you earn a lot you must be a value creator. 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. What’s more, if we cannot differentiate value creation from value extraction, it becomes nearly impossible to reward the former over the latter. If the goal is to produce growth that is more innovation-led (smart growth), more inclusive and more sustainable, we need a better understanding of value to steer us.

This is not an abstract debate. It has far-reaching consequences – social and political as well as economic – for everyone. How we discuss value affects the way all of us, from giant corporations to the most modest shopper, behave as actors in the economy and in turn feeds back into the economy, and how we measure its performance. This is what philosophers call ‘performativity’: how we talk about things affects behaviour, and in turn how we theorize things. In other words, it is a self-fulfilling prophecy.

If we cannot define what we mean by value, we cannot be sure to produce it, nor to share it fairly, nor to sustain economic growth. The understanding of value, then, is critical to all the other conversations we need to have about where our economy is going and how to change its course.

Why Value Theory Matters

The disappearance of value from the economic debate hides what should be alive, public and actively contested. If the assumption that value is in the eye of the beholder is not questioned, some activities will be deemed to be value- creating and others will not, simply because someone – usually someone with a vested interest– says so, perhaps more eloquently than others. Activities can hop from one side of the production boundary to the other with a click of the mouse and hardly anyone notices. If bankers, estate agents and bookmakers claim to create value rather than extract it, mainstream economics offers no basis on which to challenge them, even though the public might view their claims with scepticism. Who can gainsay Lloyd Blankfein when he declares that Goldman Sachs employees are among the most productive in the world? Or when pharmaceutical companies argue that the exorbitantly high price of one of their drugs is due to the value it produces? Government officials can become convinced (or ‘captured’) by stories about wealth creation, as was recently evidenced by the US government’s approval of a leukemia drug treatment at half a million dollars, precisely using the ‘ value- based pricing’ model pitched by the industry – even when the taxpayer contributed $200 million dollars towards its discovery.

Second, the lack of analysis of value has massive implications for one particular area: the distribution of income between different members of society. When value is determined by price (rather than vice versa), the level and distribution of income seem justified as long as there is a market for the goods and services which, when bought and sold, generate that income. All income, according to this logic, is earned income: gone is any analysis of activities in terms of whether they are productive or unproductive.

Yet this reasoning is circular, a closed loop. Incomes are justified by the production of something that is of value. But how do we measure value? By whether it earns income. You earn income because you are productive and you are productive because you earn income. So with a wave of a wand, the concept of unearned income vanishes. If income means that we are productive, and we deserve income whenever we are productive, how can income possibly be unearned? As we shall see in Chapter 3, this circular reasoning is reflected in how national accounts – which track and measure production and wealth in the economy– are drawn up. In theory, no income may be judged too high, because in a market economy competition prevents anyone from earning more than he or she deserves. In practice, markets are what economists call imperfect, so prices and wages are often set by the powerful and paid by the weak.

In the prevailing view, prices are set by supply and demand, and any deviation from what is considered the competitive price (based on marginal revenues) must be due to some imperfection which, if removed, will produce the correct distribution of income between actors. The possibility that some activities perpetually earn rent because they are perceived as valuable, while actually blocking the creation of value and/or destroying existing value, is hardly discussed.

Indeed, for economists there is no longer any story other than that of the subjective theory of value, with the market driven by supply and demand. Once impediments to competition are removed, the outcome should benefit everyone. How different notions of value might affect the distribution of revenues between workers, public agencies, managers and shareholders at, say, Google, General Electric or BAE Systems, goes unquestioned.

Third, in trying to steer the economy in particular directions, policymakers are – whether they recognize it or not – inevitably influenced by ideas about value. The rate of GDP growth is obviously important in a world where billions of people still live in dire poverty. But some of the most important economic questions today are about how to achieve a particular type of growth. Today, there is a lot of talk about the need to make growth ‘smarter’ (led by investments in innovation), more sustainable (greener) and more inclusive (producing less inequality).

Contrary to the widespread assumption that policy should be directionless, simply removing barriers and focusing on ‘levelling the playing field’ for businesses, an immense amount of policymaking is needed to reach these particular objectives. Growth will not somehow go in this direction by itself. Different types of policy are needed to tilt the playing field in the direction deemed desirable. This is very different from the usual assumption that policy should be directionless, simply removing barriers so that businesses can get on with smooth production.

Deciding which activities are more important than others is critical in setting a direction for the economy: put simply, those activities thought to be more important in achieving particular objectives have to be increased and less important ones reduced. We already do this. Certain types of tax credits, for, say, R&D, try to stimulate more investment in innovation. We subsidize education and training for students because as a society we want more young people to go to university or enter the workforce with better skills. Behind such policies may be economic models that show how investment in ‘human capital’ – people’s knowledge and capabilities – benefits a country’s growth by increasing its productive capacity. Similarly, today’s deepening concern that the financial sector in some countries is too large – compared, for example, to manufacturing – might be informed by theories of what kind of economy we want to be living in and the size and role of finance within it.

But the distinction between productive and unproductive activities has rarely been the result of ‘scientific’ measurement. Rather, ascribing value, or the lack of it, has always involved malleable socio- economic arguments which derive from a particular political perspective – which is sometimes explicit, sometimes not. 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. Measurements are not neutral: they affect behaviour and vice versa (this is the concept of performativity which we encountered in the Preface).

So the point is not to create a stark divide, labelling some activities as productive and categorizing others as unproductive rent- seeking. 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. A pharmaceutical company’s value- based pricing might then be scrutinized with a more collective value- creation process in mind, one in which public money funds a large portion of pharmaceutical research – from which that company benefits – in the highest- risk stage. Similarly, the 20 per cent share that venture capitalists usually get when a high- tech small company goes public on the stock market may be seen as excessive in light of the actual, not mythological, risk they have taken in investing in the company’s development. And if an investment bank makes an enormous profit from the exchange rate instability that affects a country, that profit can be seen as what it really is: rent.

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  1. Sound of the Suburbs

    After 1929, they had to reassess everything.

    They had placed their faith in the markets and this had proved to be a catastrophic mistake.

    This is why they stopped using the markets to judge the performance of the economy and came up with the GDP measure instead.

    GDP tells us what real wealth creation is.

    In the 1930s, they pondered over where all that wealth had gone to in 1929 and realised inflating asset prices doesn’t create real wealth, they came up with the GDP measure to track real wealth creation in the economy.

    The transfer of existing assets, like stocks and real estate, doesn’t create real wealth and therefore does not add to GDP. The real wealth creation in the economy is measured by GDP.

    Inflated asset prices aren’t real wealth, and this can disappear almost over-night, as it did in 1929 and 2008.

    Real wealth creation involves real work, producing new goods and services in the economy.

    What economics did they use in the 1920s?
    Neoclassical economics.

    It’s still the same.


    1929 and 2008 look so similar because they are.

    1. cripes

      “GDP tells us what real wealth creation is.”

      This is precisely wrong.

      USA GDP is chock full with false “income.”

      The income derived from bloated, buy-back fueled stock prices.
      The income from jacked-up assets like real estate.
      The income from half-million dollar leukemia drugs and $800 bottles of Humalog is a perfect example; raising prices clearly is not value creation, it’s value expropriation.
      The income cleaved from millions of “gig” workers taking all the risks, capital equipment, insurance costs and WORK DONE then funneled into the hands of app companies.
      Ad Nauseum.

      USA GDP is certainly much less than Chinese GDP if actual value for food, transportation, energy, housing for a nation of 1.6 billion and their mountain of exports is weighed against our reams of paper and financial scams.

  2. OpenThePodBayDoorsHAL

    But what happens to the “value” equation when externalities are not reflected in the market price? Coal is cheap energy but surely the hundreds of thousands of early deaths it causes deserve to be part of the equation

  3. Thuto

    HuhUtility value tends to be priced at the lower end of the scale whereas symbolic value fetches premium pricing in the market. Whereas a simple quartz watch will be “valued” in a utilitarian manner and priced accordingly, a Patek Philippe will be priced for the “value” it provides beyond mere baseline utility (I.e. telling the time). If value is defined along a continuum, a smart capitalist would no doubt recognize the greatest profit opportunity lies at the symbolic end of said continuum because that’s where they can price their goods/services far above marginal cost to reap super profits.

    Is it possible then that classic (super) profits can be used to obscure rent seeking based on subjective definitions of value? In other words, could subjective definitions of value be exploiting to enable rent to masquerade as profits?

    1. Stephen Garry

      I think this is an interesting point. I’m just thinking that there is a self regulating mechanism which mediates these instrumental vs. expressive markets. Namely, because of market fragmentation/partitioning, per item profits may be much higher on expressive goods (i.e., Patek Philippe) but the market will probably much smaller than say for Timex (mostly instrumental product). Therefore, depending on elasticities, actual profits might be considerably greater for the cheaper instrumental product selling at greater volume. How these “specialty” markets (e.g., sunglasses, watches, clothing) arise, develop and operate would be another chapter or two in the book.

  4. JLCG

    The word value has the meaning of enabling. Value is not created it is discovered a discovery that at bottom is historical. America was not created but socially speaking it was discovered in 1492. Its value was immense because it enabled all the history that followed that discovery. Penicillin had no value until it was discovered that if used it would cure infections. Penicillin had been found many years before someone discovered that it could cure infections. A potential value became an actual value.. Many values are ephemeral ; sports, movies,others are permanent because they are the substance of history, having children, discovering the usefulness of the number zero and so on.
    Business flatters itself thinking that it is creative of value .At most it discovers a social need, that need may range from Tristan to prostitution.

  5. Bob

    Hmm, Let’s see since we are speaking of value is this the place to ask what value the health insurance companies add to the mix ? Or perhaps what value the often mentioned crapafication adds to the mix ?
    Or what value having just one world wide glasses frame company adds to the mix ?

  6. Colonel Smithers

    Many thanks, Yves. Super.

    Readers and you will be glad to hear that Mazzucato advises Labour. A road show of economists et al will soon begin touring the UK. She will be there along with Daniela Gabor and Grace Blakeley.

  7. Brooklin Bridge

    A nit pick

    Productivity bothers me somewhat as a term used in determining value. It makes me think of production lines producing tons and tons of stuff such as plastic, where the faster the line goes and the more plastic we produce, the greater the value. Ugg.

    I can think of no better critique than Charlie Chaplin’s warm, gentle parody of the production line and it’s unnatural tendency to go amuck. It is clearly used more abstractly in the article, along with it’s ostensible opposite, unearned income and rent extraction, but for me it remains difficult to divorce the term from the residue of this utilitarian, faster faster, more is better, characteristic that stripped of humor is little more than horrible exploitation.

    The article, particularly in the last couple of paragraphs, seems to be looking for better means of defining “value creation” than simply producing more stuff and is perhaps nudging the discussion in the direction of questioning the value of infinite economic activity in a world of finite resources to society as a whole, in addition to policy as a means of more equitable distribution.

  8. JCC

    Deciding which activities are more important than others is critical in setting a direction for the economy.

    As the author clearly points out, value is a subjective measurement. I agree. Now we need an essay clearly explaining why “economic growth” is also a subjective measurement.

    1. Anarcissie

      If value is entirely subjective, that is, is a psychic state, it is not really measurable in any coherent, rational way, at least not at the current stage of our science, philosophy, law, or business practices. What is determined in markets is not value but power.

      Therefore, ‘value creation’ (or any other role regarding value) cannot justify anything.

      ‘Deciding which activities are more important than others’ is an exercise of power, not of value judgement. Intelligent, rational beings would probably like to see that power as widely distributed as possible, which would be the result of some kind of communism, not markets. But perhaps I overrate intelligence and rationality.

  9. Inode_buddha

    “They know the price of everything and the value of nothing”. I think this article should be strongly linked with the one about shareholder value… my comment there would apply here also.

    Quote:”What bothers me is that this stuff was obvious to me 30 years ago, but I was just some ignorant college kid with no idea how the “real world” actually works, or so I was told…. it’s incredibly annoying to have to say “See, I told you so!” sometimes. ” Unquote

    You don’t have to study economics to understand it — instead you have to study human nature. And avoid drinking.

    1. Synoia

      After studying Human Behavior: Then avoid drinking?

      Isn’t that a recommendation for unremitting Masochism?

  10. rd

    I think the financial, management, and political elite use risk, value, and productivity almost interchangeably when they are really quite different concepts.

    So people should get rewarded for taking risk….until the risk-takers blow up the system in 2008 and Congress and the Fed step in to save them. The fundamental flaw in 2008-9 was that the institutions and the people were viewed as too intertwined to be separated despite having a President changeover in the middle of it all. So I am fine with risk-takers getting rewarded when it pans out, but they need to lose most everything when it doesn’t. They could have saved the institutions for stability sake but dumped the people who caused the problem out back with the trash. Once the smoke cleared from 1929-1932, that was what helped the stage for the next 60 years of relative financial stability. The incompetent risk-takers had been taken out of the game and Glass-Steagal had been put in to limit systemic risk.

    Creating value is always a good thing as that is how society advances. But there are many players who usually create the value. The person on the floor helping to create the value should also participate. It seems like our culture glorifies the person who crunches the numbers of the value instead of the person who actually creates it. How many hospital administrators have actually saved a person’s life by creating more profits for their hospital? Are they truly engaged in coming up with the original ideas for the quality system that improves the care or just on how to get it through the Board of Directors and crunch the numbers for Wall Street? there is value in the latter, but is it worth 200 times the value of the person who actually is coming up with the ideas?

    Productivity is a tough one since most companies have been seeing declining productivity. So we used to hear much more about that in the 90s but they have switched over to value instead now because they can’t prove they are exemplary looking at productivity. However, since Wall Street is valuing their company at higher multiples, then clearly they are adding value. I think only a few executives really understand how to drive productivity gains in their company. Usually I just see a demand to cut costs coupled with a demand for the staff on the floor to figure out how to do that. Lo and behold, that often turns into an ethics crisis as short cuts are taken to meet impossible demands.

    Meanwhile, we see stories like this where many Americans are unable to take a vacation because of their finances. Basically much of their productivity and value have been hoovered up by somebody at the topo o the food chain. https://www.marketwatch.com/story/americans-financial-worries-are-messing-with-their-summer-vacation-plans-2019-06-28

    1. KevinD

      “have been hoovered up by somebody at the topo o the food chain”

      I know many families with teen-age kids looking for summer jobs in our small farm town, about 20,000 people.

      Several places keep getting mentioned because they don’t allow their waitstaff’s to keep their tips – they must be turned over to management. Hoovering must be contagious….

  11. JimTan

    “And in the process rents (unearned income) get confused with profits (earned income); inequality rises, and investment in the real economy falls.”

    I agree completely.

    The reason companies love rent seeking because its so easy – they simply lobby for some exclusive benefit or to ignore some law that everyone else must follow, and then collect a risk free guaranteed profit for essentially doing nothing. Too many risk free rent seeking opportunities, however, can overwhelm and economy filled with corporations who are all chasing the highest risk adjusted rate of return. When there are too many rent seeking opportunities in an economy then its companies will select only these risk-less rent seeking strategies, while abandoning all riskier but socially productive profit strategies like the pursuit of new breakthroughs, product innovations, design quality, superior service, and product reliability. What magnifies the negative consequences of this ubiquitous corporate rent seeking is that most rents offer particular exclusions from laws designed to protect society like those prohibiting consumer or investor fraud, prohibiting worker exploitation, ensuring consumer safety, and maintaining financial market stability.

    So an economy with systemic rent seeking often incentivizes its corporations to abandon their socially productive profit strategies, and then replace them with risk-less ‘rent’ strategies where profit comes from ignoring laws that protect our society from fraud, exploitation, and economic disruption.

  12. Off The Street

    Combine a value creation ethos and mythology, to provide the appropriate reverential setting, with Jensen’s shareholder reward work, since disavowed, and you have a generation of wealth diversion. Trying to bring up the endpoints or the logical consequences during such formative periods doesn’t get much traction.
    Where are the employee’s yachts?

  13. Susan the other`

    This is a good way to evaluate economics going forward. I’d also like to see the opposite side of the analysis. In addition to values as politics and the performability of the entire economy toward good economic policy, it wouldn’t hurt to indulge in a little constructive criticism. To know what we value is a good goal. And why we value it. But equally important now, in a time of environmental crisis and fewer and fewer resources, is to know clearly what we do not value. I see it as doing triage on the economy. Save what we can and let the rest go. It is too hopeful to think we can provide positive reinforcement for the correct direction and that will solve it all.

  14. shinola

    Big Pharma is a good example of the redefinition of value.

    Once upon a time: For Jonas Salk, the value of a polio vaccine accrued to society as a whole (personal profit was not an appropriate consideration)

    Nowadays: Developing a leukemia drug is a means to profit$ (the primary goal is to make a profit through development of a drug). Societal value is secondary to shareholder value.

    That’s just the way it is and the way it should be. I know because Milton Friedman told me so.

  15. Craig H.

    I found this book informative:

    Origin of Wealth

    Author is a veteran McKinsey hand. He lucidly gives the party line how inequality is baked in. Also he is an atheist so you don’t have to endure any poor will always be with you shuck jive.

    There are loads of substitutes shucks and jives you may rest assured.

    1. inode_buddha

      Therein lies the root of the issue, IMHO. There are those whose *only* value is the Almighty Dollar, they seem completely unable to value in any other way. Certainly they are insulated against the negative externalities of their system. Our failure as a society lies in rewarding this huge blind spot.

  16. Jeremy C

    Yes, the central Marxist economic insight: there’s exchange value and then there’s use value. Interesting that she avoids that terminology. Is she trying to sneak some marxism into mainstream economics? A worthy project, I think.

  17. Larry Motuz

    The classical distinction between ‘value-in-use’ :: namely, the instrumental benefits a user gets from putting a good to a particular use (e.g., Ricardo’s two pecks of corn provide food nutrients which metabolically sustain one for twice as long as does one peck does —er, no diminishing marginal utility here from which ‘demand curves’ are derived, unless there is a diminishing marginal utility to life itself : : and ‘value-in-exchange’ was an important distinction lost in the utility revolution that presumed satisfaction always arose when goods were ‘purchased’. (It’s one thing to receive a benefit, another to be satisfied or pleased with how that benefit came about. G.H.W. Bush got benefits from eating broccoli but no satisfaction nevertheless. Similarly, when one obtains less than what is needed, dissatisfaction is normal.)

    Market prices have nothing to do with ‘value’. They have more to do with the distributions of money within society than to any values: in use or otherwise.

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