Hardcover | 384 pp. | Allen Lane | 11/09/2018 | 1st Edition
The Value of Everything by Mariana Mazzucato is not a book of Management, nor it focuses on specific elements linked to Human Resources or Organisation Design. It’s a book about the Economy as a whole and discusses in depth the concept of Value. In an age in which both economists and the public alike seem too often to confuse wealth with Value, this book comes as a breath of fresh air, stirring an essential discussion on how we see Value Creation within the Economy.
Value creation should be at the core of any organisation, and this is the reason why I read this book, and why I am reviewing this today here.
What is Value?
Mariana Mazzucato analyses in depth the history of the different economic theories of Value and how it is is generated. Starting from Adam Smith, a key differentiation has always been between value creation and value extraction, with the latter, generally seen through the concept of “Rent”.
Why is this definition important? Because, as the author notes, contemporary capitalism seems to be rewarding more “rent-seekers” over actual “wealth creators”, precisely because of a misunderstood definition of the concept of Value.
Again, going back to the classical economists, they discussed a lot on the principle of the “production boundary”. They classified the different activities between what was “productive”, i.e. what was generating Value, and what onstead was not creating Value per se. In this field, you would typically find merchants: their role was and is essential, as they are necessary to ensure the flow of goods. But they do not create Value alone.
The same holds for banks and financial intermediaries. They are vital to allow the Economy to work, providing the monetary means to enable production and exchange of goods, but they do not produce Value alone.
If the above holds, then why has the Financial Sector grown to such a considerable size over the past forty years? Precisely because this sector was considered not productive, it was not part of the GDP calculations up until recently. Then something happened.
Mazzucato goes at length to analyse how also the rest of the Economy has now been “financialised”. Companies work today more at engineering their tax set-ups then to engineer new products, and more money is spent in shares buy-backs today that in the entire R&D over the past twenty years.
Our understanding of rent and value profoundly affects how we measure GDP, how we view finance and the ‘financialization’ of the economy, how we treat innovation, how we see government’s role in the economy, and how we can steer the economy in a direction that is propelled by more investment and innovation, sustainable and inclusive.Mariana Mazzucato, The Value of Everything, page 74
In the chapter, ‘The Rise of Casino Capitalism’, she explains how extraction is done by the insertion of a wedge, namely, a ‘transaction cost’ between the providers and the receivers of finance. But this alone is not sufficient, as it is complemented by a managerial devolution of power from production-focused activities to again, financial focused ones. A lot of this has been done in the name of a “Shareholder Focus”, where EPS (Earning Per Share) has become the Mantra for most corporate executives.
Mazzucato goes on by debunking many assumptions we have on this: one that I particularly appreciated is linked to the concept of accounting.
accounting is not neutral, nor is it set in stone; it can be moulded to fit the purpose of an organization and in so doing affect that organization’s evolution.Mariana Mazzucato, The Value of Everything, page 78
While she refers mostly to national accounting in her analysis, responsible for the formation of GDP, the critique can also extend to GAAP, but also to the way every organisation interpret this. Joined with the EPS focus, a mistaken view of value production in many companies has led to very short-sighted investment strategies, creating what she mentions as “short-terminism”. Business Investment is in the US, for example, at their lowest level for more than sixty years, a disturbing phenomenon, especially if seen in the context of what we are told is a growing economy.
A right multi-stakeholder focus is needed, to interpret the Value that is created, extracted or even destroyed by an organisation. A necessary holistic view, but that is far out of the debate from many different organisations. Is Purpose an answer in this direction? The author recognises that many business leaders are trying to move in a new direction, but concrete steps are yet to be fully appreciated.
This is the concept that for me has the highest value also in terms of organisation design and governance. When I introduced the concept of Operating Model, I have been very clear to focus on the necessity to focus on Value Creation. Yet, this process is still unknown to many, and very subjective. I think we need to support this quest for a definition of the concept of Value also within organisations. The Value of Everything is a key focus element also for organisation design.
Innovation and Value
Central in the book is also an analysis of the concept of Innovation, whereby the author debunks the myth that innovation comes predominantly from the garages of illuminated minds who have a Eureka idea and develop it for the goods of the world. The reality is not so simple. In her example, an iPhone could not work without technologies such as the World Wide Web or GPS, all existing thanks to public funding.
This brings up the question of the role of government in the creation of Value, and she challenges the very common view that the State should shrink as much as possible. An argument made strong by two key examples: the unsuccess of austerity measures after the financial crisis, which has always caused shrinking GDP way above the level of spending cuts, and the case of privatizations in many western countries, particularly in sectors that were once considered “public goods”. Truth is that privatizations have not brought any efficiency whatsoever: where we once had a public institution governing a specific service, we now have an oligopoly of private companies, focused on rent extraction. But because of their relevance, all these specific service areas deserve today a “public authority” to govern the relationship between companies and consumers. Thus causing essentially a double work in many cases.
The Value of Everything and the Covid-19 Pandemics
Reading this book in this challenging moment has also given more weight on its content. Towards the end of the book, Mazzucato advocates for a complete reinterpretation of the Economy based on a new vision of what Value is, to be able to face the uncertain challenge of Global Warming. I believe that Covid-19 has possibly a much more striking effect because there is now a shared perception globally of an imminent and urgent need for change. Everybody is worried about the Economy, and I have already pointed out how important it will be for organisations to think in terms of resilience, as well as to rethink entire areas of the Economy and re-imagining the future of work.
Here we are, however talking of something broader. We already see what seems the most significant economic effort to stimulate the Economy by most countries around the world. At the same time, we are seeing the limits of monetary policy alone. After only a few weeks of the crisis, markets have been collapsing under the uncertainty of what is coming. The question that Mazzucato asks herself becomes more and more relevant: what direction should the Economy take if it is to benefit the greatest number of people?
Let’s think of two examples: Airlines and Pharmaceutical companies. These two industries are well representative of the two extremes of the current economic scenario. On one side, airlines who are facing an unprecedented crisis. On the other Pharma giants that are hopeful of gaining an advantage in the saving of this crisis. In both cases, there is public money involved: to save the airlines on one side, to stimulate research on the other. Everything seems clear: we can’t lose airlines, they are a critical part of our Economy. And we need to foster research to find a cure and maybe a vaccine against Covid-19. The issue is that Pharma companies have a history of patenting discoveries partly funded through public money, and selling them at exorbitant prices. On the other side of the spectrum, several airlines have just emerged from a decade with enormous profits, mostly invested in the short-term benefits of their executives.
Probably, while we all sit at home, exercising our duty of social-distancing, we can reflect on the Value of a Future that can discuss and redefine the Value of Everything. And a way to redefine capitalism.
After all, if we cannot dream of a better future and try to make it happen, there is no real reason why we should care about value. And this perhaps is the greatest lesson of all.Mariana Mazzucato, The Value of Everything, page 281
And you? Did you read The Value of Everything?