Theory matters, alas not only in theory.
In her latest book, The Value of Everything, Mariana Mazzucato complained that value used to “measure what Smith called ‘the wealth of nations’, the total production of an economy in terms of value. As value is now merely a relative concept . . . we can no longer measure the labor that produced the goods in the economy and by this means assess how much wealth was created.” Mazzucato longs for those times when “the values of… products derived from the amount of work that was needed to produce things, the ways in which technological and organizational changes were affecting work, and the relations between capital and labour.” She believes that “with marginal utility there are no longer classes, only individuals, and there is [sadly] no objective measurement of value.”
Recently, Mazzucato was appointed by the Italian government as a member of a committee (task force) of experts that should oversee the attempts to re-open the economy after the COVID-19 lockdown. As in other jurisdictions, the government is trying to plan the lockdowns lest they cause shortages of food and the like. For this reason, “essential” supply chains are kept working. Defining what is “essential” and what is not is proving difficult, because, as Don Boudreaux aptly remarked, the economy is not a series of supply chains.
A few days after her appointment, Mazzucato tweeted the following: “if there are ‘key’ or ‘essential’ workers in the economy, next step is to recognize ‘essential’ part of the economy that needs funding, nurturing and massive rethinking. Corollary is to understand how so much value could have been extracted by ‘non essential’ part, and reverse that”.
Mazzucato’s latest book is essentially (no pun intended—or not?) a reappraisal of the labour theory of value – and here Mazzucato is trying to infer some normative prescriptions out of that. Let me point out just a few problems, and certainly our readers will easily find more:
– what is “key” and “essential” changes. Mazzucato and others think you can come up with a hierarchy of needs – and that the point of view of the Minister of Health should trump yours and mine. But even that may change over time. What is “key” in a pandemic may not be so in a normal situation, or in an emergency of other kind. One good example of that are policies that Mazzucato tends to follow, i.e., those leading us towards “greener” productions. Governments that used to want us to use less plastic now will nudge us towards using plastic bags, but it is not necessarily something we want to keep doing for ever.
– how do you “reverse” resources going to the unessential part of the economy? What does that include? Everything which is shut down now? That, in Milan includes restaurants, bookstores, and shoe shops. Shall we tax them harder, so that resources may happily reallocate to the “essential” part of the economy?
– Mazzucato is likely to be thinking, actually, about finance, her bete noire. Shall we “direct” finance towards some kind of investment instead of others? How do we do that? Nationalizing hospitals and pharmaceutical companies? Are we sure the government will better finance them than private investors will do? Or shall we aim for the nationalization of banks, like in China? That will make credit a province of politics. Is that going to help distinguishing between what is essential and what is not?
I fear we may end up seeing a new wave of nationalization, in Italy, in a couple of years. Firing people is prohibited during the lockdown; the government is trying to relieve businesses from repaying debt, quite a few of the Italian banks already had plenty of non performing loans. Perhaps COVID-19 will also produce a banking crisis, at least for us.
Mazzucato will then rejoice in Schadenfreude. All of her interventions are predicated upon the idea that some “experts” can substitute their judgment for consumers’ and investors’ for good. I’d say let her have a chance and later see the results if only she was advising some other country’s government, and possibly in less a dramatic time.
READER COMMENTS
David
Apr 20 2020 at 11:38am
The biggest problem with that point of view is that it seems to miss that the fact we spend so little on essential is a success (and should be a goal) not a failure. We’ve become so wealthy that we only need to spend a fraction of our income on essentials. Wanting to reverse that makes no sense whatsoever and goes against the most rudimentary economic thinking, unless your values consider subsistence economy is the epitome of civilization.
Dylan
Apr 20 2020 at 5:26pm
I get this and agree. It is something that should be celebrated that we can produce enough to provide the world with enough to eat, shelter, and other basics with so much productivity left over to cover other wants.
That being said, I think it is hard to deny that there is something just a bit weird and troubling that so many of the people that provide these essential services to us, also happen to be some of the lowest paid, at least in the developed world. That feels particularly stark now that people that didn’t sign up for dangerous work, now have it anyway, and for the same wage they used to make.
At the same time, so much “knowledge” work comes off as particularly useless or trivial during a time like this. At my last job, a good chunk of my time was creating PPT decks that clients or potential clients would never read. Yet we’d still have two hour internal calls about them on almost every major holiday. And that was the relatively benign part of my job. The rest of the time, I was getting paid to actively destroy value. Yet, this was the best paid job I’ve ever had.
It’s amazing (to me at least) how many knowledge work jobs look like the equivalent of paying one guy to did a hole, and then another guy to come up behind him and fill it. What if the societal takeaway from all of this, is that we’re actually better without lots of that stuff? Lots of people I’ve spoken with, actually seem far more happy during the pandemic than they were before it. They’ve got enough money they don’t need to worry about food or shelter, and they get to spend time doing a lot more of what they enjoy (at least for the natural introverts in the group).
Thomas Hutcheson
Apr 20 2020 at 2:21pm
The mistake is trying to regulate by “essential”/”non-essential” instead of by what kinds of activities generate contagion externalities. It’s the counterpart of trying to deal with CO2 accumulation externalities with taxes, subsidies, and regulation of specific CO2 producing technologies instead or just taxing net CO2 emissions.
Phil H
Apr 20 2020 at 9:13pm
I think it’s reasonable to distinguish between the long and short terms. Over the short term – by which I mean the few months that the peak of the covid epidemic will last – I do think that there are certain industries that can be reasonably identified as nonessential, and furloughed without harming people or the economy permanently; and other industries, like food, healthcare, electricity, transport, that are essential. It’s not simple, but this kind of triage can be done.
Over the long term, I agree with Mingardi’s point that attempting to define what is essential and inessential would only lead to inflexibility and lower economic dynamism.
Thomas Hutcheson
Apr 21 2020 at 8:23am
As a rule of thumb in the super short run a crude “essential”/”non essential” closure order is an approximation to the conceptual optimal contagion externality tax that allows each firm and person adjust the quantities of their own behavior. But policy makers ought to keep in mind how to constantly adjust policies toward closer and closer approximations. Regulations on how firms operate rather than what kind of firm is operating seem like a much better approximation to the optimal.
Separate issue. Our unemployment insurance regime does not just automatically replace enough of lost wages and health insurance (not even with our magnificent Rube Goldberg “Paycheck Protection Plan) to permit closing down “non-essential” firms without great harm to people.
Jon Murphy
Apr 21 2020 at 11:04am
The problem is what is “essential” and what is not, what causes harm and what does not, is highly subjective, even in the short-term. The key question is “essential according to whom?” Ultimately, that question will be “essential according to Mazzucato.” What she decides is essential is what shall be essential; the plans of other people are irrelevant. But to the person who sunk his life into his store only to have it shut down, he would protest that his store is essential.
This whole discussion of “essential” is Smith’s Man of System writ large. It assumes the economy and the people are nothing more than inanimate chess pieces who need a Great Mind to direct them.
Dylan
Apr 21 2020 at 11:59am
The thing is, it doesn’t actually matter the opinion of the store owner that sunk his life into his store if he thinks it is essential, what matters is if his customers still think it is essential. And, the opinions of millions of customers changed pretty quickly on what things were essential to their well-being.
It seems unlikely that most small businesses that rely on in person contact are viable in NYC right now, no matter what the law says on if they are able to open or not. This is reinforced by the fact that lots and lots of mom-and-pop restaurants in my neighborhood, the kinds of places that were primarily takeout before this, have nevertheless voluntarily shut down, because they have no business all of a sudden.
So, we could have left businesses and their customers free to make their own decisions, which definitely has appeal. But, the upshot is that huge numbers of those businesses would fail anyway. But, my guess is, that without the forced closures, not only would you have more disease transmission, but you would also have far less political support for any kind of bailouts for impacted businesses. If I’m right, then you end up with the worst of both worlds, both more death and also a far worse economic decline as capital is destroyed.
Jon Murphy
Apr 21 2020 at 12:43pm
You are right. My point is that in the case of Massucato, it won’t matter what is essential to the business owner or the customers. it’ll matter what is essential to Mazzucato.
Dylan
Apr 21 2020 at 1:50pm
Based on the characterization given of her here, I agree. I’m not familiar enough with her work to know how accurate this characterization is. Based on the quick summary of the book, it seems possible that she is using “non-essential”to mean rent seeking businesses, or extractive industries in her jargon. That might be too charitable of a reading, there are certainly no shortage of people right now that want to dictate for others what is and isn’t essential, even when the health risks seem minimal to zilch (my discovery today was that Washington State has apparently banned all recreational fishing, never mind the fact that this is one of the more solitary activities available to a person).
Jon Murphy
Apr 22 2020 at 9:28am
My point is broader than just her. Anytime anyone makes a decision, it is based on their subjective valuations of costs and benefits.
Robert Schadler
Apr 21 2020 at 8:56pm
There might be something approaching a consensus on “essentials” on the minimum of food, shelter and clothing (think standard of living for monastics), but even there problems emerge, e.g. vegan vs meat-eaters.
Also disheartening is her apparent pining for some version of the labor theory of value as an “objective” measurement of value. As James Buchanon pointed out, even though both Smith and Marx looked to the labor theory of value, it is neither reliably “objective” nor does it measure anything of value. Measurements, when they distort more than provide reliable information, need to be discarded rather than embraced. And with our current concern for preserving small businesses, the labor theory of value is useless in the extreme. Ask any entrepreneur starting up his or her business venture.
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