Perils of the free market

Public value must come back into economic thinking

April 17, 2018
Father of the Free Market: David Ricardo
Father of the Free Market: David Ricardo

Mariana Mazzucato offers an exposé of how value extractors and rent-seekers have been masquerading as value creators in the global economy. And, furthermore, how the conventional wisdom has indulged them in this.

She lays out the long intellectual backstory, describing 200 years of economic thought in which those who simply sought to extract from value-creating activity used to be regarded as parasitic—including by the classical liberal economists such as Adam Smith and David Ricardo. So how did that understanding disappear?

She points the finger at the same neoclassical model that Howard Reed critiques elsewhere in Prospect, which contains two concepts that Mazzucato argues have got us seriously off track. First, marginal utility theory, and with it the idea that price determines value. This obliterates the distinction between value creating and value extracting, because everything just comes down to the price. Second, a picture of the economy as a self-equilibrating system, with competitive mechanisms that mean rent-seeking activities should simply disappear. She tracks how these concepts have undermined our knowledge of what value is, and left us forgetting that its creation is a collective endeavour, dependent on all sorts of things from the education system to the availability of broadband.

She critiques our swollen financial sector, and over-financialised wider economy. The collapse of Carillion bears out the economics she describes. There is a powerful chapter on how economics consistently undervalues the public sector, and how an understanding of public value must come back into economic thinking. Her passionate call to empower policymakers to understand that the state’s role is not secondary to the private sector is infectious.

This is a timely book about crucial concepts that have slipped out of mainstream discourse, and urgently need to be brought back in.

The Value of Everything: Making and Taking in the Global Economy

by Mariana Mazzucato (Allen Lane, £20)