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Value creation.

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Wealth creation.

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These are really powerful words.

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Maybe you think of finance,
you think of innovation,

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you think of creativity.

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But who are the value creators?

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If we use that word, we must be implying
that some people aren't creating value.

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Who are they?

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The couch potatoes?

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The value extractors?

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The value destroyers?

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To answer this question, we actually
have to have a proper theory of value.

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And I'm here as an economist
to break it to you

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that we've kind of lost our way
on this question.

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Now, don't look so surprised.

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What I mean by that is,
we've stopped contesting it.

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We've stopped actually asking
really tough questions

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about what is the difference between
value creation and value extraction,

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productive and unproductive activities.

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Now, let me just give you
some context here.

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2009 was just about
a year and a half after

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one of the biggest
financial crises of our time,

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second only to the 1929 Great Depression,

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and the CEO of Goldman Sachs said

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Goldman Sachs workers are the most
productive in the world.

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Productivity and productiveness,
for an economist,

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actually has a lot to do with value.

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You're producing stuff,

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you're producing it
dynamically and efficiently.

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You're also producing things
that the world needs, wants and buys.

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Now, how this could have been said
just one year after the crisis,

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which actually had this bank
as well as many other banks --

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I'm just kind of picking
on Goldman Sachs here --

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at the center of the crisis, because
they had actually produced

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some pretty problematic financial products
mainly but not only related to mortgages,

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which saw many thousands of people
actually lose their homes.

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In 2010, in just one month, September,

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120,000 people lost their homes
through the foreclosures of that crisis.

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Between 2007 and 2010,

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8.8 million people lost their jobs.

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The bank also had to then
be bailed out by the US taxpayer

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for the sum of 10 billion dollars.

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We didn't hear the taxpayers bragging
that they were value creators,

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but obviously, having bailed out

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one of the biggest value-creating
productive companies,

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perhaps they should have.

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What I want to do next
is kind of ask ourselves

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how we lost our way,

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how it could be, actually,

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that a statement like that
could almost go unnoticed,

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because it wasn't an after-dinner joke;
it was said very seriously.

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So what I want to do is bring you back
300 years in economic thinking,

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when, actually, the term was contested.

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It doesn't mean that
they were right or wrong,

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but you couldn't just call yourself
a value creator, a wealth creator.

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There was a lot of debate
within the economics profession.

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And what I want to argue is,
we've kind of lost our way,

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and that has actually allowed this term,
"wealth creation" and "value,"

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to become quite weak and lazy

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and also easily captured.

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OK? So let's start --
I hate to break it to you --

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300 years ago.

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Now, what was interesting 300 years ago

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is the society was still
an agricultural type of society.

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So it's not surprising
that the economists of the time,

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who were called the Physiocrats,

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actually put the center
of their attention to farm labor.

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When they said, "Where
does value come from?"

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they looked at farming.

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And they produced what I think was
probably the world's first spreadsheet,

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called the "Tableau Economique,"

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and this was done by François Quesnay,
one of the leaders of this movement.

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And it was very interesting,

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because they didn't just say,
"Farming is the source of value."

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They then really worried about
what was happening to that value

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when it was produced.

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What the Tableau Economique does --

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and I've tried to make it
a bit simpler here for you --

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is it broke down the classes
in society into three.

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The farmers, creating value,
were called the "productive class."

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Then others who were just
moving some of this value around

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but it was useful, it was necessary,

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these were the merchants;

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they were called the "proprietors."

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And then there was another class
that was simply charging the farmers a fee

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for an existing asset, the land,

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and they called them the "sterile class."

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Now, this is a really heavy-hitting word
if you think what it means:

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that if too much of the resources
are going to the landlords,

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you're actually putting the reproduction
potential of the system at risk.

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And so all these little arrows there
were their way of simulating --

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again, spreadsheets and simulators,
these guys were really using big data --

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they were simulating what would
actually happen under different scenarios

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if the wealth actually wasn't
reinvested back into production

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to make that land more productive

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and was actually being
siphoned out in different ways,

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or even if the proprietors
were getting too much.

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And what later happened in the 1800s,

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and this was no longer
the Agricultural Revolution

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but the Industrial Revolution,

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is that the classical economists,

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and these were Adam Smith, David Ricardo,
Karl Marx, the revolutionary,

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also asked the question "What is value?"

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But it's not surprising that
because they were actually living

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through an industrial era
with the rise of machines and factories,

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they said it was industrial labor.

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So they had a labor theory of value.

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But again, their focus was reproduction,

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this real worry of what was happening
to the value that was created

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if it was getting siphoned out.

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And in "The Wealth of Nations,"

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Adam Smith had this really great example
of the pin factory where he said

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if you only have one person
making every bit of the pin,

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at most you can make one pin a day.

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But if you actually invest in factory
production and the division of labor,

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new thinking --

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today, we would use the word
"organizational innovation" --

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then you could increase the productivity

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and the growth and the wealth of nations.

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So he showed that 10 specialized workers

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who had been invested in,
in their human capital,

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could produce 4,800 pins a day,

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as opposed to just one
by an unspecialized worker.

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And he and his fellow classical economists

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also broke down activities
into productive and unproductive ones.

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(Laughter)

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And the unproductive ones weren't --

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I think you're laughing because
most of you are on that list, aren't you?

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(Laughter)

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Lawyers! I think he was right
about the lawyers.

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Definitely not the professors,
the letters of all kind people.

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So lawyers, professors,
shopkeepers, musicians.

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He obviously hated the opera.

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He must have seen
the worst performance of his life

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the night before writing this book.

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There's at least
three professions up there

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that have to do with the opera.

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But this wasn't an exercise
of saying, "Don't do these things."

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It was just, "What's going to happen

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if we actually end up allowing
some parts of the economy to get too large

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without really thinking about
how to increase the productivity

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of the source of the value
that they thought was key,

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which was industrial labor.

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And again, don't ask yourself
is this right or is this wrong,

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it was just very contested.

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By making these lists,

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it actually forced them also
to ask interesting questions.

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And their focus,
as the focus of the Physiocrats,

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was, in fact, on these objective
conditions of production.

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They also looked, for example,
at the class struggle.

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Their understanding of wages

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had to do with the objective,
if you want, power relationships,

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the bargaining power of capital and labor.

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But again, factories, machines,
division of labor,

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agricultural land
and what was happening to it.

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So the big revolution
that then happened --

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and this, by the way, is not often
taught in economics classes --

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the big revolution that happened
with the current system

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of economic thinking that we have,

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which is called "neoclassical economics,"

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was that the logic completely changed.

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It changed in two ways.

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It changed from this focus on
objective conditions to subjective ones.

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Let me explain what I mean by that.

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Objective, in the way I just said.

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Subjective, in the sense that
all the attention went to

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how individuals of different sorts
make their decisions.

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OK, so workers are maximizing
their choices of leisure versus work.

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Consumers are maximizing
their so-called utility,

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which is a proxy for happiness,

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and firms are maximizing their profits.

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And the idea behind this was that
then we can aggregate this up,

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and we see what that turns into,

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which are these nice, fancy
supply-and-demand curves

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which produce a price,

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an equilibrium price.

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It's an equilibrium price,
because we also added to it

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a lot of Newtonian physics equations

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where centers of gravity are very much
part of the organizing principle.

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But the second point here is that
that equilibrium price, or prices,

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reveal value.

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So the revolution here is a change
from objective to subjective,

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but also the logic is no longer
one of what is value,

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how is it being determined,

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what is the reproductive
potential of the economy,

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which then leads to a theory of price

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but rather the reverse:

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a theory of price and exchange

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which reveals value.

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Now, this is a huge change.

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And it's not just an academic exercise,
as fascinating as that might be.

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It affects how we measure growth.

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It affects how we steer economies
to produce more of some activities,

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less of others,

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how we also remunerate
some activities more than others.

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And it also just kind of makes you think,

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you know, are you happy to get out of bed
if you're a value creator or not,

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and how is the price system itself
if you aren't determining that?

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I mentioned it affects
how we think about output.

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If we only include, for example, in GDP,

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those activities that have prices,

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all sorts of really weird things happen.

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Feminist economists
and environmental economists

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have actually written
about this quite a bit.

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Let me give you some examples.

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If you marry your babysitter,
GDP will go down, so do not do it.

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Do not be tempted to do this, OK?

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Because an activity that perhaps was
before being paid for is still being done

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but is no longer paid.

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(Laughter)

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If you pollute, GDP goes up.

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Still don't do it, but if you do it,
you'll help the economy.

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Why? Because we have to actually
pay someone to clean it.

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Now, what's also really interesting
is what happened to finance

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in the financial sector in GDP.

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This also, by the way, is something
I'm always surprised

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that many economists don't know.

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Up until 1970,

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most of the financial sector
was not even included in GDP.

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It was kind of indirectly,
perhaps not knowingly,

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still being seen through the eyes
of the Physiocrats

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as just kind of moving stuff around,
not actually producing anything new.

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So only those activities
that had an explicit price were included.

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For example, if you went to get
a mortgage, you were charged a fee.

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That went into GDP and the national
income and product accounting.

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But, for example,
net interest payments didn't,

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the difference between
what banks were earning in interest

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if they gave you a loan and what
they were paying out for a deposit.

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That wasn't being included.

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And so the people doing the accounting
started to look at some data,

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which started to show
that the size of finance

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and these net interest payments

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were actually growing substantially.

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And they called this
the "banking problem."

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These were some people working
inside, actually, the United Nations

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in a group called the Systems
of National [Accounts], SNA.

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They called it the "banking problem,"

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like, "Oh my God, this thing is huge,
and we're not even including it."

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So instead of stopping and actually
making that Tableau Economique

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or asking some of these
fundamental questions

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that also the classicals were asking
about what is actually happening,

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the division of labor between different
types of activities in the economy,

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they simply gave these
net interest payments a name.

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00:10:50,029 --> 00:10:53,359
So the commercial banks, they called this
"financial intermediation."

245
00:10:53,383 --> 00:10:55,281
That went into the NIPA accounts.

246
00:10:55,305 --> 00:10:58,945
And the investment banks
were called the "risk-taking activities,"

247
00:10:58,969 --> 00:11:00,120
and that went in.

248
00:11:00,144 --> 00:11:02,149
In case I haven't explained this properly,

249
00:11:02,173 --> 00:11:04,142
that red line is showing how much quicker

250
00:11:04,166 --> 00:11:06,935
financial intermediation
as a whole was growing

251
00:11:06,959 --> 00:11:10,152
compared to the rest of the economy,
the blue line, industry.

252
00:11:10,679 --> 00:11:12,749
And so this was quite extraordinary,

253
00:11:12,749 --> 00:11:15,331
because what actually happened,
and what we know today,

254
00:11:15,331 --> 00:11:17,597
and there's different people
writing about this,

255
00:11:17,597 --> 00:11:19,768
this data here
is from the Bank of England,

256
00:11:19,768 --> 00:11:22,052
is that lots of what finance
was actually doing

257
00:11:22,052 --> 00:11:23,987
from the 1970s and '80s on

258
00:11:24,194 --> 00:11:26,724
was basically financing itself:

259
00:11:26,748 --> 00:11:28,601
finance financing finance.

260
00:11:28,625 --> 00:11:32,156
And what I mean by that is finance,
insurance and real estate.

261
00:11:32,180 --> 00:11:33,783
In fact, in the UK,

262
00:11:33,807 --> 00:11:36,904
something like between
10 and 20 percent of finance

263
00:11:36,928 --> 00:11:39,465
finds its way into
the real economy, into industry,

264
00:11:39,489 --> 00:11:42,157
say, into the energy sector,
into pharmaceuticals,

265
00:11:42,181 --> 00:11:43,899
into the IT sector,

266
00:11:43,923 --> 00:11:48,057
but most of it goes back
into that acronym, FIRE:

267
00:11:48,081 --> 00:11:49,815
finance, insurance and real estate.

268
00:11:49,839 --> 00:11:52,398
It's very conveniently called FIRE.

269
00:11:52,422 --> 00:11:55,962
Now, this is interesting because, in fact,

270
00:11:55,986 --> 00:11:59,025
it's not to say that finance
is good or bad,

271
00:11:59,049 --> 00:12:00,459
but the degree to which,

272
00:12:00,483 --> 00:12:02,086
by just having to give it a name,

273
00:12:02,110 --> 00:12:04,973
because it actually had an income
that was being generated,

274
00:12:04,997 --> 00:12:08,120
as opposed to pausing and asking,
"What is it actually doing?" --

275
00:12:08,144 --> 00:12:09,609
that was a missed opportunity.

276
00:12:09,633 --> 00:12:14,009
Similarly, in the real economy,
in industry itself, what was happening?

277
00:12:14,501 --> 00:12:21,385
And this real focus on prices
and also share prices

278
00:12:21,409 --> 00:12:23,929
has created a huge problem
of reinvestment,

279
00:12:23,953 --> 00:12:27,771
again, this real attention that both
the Physiocrats and the classicals had

280
00:12:27,795 --> 00:12:31,396
to the degree to which the value
that was being generated in the economy

281
00:12:31,420 --> 00:12:33,586
was in fact being reinvested back in.

282
00:12:33,610 --> 00:12:37,603
And so what we have today is
an ultrafinancialized industrial sector

283
00:12:37,627 --> 00:12:41,298
where, increasingly, a share
of the profits and the net income

284
00:12:41,322 --> 00:12:44,182
are not actually going
back into production,

285
00:12:44,206 --> 00:12:47,805
into human capital training,
into research and development

286
00:12:47,829 --> 00:12:51,714
but just being siphoned out
in terms of buying back your own shares,

287
00:12:51,738 --> 00:12:54,518
which boosts stock options,
which is, in fact, the way

288
00:12:54,542 --> 00:12:56,520
that many executives are getting paid.

289
00:12:56,544 --> 00:12:59,108
And, you know, some
share buybacks is absolutely fine,

290
00:12:59,132 --> 00:13:01,169
but this system
is completely out of whack.

291
00:13:01,193 --> 00:13:03,062
These numbers that I'm showing you here

292
00:13:03,086 --> 00:13:07,283
show that in the last 10 years,
466 of the S and P 500 companies

293
00:13:07,307 --> 00:13:11,032
have spent over four trillion
on just buying back their shares.

294
00:13:11,056 --> 00:13:14,871
And what you see then if you aggregate
this up at the macroeconomic level,

295
00:13:14,895 --> 00:13:17,441
so if we look at aggregate
business investment,

296
00:13:17,465 --> 00:13:19,452
which is a percentage of GDP,

297
00:13:19,476 --> 00:13:23,130
you also see this falling level
of business investment.

298
00:13:23,154 --> 00:13:24,333
And this is a problem.

299
00:13:24,357 --> 00:13:28,667
This, by the way, is a huge problem
for skills and job creation.

300
00:13:28,691 --> 00:13:31,397
You might have heard there's lots
of attention these days

301
00:13:31,421 --> 00:13:33,200
to, "Are the robots taking our jobs?"

302
00:13:33,224 --> 00:13:36,180
Well, mechanization has
for centuries, actually, taken jobs,

303
00:13:36,204 --> 00:13:39,530
but as long as profits were being
reinvested back into production,

304
00:13:39,554 --> 00:13:41,552
then it didn't matter: new jobs appeared.

305
00:13:41,576 --> 00:13:45,366
But this lack of reinvestment
is, in fact, very dangerous.

306
00:13:45,390 --> 00:13:49,532
Similarly, in the pharmaceutical industry,
for example, how prices are set,

307
00:13:49,556 --> 00:13:52,937
it's quite interesting how it doesn't look
at these objective conditions

308
00:13:52,961 --> 00:13:57,320
of the collective way in which value
is created in the economy.

309
00:13:57,344 --> 00:14:00,134
So in the sector where you have
lots of different actors --

310
00:14:00,158 --> 00:14:03,723
public, private, of course, but also
third-sector organizations --

311
00:14:03,747 --> 00:14:04,899
creating value,

312
00:14:04,923 --> 00:14:07,311
the way we actually measure
value in this sector

313
00:14:07,335 --> 00:14:09,540
is through the price system itself.

314
00:14:09,564 --> 00:14:11,077
Prices reveal value.

315
00:14:11,101 --> 00:14:12,432
So when, recently,

316
00:14:12,456 --> 00:14:16,642
the price of an antibiotic
went up by 400 percent overnight,

317
00:14:16,666 --> 00:14:18,738
and the CEO was asked,
"How can you do this?

318
00:14:18,762 --> 00:14:20,560
People actually need that antibiotic.

319
00:14:20,584 --> 00:14:21,744
That's unfair."

320
00:14:21,768 --> 00:14:23,825
He said, "Well, we have a moral imperative

321
00:14:23,849 --> 00:14:26,593
to allow prices to go
what the market will bear,"

322
00:14:26,617 --> 00:14:29,676
completely dismissing the fact
that in the US, for example,

323
00:14:29,700 --> 00:14:34,012
the National Institutes of Health
spent over 30 billion a year

324
00:14:34,036 --> 00:14:36,816
on the medical research
that actually leads to these drugs.

325
00:14:36,840 --> 00:14:39,774
So, again, a lack of attention
to those objective conditions

326
00:14:39,798 --> 00:14:43,044
and just allowing the price system
itself to reveal the value.

327
00:14:43,068 --> 00:14:45,616
Now, this is not just
an academic exercise,

328
00:14:45,640 --> 00:14:47,483
as interesting as it may be.

329
00:14:47,507 --> 00:14:51,328
All this really matters
[for] how we measure output,

330
00:14:51,352 --> 00:14:52,926
to how we steer the economy,

331
00:14:52,950 --> 00:14:55,065
to whether you feel
that you're productive,

332
00:14:55,089 --> 00:14:58,431
to which sectors we end up
helping, supporting

333
00:14:58,455 --> 00:15:01,635
and also making people feel
proud to be part of.

334
00:15:01,659 --> 00:15:03,554
In fact, going back to that quote,

335
00:15:03,578 --> 00:15:05,913
it's not surprising that Blankfein
could say that.

336
00:15:05,913 --> 00:15:06,983
He was right.

337
00:15:06,983 --> 00:15:09,876
In the way that we actually measure
production, productivity

338
00:15:09,900 --> 00:15:11,184
and value in the economy,

339
00:15:11,208 --> 00:15:13,876
of course Goldman Sachs workers
are the most productive.

340
00:15:13,900 --> 00:15:15,547
They are in fact earning the most.

341
00:15:15,571 --> 00:15:17,999
The price of their labor
is revealing their value.

342
00:15:18,023 --> 00:15:20,504
But this becomes tautological, of course.

343
00:15:20,528 --> 00:15:22,942
And so there's a real need to rethink.

344
00:15:23,609 --> 00:15:25,783
We need to rethink
how we're measuring output,

345
00:15:25,807 --> 00:15:28,402
and in fact there's some
amazing experiments worldwide.

346
00:15:28,426 --> 00:15:32,960
In New Zealand, for example, they now have
a gross national happiness indicator.

347
00:15:32,984 --> 00:15:37,275
In Bhutan, also, they're thinking
about happiness and well-being indicators.

348
00:15:37,299 --> 00:15:40,564
But the problem is that we can't
just be adding things in.

349
00:15:40,588 --> 00:15:41,745
We do have to pause,

350
00:15:41,769 --> 00:15:43,944
and I think this should be
a moment for pause,

351
00:15:43,968 --> 00:15:46,230
given that we see so little
has actually changed

352
00:15:46,254 --> 00:15:47,579
since the financial crisis,

353
00:15:47,603 --> 00:15:51,111
to make sure that
we are not also confusing

354
00:15:51,135 --> 00:15:53,132
value extraction with value creation,

355
00:15:53,156 --> 00:15:56,463
so looking at what's included,
not just adding more,

356
00:15:56,487 --> 00:16:00,354
to make sure that we're not, for example,
confusing rents with profits.

357
00:16:00,378 --> 00:16:03,356
Rents for the classicals
was about unearned income.

358
00:16:03,380 --> 00:16:05,882
Today, rents, when they're
talked about in economics,

359
00:16:05,906 --> 00:16:09,112
is just an imperfection
towards a competitive price

360
00:16:09,136 --> 00:16:12,615
that could be competed away
if you take away some asymmetries.

361
00:16:13,376 --> 00:16:17,620
Second, we of course can steer
activities into what the classicals called

362
00:16:17,644 --> 00:16:18,920
the "production boundary."

363
00:16:18,944 --> 00:16:20,891
This should not be an us-versus-them,

364
00:16:20,915 --> 00:16:24,001
big, bad finance versus
good, other sectors.

365
00:16:24,025 --> 00:16:25,437
We could reform finance.

366
00:16:25,461 --> 00:16:28,527
There was a real lost opportunity
in some ways after the crisis.

367
00:16:28,551 --> 00:16:31,119
We could have had
the financial transaction tax,

368
00:16:31,143 --> 00:16:34,629
which would have rewarded
long-termism over short-termism,

369
00:16:34,653 --> 00:16:36,962
but we didn't decide to do that globally.

370
00:16:36,986 --> 00:16:38,776
We can. We can change our minds.

371
00:16:38,800 --> 00:16:40,929
We can also set up
new types of institutions.

372
00:16:40,953 --> 00:16:45,103
There's different types of, for example,
public financial institutions worldwide

373
00:16:45,127 --> 00:16:48,791
that are actually providing that patient,
long-term, committed finance

374
00:16:48,815 --> 00:16:52,907
that helps small firms grow, that help
infrastructure and innovation happen.

375
00:16:52,931 --> 00:16:55,188
But this shouldn't just be about output.

376
00:16:55,212 --> 00:16:57,487
This shouldn't just be about
the rate of output.

377
00:16:57,511 --> 00:16:59,277
We should also as a society pause

378
00:16:59,301 --> 00:17:02,243
and ask: What value are we even creating?

379
00:17:02,267 --> 00:17:05,998
And I just want to end with the fact
that this week we are celebrating

380
00:17:06,022 --> 00:17:08,643
the 50th anniversary of the Moon landing.

381
00:17:08,667 --> 00:17:11,455
This required the public sector,
the private sector,

382
00:17:11,479 --> 00:17:14,404
to invest and innovate
in all sorts of ways,

383
00:17:14,428 --> 00:17:16,254
not just around aeronautics.

384
00:17:16,278 --> 00:17:20,296
It included investment in areas
like nutrition and materials.

385
00:17:20,320 --> 00:17:23,561
There were lots of actual mistakes
that were done along the way.

386
00:17:23,585 --> 00:17:26,972
In fact, what government did was it used
its full power of procurement,

387
00:17:26,996 --> 00:17:30,021
for example, to fuel
those bottom-up solutions,

388
00:17:30,045 --> 00:17:31,672
of which some failed.

389
00:17:31,696 --> 00:17:34,512
But are failures part of value creation?

390
00:17:34,536 --> 00:17:35,860
Or are they just mistakes?

391
00:17:35,884 --> 00:17:39,653
Or how do we actually also
nurture the experimentation,

392
00:17:39,677 --> 00:17:42,229
the trial and error and error and error?

393
00:17:42,253 --> 00:17:45,448
Bell Labs, which was
the R and D laboratory of AT and T,

394
00:17:45,472 --> 00:17:49,199
actually came from an era
where government was quite courageous.

395
00:17:49,223 --> 00:17:54,079
It actually asked AT and T that
in order to maintain its monopoly status,

396
00:17:54,103 --> 00:17:57,750
it had to reinvest its profits
back into the real economy,

397
00:17:57,774 --> 00:17:59,036
innovation

398
00:17:59,060 --> 00:18:00,738
and innovation beyond telecoms.

399
00:18:00,762 --> 00:18:03,336
That was the history,
the early history of Bell Labs.

400
00:18:03,360 --> 00:18:07,126
So how we can get these new conditions
around reinvestment

401
00:18:07,150 --> 00:18:10,002
to collectively invest
in new types of value

402
00:18:10,026 --> 00:18:12,934
directed at some of the biggest
challenges of our time,

403
00:18:12,958 --> 00:18:14,229
like climate change?

404
00:18:14,253 --> 00:18:16,220
This is a key question.

405
00:18:16,244 --> 00:18:17,972
But we should also ask ourselves,

406
00:18:17,996 --> 00:18:21,683
had there been a net
present value calculation

407
00:18:21,707 --> 00:18:24,427
or a cost-benefit analysis done

408
00:18:24,451 --> 00:18:28,066
about whether or not to even try
to go to the Moon and back again

409
00:18:28,090 --> 00:18:29,267
in a generation,

410
00:18:29,291 --> 00:18:31,779
we probably wouldn't have started.

411
00:18:31,803 --> 00:18:33,523
So thank God,

412
00:18:33,547 --> 00:18:35,687
because I'm an economist,
and I can tell you,

413
00:18:35,711 --> 00:18:37,644
value is not just price.

414
00:18:38,057 --> 00:18:39,239
Thank you.

415
00:18:39,263 --> 00:18:41,484
(Applause)