Value creation.
Wealth creation.
These are really powerful words.
Maybe you think of finance, you think of innovation,
you think of creativity.
But who are the value creators?
If we use that word, we must be implying that some people aren't creating value.
Who are they?
The couch potatoes?
The value extractors?
The value destroyers?
To answer this question, we actually have to have a proper theory of value,
and I'm here as an economist to break it to you
that we've kind of lost our way on this question.
Now, don't look so surprised.
Now, what I mean by that is we've stopped contesting it.
We've stopped actually asking really tough questions
about what is the difference between value creation and value extraction,
productive and unproductive activities?
Now, let me just give you some context here.
2009 was just about a year and a half
after one of the biggest financial crises of our time,
second only to the 1929 Great Depression,
and the CEO of Goldman Sachs said
Goldman Sachs workers are the most productive in the world.
Now, productivity and productiveness
for an economist actually has a lot to do with value.
You're producing stuff,
you're producing it dynamically and efficiently.
You're also producing things that the world needs, wants, and buys.
Now, how this could have been said just one year after the crisis
which actually had this bank as well as many other banks,
and just kind of picking on Goldman Sachs here,
at the center of the crisis because they had actually produced
some pretty problematic financial products mainly but not only related to mortgages
which saw many thousands of people actually lose their homes.
In 2010 in just one month, September,
120,000 people lost their homes through the foreclosures of that crisis.
Between 2007 and 2010,
8.8 million people lost their jobs.
Now, the bank also had to then be bailed out by the US taxpayer
for the sum of 10 billion dollars.
We didn't hear the taxpayers bragging that they were value creators,
but obviously having bailed out
one of the biggest value-creating productive companies,
perhaps they should have.
Now, what I want to do next
is kind of ask ourselves how we lost our way,
how it could be, actually,
that a statement like that could almost go unnoticed,
because it wasn't an after dinner joke, it was said very seriously.
So what I want do is bring you back 300 years in economic thinking
when actually the term was contested.
It doesn't mean that they were right or wrong,
but you couldn't just call yourself a value creator, a wealth creator.
There was a lot of debate within the economics profession,
and what I want to argue is we've kind of lost our way,
and that has actually allowed this term
"wealth creation" and "value"
to become quite weak and lazy
and also easily captured.
OK? So let's start, I hate to break it to you,
300 years ago.
Now, what was interesting 300 years ago
was the society was still an agricultural type of society,
so it's not surprising that the economists of the time,
who were called the Physiocrats,
actually put the center of their attention to farm labor.
When they said, "Where does value come from?"
they looked at farming,
and they produced what I think was probably the world's first spreadsheet
called the "Tableau Economique,"
and this was done by François Quesnay, one of the leaders of this movement.
And it was very interesting,
because they didn't just say "farming is the source of value."
They then really worried about what was happening to that value
when it was produced.
So what the Tableau Economique does,
and I've tried to make it a bit simpler here for you,
is it broke down the classes in society into three.
The farmers, creating value, were called the "productive class,"
and then others who were just moving some of this value around
but it was useful, it was necessary, these were the merchants,
they were called "the proprietors."
And then there was another class that was simply charging the farmers a fee
for an existing asset, the land,
and they called them "the sterile class."
Now, this is a really heavy-hitting word
if you think what it means,
that if too much of the resources are going to the landlords,
you're actually putting the reproduction potential of the system at risk.
And so all these little arrows there were their way of simulating --
again, spreadsheets and simulators, these guys were really using big data --
they were simulating what would actually happen under different scenarios
if the wealth actually wasn't reinvested back into production
to make that land more productive
and actually being siphoned out in different ways,
or even if the proprietors were getting too much.
And what later happened in the 1800s,
and this was no longer the Agricultural Revolution
but the Industrial Revolution
is that the classical economists,
and these were Adam Smith, David Ricardo, Karl Marx the revolutionary,
also asked the question "what is value"
but it's not surprising that because they were actually living
through an industrial era with the rise of machines and factories,
they said it was industrial labor.
So they had a labor theory of value.
But again, their focus was reproduction,
this real worry of what was happening to the value that was created
if it was getting siphoned out.
And in "The Wealth of Nations,"
Adam Smith had this really great example of the pin factory where, he said,
if you only have one person making every bit of the pin,
at most you can make one pin a day,
but if you actually invest in factory production and the division of labor,
new thinking,
think of it today we would use the word "organizational innovation,"
then you could increase the productivity
and the growth and the wealth of nations.
So he showed that 10 specialized workers
who had been invested in in their human capital
could produce 4,800 pins a day,
as opposed to just one by an unspecialized worker.
And he and his fellow classical economists
also broke down activities into productive and unproductive ones,
(Laughter),
and the unproductive ones weren't --
I think you're laughing because
most of you are up on that list, aren't you.
(Laughter)
(Applause)
Lawyers!
I think he was right about the lawyers.
Definitely not the professors, the letters of all kind people.
So lawyers, professors, shopkeepers, musicians.
He obviously hated the opera.
He must have seen the worst performance of his life
the night before writing this book,
because there's at least three professions up there
that have to do with the opera.
But this wasn't an exercise of saying, "Don't do these things."
It was just, "What's going to happen
if we actually end up allowing some parts of the economy to get too large
without really thinking about how to increase the productivity
of the source of the value that they thought was key,
which was industrial labor.
And again, don't ask yourself is this right or is this wrong,
it was just very contested.
By making these lists,
it actually forced them also to ask interesting questions.