WEBVTT

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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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Now, 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?

NOTE Paragraph

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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

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after 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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Now, productivity and productiveness

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for an economist 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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and 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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Now, 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.

NOTE Paragraph

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Now, what I want to do next

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is kind of ask ourselves
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 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

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"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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was 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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So 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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and then others who were just
moving some of this value around

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but it was useful, it was necessary,
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

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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 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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think of it 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

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most of you are up
on that list, aren't you.

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(Laughter)

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(Applause)

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Lawyers!

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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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because 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.