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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?

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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.

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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.

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And their focus,

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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,

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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,
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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And let me just 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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whichi is a proxy for happiness,

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and firms are maximizing their profits.

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And the idea behind 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
where centers of gravity

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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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So, now 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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and feminist economists
and environmental economists

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have actually written
about this quite a bit.

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Let me just 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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(Laughter)

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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 will 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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And this also by the way is something
that 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,

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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
were actually growing substantially.

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And they kind of called this
"the banking problem."

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

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and a group called the Systems
of National Accounting, SNA.

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They called it the banking problem.

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Like, oh my God, this thing, it's huge,
and we're not even including it.

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So instead of stopping

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and actually making
that Tableau Economique

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or asking some of these
fundamental questions

248
00:10:41,247 --> 00:10:43,843
that also the classicals were asking
about what is actually happening,

249
00:10:43,843 --> 00:10:47,054
the division of labor between different
types of activities in the economy,

250
00:10:47,054 --> 00:10:50,046
they simply gave these
net interest payments a name.

251
00:10:50,046 --> 00:10:53,699
So the commercial banks, they called this
"financial intermediation."

252
00:10:53,699 --> 00:10:55,578
That went into the NIPA accounts.

253
00:10:55,578 --> 00:10:59,386
And the investment banks
were called the "risk-taking activities,"

254
00:10:59,386 --> 00:11:00,846
and that went in.

255
00:11:00,846 --> 00:11:02,145
And by the way, in case I haven't
explained this properly,

256
00:11:02,145 --> 00:11:04,149
that red line is showing
just how much quicker

257
00:11:04,149 --> 00:11:06,857
financial intermediation
as a whole was growing

258
00:11:06,857 --> 00:11:09,330
compared to the rest of the economy,
the blue line, industry.

259
00:11:09,330 --> 00:11:10,839
And so this was quite extraordinary,

260
00:11:10,839 --> 00:11:14,198
because what actually then happened,
and what we know today,

261
00:11:14,198 --> 00:11:17,276
and there's different people
writing about this,

262
00:11:17,276 --> 00:11:19,048
and this data here
is from the Bank of England,

263
00:11:19,048 --> 00:11:22,295
is that lots of what finance
was actually doing

264
00:11:22,295 --> 00:11:24,505
from the 1970s and '80s on

265
00:11:24,505 --> 00:11:26,948
was basically financing itself,

266
00:11:26,948 --> 00:11:28,998
finance financing finance.

267
00:11:28,998 --> 00:11:32,505
And in fact what I mean by that
is finance, insurance, and real estate.

268
00:11:32,505 --> 00:11:33,697
In fact, in the UK,

269
00:11:33,697 --> 00:11:36,587
something like between
10 and 20 percent of finance

270
00:11:36,587 --> 00:11:39,257
finds its way into
the real economy, into industry,

271
00:11:39,257 --> 00:11:42,191
say into the energy sector,
into pharmaceuticals,

272
00:11:42,191 --> 00:11:44,123
into the IT sector,

273
00:11:44,123 --> 00:11:48,495
but most of it goes back
into that acronym, FIRE,

274
00:11:48,495 --> 00:11:50,184
finance, insurance, and real estate.

275
00:11:50,184 --> 00:11:52,384
It's very conveniently called FIRE.

276
00:11:52,589 --> 00:11:55,693
Now, this is interesting because in fact

277
00:11:55,693 --> 00:11:59,701
it's not to say that finance
is good or bad,

278
00:11:59,701 --> 00:12:01,124
but the degree to which,

279
00:12:01,124 --> 00:12:03,152
by just having to give it a name

280
00:12:03,152 --> 00:12:05,197
because it actually had
an income that was being generated,

281
00:12:05,197 --> 00:12:08,344
as opposed to pausing and asking,
what is it actually doing,

282
00:12:08,344 --> 00:12:09,705
that was a missed opportunity.

283
00:12:09,705 --> 00:12:13,005
Similarly, in the real economy,
in industry itself, what was happening?

284
00:12:13,005 --> 00:12:21,454
And this real focus on prices
and also share prices

285
00:12:21,454 --> 00:12:23,390
has created a huge problem
of reinvestment,

286
00:12:23,390 --> 00:12:26,307
again this real attention that both
the Physiocrats and the classicals had

287
00:12:26,307 --> 00:12:31,620
to the degree to which the value
that was being generated in the economy

288
00:12:31,620 --> 00:12:34,028
was in fact being reinvested back in.

289
00:12:34,028 --> 00:12:37,357
And so what we have is
an ultra-financialized industrial sector

290
00:12:37,357 --> 00:12:41,445
where, increasingly, a share
of the process of the net income

291
00:12:41,445 --> 00:12:44,521
are not actually going
back into production,

292
00:12:44,521 --> 00:12:48,126
into human capital training,
into research and development,

293
00:12:48,126 --> 00:12:52,202
but just being siphoned out
in terms of buying back your own shares,

294
00:12:52,202 --> 00:12:54,480
which boosts stock options,
which is in fact the way

295
00:12:54,480 --> 00:12:56,792
that many executives are getting paid.

296
00:12:56,792 --> 00:13:00,666
And, you know, some
share buybacks is absolutely fine,

297
00:13:00,666 --> 00:13:01,573
but this system
is completely out of whack.

298
00:13:01,573 --> 00:13:02,873
These numbers that I'm showing you here

299
00:13:02,873 --> 00:13:07,129
show that in the last 10 years,
466 of the S&P 500 companies

300
00:13:07,129 --> 00:13:10,999
have spent over $4 trillion
on just buying back their shares.

301
00:13:10,999 --> 00:13:14,887
And what you see then if you aggregate
this up at the macroeconomic level,

302
00:13:14,887 --> 00:13:17,779
so if you look at aggregate
business investment,

303
00:13:17,779 --> 00:13:20,159
which is a percentage of GDP,

304
00:13:20,159 --> 00:13:23,066
you also see this falling level
of business investment.

305
00:13:23,066 --> 00:13:24,658
And this is a problem.

306
00:13:24,658 --> 00:13:26,394
This, by the way, is a huge problem

307
00:13:26,394 --> 00:13:28,531
for skills and job creation.

308
00:13:28,531 --> 00:13:31,275
You might have heard there's lots
of attention these days

309
00:13:31,275 --> 00:13:32,924
to, "Are the robots taking our jobs?"

310
00:13:32,924 --> 00:13:36,173
Well, mechanization has
for centuries actually taken jobs,

311
00:13:36,173 --> 00:13:39,581
but as long as profits were being
reinvested back into production,

312
00:13:39,581 --> 00:13:41,728
then it didn't matter. New jobs appeared.

313
00:13:41,728 --> 00:13:45,502
But this lack of investment
is in fact very dangerous.

314
00:13:45,502 --> 00:13:49,756
Similarly in the pharmaceutical industry,
for example, how prices are set,

315
00:13:49,756 --> 00:13:52,979
it's quite interesting how it doesn't look
at these objective conditions

316
00:13:52,979 --> 00:13:57,334
of the collective way in which value
is created in the economy.

317
00:13:57,334 --> 00:14:01,393
So in the sector where you have
lots of different actors --

318
00:14:01,393 --> 00:14:04,032
public, private of course, but also
third sector organizations

319
00:14:04,032 --> 00:14:05,023
creating value --

320
00:14:05,023 --> 00:14:07,561
the way we actually measure
value in this sector

321
00:14:07,561 --> 00:14:09,789
is in fact through
the price system itself.

322
00:14:09,789 --> 00:14:11,301
Prices reveal value.

323
00:14:11,301 --> 00:14:13,366
So when, recently,

324
00:14:13,366 --> 00:14:16,915
the price of an antibiotic
went up by 400 percent overnight

325
00:14:16,915 --> 00:14:18,658
and the CEO was asked,
"How can you do this?

326
00:14:18,658 --> 00:14:21,377
People actually need that antibiotic.

327
00:14:21,377 --> 00:14:21,944
That's unfair."

328
00:14:21,944 --> 00:14:23,743
He said, "Well, we have a moral imperative

329
00:14:23,743 --> 00:14:26,625
to allow prices to go
what the market will bear,"

330
00:14:26,625 --> 00:14:29,900
completely dismissing the fact
that in the US, for example,

331
00:14:29,900 --> 00:14:34,125
the National Institutes of Health
spent over 30 billion a year

332
00:14:34,125 --> 00:14:36,740
on the medical research
that actually leads to these drugs.

333
00:14:36,740 --> 00:14:39,513
So again, the lack of attention
to those objective conditions,

334
00:14:39,513 --> 00:14:43,238
and just allowing the price system
itself to reveal the value.

335
00:14:43,238 --> 00:14:45,766
Now, this is not just
an academic exercise,

336
00:14:45,766 --> 00:14:47,571
as interesting as it may be.

337
00:14:47,571 --> 00:14:49,613
All this really matters

338
00:14:49,613 --> 00:14:51,552
to how we measure output,

339
00:14:51,552 --> 00:14:53,150
how we steer the economy,

340
00:14:53,150 --> 00:14:55,395
to whether you feel
that you're productive,

341
00:14:55,395 --> 00:14:57,820
to which sectors we end up helping,

342
00:14:57,820 --> 00:14:59,160
supporting,

343
00:14:59,160 --> 00:15:01,859
and also making people feel
proud to be a part of.

344
00:15:01,859 --> 00:15:03,778
In fact, going back to that quote,

345
00:15:03,778 --> 00:15:05,692
it's not surprising actually
that Blankfein could say that.

346
00:15:05,692 --> 00:15:07,183
He was right.

347
00:15:07,183 --> 00:15:11,064
In the way that we actually measure
production, productivity,

348
00:15:11,064 --> 00:15:13,799
and value in the economy,

349
00:15:13,799 --> 00:15:16,118
of course Goldman Sachs workers
are the most productive.

350
00:15:16,118 --> 00:15:17,113
They are in fact earning the most.

351
00:15:17,113 --> 00:15:18,375
The price of their labor
is revealing their value.

352
00:15:18,375 --> 00:15:20,728
But this becomes tautological, of course.

353
00:15:20,728 --> 00:15:23,680
And so there's a real need to rethink.

354
00:15:23,680 --> 00:15:25,945
We need to rethink
how we're measuring output,

355
00:15:25,945 --> 00:15:28,620
and in fact there's some
amazing experiments worldwide.

356
00:15:28,620 --> 00:15:30,663
So, in New Zealand,
for example, they now have

357
00:15:30,663 --> 00:15:33,184
a Gross National Happiness Indicator.

358
00:15:33,184 --> 00:15:37,281
In Bhutan, also, they're thinking
about happiness and wellbeing indicators.

359
00:15:37,281 --> 00:15:40,631
But the problem is that we can't
just be adding things in.

360
00:15:40,631 --> 00:15:41,958
We do have to pause,

361
00:15:41,958 --> 00:15:43,809
and I think this should be
a moment for pause,

362
00:15:43,809 --> 00:15:47,030
given that we see so little
has actually changed

363
00:15:47,030 --> 00:15:48,245
since the financial crisis,

364
00:15:48,245 --> 00:15:51,279
to make sure that
we are not also confusing

365
00:15:51,279 --> 00:15:53,805
value extraction with value creation,

366
00:15:53,805 --> 00:15:56,606
so looking actually at what's included,
not just adding more,

367
00:15:56,606 --> 00:16:00,578
to make sure that we're not, for example,
confusing rents with profits.

368
00:16:00,578 --> 00:16:03,536
Rents for the classicals
was about unearned income.

369
00:16:03,536 --> 00:16:07,470
Today, rents, when they're talked about
in economics is just an imperfection

370
00:16:07,470 --> 00:16:09,336
towards a competitive price

371
00:16:09,336 --> 00:16:13,459
that could be competed away
if you take away some asymmetries.

372
00:16:13,459 --> 00:16:17,919
Second, we of course can steer
activities into what the classicals called

373
00:16:17,919 --> 00:16:19,084
"the production boundary."

374
00:16:19,084 --> 00:16:22,382
This should not be an us-versus-them,

375
00:16:22,382 --> 00:16:24,438
big, bad finance versus
good other sectors.

376
00:16:24,438 --> 00:16:25,768
We could reform finance.

377
00:16:25,768 --> 00:16:28,804
There was a real lost opportunity
in some ways after the crisis.

378
00:16:28,804 --> 00:16:31,343
We could have had
the financial transaction tax,

379
00:16:31,343 --> 00:16:34,948
which would have in fact rewarded
long-termism over short-termism,

380
00:16:34,948 --> 00:16:37,294
but we didn't decide to do that globally.

381
00:16:37,294 --> 00:16:39,088
We can. We can change our minds.

382
00:16:39,088 --> 00:16:41,719
We can also set up
new types of institutions.

383
00:16:41,719 --> 00:16:45,608
There's different types of, for example,
public financial institutions worldwide

384
00:16:45,608 --> 00:16:48,891
that are actually providing that patient,
long-term, committed finance

385
00:16:48,891 --> 00:16:53,076
that help small firms grow, that help
infrastructure and innovation happen.

386
00:16:53,076 --> 00:16:55,412
But this shouldn't just be about output.

387
00:16:55,412 --> 00:16:57,288
This shouldn't just be about
the rate of output.

388
00:16:57,288 --> 00:16:59,683
We should also as a society pause

389
00:16:59,683 --> 00:17:02,368
and ask what value are we even creating.

390
00:17:02,368 --> 00:17:06,222
And I just want to end with the fact
that this week we are celebrating

391
00:17:06,222 --> 00:17:08,664
the 50th anniversary of the Moon landing.

392
00:17:08,664 --> 00:17:12,559
This required the public sector,
the private sector,

393
00:17:12,559 --> 00:17:15,306
to invest and innovate
in all sorts of ways,

394
00:17:15,306 --> 00:17:16,709
not just around aeronautics.

395
00:17:16,709 --> 00:17:20,621
It included investment in areas
like nutrition and materials.

396
00:17:20,621 --> 00:17:23,785
There was lots of actual mistakes
that were done along the way.

397
00:17:23,785 --> 00:17:27,196
In fact, what government did was it used
its full power of procurement,

398
00:17:27,196 --> 00:17:30,344
for example, to fuel
those bottom-up solutions,

399
00:17:30,344 --> 00:17:31,958
of which some failed.

400
00:17:31,958 --> 00:17:34,736
But are failures part of value creation?

401
00:17:34,736 --> 00:17:37,281
Or are they just mistakes?

402
00:17:37,281 --> 00:17:39,715
Or how do we actually also
nurture the experimentation,

403
00:17:39,715 --> 00:17:42,414
the trial and error and error and error?

404
00:17:42,414 --> 00:17:45,672
Bell Labs, which was
the R&D laboratory of AT&T,

405
00:17:45,672 --> 00:17:47,312
it actually came from an era

406
00:17:47,312 --> 00:17:49,230
where government was quite courageous.

407
00:17:49,230 --> 00:17:54,345
It actually asked AT&T that in order
to maintain its monopoly status,

408
00:17:54,345 --> 00:17:56,644
it had to reinvest its profits
back into the real economy,

409
00:17:56,644 --> 00:17:58,746
innovation,

410
00:17:58,746 --> 00:18:01,093
and innovation beyond telecoms.

411
00:18:01,093 --> 00:18:03,607
That was the history,
the early history of Bell Labs.

412
00:18:03,607 --> 00:18:07,350
So how we can get these new conditions
around reinvestment

413
00:18:07,350 --> 00:18:10,404
to collective invest in new types of value

414
00:18:10,404 --> 00:18:13,147
directed at some of the biggest
challenges of our time,

415
00:18:13,147 --> 00:18:14,453
like climate change,

416
00:18:14,453 --> 00:18:16,444
this is a key question.

417
00:18:16,444 --> 00:18:18,317
But we should also ask ourselves,

418
00:18:18,317 --> 00:18:21,808
had there been a net
present value calculation

419
00:18:21,808 --> 00:18:24,651
or a cost-benefit analysis done

420
00:18:24,651 --> 00:18:28,290
about whether or not to even try
to go to the Moon and back again

421
00:18:28,290 --> 00:18:29,550
in a generation,

422
00:18:29,550 --> 00:18:32,003
we probably wouldn't have started.

423
00:18:32,003 --> 00:18:33,421
So thank God,

424
00:18:33,421 --> 00:18:35,768
because I'm an economist,
and I can tell you,

425
00:18:35,768 --> 00:18:37,806
value is not just price.

426
00:18:37,806 --> 00:18:40,055
Thank you.

427
00:18:40,055 --> 00:18:42,031
(Applause)