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.

NOTE Paragraph

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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.

NOTE Paragraph

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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.

NOTE Paragraph

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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.

NOTE Paragraph

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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.

NOTE Paragraph

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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.

NOTE Paragraph

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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.

NOTE Paragraph

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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.

NOTE Paragraph

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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

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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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So the commercial banks, they called this
"financial intermediation."

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That went into the NIPA accounts.

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And the investment banks
were called the "risk-taking activities,"

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and that went in.

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And by the way, in case I haven't
explained this properly,

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that red line is showing
just how much quicker

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financial intermediation
as a whole was growing

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compared to the rest of the economy,
the blue line, industry.

NOTE Paragraph

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And so this was quite extraordinary,

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because what actually then happened,
and what we know today,

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and there's different people
writing about this,

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and this data here
is from the Bank of England,

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is that lots of what finance
was actually doing

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from the 1970s and '80s on

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was basically financing itself,

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finance financing finance.

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And in fact what I mean by that
is finance, insurance, and real estate.

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In fact, in the UK,

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something like between
10 and 20 percent of finance

00:11:36.587 --> 00:11:39.257
finds its way into
the real economy, into industry,

00:11:39.257 --> 00:11:42.191
say into the energy sector,
into pharmaceuticals,

00:11:42.191 --> 00:11:44.123
into the IT sector,

00:11:44.123 --> 00:11:48.495
but most of it goes back
into that acronym, FIRE,

00:11:48.495 --> 00:11:50.184
finance, insurance, and real estate.

00:11:50.184 --> 00:11:52.384
It's very conveniently called FIRE.

NOTE Paragraph

00:11:52.589 --> 00:11:55.693
Now, this is interesting because in fact

00:11:55.693 --> 00:11:59.701
it's not to say that finance
is good or bad,

00:11:59.701 --> 00:12:01.124
but the degree to which,

00:12:01.124 --> 00:12:03.152
by just having to give it a name

00:12:03.152 --> 00:12:05.197
because it actually had
an income that was being generated,

00:12:05.197 --> 00:12:08.344
as opposed to pausing and asking,
what is it actually doing,

00:12:08.344 --> 00:12:09.705
that was a missed opportunity.

NOTE Paragraph

00:12:09.705 --> 00:12:13.005
Similarly, in the real economy,
in industry itself, what was happening?

00:12:13.005 --> 00:12:21.454
And this real focus on prices
and also share prices

00:12:21.454 --> 00:12:23.390
has created a huge problem
of reinvestment,

00:12:23.390 --> 00:12:26.307
again this real attention that both
the Physiocrats and the classicals had

00:12:26.307 --> 00:12:31.620
to the degree to which the value
that was being generated in the economy

00:12:31.620 --> 00:12:34.028
was in fact being reinvested back in.

00:12:34.028 --> 00:12:37.357
And so what we have is
an ultra-financialized industrial sector

00:12:37.357 --> 00:12:41.445
where, increasingly, a share
of the process of the net income

00:12:41.445 --> 00:12:44.521
are not actually going
back into production,

00:12:44.521 --> 00:12:48.126
into human capital training,
into research and development,

00:12:48.126 --> 00:12:52.202
but just being siphoned out
in terms of buying back your own shares,

00:12:52.202 --> 00:12:54.480
which boosts stock options,
which is in fact the way

00:12:54.480 --> 00:12:56.792
that many executives are getting paid.

00:12:56.792 --> 00:13:00.666
And, you know, some
share buybacks is absolutely fine,

00:13:00.666 --> 00:13:01.573
but this system
is completely out of whack.

00:13:01.573 --> 00:13:02.873
These numbers that I'm showing you here

00:13:02.873 --> 00:13:07.129
show that in the last 10 years,
466 of the S&P 500 companies

00:13:07.129 --> 00:13:10.999
have spent over $4 trillion
on just buying back their shares.

00:13:10.999 --> 00:13:14.887
And what you see then if you aggregate
this up at the macroeconomic level,

00:13:14.887 --> 00:13:17.779
so if you look at aggregate
business investment,

00:13:17.779 --> 00:13:20.159
which is a percentage of GDP,

00:13:20.159 --> 00:13:23.066
you also see this falling level
of business investment.

00:13:23.066 --> 00:13:24.658
And this is a problem.

NOTE Paragraph

00:13:24.658 --> 00:13:26.394
This, by the way, is a huge problem

00:13:26.394 --> 00:13:28.531
for skills and job creation.

00:13:28.531 --> 00:13:31.275
You might have heard there's lots
of attention these days

00:13:31.275 --> 00:13:32.924
to, "Are the robots taking our jobs?"

00:13:32.924 --> 00:13:36.173
Well, mechanization has
for centuries actually taken jobs,

00:13:36.173 --> 00:13:39.581
but as long as profits were being
reinvested back into production,

00:13:39.581 --> 00:13:41.728
then it didn't matter. New jobs appeared.

00:13:41.728 --> 00:13:45.502
But this lack of investment
is in fact very dangerous.

00:13:45.502 --> 00:13:49.756
Similarly in the pharmaceutical industry,
for example, how prices are set,

00:13:49.756 --> 00:13:52.979
it's quite interesting how it doesn't look
at these objective conditions

00:13:52.979 --> 00:13:57.334
of the collective way in which value
is created in the economy.

00:13:57.334 --> 00:14:01.393
So in the sector where you have
lots of different actors --

00:14:01.393 --> 00:14:04.032
public, private of course, but also
third sector organizations

00:14:04.032 --> 00:14:05.023
creating value --

00:14:05.023 --> 00:14:07.561
the way we actually measure
value in this sector

00:14:07.561 --> 00:14:09.789
is in fact through
the price system itself.

00:14:09.789 --> 00:14:11.301
Prices reveal value.

00:14:11.301 --> 00:14:13.366
So when, recently,

00:14:13.366 --> 00:14:16.915
the price of an antibiotic
went up by 400 percent overnight

00:14:16.915 --> 00:14:18.658
and the CEO was asked,
"How can you do this?

00:14:18.658 --> 00:14:21.377
People actually need that antibiotic.

00:14:21.377 --> 00:14:21.944
That's unfair."

00:14:21.944 --> 00:14:23.743
He said, "Well, we have a moral imperative

00:14:23.743 --> 00:14:26.625
to allow prices to go
what the market will bear,"

00:14:26.625 --> 00:14:29.900
completely dismissing the fact
that in the US, for example,

00:14:29.900 --> 00:14:34.125
the National Institutes of Health
spent over 30 billion a year

00:14:34.125 --> 00:14:36.740
on the medical research
that actually leads to these drugs.

00:14:36.740 --> 00:14:39.513
So again, the lack of attention
to those objective conditions,

00:14:39.513 --> 00:14:43.238
and just allowing the price system
itself to reveal the value.

NOTE Paragraph

00:14:43.238 --> 00:14:45.766
Now, this is not just
an academic exercise,

00:14:45.766 --> 00:14:47.571
as interesting as it may be.

00:14:47.571 --> 00:14:49.613
All this really matters

00:14:49.613 --> 00:14:51.552
to how we measure output,

00:14:51.552 --> 00:14:53.150
how we steer the economy,

00:14:53.150 --> 00:14:55.395
to whether you feel
that you're productive,

00:14:55.395 --> 00:14:57.820
to which sectors we end up helping,

00:14:57.820 --> 00:14:59.160
supporting,

00:14:59.160 --> 00:15:01.859
and also making people feel
proud to be a part of.

00:15:01.859 --> 00:15:03.778
In fact, going back to that quote,

00:15:03.778 --> 00:15:05.692
it's not surprising actually
that Blankfein could say that.

00:15:05.692 --> 00:15:07.183
He was right.

00:15:07.183 --> 00:15:11.064
In the way that we actually measure
production, productivity,

00:15:11.064 --> 00:15:13.799
and value in the economy,

00:15:13.799 --> 00:15:16.118
of course Goldman Sachs workers
are the most productive.

00:15:16.118 --> 00:15:17.113
They are in fact earning the most.

00:15:17.113 --> 00:15:18.375
The price of their labor
is revealing their value.

00:15:18.375 --> 00:15:20.728
But this becomes tautological, of course.

NOTE Paragraph

00:15:20.728 --> 00:15:23.680
And so there's a real need to rethink.

00:15:23.680 --> 00:15:25.945
We need to rethink
how we're measuring output,

00:15:25.945 --> 00:15:28.620
and in fact there's some
amazing experiments worldwide.

00:15:28.620 --> 00:15:30.663
So, in New Zealand,
for example, they now have

00:15:30.663 --> 00:15:33.184
a Gross National Happiness Indicator.

00:15:33.184 --> 00:15:37.281
In Bhutan, also, they're thinking
about happiness and wellbeing indicators.

00:15:37.281 --> 00:15:40.631
But the problem is that we can't
just be adding things in.

00:15:40.631 --> 00:15:41.958
We do have to pause,

00:15:41.958 --> 00:15:43.809
and I think this should be
a moment for pause,

00:15:43.809 --> 00:15:47.030
given that we see so little
has actually changed

00:15:47.030 --> 00:15:48.245
since the financial crisis,

00:15:48.245 --> 00:15:51.279
to make sure that
we are not also confusing

00:15:51.279 --> 00:15:53.805
value extraction with value creation,

00:15:53.805 --> 00:15:56.606
so looking actually at what's included,
not just adding more,

00:15:56.606 --> 00:16:00.578
to make sure that we're not, for example,
confusing rents with profits.

00:16:00.578 --> 00:16:03.536
Rents for the classicals
was about unearned income.

00:16:03.536 --> 00:16:07.470
Today, rents, when they're talked about
in economics is just an imperfection

00:16:07.470 --> 00:16:09.336
towards a competitive price

00:16:09.336 --> 00:16:13.459
that could be competed away
if you take away some asymmetries.

NOTE Paragraph

00:16:13.459 --> 00:16:17.919
Second, we of course can steer
activities into what the classicals called

00:16:17.919 --> 00:16:19.084
"the production boundary."

00:16:19.084 --> 00:16:22.382
This should not be an us-versus-them,

00:16:22.382 --> 00:16:24.438
big, bad finance versus
good other sectors.

00:16:24.438 --> 00:16:25.768
We could reform finance.

00:16:25.768 --> 00:16:28.804
There was a real lost opportunity
in some ways after the crisis.

00:16:28.804 --> 00:16:31.343
We could have had
the financial transaction tax,

00:16:31.343 --> 00:16:34.948
which would have in fact rewarded
long-termism over short-termism,

00:16:34.948 --> 00:16:37.294
but we didn't decide to do that globally.

00:16:37.294 --> 00:16:39.088
We can. We can change our minds.

00:16:39.088 --> 00:16:41.719
We can also set up
new types of institutions.

00:16:41.719 --> 00:16:45.608
There's different types of, for example,
public financial institutions worldwide

00:16:45.608 --> 00:16:48.891
that are actually providing that patient,
long-term, committed finance

00:16:48.891 --> 00:16:53.076
that help small firms grow, that help
infrastructure and innovation happen.

NOTE Paragraph

00:16:53.076 --> 00:16:55.412
But this shouldn't just be about output.

00:16:55.412 --> 00:16:57.288
This shouldn't just be about
the rate of output.

00:16:57.288 --> 00:16:59.683
We should also as a society pause

00:16:59.683 --> 00:17:02.368
and ask what value are we even creating.

00:17:02.368 --> 00:17:06.222
And I just want to end with the fact
that this week we are celebrating

00:17:06.222 --> 00:17:08.664
the 50th anniversary of the Moon landing.

00:17:08.664 --> 00:17:12.559
This required the public sector,
the private sector,

00:17:12.559 --> 00:17:15.306
to invest and innovate
in all sorts of ways,

00:17:15.306 --> 00:17:16.709
not just around aeronautics.

00:17:16.709 --> 00:17:20.621
It included investment in areas
like nutrition and materials.

00:17:20.621 --> 00:17:23.785
There was lots of actual mistakes
that were done along the way.

00:17:23.785 --> 00:17:27.196
In fact, what government did was it used
its full power of procurement,

00:17:27.196 --> 00:17:30.344
for example, to fuel
those bottom-up solutions,

00:17:30.344 --> 00:17:31.958
of which some failed.

00:17:31.958 --> 00:17:34.736
But are failures part of value creation?

00:17:34.736 --> 00:17:37.281
Or are they just mistakes?

00:17:37.281 --> 00:17:39.715
Or how do we actually also
nurture the experimentation,

00:17:39.715 --> 00:17:42.414
the trial and error and error and error?

00:17:42.414 --> 00:17:45.672
Bell Labs, which was
the R&D laboratory of AT&T,

00:17:45.672 --> 00:17:47.312
it actually came from an era

00:17:47.312 --> 00:17:49.230
where government was quite courageous.

00:17:49.230 --> 00:17:54.345
It actually asked AT&T that in order
to maintain its monopoly status,

00:17:54.345 --> 00:17:56.644
it had to reinvest its profits
back into the real economy,

00:17:56.644 --> 00:17:58.746
innovation,

00:17:58.746 --> 00:18:01.093
and innovation beyond telecoms.

00:18:01.093 --> 00:18:03.607
That was the history,
the early history of Bell Labs.

00:18:03.607 --> 00:18:07.350
So how we can get these new conditions
around reinvestment

00:18:07.350 --> 00:18:10.404
to collective invest in new types of value

00:18:10.404 --> 00:18:13.147
directed at some of the biggest
challenges of our time,

00:18:13.147 --> 00:18:14.453
like climate change,

00:18:14.453 --> 00:18:16.444
this is a key question.

NOTE Paragraph

00:18:16.444 --> 00:18:18.317
But we should also ask ourselves,

00:18:18.317 --> 00:18:21.808
had there been a net
present value calculation

00:18:21.808 --> 00:18:24.651
or a cost-benefit analysis done

00:18:24.651 --> 00:18:28.290
about whether or not to even try
to go to the Moon and back again

00:18:28.290 --> 00:18:29.550
in a generation,

00:18:29.550 --> 00:18:32.003
we probably wouldn't have started.

00:18:32.003 --> 00:18:33.421
So thank God,

00:18:33.421 --> 00:18:35.768
because I'm an economist,
and I can tell you,

00:18:35.768 --> 00:18:37.806
value is not just price.

NOTE Paragraph

00:18:37.806 --> 00:18:40.055
Thank you.

NOTE Paragraph

00:18:40.055 --> 00:18:42.031
(Applause)