An honest look at price, innovation and who powers the economy

Value creation.

Wealth creation.

These are really powerful words.

Maybe you think of finance,
you think of innovation,

you think of creativity.

But who are the value creators?

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

Who are they?

The couch potatoes?

The value extractors?

The value destroyers?

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

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

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

Now, don't look so surprised.

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

We've stopped actually asking
really tough questions

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

productive and unproductive activities?

Now, let me just give you
some context here.

2009 was just about a year and a half

after one of the biggest
financial crises of our time,

second only to the 1929 Great Depression,

and the CEO of Goldman Sachs said

Goldman Sachs workers are the most
productive in the world.

Now, productivity and productiveness

for an economist actually has
a lot to do with value.

You're producing stuff,

you're producing it
dynamically and efficiently.

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

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

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

and just kind of picking
on Goldman Sachs here,

at the center of the crisis because
they had actually produced

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

which saw many thousands of people
actually lose their homes.

In 2010 in just one month, September,

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

Between 2007 and 2010,

8.8 million people lost their jobs.

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

for the sum of 10 billion dollars.

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

but obviously having bailed out

one of the biggest value-creating
productive companies,

perhaps they should have.

Now, what I want to do next

is kind of ask ourselves
how we lost our way,

how it could be, actually,

that a statement like that
could almost go unnoticed,

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

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

when actually the term was contested.

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

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

There was a lot of debate
within the economics profession,

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

and that has actually allowed this term

"wealth creation" and "value"

to become quite weak and lazy

and also easily captured.

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

300 years ago.

Now, what was interesting 300 years ago

was the society was still
an agricultural type of society,

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

who were called the Physiocrats,

actually put the center
of their attention to farm labor.

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

they looked at farming,

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

called the "Tableau Economique,"

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

And it was very interesting,

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

They then really worried about
what was happening to that value

when it was produced.

So what the Tableau Economique does,

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

is it broke down the classes
in society into three.

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

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

but it was useful, it was necessary,
these were the merchants,

they were called "the proprietors."

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

for an existing asset, the land,

and they called them "the sterile class."

Now, this is a really heavy-hitting word

if you think what it means,

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

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

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

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

they were simulating what would
actually happen under different scenarios

if the wealth actually wasn't
reinvested back into production

to make that land more productive

and actually being
siphoned out in different ways,

or even if the proprietors
were getting too much.

And what later happened in the 1800s,

and this was no longer
the Agricultural Revolution

but the Industrial Revolution

is that the classical economists,

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

also asked the question "what is value"

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

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

they said it was industrial labor.

So they had a labor theory of value.

But again, their focus was reproduction,

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

if it was getting siphoned out.

And in "The Wealth of Nations,"

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

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

at most you can make one pin a day,

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

new thinking,

think of it today we would use the word
"organizational innovation,"

then you could increase the productivity

and the growth and the wealth of nations.

So he showed that 10 specialized workers

who had been invested in
in their human capital

could produce 4,800 pins a day,

as opposed to just one
by an unspecialized worker.

And he and his fellow classical economists

also broke down activities
into productive and unproductive ones,

(Laughter),

and the unproductive ones weren't --

I think you're laughing because

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

(Laughter)

(Applause)

Lawyers!

I think he was right about the lawyers.

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

So lawyers, professors,
shopkeepers, musicians.

He obviously hated the opera.

He must have seen
the worst performance of his life

the night before writing this book,

because there's at least
three professions up there

that have to do with the opera.

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

It was just, "What's going to happen

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

without really thinking about
how to increase the productivity

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

which was industrial labor.

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

it was just very contested.

By making these lists,

it actually forced them also
to ask interesting questions.