-
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.
-
And their focus,
-
as the focus of the Physiocrats,
-
was in fact on these objective
conditions of production.
-
They also looked, for example,
at the class struggle.
-
Their understanding of wages
-
had to do with the objective,
if you want, power relationships,
-
the bargaining power of capital and labor.
-
But again, factories, machines,
-
division of labor,
-
agricultural land
and what was happening to it.
-
So the big revolution
that then happened --
-
and this by the way is not often
taught in economics classes --
-
the big revolution that happened
with the current system
-
of economic thinking that we have,
which is called neoclassical economics,
-
was that the logic completely changed.
-
It changed in two ways.
-
It changed from this focus on
objective conditions to subjective ones.
-
And let me just explain
what I mean by that.
-
Objective, in the way I just said.
-
Subjective, in the sense that
all the attention went to
-
how individuals of different sorts
make their decisions.
-
OK, so workers are maximizing
their choices of leisure versus work.
-
Consumers are maximizing
their so-called utility,
-
whichi is a proxy for happiness,
-
and firms are maximizing their profits.
-
And the idea behind was that then
we can aggregate this up
-
and we see what that turns into,
-
which are these nice fancy
supply-and-demand curves
-
which produce a price,
-
an equilibrium price.
-
It's an equilibrium price
because we also added to it
-
a lot of Newtonian physics equations
where centers of gravity
-
are very much part of
the organizing principle.
-
But the second point here is that
that equilibrium price, or prices,
-
reveal value.
-
So the revolution here
is a change from objective to subjective,
-
but also the logic is no longer
one of what is value,
-
how is it being determined,
-
what is the reproductive
potential of the economy,
-
which then leads to a theory of price,
-
but rather the reverse,
-
a theory of price and exchange
-
which reveals value.
-
Now, this is a huge change,
-
and it's not just an academic exercise,
as fascinating as that might be.
-
It affects how we measure growth.
-
It affects how we steer economies
to produce more of some activities,
-
less of others,
-
how we also remunerate
some activities more than others,
-
and it also just kind of makes you think,
-
you know, are you happy to get out of bed
if you're a value creator or not,
-
and how is the price system itself
if you aren't determining that.
-
So, now I mentioned it affects
how we think about output.
-
If we only include, for example, in GDP,
-
those activities that have prices,
-
all sorts of really weird things happen,
-
and feminist economists
and environmental economists
-
have actually written
about this quite a bit.
-
Let me just give you some examples.
-
If you marry your babysitter,
GDP will go down, so do not do it.
-
Do not be tempted to do this, OK?
-
(Laughter)
-
Because, an activity that perhaps was
before being paid for is still being done,
-
but is no longer paid.
-
(Laughter)
-
If you pollute, GDP goes up.
-
Still don't do it, but if you do it,
you will help the economy.
-
Why? Because we have to actually
pay someone to clean it.
-
Now, what's also really interesting
is what happened to finance
-
in the financial sector in GDP.
-
And this also by the way is something
that I'm always surprised
-
that many economists don't know.
-
Up until 1970,
-
most of the financial sector
was not even included in GDP.
-
It was kind of indirectly,
perhaps not knowingly,
-
still being seen through the eyes
of the Physiocrats
-
as just kind of moving stuff around,
not actually producing anything new.
-
So only those activities
that had an explicit price were included.
-
For example, if you
went to get a mortgage,
-
you were charged a fee.
-
That went into GDP and the national
income and product accounting.
-
But, for example,
net interest payments didn't,
-
the difference between
what banks were earning in interest
-
if they gave you a loan and what
they were paying out for a deposit.
-
That wasn't being included.
-
And so the people doing the accounting
started to look at some data
-
which started to show
that the size of finance
-
and these net interest payments
were actually growing substantially.
-
And they kind of called this
"the banking problem."
-
These were some people working
inside, actually, the United Nations
-
and a group called the Systems
of National Accounting, SNA.
-
They called it the banking problem.
-
Like, oh my God, this thing, it's huge,
and we're not even including it.
-
So instead of stopping
-
and actually making
that Tableau Economique
-
or asking some of these
fundamental questions
-
that also the classicals were asking
about what is actually happening,
-
the division of labor between different
types of activities in the economy,
-
they simply gave these
net interest payments a name.
-
So the commercial banks, they called this
"financial intermediation."
-
That went into the NIPA accounts.
-
And the investment banks
were called the "risk-taking activities,"
-
and that went in.
-
And by the way, in case I haven't
explained this properly,
-
that red line is showing
just how much quicker
-
financial intermediation
as a whole was growing
-
compared to the rest of the economy,
the blue line, industry.
-
And so this was quite extraordinary,
-
because what actually then happened,
and what we know today,
-
and there's different people
writing about this,
-
and this data here
is from the Bank of England,
-
is that lots of what finance
was actually doing
-
from the 1970s and '80s on
-
was basically financing itself,
-
finance financing finance.
-
And in fact what I mean by that
is finance, insurance, and real estate.
-
In fact, in the UK,
-
something like between
10 and 20 percent of finance
-
finds its way into
the real economy, into industry,
-
say into the energy sector,
into pharmaceuticals,
-
into the IT sector,
-
but most of it goes back
into that acronym, FIRE,
-
finance, insurance, and real estate.
-
It's very conveniently called FIRE.
-
Now, this is interesting because in fact
-
it's not to say that finance
is good or bad,
-
but the degree to which,
-
by just having to give it a name
-
because it actually had
an income that was being generated,
-
as opposed to pausing and asking,
what is it actually doing,
-
that was a missed opportunity.
-
Similarly, in the real economy,
in industry itself, what was happening?
-
And this real focus on prices
and also share prices
-
has created a huge problem
of reinvestment,
-
again this real attention that both
the Physiocrats and the classicals had
-
to the degree to which the value
that was being generated in the economy
-
was in fact being reinvested back in.
-
And so what we have is
an ultra-financialized industrial sector
-
where, increasingly, a share
of the process of the net income
-
are not actually going
back into production,
-
into human capital training,
into research and development,
-
but just being siphoned out
in terms of buying back your own shares,
-
which boosts stock options,
which is in fact the way
-
that many executives are getting paid.
-
And, you know, some
share buybacks is absolutely fine,
-
but this system
is completely out of whack.
-
These numbers that I'm showing you here
-
show that in the last 10 years,
466 of the S&P 500 companies
-
have spent over $4 trillion
on just buying back their shares.
-
And what you see then if you aggregate
this up at the macroeconomic level,
-
so if you look at aggregate
business investment,
-
which is a percentage of GDP,
-
you also see this falling level
of business investment.
-
And this is a problem.
-
This, by the way, is a huge problem
-
for skills and job creation.
-
You might have heard there's lots
of attention these days
-
to, "Are the robots taking our jobs?"
-
Well, mechanization has
for centuries actually taken jobs,
-
but as long as profits were being
reinvested back into production,
-
then it didn't matter. New jobs appeared.
-
But this lack of investment
is in fact very dangerous.
-
Similarly in the pharmaceutical industry,
for example, how prices are set,
-
it's quite interesting how it doesn't look
at these objective conditions
-
of the collective way in which value
is created in the economy.
-
So in the sector where you have
lots of different actors --
-
public, private of course, but also
third sector organizations
-
creating value --
-
the way we actually measure
value in this sector
-
is in fact through
the price system itself.
-
Prices reveal value.
-
So when, recently,
-
the price of an antibiotic
went up by 400 percent overnight
-
and the CEO was asked,
"How can you do this?
-
People actually need that antibiotic.
-
That's unfair."
-
He said, "Well, we have a moral imperative
-
to allow prices to go
what the market will bear,"
-
completely dismissing the fact
that in the US, for example,
-
the National Institutes of Health
spent over 30 billion a year
-
on the medical research
that actually leads to these drugs.
-
So again, the lack of attention
to those objective conditions,
-
and just allowing the price system
itself to reveal the value.
-
Now, this is not just
an academic exercise,
-
as interesting as it may be.
-
All this really matters
-
to how we measure output,
-
how we steer the economy,
-
to whether you feel
that you're productive,
-
to which sectors we end up helping,
-
supporting,
-
and also making people feel
proud to be a part of.
-
In fact, going back to that quote,
-
it's not surprising actually
that Blankfein could say that.
-
He was right.
-
In the way that we actually measure
production, productivity,
-
and value in the economy,
-
of course Goldman Sachs workers
are the most productive.
-
They are in fact earning the most.
-
The price of their labor
is revealing their value.
-
But this becomes tautological, of course.
-
And so there's a real need to rethink.
-
We need to rethink
how we're measuring output,
-
and in fact there's some
amazing experiments worldwide.
-
So, in New Zealand,
for example, they now have
-
a Gross National Happiness Indicator.
-
In Bhutan, also, they're thinking
about happiness and wellbeing indicators.
-
But the problem is that we can't
just be adding things in.
-
We do have to pause,
-
and I think this should be
a moment for pause,
-
given that we see so little
has actually changed
-
since the financial crisis,
-
to make sure that
we are not also confusing
-
value extraction with value creation,
-
so looking actually at what's included,
not just adding more,
-
to make sure that we're not, for example,
confusing rents with profits.
-
Rents for the classicals
was about unearned income.
-
Today, rents, when they're talked about
in economics is just an imperfection
-
towards a competitive price
-
that could be competed away
if you take away some asymmetries.
-
Second, we of course can steer
activities into what the classicals called
-
"the production boundary."
-
This should not be an us-versus-them,
-
big, bad finance versus
good other sectors.
-
We could reform finance.
-
There was a real lost opportunity
in some ways after the crisis.
-
We could have had
the financial transaction tax,
-
which would have in fact rewarded
long-termism over short-termism,
-
but we didn't decide to do that globally.
-
We can. We can change our minds.
-
We can also set up
new types of institutions.
-
There's different types of, for example,
public financial institutions worldwide
-
that are actually providing that patient,
long-term, committed finance
-
that help small firms grow, that help
infrastructure and innovation happen.
-
But this shouldn't just be about output.
-
This shouldn't just be about
the rate of output.
-
We should also as a society pause
-
and ask what value are we even creating.
-
And I just want to end with the fact
that this week we are celebrating
-
the 50th anniversary of the Moon landing.
-
This required the public sector,
the private sector,
-
to invest and innovate
in all sorts of ways,
-
not just around aeronautics.
-
It included investment in areas
like nutrition and materials.
-
There was lots of actual mistakes
that were done along the way.
-
In fact, what government did was it used
its full power of procurement,
-
for example, to fuel
those bottom-up solutions,
-
of which some failed.
-
But are failures part of value creation?
-
Or are they just mistakes?
-
Or how do we actually also
nurture the experimentation,
-
the trial and error and error and error?
-
Bell Labs, which was
the R&D laboratory of AT&T,
-
it actually came from an era
-
where government was quite courageous.
-
It actually asked AT&T that in order
to maintain its monopoly status,
-
it had to reinvest its profits
back into the real economy,
-
innovation,
-
and innovation beyond telecoms.
-
That was the history,
the early history of Bell Labs.
-
So how we can get these new conditions
around reinvestment
-
to collective invest in new types of value
-
directed at some of the biggest
challenges of our time,
-
like climate change,
-
this is a key question.
-
But we should also ask ourselves,
-
had there been a net
present value calculation
-
or a cost-benefit analysis done
-
about whether or not to even try
to go to the Moon and back again
-
in a generation,
-
we probably wouldn't have started.
-
So thank God,
-
because I'm an economist,
and I can tell you,
-
value is not just price.
-
Thank you.
-
(Applause)
Hong Phat
English original (version 7) wrong timeline, please fix it.