Reinvigorating the most important battle in economics

https://palladiummag.com/2019/11/21/mariana-mazzucato-has-reinvigorated-the-most-important-battle-in-economics/

by ignored • 7 years ago

86 61 7 years ago

I did my undergrad in economics a decade and a half ago, and it could have just as easily been an applied statistics degree with a few classes on the history of politics.

I had to independently go read Hayek, Marx, Rothbard etc...and at the time there really wasnt any research that attempted quantifying value or mapping preferences to anything measurable.

So I'm glad to see this line of study come back into the discipline.

Cyder• 7 years ago

This aspect of economics is critically important as the supposed engine for growth changes from private to public domains. Where I live, the public sector far outweighs the private sector in providing jobs. As such, the voters follow the ever curricular pattern of growing the government to the demise of the private sector. The subject of this book being the public sector, my interest would be the balance of the private and public. Just how large can the public sector grow ( with their overpaying for outsourcing, as the review stated) before becoming unsustainable? Another good aspect of this book is it's analysis of healthcare systems. In the US, healthcare is often used as the poster boy for failed capitalism. The fact is that healthcare is overregulated and not at all capitalist in most Western societies. But that would be another book entirely....

Ididntdothis• 7 years ago

The US health system had managed to merge bad attributes from different systems into a system that’s incredibly bad. Highly regulated, tons of unaccountable bureaucracy, lots of barriers for market entry , protectionist, lack of consumer choices and also highly capitalistic. The problem is that the US can’t decide what it wants so we have a system where a lot of people make a lot of money whole being protected from competition or even scrutiny by customers.

hogFeast5• 7 years ago

I think that is largely a misconception from people who live in the US and think the US is the worst of all possible worlds (based largely on the politics of the last decade or so)...it isn't. Not even close.

The US is an extreme example of a system that optimizes totally for choice...and it achieves that aim. The UK is an extreme example of system that optimizes totally for access. They both achieve their aims but there is a necessary cost. The most successful systems are mixed ones (Mazzucato is prone to make extremely reductionist statements about this: the private sector has this disadvantage, the solution is all public...in the UK, we know this doesn't work...we have tried it).

cs702• 7 years ago

The reviews of the book on Amazon are both more succinct and better, I think, than this long-winded article:

https://www.amazon.com/Value-Everything-Making-Taking-Econom...

skybrian4• 7 years ago

A fundamental assumption of mainstream economics is that market prices are approximately correct. This is more for pragmatic reasons than anything; you need some sort of prices to compare unlike things and it's often easy to get some consensus on what the market price is.

If you want to calculate GDP some other way then you will need to decide what millions of prices "should" be and persuade others with your argument. Coming up with an alternative scheme is probably the easy part. Agreeing on a new standard would be much harder.

Consider also that those millions of prices are also changing, often rapidly.

The problem is that, even within mainstream economics, we know market prices aren't correct. Pricing externalities is something pretty much all economists can get behind, and that's just the beginning. Does anyone really believe health care prices are correct? How about all the other subsidies? Asset prices for things like startups are even worse.

In areas where there are no market prices or the market is obviously artificial, price and value become nebulous. Without any objective standards of value, what things are worth becomes a matter of opinion and politics. I am pessimistic on there being consensus on a better way of understanding value any time soon.

More likely we will muddle through with patches to the system we have. Philosophically, even major changes like a carbon tax or universal basic income are basically just patches to get prices somewhere closer to what we think they should be.

Nasrudith2• 7 years ago

I would say the assumption of correctness is a "if you are so smart why aren't you rich" sort of heuristic.

Essentially if you knew that and that it was wrong then it would lead to massive arbitrage opportunities.

Personally I believe that treating value in terms of "should" is asking the wrong question. The actual questions are chains.

* What is the current production cost? Can we do better? * What does it cost to produce production if we can? How long does it take to get it producing? * Can anything substitute for it acceptably?

skybrian4• 7 years ago

Having the idea of doing arbitrage doesn't matter if you can't build a canal or railroad or pipeline to make it happen. It's only in financial markets where it might be realistic to pretend this is only a matter of being smart enough to come up with an idea. (Because they assume you have the money and that's the only thing you need.)

Also, focusing on cost ignores markets where the marginal cost is nearly zero and price is set in other ways.

crdoconnor3• 7 years ago

Does anyone really believe health care prices are correct?

Yes. Market clearing prices are set by the intersection of desire/need and scarcity.

Health care prices can be virtually as high as you like if you can make health care scarce enough, because pretty much everybody wants to live.

The greatest profits are usually found where scarcity meets desperation.

This is also why most large corporations spend half of their time trying to tweak the desire side (advertising) and the scarcity side (market manipulation/intellectual property/contractual exclusivity/lobbying) in a bid to secure margins. De beers is probably the clearest example of success in these endeavours.

WalterBright6• 7 years ago

Health care prices can be virtually as high as you like if you can make health care scarce enough, because pretty much everybody wants to live.

Everybody needs food, too, but food is as cheap as dirt.

thaumasiotes3• 7 years ago

The greatest profits are usually found where scarcity meets desperation.

Chinese history records that the premodern government was often suspicious of market trade for a pretty interesting reason -- when a region experienced famine, the market directed food away from the afflicted region. [1]

The problem, of course, was that in the premodern context, what most people produced was... food. A famine meant that everyone needed food, but it simultaneously meant that everyone had just been impoverished, such that there wasn't much profit available to be had in selling them the food they needed.

[1] It goes without saying that they were also suspicious of market trade for the standard other reasons.

kgwgk• 7 years ago

It's not obvious what "scarcity" is in health care: demand is infinite because everybody is going to die.

nixpulvis2• 7 years ago

You're assuming we actually have rational actors in the "free market", which depends on free access to information. Something I find issue with today.

nixpulvis2• 7 years ago

If my understanding of the math is correct, a carbon tax is somewhat more fundamentally meaningful than UBI vs other forms of welfare. A carbon tax is in a way trying to model a previously external factor in the market, i.e. the environment or earth itself.

skybrian4• 7 years ago

Right, but there are no prices on an uninhabited planet. The prices placed on environmental changes is something humans decide on. It's a subjective, arbitrary number.

It's good to avoid environmental degradation but the prices we use to do that are going to be arbitrarily set by government.

AnthonyMouse3• 7 years ago

If you want to calculate GDP some other way then you will need to decide what millions of prices "should" be and persuade others with your argument.

It's a bit worse than that because cost, value and price are all different things.

The amortized cost of making water available from the tap is pennies per gallon. The value of water is nigh infinite because without it you die. The price is presumably somewhere between those two values, but it could be anywhere -- an efficient water company might charge close to the cost but a robber baron with a hard monopoly on water might charge close to the value. The market only tells you the price, not the cost or the value.

In a lot of cases it doesn't even tell you that. Consider what happens when a person spends time on a hobby. The cost is not zero, the value is not zero, and there is no price. Even more complicated, suppose the hobby is writing free software. Then there is no price (or it's zero, which isn't very informative) but you have value being derived by people all over the world, who may each value it in a different amount.

Philosophically, even major changes like a carbon tax or universal basic income are basically just patches to get prices somewhere closer to what we think they should be.

A carbon tax is definitely about pricing an externality. A UBI is kind of the opposite. It's basically admitting that we don't know how to value everything correctly so instead of that here's the money, go choose what you need for yourself.

hogFeast5• 7 years ago

Mazzucato is one of the most suspect economists out there. Courts a huge public profile, is apparently an expert on innovation without ever having worked in the private sector, and all the conclusions appeared tailored to win more consulting work with left-wing parties.

Her conclusions also tend to be far too simplistic. The reason why the UK has moved to using the private sector more is because the other way was bankrupting us. She seems to believe that the public sector can innovate...okay, where is the evidence of this? The examples of successful innovation are cases where private incentives have been merged with public funding. All very suspect.

Mvandenbergh• 7 years ago

She seems to believe that the public sector can innovate...okay, where is the evidence of this?

Well, she wrote a whole book about it, she's not just asserting it. The public sector played a huge part in the genesis of the Internet for one thing.

The examples of successful innovation are cases where private incentives have been merged with public funding. All very suspect.

But another pretty critical point of that book was that our public conversation is inhibited by the extremely limited vocabulary we use to describe it. Is a defence contractor really part of the "private sector"? Is a NASA engineering team part of the "public sector" the way an employee of a mail sorting centre is? What about an academic working for an old school monopolist like Bell? Ok, fine it was privately owned so if you want to use a crude and almost useless private/public sector split it is very easy to say "private" but it's not private sector in quite the same way as a local shop is, is it?

hogFeast5• 7 years ago

What is distinction between an assertion and writing a book? You also realise that writing a book does not mean you are automatically right. Presumably you think Mein Kampf was a real triumph? The book is irrelevant, you are either wrong or right.

And my exact point is that there is a distinction between saying:

1. The public sector played a huge part in the genesis of the Internet.

2. The public sector can make wise investments, and we can definitely control this.

Point 1 is true but point 2 does not follow logically from it. And, again, there is a lot of evidence that point 2 is definitely not true.

I am not particularly sure there is any need for quibbling over definitions. It is just about incentives. To take the UK as an example: stuff like ICFC/3i, which was publicly funded but run on a commercial basis (another example is NEB/BTG, this failed...until Thatcher), worked and pretty much all of the nationalised industries failed because there were no budget constraints (the purpose of the 1975 Industry Act was to ensure nationalised companies employed a lot of people who would then vote for the govt...it didn't matter if a private sector manager was employed i.e. British Leyland).

Again: the distinction between what works and what doesn't is fairly well understood. The issue is that Mazucutto looks at something like ICFC (btw, I know she looked at this because I have talked to people who she has advised) and says: look the public sector can get things right (i.e. confirmation bias). When the point is that how you design things matter massively (a point which is often made less explicitly). Ownership is basically irrelevant but for someone who wants to grow the state, i.e. most of the people she advises, that seems like the most relevant point.

bjourne• 7 years ago

Tl;dr for those who didn't read the book review:

1. Modern economics doesn't try to define "value" objectively. Value is whatever price the market is willing to bear. This logic fuels speculation bubbles.

2. The finance industry is a huge part of a modern market economy. But what value does it provide?

3. Public spending is behind most fundamental scientific research: "research has shown that two-thirds of the most innovative drugs (new molecular entities with priority rating) trace their research back to funding by the US National Institutes of Health."

4. Public spending grows the economy. The effect multiplier is 1.5.

Animats• 7 years ago

What is output?

That's the big question. What gets measured?

Capitalism optimizes for - something. And what it optimizes for matters. Think of the "free market" as a system for evaluating an objective function. You get what you optimize for. That may not be what you want.

"Externalities" are not in the objective function, which is the cause of many problems.

Nasrudith2• 7 years ago

Really valuation as a pursuit was abandoned for a damned good reason - it took a lot of time to get it through most of humanity's thick heads that value is circumstance based. Even something outragously useful like a fountain of youth would become relatively worthless if it was nearly ubiquitous like oxygen.

Likewise the public sector section is annoyingly simplistic in that it doesn't grasp the difference between neccessary and sufficent in creation. Research certainly does give major dividend when it is pulled off but it also requires utilization.

I am not sure if the actual book addresses it better but any refusal to acknowledge the complexity and tries for a simple one size fits all is frankly insane.

claudiawerner• 7 years ago

All theories of value integrate the idea of circumstance into their workings; Ricardo himself realized this. The spirit of the marginalist objection to an "objective" theory of value (I put objective in quotes because it's a mistake to view it as anything but as Marx put it a "phantom-like objectivity") was put by Whatley in 1832: "It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price" but as Cockshott and Cottrel put in Classical Econophysics, "if pearls washed up on the beach, they would not collect anything like their current price".

Ricardo's reply was that the precondition to a commodity having value is that it is firstly an object of demand. Smith's, Ricardo's and Marx's theories of value (the commonalities of which tend to be overstated, even by the likes of greats such as Samuelson) all describe the case in which if I decide to make a product and nobody (or not enough people) want it, this leads to my realization that what I've been doing is useless and subsequently moving my capital elsewhere.

I think Carchedi and Kliman defend Marx's version of the "labour theory of value" quite well, as do Shaikh and Tonak on empirical grounds, and from an opposing perspective Dumenil and Levy do as well. Others, such as Moseley and Patrick Murray, relax their conditions a litle and argue that it is a mistake to apply the theory to individual commodities, rather, it can only be applied to "aliquots representative of the lot".

I have a comment here with some (slightly outdated) information as to the status of the classical (mostly Ricardian and Marxian) theories of value among the people who still study it (usually heterodox economists): https://news.ycombinator.com/item?id=18490388

randcraw4• 7 years ago

You make the author's point for her. When any model for valuation disregards the vast good arising from a fountain of youth, that (margin-based) model is corrupt.

(Obviously I'm disregarding all the derivative concerns that inevitably would arise from introducing immortality. After all, it's simply one possible example of a vastly undervalued innovation.)

thaumasiotes3• 7 years ago

But the good arising from a fountain of youth really is negligible if there are a hundred other identical fountains right next to it. It's only outrageously useful if you make the additional assumption that it's hard to replace.

henrik_w• 7 years ago

Currently reading this book (two thirds through it) - can confirm that it is very interesting, and raises many good questions on what producing value actually means.

HashThis• 7 years ago

Wall Street earns the most, because it is the center of crony capitalism. (Not healthy captialism, but the theft side)

lotsofpulp2• 7 years ago

Does "it" earn the most? What is the definition of wall street? In my circles, those in tech have far out-earned those on Wall St, especially on a dollars per hour and quality of life metrics.

randomname93857• 7 years ago

Are people in your circles among main shareholders or CIOs in top US investment banks?

galaxyLogic2• 7 years ago

I'm trying to understand this.

If I sell you something does that count as part of GDP? If I sell my labor to a company does my selling of it become part of the GDP? Then the company sells the product I produced for it, is that added to the GDP as well?

Or is it only when a company sells something that it is counted as part of the GDP?

octbash• 7 years ago

The quick answer to your broader question is that there are multiple ways of slicing how GDP is computed, and yes, economists are aware of them and have thought through the edge-cases as well as being aware of where the measures fall short.

E.g. in your example, see the Value-added approach: https://quickonomics.com/gross-domestic-product-gdp/

galaxyLogic2• 7 years ago

A good resource thanks. "It measures the total value of all goods and services produced".

But so then if I produce nothing but just sell something at profit which I already have is that part of the GDP?

If the value of my stamps-collection increases and I sell it at considerable profit is that an increase in GDP?

WalterBright6• 7 years ago

Rather than lean and efficient services, privatization appears to have led to administrative bloat, price inflation, and a gutting of state capacity.

Privatization of government services is not the same thing as a free market, and hence free market forces are not applying to it.

In a free market, when a business contracts for services from another business, it is motivated by value received and price paid. When the government contracts for services, price and value are of much lesser concern. The bureaucrats negotiating the contracts have little care for what it costs, whereas political and social concerns are paramount.

It's not in the least surprising that privatizing who provides government services does not result in cost savings.

littlestymaar2• 7 years ago

Privatization of government services is not the same thing as a free market, and hence free market forces are not applying to it.

The problem is that nothing is the “same thing as a free market”. Free market don't exist in the real world, and the market forces are way less powerful than what we would like. They are almost always dwarfed by other forces (transaction cost, network effect, economies of scale, and information asymmetry for instance).

Remember, the free market model comes from an era when chemistry was modeled with the 4 elements !

WalterBright6• 7 years ago

They are almost always dwarfed by other forces (transaction cost, network effect, economies of scale, and information asymmetry for instance).

Those are all free markets, too. Consider information asymmetry, for example. The less I know about something, the riskier it will be for me to buy it, hence the less I am willing to pay for it.

I.e. information asymmetry is called risk, and is accounted for in the pricing. Companies are incentivized to reduce risk for their customers, because then they can charge a higher price.

AnimalMuppet• 7 years ago

Remember, the free market model comes from an era when chemistry was modeled with the 4 elements !

I fail to see how the age of the model has anything whatsoever to say to its validity. Not everything old is stupid; not everything new is right. If you want to disprove the free market model, you have to do a lot better than pointing out that it's old.

It is true that perfectly free markets don't exist in the world. That doesn't mean that the model isn't useful as an approximate ideal.

9c8675a8• 7 years ago

So you want a false sense of "security" and "certainty" instead of reality. You're basically insane.

AnthonyMouse3• 7 years ago

In principle competitive bidding should result in cost savings because anyone who could do it for significantly less could profit by submitting a lower bid.

The problem is some combination of corruption and regulatory requirements. If the bureaucrats write the contract in such a way that only one company can satisfy it, that company has no effective competition so they don't have to compete on price. Same thing if the contract requirements, or the paperwork required to enter into the bidding itself, are such that smaller entities need not apply and you again have insufficient competition to drive down prices.

But none of that goes away by bringing the project in house either, you just trade corruption and high costs by contractors for corruption and high costs by public sector unions, and in that case there is explicitly not even the possibility for competition.

So you still either have to solve the corruption and bureaucracy somehow (effective method unknown), or move the project entirely to the private sector, e.g. by using the money instead to make tax cuts for regular people or transfer payments so that instead of government housing projects you leave people with the money to buy market rate housing directly, or whatever else they need.

blotter_paper• 7 years ago

Or, find new models that don't require a government to be involved in building things at all. The existing solutions (e.g. privately developed toll roads instead of public highways) have their own issues, but this is one potential solution space to explore.

randcraw4• 7 years ago

Stiglitz weighs in on this very topic in today's Guardian:

”It's time to retire metrics like GDP. They don't measure everything that matters time to retire metrics like GDP. They don't measure everything that matters”

https://news.ycombinator.com/item?id=21623150

Reinvigorating the most important battle in economics

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