Written with Terence Kealey


In 1871, Austrian economist Carl Menger published his Principles of Economics. Simultaneously, British economist William Stanley Jevons sent to the printing presses The Theory of Political Economy. The two of them, to be joined in a couple of years by Swiss economist Léon Walras, had independently come to a dicovery that Menger’s student Friedrich von Wieser was to call “marginal utility.”

By which economists mean that “value” is something related to the incrementally consumed unit, one choice at a time. It is not, as their predecessors used to fancy, determined by the total stock of goods available at a certain moment or by its perceived meaning to the whole of society.

In his musings on the notion of “value,” Adam Smith remarked that “nothing is more useful than water; but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it”.

This was the paradox that Menger, Jevons and Walras solved. You may be willing to pay more for a glass of San Pellegrino than for a diamond: that is, if you’ve been walking for days in the desert and consumed all your supplies. “Value” depends on circumstances, which include how much you had of a certain thing already.

Now, critics sometimes downplay the number of genuine _scientific_ discoveries in the history of economics – but marginal utility was certainly one of those. Considering value as subjective was a major step forward for economics to better understand the world. This has nothing to do with any ideological tune: neither Menger nor Jevons nor Walras were free-market liberals, cheerleading unfettered competition.

Yet economist Mariana Mazzucato thinks otherwise, and her latest book, The Value of Everything, expresses nostalgia for pre-Mengerian theories of value.

Professor Mazzucato has now been interviewed by Russ Roberts for Econtalk, and as always in her public performances, she is assertive and yet persuasive: the perfect spokesperson for her contentions.

But what about these contentions?

Mazzucato’s fundamental claim in her new book is that “we’ve stopped debating value,” which has therefore provided the cover under which value extractors (who are bad) cheat value producers (who are good). So, she says, earlier generations of economists had an objective understanding of value (for the mercantilists of the 17th century, it emerged by trade; for the physiocrats of the 18th century it emerged by farming; for the classical economists of the 19th century it emerged by labour) but because economists now judge value by the satisfying of subjective preference, and because bad people such as bankers have a subjective preference for obscene profits, said bad people will use marginal utility to justify getting their hands on said obscene profits.

In her critique of marginal utility, Mazzucato casts herself as only following in the footsteps of classical giants. So she says she’s only following Adam Smith in distinguishing between productive labour (which is good) and unproductive labour (which is bad). But did Smith make the distinction Mazzucato says he did?

In paragraph 2 of chapter 3 (subtitled ‘of Productive and Unproductive Labour’) of book 2 of The Wealth of Nations, Smith wrote that “the labour of a manufacturer adds, generally, to the value of the materials which he works upon … The labour of a menial servant, on the contrary, adds to the value of nothing.” This appears to justify Mazzucato’s invocation of Smith, but Smith then immediately wrote that “the labour of the latter, however, has its value, and deserves its reward as well as that of the former.”

Smith’s key point emerges a few paragraphs later when he wrote, “Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct.” Smith’s point, in short, is that the private sector will make a shrewd distribution of its resources between investment and consumption, but that the public sector—and only the public sector—can destroy a country by funding consumption in its most prodigal forms.

And who is the world’s greatest exponent today of public prodigality? Professor Marianna Mazzucato. In her earlier book The Entrepreneurial State she actually praises governments for being prodigal, for not engaging in a cost-benefit analysis of their expenditures in research et alia, and for being, in her own words, courageous in spending your money and mine on projects with nary a care as to any possible return.

In the interview, Roberts tries to contextualize her claims: the government has been indeed investing in R&D, but it did so only in the last seventy years or so, well after inventions that changed the world in the 19th century. Mazzucato doesn’t acknowledge the comment, and when Roberts points out that yes, some contemporary innovations may be government-financed but some are not, she gives a revealing answer. The transcript is worth quoting:

“Russ Roberts: Those things that were financed by the government–touch-screen, GPS, Siri, etc.–they were partly funded by the government. Things, innovations that made them possible in their final form were funded by the government. But of course there were other innovations that made them useful and practical, and–

Mariana Mazzucato: Yeah. No one is debating that. But, see, we are on–what I’m not doing is saying the private sector is not important. What you are potentially doing–and maybe you are not but some other people are, many people are, is denying the role that government played in doing more than just the infrastructure.”

Was Roberts denying that some innovations may be sometimes funded, directly or indirectly, by the government? Not at all. But the mere allusion to the fact that, well, not all innovations are state-financed brought Mazzucato to turn Roberts’ words around him, in a strategic move to reaffirm the supposed general status of the “truth” of her finding: innovation doesn’t pop up if the government isn’t involved.

Let’s leave aside the fact that Mazzucato believes that “laissez-faire” liberalism is about government fixing market failure and paying for infrastructure (she should read one of those “laissez-faire” guys she so poignantly criticizes, one day or another). Her own case is predicated upon stating and restating the supposed truth that innovation depends upon government “patient capital”. Government is in fact “shaping” or “co-creating” markets: it does not stumble upon inventions that may also have commercial use, according to Mazzucato it foresees them.

Yet she doesn’t seem to consider that government spending has an opportunity cost: if you invest in space travel, you can’t use the same money to finance kindergartens. She seems to believe that the government has infinitely deep pockets, whereas the private sector doesn’t. And she does seem to believe that private investors do wrong because they need, at a certain point, to recover their own investment. At a certain point, she implicitly compares government to a venture capitalist, insisting venture capitalists endure many losses in many a failed project to eventually find a profitable one. As government should too. But if this is what venture capitalists do, why should government do the same? Is a bureaucracy (let’s use a better word than the anodyne ‘government’) structured around the right incentives to decide what sort of projects should be financed, and what should not?


Stay tuned for Part 2 on Wednesday…