ABOUT THE SPEAKER
Mariana Mazzucato - Innovation economist
Which actor in the economy is most responsible for making radical innovation happen? Mariana Mazzucato comes up with a surprising answer: the state.

Why you should listen

States and governments are often depicted as slow, bureaucratic, risk-averse. That argument is used in support of making states smaller and the private sector bigger. In her latest book, The Entrepreneurial State: Debunking Private vs. Public Myths in Innovation and in her research, Mariana Mazzucato offers a bold contrarian view: States aren't only market regulators and fixers, but "market makers" -- actively creating a vision for innovation and investing in risky and uncertain areas where private capital may not see the ROI. Yes: Private venture capital is much less risk-taking than generally thought. As an example, the technology behind the iPhone and Google exists because the U.S. government has been very interventionist in funding innovation. Private investors jumped in only later. The same is true today of what promises to be the next big thing after the Internet: the green revolution.

Mazzucato, a professor of economics at the Science and Technology Policy Research Unit (SPRU, University of Sussex), argues that Europe needs today to rediscover that role -- that what the continent needs is not austerity but strategic investments (and new instruments such as public investments banks) towards an "innovation Union."

More profile about the speaker
Mariana Mazzucato | Speaker | TED.com
TEDSummit 2019

Mariana Mazzucato: What is economic value, and who creates it?

Filmed:
1,303,765 views

Where does wealth come from, who creates it and what destroys it? In this deep dive into global economics, Mariana Mazzucato explains how we lost sight of what value means and why we need to rethink our current financial systems -- so capitalism can be steered toward a bold, innovative and sustainable future that works for all of us.
- Innovation economist
Which actor in the economy is most responsible for making radical innovation happen? Mariana Mazzucato comes up with a surprising answer: the state. Full bio

Double-click the English transcript below to play the video.

00:12
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.
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Now, don't look so surprised.
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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.
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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 after
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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.
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Productivity and productiveness,
for an economist,
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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.
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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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I'm 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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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.
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What I want to do next
is kind of ask ourselves
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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.
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So what I want to 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,
"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.
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Now, what was interesting 300 years ago
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is 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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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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Then others who were just
moving some of this value around
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but it was useful, it was necessary,
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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
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 was 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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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
most of you are on that list, aren't you?
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(Laughter)
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Lawyers! 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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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,
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,
division of labor,
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agricultural land
and what was happening to it.
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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,
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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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Let me 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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which is a proxy for happiness,
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and firms are maximizing their profits.
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And the idea behind this 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
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where centers of gravity 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.
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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?
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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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Feminist economists
and environmental economists
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have actually written
about this quite a bit.
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Let me 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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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'll 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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This also, by the way, is something
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, you were charged a fee.
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That went into GDP and the national
income and product accounting.
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10:13
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
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were actually growing substantially.
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And they called this
the "banking problem."
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These were some people working
inside, actually, the United Nations
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in a group called the Systems
of National [Accounts], SNA.
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They called it the "banking problem,"
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like, "Oh my God, this thing is huge,
and we're not even including it."
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So instead of stopping 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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In case I haven't explained this properly,
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that red line is showing 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.
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And so this was quite extraordinary,
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because what actually happened,
and what we know today,
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and there's different people
writing about this,
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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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11:40
And what I mean by that is finance,
insurance and real estate.
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3531
11:44
In fact, in the UK,
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1603
11:45
something like between
10 and 20 percent of finance
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3097
11:48
finds its way into
the real economy, into industry,
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2537
11:51
say, into the energy sector,
into pharmaceuticals,
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2668
11:54
into the IT sector,
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1718
11:55
but most of it goes back
into that acronym, FIRE:
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4134
12:00
finance, insurance and real estate.
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12:01
It's very conveniently called FIRE.
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2559
12:04
Now, this is interesting because, in fact,
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3540
12:07
it's not to say that finance
is good or bad,
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3039
12:11
but the degree to which,
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1410
12:12
by just having to give it a name,
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1603
12:14
because it actually had an income
that was being generated,
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2863
12:16
as opposed to pausing and asking,
"What is it actually doing?" --
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3123
12:20
that was a missed opportunity.
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728144
1465
12:21
Similarly, in the real economy,
in industry itself, what was happening?
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729633
4376
12:26
And this real focus on prices
and also share prices
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6884
12:33
has created a huge problem
of reinvestment,
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2520
12:35
again, this real attention that both
the Physiocrats and the classicals had
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3818
12:39
to the degree to which the value
that was being generated in the economy
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747795
3601
12:43
was in fact being reinvested back in.
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2166
12:45
And so what we have today is
an ultrafinancialized industrial sector
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3993
12:49
where, increasingly, a share
of the profits and the net income
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757627
3671
12:53
are not actually going
back into production,
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2860
12:56
into human capital training,
into research and development
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764206
3599
12:59
but just being siphoned out
in terms of buying back your own shares,
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767829
3885
13:03
which boosts stock options,
which is, in fact, the way
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771738
2780
13:06
that many executives are getting paid.
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774542
1978
13:08
And, you know, some
share buybacks is absolutely fine,
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2564
13:11
but this system
is completely out of whack.
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779132
2037
13:13
These numbers that I'm showing you here
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781193
1869
13:15
show that in the last 10 years,
466 of the S and P 500 companies
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4197
13:19
have spent over four trillion
on just buying back their shares.
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787307
3725
13:23
And what you see then if you aggregate
this up at the macroeconomic level,
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791056
3815
13:26
so if we look at aggregate
business investment,
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794895
2546
13:29
which is a percentage of GDP,
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797465
1987
13:31
you also see this falling level
of business investment.
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799476
3654
13:35
And this is a problem.
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1179
13:36
This, by the way, is a huge problem
for skills and job creation.
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4310
13:40
You might have heard there's lots
of attention these days
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808691
2706
13:43
to, "Are the robots taking our jobs?"
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811421
1779
13:45
Well, mechanization has
for centuries, actually, taken jobs,
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813224
2956
13:48
but as long as profits were being
reinvested back into production,
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3326
13:51
then it didn't matter: new jobs appeared.
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819554
1998
13:53
But this lack of reinvestment
is, in fact, very dangerous.
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821576
3790
13:57
Similarly, in the pharmaceutical industry,
for example, how prices are set,
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825390
4142
14:01
it's quite interesting how it doesn't look
at these objective conditions
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3381
14:04
of the collective way in which value
is created in the economy.
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832961
4359
14:09
So in the sector where you have
lots of different actors --
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837344
2790
14:12
public, private, of course, but also
third-sector organizations --
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840158
3565
14:15
creating value,
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843747
1152
14:16
the way we actually measure
value in this sector
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844923
2388
14:19
is through the price system itself.
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2205
14:21
Prices reveal value.
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849564
1513
14:23
So when, recently,
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851101
1331
14:24
the price of an antibiotic
went up by 400 percent overnight,
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852456
4186
14:28
and the CEO was asked,
"How can you do this?
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856666
2072
14:30
People actually need that antibiotic.
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858762
1798
14:32
That's unfair."
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860584
1160
14:33
He said, "Well, we have a moral imperative
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861768
2057
14:35
to allow prices to go
what the market will bear,"
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863849
2744
14:38
completely dismissing the fact
that in the US, for example,
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866617
3059
14:41
the National Institutes of Health
spent over 30 billion a year
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869700
4312
14:46
on the medical research
that actually leads to these drugs.
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874036
2780
14:48
So, again, a lack of attention
to those objective conditions
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876840
2934
14:51
and just allowing the price system
itself to reveal the value.
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879798
3246
14:55
Now, this is not just
an academic exercise,
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883068
2548
14:57
as interesting as it may be.
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885640
1843
14:59
All this really matters
[for] how we measure output,
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887507
3821
15:03
to how we steer the economy,
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891352
1574
15:04
to whether you feel
that you're productive,
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892950
2115
15:07
to which sectors we end up
helping, supporting
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895089
3342
15:10
and also making people feel
proud to be part of.
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898455
3180
15:13
In fact, going back to that quote,
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901659
1895
15:15
it's not surprising that Blankfein
could say that.
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903578
2335
15:17
He was right.
335
905913
1070
15:18
In the way that we actually measure
production, productivity
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906983
2893
15:21
and value in the economy,
337
909900
1284
15:23
of course Goldman Sachs workers
are the most productive.
338
911208
2668
15:25
They are in fact earning the most.
339
913900
1647
15:27
The price of their labor
is revealing their value.
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915571
2428
15:30
But this becomes tautological, of course.
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918023
2481
15:32
And so there's a real need to rethink.
342
920528
2414
15:35
We need to rethink
how we're measuring output,
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923609
2174
15:37
and in fact there's some
amazing experiments worldwide.
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925807
2595
15:40
In New Zealand, for example, they now have
a gross national happiness indicator.
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928426
4534
15:44
In Bhutan, also, they're thinking
about happiness and well-being indicators.
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932984
4291
15:49
But the problem is that we can't
just be adding things in.
347
937299
3265
15:52
We do have to pause,
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940588
1157
15:53
and I think this should be
a moment for pause,
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2175
15:55
given that we see so little
has actually changed
350
943968
2262
15:58
since the financial crisis,
351
946254
1325
15:59
to make sure that
we are not also confusing
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947603
3508
16:03
value extraction with value creation,
353
951135
1997
16:05
so looking at what's included,
not just adding more,
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953156
3307
16:08
to make sure that we're not, for example,
confusing rents with profits.
355
956487
3867
16:12
Rents for the classicals
was about unearned income.
356
960378
2978
16:15
Today, rents, when they're
talked about in economics,
357
963380
2502
16:17
is just an imperfection
towards a competitive price
358
965906
3206
16:21
that could be competed away
if you take away some asymmetries.
359
969136
3479
16:25
Second, we of course can steer
activities into what the classicals called
360
973376
4244
16:29
the "production boundary."
361
977644
1276
16:30
This should not be an us-versus-them,
362
978944
1947
16:32
big, bad finance versus
good, other sectors.
363
980915
3086
16:36
We could reform finance.
364
984025
1412
16:37
There was a real lost opportunity
in some ways after the crisis.
365
985461
3066
16:40
We could have had
the financial transaction tax,
366
988551
2568
16:43
which would have rewarded
long-termism over short-termism,
367
991143
3486
16:46
but we didn't decide to do that globally.
368
994653
2309
16:48
We can. We can change our minds.
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996986
1790
16:50
We can also set up
new types of institutions.
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998800
2129
16:52
There's different types of, for example,
public financial institutions worldwide
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1000953
4150
16:57
that are actually providing that patient,
long-term, committed finance
372
1005127
3664
17:00
that helps small firms grow, that help
infrastructure and innovation happen.
373
1008815
4092
17:04
But this shouldn't just be about output.
374
1012931
2257
17:07
This shouldn't just be about
the rate of output.
375
1015212
2275
17:09
We should also as a society pause
376
1017511
1766
17:11
and ask: What value are we even creating?
377
1019301
2942
17:14
And I just want to end with the fact
that this week we are celebrating
378
1022267
3731
17:18
the 50th anniversary of the Moon landing.
379
1026022
2621
17:20
This required the public sector,
the private sector,
380
1028667
2788
17:23
to invest and innovate
in all sorts of ways,
381
1031479
2925
17:26
not just around aeronautics.
382
1034428
1826
17:28
It included investment in areas
like nutrition and materials.
383
1036278
4018
17:32
There were lots of actual mistakes
that were done along the way.
384
1040320
3241
17:35
In fact, what government did was it used
its full power of procurement,
385
1043585
3387
17:38
for example, to fuel
those bottom-up solutions,
386
1046996
3025
17:42
of which some failed.
387
1050045
1627
17:43
But are failures part of value creation?
388
1051696
2816
17:46
Or are they just mistakes?
389
1054536
1324
17:47
Or how do we actually also
nurture the experimentation,
390
1055884
3769
17:51
the trial and error and error and error?
391
1059677
2552
17:54
Bell Labs, which was
the R and D laboratory of AT and T,
392
1062253
3195
17:57
actually came from an era
where government was quite courageous.
393
1065472
3727
18:01
It actually asked AT and T that
in order to maintain its monopoly status,
394
1069223
4856
18:06
it had to reinvest its profits
back into the real economy,
395
1074103
3647
18:09
innovation
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1077774
1262
18:11
and innovation beyond telecoms.
397
1079060
1678
18:12
That was the history,
the early history of Bell Labs.
398
1080762
2574
18:15
So how we can get these new conditions
around reinvestment
399
1083360
3766
18:19
to collectively invest
in new types of value
400
1087150
2852
18:22
directed at some of the biggest
challenges of our time,
401
1090026
2908
18:24
like climate change?
402
1092958
1271
18:26
This is a key question.
403
1094253
1967
18:28
But we should also ask ourselves,
404
1096244
1728
18:29
had there been a net
present value calculation
405
1097996
3687
18:33
or a cost-benefit analysis done
406
1101707
2720
18:36
about whether or not to even try
to go to the Moon and back again
407
1104451
3615
18:40
in a generation,
408
1108090
1177
18:41
we probably wouldn't have started.
409
1109291
2488
18:43
So thank God,
410
1111803
1720
18:45
because I'm an economist,
and I can tell you,
411
1113547
2140
18:47
value is not just price.
412
1115711
1933
18:50
Thank you.
413
1118057
1182
18:51
(Applause)
414
1119263
2221

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ABOUT THE SPEAKER
Mariana Mazzucato - Innovation economist
Which actor in the economy is most responsible for making radical innovation happen? Mariana Mazzucato comes up with a surprising answer: the state.

Why you should listen

States and governments are often depicted as slow, bureaucratic, risk-averse. That argument is used in support of making states smaller and the private sector bigger. In her latest book, The Entrepreneurial State: Debunking Private vs. Public Myths in Innovation and in her research, Mariana Mazzucato offers a bold contrarian view: States aren't only market regulators and fixers, but "market makers" -- actively creating a vision for innovation and investing in risky and uncertain areas where private capital may not see the ROI. Yes: Private venture capital is much less risk-taking than generally thought. As an example, the technology behind the iPhone and Google exists because the U.S. government has been very interventionist in funding innovation. Private investors jumped in only later. The same is true today of what promises to be the next big thing after the Internet: the green revolution.

Mazzucato, a professor of economics at the Science and Technology Policy Research Unit (SPRU, University of Sussex), argues that Europe needs today to rediscover that role -- that what the continent needs is not austerity but strategic investments (and new instruments such as public investments banks) towards an "innovation Union."

More profile about the speaker
Mariana Mazzucato | Speaker | TED.com