What we measure matters – how to measure value?

I talk a lot about value adders and value extractors. This distinguishes between those organisations and brands that create value for customers vs those that focus on extracting as much value as possible from existing customers.

I just finished reading Mariana Mazzucato on The Value of Everything. She is an economist who discusses the idea of value creators and value extractors and applies it to the wider macroeconomic context.  She looks at how classical economists like Adam Smith and Marx defined what creates value for the economy and contrasted this with those who extract rent or value from the economy. They identified producers who create things and create value e.g. a factory making cars) vs those services or extractors who just extract value or rent from the surplus profit that was made by the producers (e.g. the bank, the lawyers, the landlord). This implies value is created by creating something.

Mazzucato then explains how neoclassical economists have changed our assessment of value so now we don’t make this distinction. Now measurement of value now purely looks at what someone is willing to pay for something. That price defines its value and its contribution to the economy.

Mariana Mazzucato The value of everything

GDP used to use at the classical view and reflect the value of what is produced. Now neoclassical view prevails and GDP measures value purely on the basis of price and what people pay for things and not what an investment actually does or what goes into it.

So GDP includes banking, asset management, investment banking but excludes government investment in valuable infrastructure, education and healthcare. This government investment has no price and is treated as a cost. The value of this government investment is excluded from GDP.

Yet these investments are essential so that the producers, the tech firms, the banks and others can go about their business. Mazzucato points out that many businesses that claim to have created value, could not have done so without massive government investments in infrastructure, internet and science research.

The implication is that GDP overestimates the value of some services such as asset management and investment banking and underestimates the value provided by governments. She then goes on to criticise many financial services firms for the methods they have used to extract value. She demonstrates they have been so brilliant at extracting value that they have not had to make any productivity gains in the past 50 years. In the meantime government and producers have been consistently making productivity improvements under pressure from limited tax revenues or intense competition.

Mazzucato goes on to argue one of the problems is what we measure. If GDP were measured differently then we would make different decisions about how to grow the economy, we would value production and the provision of valuable consumer services and government investment more highly than we do now. And we would place less value on industries and businesses that extract value.

I took three things from this.

  1. It matters what we measure, it affects our decision making
  2. What businesses need to do is create real value for their customers, it is the engine of growth, it is the engine of profit
  3. Real value comes when you provide something that solves a problem or address a need for your customers.

There is quite a bit more to this argument and I will be discussing this in future blogs