Produce and extract in the global economy

Image: Luiz Armando Bagolin
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By LADISLAU DOWBOR*

Commentary on the book "The Value of Everything” by Mariana Mazzucato.

We know Mariana Mazzucato well for her excellent study of the role of the state in the modern economy (The Entrepreneurial State, Companhia das Letras), but this book, The Value of Everything: Making and Taking in the Global Economy (PublicAffairs, 2018), whose subtitle we can translate as “produce and extract in the global economy”, is broader, and systematizes in a clear and very organized way the transformations of capitalism in recent decades.

In economic terms, producing and extracting constitute different dynamics. The tycoons in the Arabians fill themselves up with money selling the oil they never had to produce, even transferring to transnational corporations the task of extracting, selling and transporting it. They are selling the future of their countries, squandering natural resources that future generations will need. Oil feeds not only the sheikhs, but also a world of shareholders around the world, who claim to “invest” their money, and who begin to increase their capital as the planet's natural capital is depleted. In the Northeast, they use the image of “party with the hat of others”, and the expression strictly translates what in economics we call rentism, which extracts value without increasing or contributing to production. Whoever produces, in the sense of effectively producing useful things for society, makes a profit, which will allow the person to increase his 'income'. Anyone who extracts money just by draining what others produce is a rentier, and the money extracted is “rent”.

Mariana Mazzucato's book, The Value of Everything, precisely analyzes the difference betweenMaking and Taking” in the global economy. Why is it so important? Because current capitalism has generated a world of parasites that extract income through a tangle of financial intermediation mechanisms, of tolls on any transaction, allowing absurdly high fortunes in the hands of smart people, but which slows down the economy. “Renta – considered as unearned income – was classified as a transfer from the productive sector to the unproductive sector, and was consequently excluded from GDP. ”[1]

Understanding how the greatest fortunes on the planet are fed, and how world inequality is aggravated, to the benefit of people who not only do not produce but essentially decapitalize the economy, is essential to rescue the directions of a functioning economy. These are the mechanisms that allow us to understand how, in the middle of the pandemic, with the economy in full crisis (with the exception of China), 42 billionaires in Brazil increased their fortunes by 34 billion dollars, equivalent to 180 billion reais, six years of Bolsa Família , in practically four months (between March and July 2020), without having to produce, simply charging interest, dividends and other financial gains. Including seeing the stock market go up while the economy goes down is significant.

Another example: the publication Economic Value: Large Groups presented in December 2020 the evolution of the 200 largest economic groups in the country. Based on data from 2019, therefore before the impact of the pandemic, the study finds that “of the four sectors analyzed, only the Finance sector recorded an increase in net profit (27,1%). Trade (-6,8%), Industry (-7,8%) and Services (-34,8%) moved backward”. It's not about the economy as a whole, but the big groups, where finance predominates, but it's impressive. The study underscores “the good performance of the financial area, especially banks, whose share of the consolidated net income of the 200 largest companies increased from 37,7% to 48,9%” (p.12).[2] Translated, what pays off is being a bank, and preferably a big one; it's not producing, it's charging tolls from those who produce. And the more financial intermediaries extract, the less is left over for productive investment.

The strength of Mariana Mazzucato's book is to explain the mechanisms. “Today, the [financial] sector has expanded far beyond the confines of traditional finance, essentially banking activities, to encompass an immense range of financial instruments, and has created a new force in modern capitalism: asset management (asset management). The financial sector today represents a significant and growing part of the economy's added value and profits. But only 15% percent of the funds generated go to companies in the non-financial industries sector. The rest is traded between financial institutions, making money simply by money changing hands, a phenomenon that developed enormously, giving rise to what Hyman Minsky called “money manager capitalism” (money manager capitalism). Or to put it another way: when finance makes money by serving not the 'real' economy, but itself” (p.136). The financial sector began to “capture a growing part of the economy's surplus” (p.124).

The system started to drain the purchasing power of families, the pace of investment by productive companies, and public investment, due to widespread indebtedness. Public companies see themselves drained of their ability to expand by dividends charged by “institutional investors”. The fortunes of the richest, instead of being used to finance productive activities, began to be managed by the wealth management industry (wealth management). The international trade of commodities started to be managed by traders, large intermediaries that created financial giants through so-called derivatives: the largest of them, BlackRock, has assets of around US$8,7 trillion, five times Brazil's GDP. The securitization industry has developed, an authentic risk-sharing industry that has largely led to systemic crises, and which also charges tolls on operations. Financial corporations are powerful enough to extract part of our taxes through direct public support (QE, Quantitative Easing) in a volume that in the US exceeded 4 trillion dollars. The drain is widespread, the favored never had the trouble to enter a factory, a farm, a hospital. They administer papers, which today are simply magnetic signs.

Banks also charge impressive fees on IPOs, and apply a set of fees that burden the productive sector. Financializing higher education is also widespread: today we have a generation of young people hanging in debt that allowed them to access higher education, but which they will carry for decades. When they contracted them, they waved at them with the excellent wages they would earn. The author brings the various mechanisms that expand the appropriation of social surplus by financial intermediaries of the most diverse types.

An indirect impact of financialization is that it profoundly distorts our calculation of GDP. When we calculate as a productive input what are the additional costs of intermediaries – forcing us to support an immense private financial bureaucracy – we create a false impression of economic growth. Counting the profits of intermediaries in productive activity as an increase in GDP, therefore as an expansion of production itself, when we only increase costs with more intermediaries, constitutes an absurdity to which Mazzucato dedicates a good part of the book.

In reality, it is simply wrong accounting. If I have a productive company, and I have financial costs, these will be incorporated into the value of my final product, they are part of the production costs. But if the money I transfer to the banks is also accounted for in the banks as production value, I am counting twice the same sum in GDP. In traditional accounting, they would be deducted as “intermediate consumption”. If I produce cars, and I incorporate into my final cost what the steel I bought cost me, in terms of accounts, I cannot count steel from the steel plant as a product, as it is already incorporated into the value of the car.

This double counting of financial costs, once in the banks' profits and once in the final production value of the companies that borrow financial services, is recent. “For much of recent human history, in stark contrast to the current enthusiasm for financial sector growth as a sign (and stimulant) of prosperity, banks and financial markets were long regarded as the cost of doing business. . Their profits reflected added value only in proportion as they improved the allocation of a country's resources.” (102) More recently, however, “through a combination of the economic reassessment of the sector and the political pressures exerted, finance has been promoted from the outside into the productive frontiers – and in the process created chaos (havoc).” (105)

Thus, from the 1993 review of the national accounting system, financial costs began to be calculated as added value, contributing to GDP: “This transformed what was previously considered a cost, into a source of added value, of the night to day. The change was officially presented at the conference of the International Association of Official Statistics of 2002, and incorporated into most national accounts just in time before the 2008 financial crisis. Banking services are naturally necessary to keep the wheels of the economy turning. But this does not mean that the interest and other charges charged to those who use financial services are a productive 'output'” (p.108). “The national accounts now state that we are better off when a greater mass of our income flows to people who “manage” our money, or who gamble (gamble) with their own money” (p.109). For Brazil, this is very significant, as the profits of financial intermediaries, costs for the economy, allow the GDP to appear as “growing”.

Mazzucato presents a series of examples of how this deforms the economy, due to the fact that the costs of intermediaries are presented as a “product”, an increase in GDP, therefore prosperity. In the same way, the middlemen who buy cheap from the farmer and resell at high prices in the markets could present their profits as an increase in GDP, enrichment of society. In reality, farmers receive little money and can invest less in production, and consumers will buy less because the product is more expensive. What happens when, as is currently the case, direct online sales from the farmer to the consumer are expanded, is that the two poles of the cycle, the producer and the consumer, become more efficient. To say that weakening the middleman weakens the economy is absurd.

But what about the ways in which economics analyzes the process? Mazzucato gets right to the point: “When the costs of financial intermediation rise in real terms, we celebrate the strengthening of the vibrant and successful sector of banks and insurance companies” (p.108). In reality, what was once a sector that pooled savings and financed productive activities, boosting the economy, turned into an uncontrolled drain, which becomes clear as unproductive billionaires, Wall Street speculators, bankers, in the set that Michael Hudson summarizes as FIRE ( Finance, Insurances, Real Estate), real estate speculators, traders International corporations – a mass of unproductive intermediaries – now control so many fortunes.[3]

Mazzucato's book unfolds the reasoning for understanding rentism through patents, and closes with an analysis of the “myth of austerity”. It is impossible not to remember here the clarity of Conceição Tavares: “We surrendered to financialization, without any resistance… Brazil became an economy of rentiers, which I feared the most. It is necessary to euthanize rentism, the most effective and perverse form of wealth concentration”.[4]

*Ladislau Dowbor is professor of economics at PUC-SP. Author, among other books, of A era do capital improvutivo (Literary Autonomy).

Originally published on the website Other words.

Reference


Mariana Mazzucato, The Value of Everything: Making and Taking in the Global Economy. PublicAffairs, 2018.

Notes


[1] “Rent – ​​which was regarded as unearned income – was classified as a transfer from the productive to the unproductive sector, and was therefore exlcuded from GDP.” (p. 97) See that 'unearned income' can be translated both by 'unearned income' and 'unearned income'. Joseph Stiglitz uses much the same expression. Rent, in my opinion, has to be translated by 'renta', and income by 'income'. The difference is essential. In French it is equally clear the difference between 'rente' and 'revenu', the latter representing 'lace'.

[2] Valor Econômico: Large Groups, – December 2020, Year 19, Nº 19, p. 12 and p. 16 www.valor.globo.com

[3] Michael Hudson's excellent study is available in Portuguese at http://aepet.org.br/w3/index.php/conteudo-geral/item/5794-ressurgimento-rentista-e-tomada-de-controle-capitalismo-financeiro-vs-capitalismo-industrial-1

[4] Conceicao Tavares, Restore the State is Necessary - https://aterraeredonda.com.br/restaurar-o-estado-e-preciso/

 

 

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