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

~~~
littlestymaar
> 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 !

~~~
AnimalMuppet
> 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.

~~~
littlestymaar
The complete inability to predict anything useful[1] is a clear marker of the
failure of this model though…

[1]: crisis for starter…

~~~
WalterBright
I predict that when I go to the supermarket, the free market has apples for
sale there. My prediction has never turned out to be false. It's a useful
prediction.

~~~
dredmorbius
I predict that when I look out my door to the east tomorrow morning, I will
see Apollo's chariot ascending through the firmament.

My prediction has never turned out to be false. It's a useful prediction.

------
skybrian
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.

~~~
crdoconnor
>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.

~~~
WalterBright
> 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.

~~~
Red_Leaves_Flyy
There's a lot more competition in the food market. Bananas too expensive? Just
get oranges. Asthma meds too expensive? Take out a loan, drive to
anthercountry, or roll the dice and maybe die.

~~~
WalterBright
Government interference has severely limited competition in health care. For
just one example, after Obamacare passed my health insurance provider decided
to exit the business, and there is only one provider left in the county. They
have a monopoly. I pay far higher premiums now, and can only go to "network"
doctors.

~~~
crdoconnor
The whole idea behind Obamacare was that people like you would pay more so
that others got coverage on pre existing conditions and HMOs could make a bit
more profit.

------
cs702
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...](https://www.amazon.com/Value-Everything-Making-Taking-
Economy/dp/161039674X)

------
henrik_w
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.

------
Nasrudith
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.

~~~
randcraw
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.)

~~~
thaumasiotes
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.

~~~
randcraw
Rarity is not the only possible basis for value. Public good is another.

~~~
thaumasiotes
The 101st fountain of youth in a line is not producing any significant public
good. I just said this. If it was destroyed, we would be no worse off.

------
randcraw
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](https://news.ycombinator.com/item?id=21623150)

------
AndrewKemendo
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.

------
galaxyLogic
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
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/](https://quickonomics.com/gross-domestic-product-gdp/)

~~~
galaxyLogic
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?

~~~
PeterisP
In general, the added value would be part of the GDP - e.g. a retailer would
be considered to contribute its revenue minus the wholesale cost of goods,
rent, salaries, etc which was already counted as produced by its suppliers.

------
Cyder
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
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.

~~~
hogFeast
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).

~~~
randcraw
When a third of the population is disenfranchised from choice by outright
exclusion, choice as it applies to everyone is clearly NOT well served by that
system.

~~~
hogFeast
You don't understand. Nothing is free. Systems that guarantee access have to
make the same choice. They have to chose not to treat some people with
expensive conditions too. The thing the US gets right is a mixed
private/public healthcare system, the issue is that the balance is wrong, not
that the system is wrong.

------
bjourne
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
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.

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

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

~~~
lotsofpulp
That's my point, what is the definition of "wall street". If you're going to
include main shareholders or CIOs, why not throw in Zuckerberg, Bezos, Brin,
Page, Schmidt, etc on the tech side?

------
hogFeast
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
>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?

~~~
hogFeast
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.

