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THE GIST of Editorial for UPSC Exams : 14 September 2018 (Who really creates value in an economy?)

Who really creates value in an economy?

Mains Paper: 3 | Economic Development
Prelims level: 2008 global financial crisis
Mains level: Indicators create the value in an economy.

Introduction :

Value is determined collectively, by business, workers, strategic public institutions, and civil society organizations.

After the 2008 global financial crisis, a consensus emerged that the public sector had a responsibility to intervene to bail out systemically important banks and stimulate economic growth.
But that consensus proved short-lived, and soon the public sector’s economic interventions came to be viewed as the main cause of the crisis, and thus needed to be reversed.
This turned out to be a grave mistake. In Europe, in particular, governments were lambasted for their high debts, even though private debt, not public borrowing, caused the collapse.
Many were instructed to introduce austerity, rather than to stimulate growth with counter-cyclical policies.
The state was expected to pursue financial-sector reforms, which, together with a revival of investment and industry, were supposed to restore competitiveness.

Is the any significant development after the crisis?

There is too little financial reform actually took place, and in many countries, industry still has not gotten back on its feet.
The profits have bounced back in many sectors, investment remains weak, owing to a combination of cash hoarding and increasing financialization,
With share buybacks to boost stock prices and hence stock options also at record highs.
Growth requires a well-functioning financial sector, in which long-term investments are rewarded over short-term plays.
In Europe, a financial-transaction tax was introduced only in 2016, and so-called patient finance remains inadequate almost everywhere.
As a result, the money that is injected into the economy through, say, monetary easing ends up back in the banks.
The predominance of short-term thinking reflects fundamental misunderstandings about the state’s proper economic role.
Contrary to the post-crisis consensus, active strategic public-sector investment is critical to growth.
That is why all the great technological revolutions were made possible by the state acting as an investor of first resort.

To address the problem

The popular assumption is that the state facilitates wealth creation, but does not actually create wealth.
Business leaders, by contrast, are considered to be productive economic actors—a notion used by some to justify rising inequality.
Because businesses’ (often risky) activities create wealth— and thus jobs—their leaders deserve higher incomes.
Such assumptions also result in the wrong use of patents, which in recent decades have been blocking rather than incentivizing innovation.
The patent-friendly courts have increasingly allowed them to be used too widely, privatizing research tools rather than just the downstream outcomes.
If these assumptions were true, tax incentives would spur an increase in business investment.
Instead, such incentives —such as the US corporate-tax cuts enacted in December 2017—reduce government revenues, on balance, and help to fuel record-high profits for companies, while producing little private investment.
In 2011, Warren Buffett pointed out that capital gains taxes do not stop investors from making investments, nor do they undermine job creation.
A net of nearly 40 million jobs were added between 1980 and 2000,” he noted.
These experiences clash with the beliefs forged by the so-called Marginal Revolution in economic thought, when the classical labour theory of value was replaced by the modern, subjective value theory of market prices.
In short, we assume that, as long as an organization or activity fetches a price, it is generating value.
When value is determined not by specific metrics, but rather by the market mechanism of supply and demand, value becomes simply “in the eye of the beholder” and rents (unearned income).
It become confused with profits (earned income); inequality rises; and investment in the real economy falls.

Conclusion

A decade after the crisis, the need to address enduring economic weaknesses remains.
That means, first and foremost, admitting that value is determined collectively, by business, workers, strategic public institutions, and civil society organizations.
The way these various actors interact determines not just the rate of economic growth, but also whether growth is innovation-led, inclusive, and sustainable.
It is only by recognizing that policy must be as much about actively shaping and co-creating markets as it is about fixing them when things go wrong that we may bring this crisis to an end.
Yet we continue to romanticize private actors in innovative industries, ignoring their dependence on the products of public investment.
The only way to revive our economies fully requires the public sector to reprise its pivotal role as a strategic, long-term, and mission-oriented investor.
It is vital to debunk flawed narratives about how value and wealth are created.

UPSC Prelims Questions:

Q.1) With reference to economy, what does the term de minimis level refer to?
(a) It is the minimum level of special drawing rights (SDRs) that has to be maintained by IMF memebers.
(b) It is the minimal amounts of domestic support that are allowed even though they distort trade.
(c) It is the minimum level of capital required for a foreign bank to operate in India.
(d) It is the minimum amount of trade required for a country to get status of Most Favoured Nation (MFN).
Answer: B