25At least, wrong in thinking that rent could explain important attributes of the economy. Rent was a very important component of classical economics, being the return to land, one of the three factors of production; the other two being capital and labor. Land has a very speciﬁc meaning in this context. Land is the bounty of nature: David Ricardo (1996, p. 45) referred to “the original and indestructible powers of the soil.” Fred Foldvary (2002, p. 185) writes that economic land “includes all natural resources and natural opportunities.” Land is a bounty of nature, where nature is deﬁned as “all resources prior to and apart from alteration by human action” (Foldvary, 2004, p. 166). Rent essentially has its origin in the classical theory of value. If we employ a labor theory of value, or a cost theory of value, it is difﬁcult to understand why the bounty of nature has any value at all. Rent becomes a device to explain why some resources have value when no labor power has been exerted to create that value. Joseph Schumpeter (1954, p. 675) sums up the argument very well:

If we do insist on a labor-quantity conception of value, or even on a theory of value that rests

on real cost in the sense of disutility and abstinence, and accordingly wish to eliminate

requisites of production that are costless in this sense, the device does its duty.

26S. Davidson and J. Potts

Rent serves a purpose in explaining phenomena that the classical theory of value cannot otherwise explain; land has the ability to produce goods of value despite the lack of human intervention. It is only after the marginal revolution in the 1870s and the introduction of subjective value that rent can be explained. Modern economists understand why land with different fertility and soil quality is valued differently. It turns out that land is not a homogenous asset and a device called rent does not need to be introduced to equalize returns from very different assets. As Ludwig von Mises (1949, p. 636) explained, It does not astonish the farmer that buyers pay higher prices and tenants higher leases for

more fertile land than for less fertile. The only reason why the old economists were puzzled

by this fact was that they operated with a general term—land—that neglects differences in

productivity. The value of land is determined not by some notion of rent; rather it is determined by the ability of an entrepreneur to employ that land to generate a good or service that can be proﬁtably sold on the market. Land that can be employed more productively is more valuable than land that is less productive. Similarly, since effort is a discretionary variable, employees who are more enthusiastic are more valuable than those who would seek leisure on the job; at a given wage, the former are a source of rent to their employers. The notion of rent remains in modern economics either as a so-called quasi-rent (a temporary excess return associated with inelastic supply curves) or as a basis for taxation. The basis for taxation also relies on supply curves being inelastic. It may well be that Mazzucato et al. are basing their argument on the platforms having access to quasi-rents, but they make no argument that platforms have perfectly inelastic supply curves. Many economists have argued that what Adam Smith called rent—and could not explain in the classical theory of value—is really a return to entrepreneurship. David Ricardo (1996, p. 58) comes very close to this insight:

The metals, like other things, are obtained by labour. Nature, indeed, produces them; but it is

the labour of man which extracts them from the bowels of the earth, and prepares them for

our service. Ricardo is ultimately blinded by the classical theory of value, yet he does recognize that natural resources are not naturally valuable. Picking up on that theme, Frank Knight (1921, p. 160) argued, It should be self-evident that when the discovery, appropriation, and development of new

natural resources is an open, competitive game, there is unlikely to be any difference

between the returns from resources put to this use and those put to any other. Unless money grows on trees, nature does not simply provide economic assets— even if money did grow on trees, it would still require a labor input to pick the money from the trees. In a hunter-gatherer environment, nature may well provide some bounty, but at any level of economic activity above hunter-gathering, and critically only at low population densities relative to those resources (i.e., the Malthusian curse), natural produce must be combined with capital, labor, and entrepreneurial The Entrepreneurial State and the Platform Economy

27insight before economic value can be established. Even hunting requires an investment in skills and human capital. Adam Smith, when establishing the notion of rents, used the example of collecting kelp to create alkaline salt (1976, p. 162). The land or the kelp itself did not generate a return; the knowledge that alkaline salts can be derived from kelp and subsequently turned into soap generated the returns. The rent is not inherent within the land itself; it is a return to entrepreneurial discovery. Land is an input into the wealth creation process just as any other factor of production.

What the classical economists called rent is, at the very least, a return to human capital, or entrepreneurial insight. Mazzucato et al. attribute platform ﬁrms’ high levels of proﬁt to either risk-taking or rent extraction. In doing this, they paradoxically fail to consider that the platforms may add value to their users. That individuals may enjoy using their products. Furthermore, Mazzucato et al. are convinced that the platforms simply extract and exploit data from their users. The impressions readers have is that the platforms simply acquire private data from users and are able to proﬁt from it at no cost.

Like any other natural resource—or gift of nature—data is not valuable in and of itself. It must be found, it must be curated, it must be presented to the market in a usable format. What is overlooked is that value on a platform is co-produced. The data generated by users interacting with other users and interacting with the platform itself is the valuable resource being created. The returns from that resource are not somehow free or zero-cost. They are a return to developing the platform and providing valuable interaction opportunities on the platform.

Mazzucato et al. are able to side-step those considerations by suggesting that platform users become “addicted” to the platform and are manipulated by advertising. Recommendation algorithms mediate between advertising incentives and microtargeting

demands (encouraging practices that lead users to give over more data for fewer beneﬁts);

and user interfaces are designed to maximise data collection by fostering addiction. They are somewhat scathing of advertising and the proﬁt motive.

The implication, as Google co-founders Larry Page and Sergey Brin foresaw in a 1998

paper, is that advertisers or any other third-party interest can embed mixed motives into the

design of a digital service. In the case of internet search, the advertising imperative can

distract from efforts to improve the core service, because the focus is on the value generated

for advertisers rather than for users. . . . As this example shows, it is necessary to ask who

beneﬁts the most from the design of a given service. If a platform’s core mission is to

maximise proﬁts from advertising, that fact will shape how it pursues innovation, engages

with the public, and designs its products and services. . . . How data is used, and which data

is collected in the ﬁrst place, are therefore paramount questions. If personal data is used for

micro-targeted advertising, we should ask whether the platform is in the business not only of

identifying but of creating consumer desires through subtle forms of psychological

manipulation. It seems advertising simply exists to manipulate consumers against their own interests and in the interests of business. It also appears that Mazzucato et al. believe the gains from trade mostly accrue to sellers and not buyers. Finally, we are invited S. Davidson and J. Potts

28to imagine that the proﬁt motive misallocates resources and distorts decisionmaking. Both of those views are simply wrong.

3 Modern Fallacies

Mazzucato et al.’s views on advertising echo those of John Kenneth Galbraith, articulated in his 1958 book The Afﬂuent Society. There he argues (2001, pp. 33–34),

Production only ﬁlls a void that it has itself created. . . . Consumer wants can have bizarre,

frivolous or even immoral origins, and an admirable case can still be made for a society that

seeks to satisfy them. But the case cannot stand if it is the process of satisfying wants that

creates the wants. . . . The even more direct link between production and wants is provided

by the institutions of modern advertising and salesmanship. These cannot be reconciled with

the notion of independently determined desires, for their central function is to create

desires—to bring into being wants that previously did not exist. At face value, that ﬁrst sentence reads somewhat like Say’s law: Supply creates its own demand. But that is not the point Galbraith is making. Nor Mazzucato et al. The argument is that rather than meeting consumer needs, generated by the consumer, the ﬁrm simultaneously generates and then meets the consumer need. The consumer is a passive player and is manipulated by the ﬁrm. Galbraith (2001, p. 37) labeled this phenomenon the “dependence effect.” This is the very claim that Mazzucato et al. make in relation to platform organizations.

Neoclassical economics has been hostile to advertising in general. The strong perfect information and perfect knowledge assumptions inherent within neoclassical economics preclude any valuable role for advertising. Why would consumers need to be informed about goods and service available in the market, when—by deﬁnition—they already know everything to know about those goods and services?

Nonetheless, some neoclassical economists, such as George Stigler, have countered the Galbraithian view with scorn (1976, p. 57):

The contrasting view, to which I am led by this same professional training, is that consumers

generally determine what will be produced, and producers make proﬁts by discovering more

precisely what consumers want and producing it more cheaply. Some may entertain a tinge

of doubt about this proposition, thanks to the energy and skill of Professor Galbraith, but

even his large talents hardly raise a faint thought that I live in a house rather than a tent

because of the comparative advertising outlays of the two industries. Stigler, however, also analyzed the economics of information and had an appreciation for the role advertising plays in the economy. Another neoclassical economist,