Creating Value

Wednesday December 9, 2020 — Taipei, Taiwan

There’s an assumption that I see sometimes that most work is “creating value,” which I think is incorrect. Some work does clearly create value — farming, construction, working in a factory: all work that involves taking raw materials, and putting them in a form that is more generally usefulThe word “useful” is doing a lot of heavy lifting here, but I’ll leave that discussion for another day. . Lots of software development is creating value as well — arranging bytes in a way that useful to people. You can even make the argument that being a middleman is “creating value” — connecting people who wouldn’t otherwise be connected, and getting a few arbitrage bucks on the side.This ignores the structural incentive to keep your customers disconnected that being a middleman creates, but again, we can leave that discussion for another day.

But there unambiguously also exists the category of business that, rather than creating value, realizes that it’s easier to take value that already exists, and move it from the pockets of people with less power to the pockets of people with more power. People who are in this business will often try to explain that they are in fact adding value — the loan shark is just offering the valuable service of liquidity, after all, and you best not ask too many questions about it. But regardless of where you think this line lies, it’s clear that it’s possible to profit simply from taking value that already exists, and moving it into your own pockets. The question isn’t if this is happening, it’s how much this is happening.

Given this analysis, I’m surprised that I haven’t seen much literaturePerhaps this is because I don’t follow economics literature closely, and this is actually very well understood and studied. If so, I haven’t found it. trying to quantify how much value flying around in various markets is being created, and how much is simply being moved from one place to another.Cue the old joke about two economists sitting in a room, passing a $20 bill back and forth in order to raise the GDP. If the definition of final goods was easy to measure, this wouldn’t be a problem, but I’ll offer that “final goods” are not nearly as coherent a category as one might assume, as a result of a “consumer” not being nearly as coherent of a category as one might assume. Nor have I seen much analysis trying to figure out what effects lead to the ratio of value being created vs value being shifted around. There isn’t any clear efficient-market argument that one can make about this, I don’t think, given that the ease of taking value is essentially determined by the distributions of power and cunning among the actors involved, rather than inherent properties of the system.

It can be uncomfortable to admit that large swaths of markets aren’t adding any value, and are rather siphoning off whatever they can get away with, but I suspect that it’s essential to understanding the economies that exist today.