The Yin Yang of Value Creation and Value Capture

Story Stream
recent articles

Does listening to advocates of starkly opposing world views talk past each other as they attempt to vilify or justify wealth exasperate you? Whether it’s Karl Marx or Adam Smith, they each have their sacred texts whose idealization of the human condition often bears little resemblance to the way the world actually works.

One area of contention too rarely examined outside economics journals is the relationship between value creation and value capture. Failure to achieve a sustainable balance between those-who-contribute and those-who-are-rewarded lies at the root of reckonings as diverse as the collapse of the Soviet Union and the recent meltdown on Wall Street.

There are countless ways to create value. All must ultimately pass muster in the-eyes-of-the-beholder if they are meant to enter the economy as objects of exchange. Since this exchange is normally transacted using money, value capture can be readily measured in dollars providing a “score” that all can see.

You say that value capture can also be measure with non-economic factors like satisfaction and prestige? Of course. One must also take into account the counterproductive forces of envy. But however you total it up, economies only thrive when the motivations driving individuals to create value and the mechanisms determining who gets a chance to capture this value are in balance. Practices and policies that disassociate the two are not sustainable.

A scientist can create enormous value by publishing a breakthrough paper even if he never captures a penny of it. Satisfaction and prestige provide the motivation, along with lifetime tenure and the ease of living largely on the dole. A risk-taking entrepreneur can both create and capture value by bringing a new product or service to market, charging willing customers top dollar. Take away a shot at riches and the entrepreneur decamps to another clime. A hold up man or tax collector can capture value without creating any by sticking a gun in your face and taking your money. The former knows no law. The latter better understand that value creation and value capture achieve linkage through the rule of law, and there are lots of ways to get that wrong.

Which brings us back to our arguing ideologues.

Do you think collectivists will ever openly acknowledge that motivated individuals routinely add to the sum total of things-that-we-want, whether it’s a better way to sell a sack of potatoes or finding a cure for cancer? As obvious as this seems, advocates of zero-sum economic policy obsessed with redistributing wealth make no distinction between bank robbers who steal from others and inventors who earn and keep a portion of the value they create. The lack of acknowledgment that wealth is not prima-facie evidence of theft and that you can only distribute value that someone has been motivated to create is the sort of willful ignorance that drives laissez-faire capitalists crazy. Occasionally, this propels them into government office, ushering in transformations like the Reagan revolution.

One the other hand, do you think laissez-faire capitalists will ever openly acknowledge that financial intermediaries can sometimes become wizards at disproportionately capturing value created by others, even to the point of milking asset bubbles until they burst and crater the economy? The lack of acknowledgement that some forms of financial intermediation can metastasize into stealing is the sort of willful ignorance that drives collectivists crazy. Occasionally, this propels them into government office where they promulgate economic interventions that can grow to become worse than the disease they are trying to cure.

In catalyzing both the Reagan and Obama revolutions, the failure of incumbents to acknowledge these realities coupled with supporters’ attempts to defend the indefensible precipitated change. In both cases the ensuing excesses have, or inevitably will, foment counter revolution as political momentum sweeps economic policy back past the point of sustainable equilibrium.

The disturbing aspect of these pendulum swings is that we never seem to learn from them. Why are most people happy to talk past each other as they loyally defend their political tribe, grasping for their turn at the whip hand while refusing to acknowledge that the other side may have a point? Skillful politicians use this tribal fealty and lack of intellectual integrity to play us off against each other, warping the interpretation of both current events and the lessons of the past as it suits their reelection needs. Meanwhile, attempts to achieve a just and sustainable balance between those-who-contribute and those-who-are-rewarded continue to elude us.

It’s probably safe to predict that this circus will go on as long as politics exist. But imagine how much more effective we could be at dampening the swings if we withdrew our reflexive sanction from tribal chieftains and together leaned against the excesses they propose rather than leaning into them?

Show commentsHide Comments

Related Articles