Value Creation vs. Value Capture: Musings on the New Economy

It’s easy to see that we live in a natural world that was given to us “for free” and how much of the value we enjoy as a society was not created but extracted from that feedstock of abundance. But it is important to realize that even in the world of discovery and intellectual innovation, there are those who create value, and those who merely extract it.

"Value creation and value capture  are not the same thing. An individual or a company can create enormous value for society but not capture very much of it; an individual or a company can capture a great deal of value without creating very much, or even while destroying economic value.  Ideally, those who create value are rewarded for doing so, but it is often the case that those who merely extract value do better financially.

Why does this matter? It seems to me that as economists and government policy makers think about innovation, they are trying to foster the wrong thing. Innovation often begins with people who have no thought of value capture, who have no idea that what they create will become valuable. Incentives that reward entrepreneurs, for instance, miss the fact that many of the great innovations of modern technology began with people just having fun! Companies begin at a later stage in the economic process. 

And of course, as a result of crony capitalism, companies that are adept at value extraction without value creation foster policies that support their extractive businesses. The result may be an increase in measured GDP, but not in the true health of the economy or the wealth of society.

We need to begin studying the economics of value creation, not just the economics of value capture."