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Value creation
By Venkatesh Subramanian on 13/2/2015
Value is at the heart of every economic transaction and non-economic transaction and is ideally what we should all be measuring all the times. Yet it is very difficult to find an universal definition of Value.
Take for instance:
- The value of a gun for a hunter whose livelihood is dependent on it and its overall value to the society where it can supply an entire village with food
- The value of a gun for a person living in a forest infested with dangerous wild animals (or in a high crime neighborhood) whose life depends on it and its overall value to the society
- The value of a gun for a criminal who uses it to threaten and kill people and its overall value to the society
Obviously the value in all three cases are quite different for both the individual who owns (or buys) the gun and the society at large. Yet all of them pay the same price to get the gun! And when the production of all the guns are computed for GDP it is just the price of gun multiplied by the number of guns consumed.
And yet there are so many transactions where there is no price paid but immense value created such as the timely help of a passerby! There in lies the fundamental challenge of measuring value and creating value.
So what is more fundamental to measure is what I call the use value of the goods and services that are sold rather than the price. So when the use value for the buyer and society at large is more than the price at which the product is sold there is value creation. But when the use value for the buyer and the society is less than the price at which the product is sold there is value destruction.
Often new technologies and inventions do one or both of these:
- Reduce the price of a product or service in comparison to its current use value
- Increase the use value of a product or service in a much higher proportion to the increase in the price of the product or service
But do they always create the desired value? How can we ensure that?