Value creation, capture, and distribution

Economics is equal parts value creation, capture and distribution. 

If we define "good" as promoting social stability, "good" economic policy allows value capture to enable value creation while maximizing value distribution. Or in English, it allows continuous investment into society in ways that makes all people live better lives.

We value stability because lack of stability means collapse. A stable society is when everyone has enough share of the growing value created in the world and perceive their slice of value is increasing over time.

If economic policies distribute value perfectly (disallow value capture), we may not have value creation. The cycle of capturing value and reinvesting it back into value creation is important for increasing the quality and quantity of value created. Amassing resources is needed to develop sophisticated services, goods, scientific achievements, or means of production. 

However, value capture does not always go to or come from value creation. Without value creation, value capture is just a transfer wealth from one to another. If this happens consistently, the world starts to have winners (people who have a growing slice of wealth over time) and losers (people who have a shrinking slice of wealth) - and this breeds social instability. 

Free market systems ideally create an environment that forces value capture to go to value creation and be redistributed. It does so through 2 means; first, it pushes the price of goods down through competition. Second, to keep up with competition, captured value needs to be reinvested into better value creation. Much of the value created (but not all) in free markets gets passed on to everyone, either through a better quality of product or lower prices. 

Free market competition is a much better distributor of wealth than, say, rulers that extort wealth from citizens and give trading routes to their cousins and close friends, which is how most of the world was run until a few centuries ago.

But while the free market does a much better job than, say, authoritarian dictators, it ultimately doesn't promote social stability. There are too many instances where wealth transfer is left unchecked. For instance, when companies capture so much value that it can’t reinvest it, and pays dividends to its shareholders. Or when cartels get together and agree to price fix. Or when monopolies charge a premium in order to capture more of the value from consumers, even if the costs to produce the good is much less. Some of these situations are illegal but enforcement is difficult, and there are many legal ways of wealth transfer (gambling, for instance). 

In addition, free markets fail to address the following areas of value creation, capture, and distribution (this is macroeconomics 101):

1) There exists many places where value creation cannot be captured (this is known as public goods). Free markets will ignore investment into these places, many of which can add a lot more value to society if invested in - education, public infrastructure, charity, happiness, child raising, etc.

2) There exists many instances where creating and capturing value lowers overall value in the world (this is known as social costs). Pollution, global warming, overconsumption of non-renewable resources, planned obsolescence, etc, are just a few examples.

3) Free markets allow for periods of social instability (where significant portions of the population feel a decrease in value over time) with no levers to reverse this wealth transfer.

This is where government's role should step in. Government should plug in any weaknesses around value creation, capture, and distribution, either by implementing reverse wealth transfer to counter social unrest, investment into value creation where the market doesn't touch, or enforcement of social costs that the market passes onto everyone else.


Thanks for reading, I wrote this to digest my own understanding of economics especially as it relates to current social and political discourse.


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