Lecture Notes on Value Creation and Economic Theory

Introduction

• Powerful concepts: Value creation and wealth creation.
• Discussion about who the value creators are and implication that some are not creating value (e.g., couch potatoes, value extractors).
• Need for a proper theory of value.

Historical Context

• 2009: Post-financial crisis. Goldman Sachs CEO claims productivity of workers.
• Key points about productivity:
  • Related to how much is produced, dynamically, efficiently.
  • Importance of producing what the world needs and buys.

Financial Crisis and Its Aftermath

• 2008 financial crisis effect: 120,000 foreclosures in September 2010; 8.8 million job losses between 2007 and 2010.
• Goldman Sachs bailed out for $10 billion by taxpayers.
• Irony: Taxpayers not celebrated as value creators.

Evolution of Economic Thought

Physiocrats (300 years ago)

• Focused on agriculture as source of value.
• Introduced "Tableau Economique" by François Quesnay.
• Three classes of society:
  1. Productive class (farmers creating value).
  2. Proprietors (merchants moving value).
  3. Sterile class (landlords charging fees).
• Concern about resource allocation and reproduction potential of the economy.

Classical Economists (1800s)

• Shift to industrial labor during the Industrial Revolution.
• Labor theory of value: value derived from industrial labor.
• Adam Smith's pin factory example: efficiency through division of labor.
• Classification of productive vs. unproductive activities.

Transition to Neoclassical Economics

• Shift from objective to subjective conditions in economic theory.
• Focus on individual decision-making:
  • Workers maximize leisure vs. work.
  • Consumers maximize utility.
  • Firms maximize profits.
• Emergence of supply-and-demand curves representing equilibrium prices.

Implications of Neoclassical Economics

• Prices reveal value rather than defining it.
• Affects measurement of growth and steering of economies.

Issues in Current Economic Measurement

• GDP includes only activities with prices.
• Examples of GDP measurement quirks:
  • Marrying a babysitter decreases GDP.
  • Polluting increases GDP due to cleaning costs.
• Historical exclusion of financial sector activities before 1970.

The Rise of Finance

• Growth of finance characterized as finance financing itself (FIRE sector).
• Limited investment in real economy from finance.
• A trend of profits being siphoned out instead of reinvested.

Economic Consequences

• Declining business investment leading to job and skills issues.
• Problems in the pharmaceutical sector regarding pricing and value measurement.

Need for Rethinking Value Measurement

• Call for new indicators for measuring output and economic health.
• Examples: Gross National Happiness in New Zealand and Bhutan.
• Importance of distinguishing between value creation and value extraction.

Conclusion

• Reflection on the 50th anniversary of the Moon landing as an example of collaborative value creation.
• Need for reinvestment in societal challenges (e.g., climate change).
• Final takeaway: Value is not just price; importance of nurturing innovation and experimentation.