Value creation vs capture
Imagine a road that was built with community funds long ago. An entrepreneur realizes that the road is incredibly valuable, but no one was capturing the value. They set up a toll stop along the road to collect a small fee. Perhaps they also clean the road, plant flowers, put up helpful signs, or mend small potholes — to them, this is their justification for charging the fee. Or perhaps they just have less of a distaste for rent-seeking. Surely travelers want a clean and beautiful road to travel on. And what value they're creating! They make money and perhaps generate riches for their investors. Of course, the fee isn't optional, but they got their first, and travelers pay the fee.
This contrived example shows the difference between value creation and value capture. Our society often confuses the two, and they're quite different. Value capture is what companies and investors seek, and is nearly exclusively measured in dollars. These dollars are not always dollars of profit or productivity — dollars extracted to private bank accounts count.
Value creation cannot be measured with a profit and loss statement, at least directly. What do I mean by "value", then? In Stubborn Attachments, Tyler Cowen talks of "wealth plus", which seeks to recognize that wealth measured in dollars is a poor optimization metric when we also care about cultural happiness and thriving. Wealth plus includes things not captured in GDP, such as leisure time, household production, and environmental amenities. I'd add to that communal activities, meaning-making, and rich personal connection. Dollars certainly matter, as they bring people out of poverty and provide life opportunities. But we also know that it's entirely possible to be rich and depressed with no life fulfillment or happiness. So, when I speak of value creation, I'm not ignoring money, but money is a tool to achieve other outcomes. As a primary objective, we care about well-being, which is a nebulous and mushy concept. While it's harder to quantify, we certainly can notice its absence or presence with rates of poverty, happiness, depression, connection with community, suicide, and life expectancy. But we also can make mistakes. Sometimes we don't know what value has truly been created until far later, and sometimes apparent value creation is short-sighted.
Capture detached from creation
It's entirely possible to become rich while keeping the total value to society fairly constant or negative. Pollution is an obvious example of this, where someone can produce something but offload much of the cost into the commons. But beyond that, many software companies automate legacy industries, replacing inefficiencies (read: jobs) with code, and capture a lot of value for themselves. For many consumers, though, the outcome may only be marginally better — while code may be 100x more efficient than labor, it is not 100x cheaper. Someone's still getting that money, and we've changed who. And merely shifting who gets rich doesn't necessarily benefit society.
This is a bit of a subtle point, as pure value capture without value creation is somewhat rare for reasons we'll talk about later, though certainly happens. Instead of focusing on an extreme example, like my fictional opening story, I'll focus on a marginal example to show the difference. Amazon has made many forms of consumer commerce more efficient: their warehouses run with significantly less operational overhead and consumers can choose between far more products than they could before e-commerce. This has very real benefits. And, along with other "do it better at scale" companies like Walmart, they have gutted many small shops—and to an extent, reshaped the landscape of towns themselves—across America. Yes, we get cheaper goods. But I'm pointing at how it's complex and isn't strictly an improvement, even though Amazon is worth over $1 trillion. They certainly created some value and also captured a lot for themselves.
Uber has raised over $25 billion during its lifetime and changed taxi transit in many cities. As a user, Uber is a bit better an experience than taxis in many cities and provided car transport services in many places that never had it before. It has provided flexible work for millions of drivers. And certainly, value was captured: founders, employees, and early investors made a lot of money. Yet, even if we consider investors, the median dollar invested in Uber has lost money. Its market capitalization in 2023 is roughly the same as in 2016. And if we consider the drivers, we see that even though they captured far less of the value, much just came from the former taxi industry. Users have a better product, but it's not clear how much better. Perhaps it's overall positive, but it's not necessarily obviously so.
And there are plenty of less marginal examples, where value was certainly captured (for founders, employees, and investors), with no long-term benefit to society: meal kit companies, micro-mobility scooter companies, and many crypto companies.
Ah, crypto. One of my primary complaints about crypto, besides trying to apply the technology of an inefficient database to every problem, is an attitude that was common in the industry. It was an attitude conflating value capture and value creation. As mentioned earlier, it's quite difficult—operationally—to capture a lot of value without creating some. So many crypto projects had the brand of revolutionizing industries, including "democratizing" finance, real estate, computation, and more. And over time, use cases may indeed emerge that will truly provide value. This isn't to say that current implementations don't provide value, but we need to take a wider perspective on the entire industry. Culturally, it was dominated by greed. I've known many people that I'd consider good and smart get sucked into FOMO and avarice, chasing the next hot token they can flip to the next less-sophisticated investor. Many people became fabulously rich. Yet, the people who sucked the most from the industry weren't necessarily those who created whatever "real value" exists — ponzis of many forms were a bit more effective at increasing bank account balances.
This isn't just about tech. Rent seeking, the institutionalization of capturing value, is rampant in our economy. Real estate, enabled by government-subsidized cheap capital, is the classic rent-seeking industry. Long-term returns come from owning scarce assets, depending on future people to value the land higher. Why would they value it higher? Certainly not because the land is more productive. We value real estate more because we have to. There's a lot of land in the world, but many people want to live in the same places. Supply is approximately fixed, demand increases, and someone will gladly step in to capture the money.
This also includes shifting externalities to the public commons. Entertainment apps like TikTok and Instagram care about user engagement because that is convertible to money via ads. Ads aren't evil by themselves but we can plainly see the outcome of attention optimization: these apps indeed do capture attention, at a potentially great social cost. These companies are fairly agnostic to their social impacts and tend to care to the extent that it impacts their perception and regulation. Our best and brightest optimize engagement as a single focus and are quite good at it. From what I can tell, TikTok is worse for society because it's more addictive than entertainment apps that came before it. It's more effective at what it's optimizing for.
It's cheap to pollute the epistemic commons, and when that's profitable, our society optimizes for it.
Some rent-seeking is powered by regulatory capture, such as with lobbying and monopolies. Others capitalize on scarce assets such as natural resources and attention. Whenever there's an in-demand scarce asset, there's an opportunity for investors to profit. Notice how scarcity by itself isn't enough — future demand is needed to boost asset prices.
We see this everywhere in our economy, including funds promoted to the general population that owns rare paintings, collectible cars, expensive wine, patents, and water rights. Yes, even you can rent-seek! Unsurprisingly, investors are generally agnostic about whether their returns come from rent seeking or increased productivity.
Most certainly, the private industry creates value. But let's take a look at how they don't necessarily monopolize "value".
Libraries create value and capture nearly none. Protocols, such as email, HTTP/TLS, and DNS create incredible value and capture none. Infrastructure providers—power, clean water, sanitization, roads—create value, and capture only some. Seat belts created a lot of value while capturing little (though, I suppose safer cars mean more people buy cars).
Power companies may be for-profit entities and try to maximize shareholder value, but frankly, charge largely based on costs, not value. My water bill is usually around $30 per month. If I had no alternative, I would pay significantly more for clean water. I probably pay a similar amount for police services. If I was in an unsafe area, security forces providing physical safety would be worth far more. This recognizes that it's not always a central provider that produces the value: a high-trust neighborhood where people genuinely care for each other is incredibly valuable, without anyone directly providing it.
Value is regularly non-economic. The ways you find meaning in life are valuable. Our relationships with loved ones have rich and immense value. Access to stillness, awe, and spaciousness is valuable. There are few ways to capture this kind of value, and we've lost the cultural vocabulary to recognize these directly as value creation.
I live in a small Colorado mountain town, and we often joke that many people here don't understand business. They undercharge for services, such as an instructor that offered to do a full-day couples Thai massage class "if everyone could pitch in, say, $25, to cover my costs?". Yet, there's something wonderful about it. Yes, people have less cash, but they also feel connected to their community. Not everyone is seeking to maximize how much value they capture. If customers feel they got an incredible deal, that's great. And perhaps there's an element of long-term thinking: if I treat you right now, you'll keep coming back.
Is this scalable into a utopia where people only charge what they need, and care most about benefitting others? Hardly. Value capture creates incentives, and incentives guide outcomes. It (often) works here because of other forces, such as community membership and relationships. And even here, it isn't universal: housing prices are high because demand is high, and landlords gladly capture as much of that as they can.
It doesn't surprise me that for-profit tech companies create walled gardens. That we didn't end up with end-to-end encrypted interoperable communication protocols that work with every social network and platform. While companies may pay lip service to open standards, time and time again, they'll do what they feel is best to maximize return. Occasionally this aligns with openness, and often not.
In defense of value capture
It may seem that I'm entirely critical of value capture, and perhaps capitalism in general. Not at all! In most situations, value capture correlates with value creation. And regardless, we need to incentivize value creation, both to motivate people to seek to solve real problems and to allocate resources effectively. Central allocation rarely works, particularly in open-ended systems. Value capture becomes an important tool for creating real value—wealth plus.
The modern tech startup model is for founders to take opportunity risk and attempt to create something that future investors will value, either from productive cash flow or the vision of future cash flow. They fund this using investors who take financial risks, seeking the same. And truly, most startups do indeed seek to build a product that customers value. I've never seen a founder pitch a company to early investors that centers around how appealing the company will be to future investors, especially without a central focus on why — what value they seek to actually create. (Actually, I lied. I've seen crypto projects that were thin veils on top of ponzis with no shame, but this was indeed unusual.)
Yet, incentives abound, and the difference between creating a company that investors think will increase in value, and one that produces our nebulous goal of "wealth plus", often diverge. Or perhaps, more fairly, the former is quantitative and the latter is subjective, so it's far easier to focus on sales, valuation, and growth than asking existential questions.
In general, it makes sense to incentivize risk-taking from smart and capable people to innovate. We should want to pay a premium so that everyone gets to benefit from increased freely available value. I don't mind that profit-seeking pharmaceutical companies can capture some of the value they create, because I want new drugs to improve health to be available. It makes sense for our doctors to be wealthy because we want available, good doctors. Many trades such as plumbing are blue-collar paths to the upper middle class because we need skilled labor. We complain about education lacking innovation and being controlled by rent-seeking unions but also pay teachers fairly poorly. Indeed, smart people should build things.
I have several friends that work within governments and for non-profits — places where value capture, especially economically, is nearly by definition not the direct goal. These places are rarely great examples of innovation. The "currency" transacted often ends up being political, and inefficiencies abound. Goodwill and mission turn out to allocate resources fairly haphazardly.
For example, Wikipedia has significantly increased the world's access to information. It's freely available and operates with a small army of passionate volunteers curating knowledge. It points us toward where tech can create value that's freely available. And yet, there are few Wikipedias. It's the exception, not the rule, and has itself become a bloated organization with distorted incentives.
To continually improve the lives of people across the world, we need good economic incentives. Cultural institutions can help here, such as instilling a love of community. But our institutions are decaying, and no replacement we have scales effectively.
The politics of value creation
Value creation and value capture are different, but we have few mechanisms to properly incentivize creation without capture. Politically, though, we're not even trying.
Currently, our tax code and government-backed mortgages directly promote treating real estate as an investment asset. High land prices are direct transfers of wealth from poorer people to the capital class. The rent is simply too high, because we incentivize private capture of land value.
Large holders of crypto tokens rely on future investors to value their tokens more than today — Bitcoin is deflationary by design. Social networks and messaging platforms create walled gardens to capture as much of the value that they create for themselves. Apple retains exclusive control over its App Store, extracting monopoly rents.
My weird politics: government should maximize diffuse, freely available value. This is value that's created but not captured centrally. It's available to anyone. This neither means that government should prevent people from capturing some of the value they create, nor only care about "value creation" as an exclusive goal. This is what current US politics doesn't understand: centralized planning rarely innovates, but leaving the door open to complete and entire value capture doesn't lift all boats. Billionaires are fine, to the extent that they created far more value than captured.
We should be intensely skeptical of industries that rely on rent-seeking or scarcity economics. We want people to take risks, but it's a bit weird when value destruction can so naturally make a billionaire. This should give us pause.
Value capture should exist to maximize incentives for value creation, but not necessarily more. This is a dynamic balance, not an extreme that we can optimize directly for. Are we better that Apple's iMessage and Facebook's Messenger/WhatsApp are walled gardens? We do want Apple to build great hardware and a safe App Store, yet there is a balancing force somewhere that limits how much we care to let them extract rents. It's possible to swing too far. While Adam Neumann is an unusual case of extractive startups and tech company valuations rely on walled gardens, we're actually on the precipice of this getting far worse.
The next versions of "public goods" like clean water and power will be digital. We already see this with in-game assets, the attention economy, and industry automation. But, far further, GPT-4 is already more capable at many tasks than any human. This will only accelerate. While this will hopefully help improve people's lives, it'll become easier than ever to transfer value from one source to another. I know of several companies valued north of $100m that are built directly on GPT with a short prompt that solves a domain-specific problem. Capturing value is happening quickly, and companies will be largely agnostic about whether they're creating something new or transferring value from somewhere else to themselves.
We don't yet have cultural immunity towards the depth of rent-seeking that will become possible. Imagine a startup automates an entire "legacy" industry. On its surface, this is good — we'll be able to avoid bureaucratic overhead and optimize resource allocation. But the market price for this product would approach the existing cost, so properly maximized, the startup will be able to transfer wealth to themselves quite effectively.
At its limit, whoever owns the next generations of AI, assuming continued progress will wield incredible power. Optimistically, AI will lead to trillions of dollars of value creation. Pessimistically, AI will facilitate massive value transfer from existing holders to centralized AI research labs. Who gets to keep this value? Does it make sense to funnel it all toward AI monopolies?
To balance this, we need to consider policy and economic systems that intentionally balance value creation incentives with value being freely available. I don't yet know what this will look like: UBI has some fairly clear misaligned incentives, and I don't trust that simply increasing taxes will redirect money toward more productive uses. But we can start by being vigilant about looking at where value is being created, where it's being captured, and how we can improve the commons broadly. We should care deeply about open protocols, which are our modern digital roads. We need to develop cultural allergies to pollution of the commons of all forms, physical and informational.
We need a cultural fabric that deeply recognizes the difference between value creation and capture.