Chapter 12: Invisible Capital's Understanding of Value Creation
Value creation happens in interaction
Throughout this series, we have examined how economic thinking about value creation has evolved, how value is created in modern economies, and how leading economists and researchers explain the importance of knowledge, innovation, productivity, institutions, competitiveness, trust, and human capital.
The research does not provide one universal definition of value creation.
But it points towards a fundamental realization:
Value creation occurs through interaction.
No business creates value alone.
No public institution does that.
No researcher, entrepreneur, investor, employee, or technology does that.
Value arises when people, knowledge, capital, technology, businesses, public institutions and markets are connected and contribute different resources to a greater whole.
Therefore, The Invisible Capital is based on the following understanding:
Value creation is the process by which people, knowledge, capital, technology and institutions, through interaction, are converted into products, services, solutions and social values that create benefits for people, businesses and society. The extent of value creation depends not only on the resources we have, but also on how well the interaction between them works.
The latter is crucial.
Because value creation is not just about what we have .
It's about what we achieve together .
Table of contents
Value creation begins with people
Knowledge becomes valuable when it is used
Capital makes opportunities realizable
Technology is a tool
Public and private sectors create value through interaction
Trust reduces friction
Institutions make collaboration possible
The customer and the citizen decide whether the solution has value
Value also exists between the actors
The invisible capital
Our understanding of value creation
1. Value creation begins with people
Machines can produce.
Algorithms can analyze.
Capital can be invested.
Technology can automate.
But behind the development, organization and application of these resources are people.
People develop knowledge.
People discover problems.
People get ideas.
People do research.
People start businesses.
People invest.
People develop services.
People meet customers, patients, students and residents.
Therefore, our understanding of value creation begins with people.
That does not mean that capital, technology or natural resources are unimportant.
This means that the value of these resources largely depends on humans' ability to develop, combine and use them.
Human capital is therefore not an addition to value creation. It is one of its most important prerequisites.
2. Knowledge becomes valuable when it is used
A society can have world-leading research without the research necessarily leading to value creation.
A business may have enormous amounts of data without understanding what to do with it.
An employee may have high levels of expertise without having the opportunity to use it.
The value of knowledge therefore does not arise simply through its existence.
It arises when knowledge is shared, combined, applied and further developed.
A research discovery can become the basis for a new business.
An employee's experience can improve a work process.
Knowledge about customers can develop a better service.
New technology can make previous solutions far more productive.
Value creation occurs in the transition between what we know and what we do .
3. Capital makes opportunities realizable
Ideas alone do not build factories.
Research alone does not commercialize products.
Entrepreneurs alone can rarely finance large investments.
Capital therefore plays a crucial role in value creation.
Private capital.
Public capital.
Equity.
Loan.
Research funding.
Innovation funds.
Everyone can contribute to turning ideas and knowledge into actual activity.
But capital does not create value alone.
Value creation occurs when capital is connected to people, expertise, technology and ideas that can be used productively.
4. Technology is a tool
Digitalization and artificial intelligence make this perspective increasingly important.
Technology can dramatically increase productivity.
It can automate routine tasks, analyze large amounts of data, improve decisions, and make knowledge accessible to more people.
But technology has no intrinsic value just because it is new.
Value arises when technology solves a problem, improves a service, increases quality, frees up human capacity or enables the creation of something that was previously not possible.
Therefore, Invisible Capital views technology as a means of value creation – not as value creation itself .
5. Public and private sectors create value in interaction
One of the most important principles in our understanding is that the opposition between public and private value creation is often too simple.
Businesses develop products and services, invest, compete, export, employ people and create economic value.
At the same time, they operate within a society that has developed education systems, healthcare, research, transportation, digital infrastructure, legal systems and institutions.
The public sector, in turn, depends on a productive business sector, jobs, investments and tax revenues.
The two sectors therefore do not exist independently of each other.
They are part of the same value creation system.
A publicly funded university can develop research.
An entrepreneur may see a commercial opportunity.
Private investors can add capital.
A business can develop the product.
Employees can improve the solution.
Customers can buy it.
The business can grow, hire more people, and pay taxes.
Value creation lies throughout the chain.
6. Trust reduces friction
Here we find one of the most invisible forms of capital.
Trust.
When people trust each other, collaboration becomes easier.
When employees and management trust each other, changes can be implemented more easily.
When businesses trust suppliers, collaboration becomes more effective.
When investors have confidence in institutions, long-term investments become less risky.
When citizens have trust in public institutions, the need for extensive control is reduced.
Low trust creates the opposite.
More control.
More conflicts.
Greater uncertainty.
Higher transaction costs.
Slower decisions.
This can be described as friction in value creation .
Trust does not remove all friction. Control, regulation and critical assessment will always be necessary.
But high trust can reduce unnecessary friction and make interactions between people and organizations more effective.
Thus, trust acquires economic value.
7. Institutions make collaboration possible
Trust also does not arise in a vacuum.
It is developed through experiences and through institutions that people experience as stable and trustworthy.
Laws.
Courts.
Property rights.
Democratic institutions.
Labor organizations.
The education system.
Public administration.
Market regulation.
These structures set the rules of the game for interaction.
When the rules of the game are understandable, stable and fair, it becomes easier to plan long-term, invest and collaborate.
Good institutions therefore become part of society's productive capacity.
8. The customer and the citizen decide whether the solution has value
Value creation must ultimately create benefit for someone.
In the market, the customer is crucial.
A product can be technologically advanced, but if no one wants it, its economic value is limited.
A business can be very efficient, but if it does not solve customers' problems, its competitiveness will weaken.
The same principle applies to the public sector, although the value is not always expressed through a market price.
A health center creates value when children and families receive better follow-up.
A school creates value when people learn.
A hospital creates value when people receive treatment.
A public digital service creates value when it makes everyday life easier for citizens and at the same time uses society's resources better.
Value creation must therefore always be linked to the benefit that is actually created .
9. Value also exists between the actors
Traditional economic measurements make it relatively easy to measure production, investments, income and costs.
It is more difficult to measure the quality of the connections between the actors.
But this is precisely where much of the difference between good and bad value creation systems may lie.
How quickly does knowledge move from the university to the business?
How well do management and employees collaborate?
How easy is it to start a business?
How well does the business understand the customer?
How effectively do the public and private sectors collaborate?
How much trust exists between the actors?
How quickly can organizations learn?
Two businesses can have access to the same technology and the same amount of capital, but achieve very different results.
Two societies can have large natural resources, but develop completely different levels of prosperity.
The difference does not necessarily lie in the resources.
It may lie in the interaction between them .
10. The Invisible Capital
Here we come to the core.
Much of what makes modern value creation possible is not recorded as a separate item in traditional accounting.
The competence between people.
The trust between them.
The culture of the organization.
The ability to collaborate.
The knowledge that is shared.
The relationships with customers.
The quality of the institutions.
The ability to learn.
The ability to adapt.
The ability to turn knowledge into action.
These are resources that can be difficult to see and even more difficult to measure.
But they affect how productively people, capital and technology can be used.
This is the invisible capital.
11. Our understanding of value creation
The invisible capital is therefore based on a broad understanding of value creation.
Value creation occurs when people use knowledge, expertise, capital and technology to develop products, services, solutions and societal values that create benefit.
But the size of value creation is not determined solely by how much capital we have, how advanced the technology is, or how many people work.
It is also influenced by how the resources interact .
That is why we put interaction at the center.
Between employee and employer.
Between research and business.
Between entrepreneur and investor.
Between business and customer.
Between public and private sectors.
Between technology and people.
Between institutions and society.
When knowledge flows, trust is high, institutions function,
When people use their skills and capital finds productive investments, the whole can create more value than the parts could do separately.
This means that a society's most important capital is not only found in what we can count.
It is also found in the relationships, knowledge, trust and interaction that make resources productive .
That's why we call it:
Academic background and further reading
This series also builds on my own professional journey through the Web Design study , the eMarketing study , Innovation and Commercialization and professional seminars in San Francisco and Oxford . Here you will find the background, professional environments and experiences that have followed the development from the early years of the web to today's digitalization.
Recommended literature
Value creation is about much more than economic growth and money. It is about people, knowledge, innovation, productivity, institutions, trust and the interaction between the public and private sectors.
Here we have collected books from some of the world's leading economists and thinkers who explain in various ways how value is created, who contributes to creating it, and what prerequisites make long-term value creation possible.
The books complement each other and provide different perspectives on the same fundamental question:
What really makes people, businesses and societies create greater value over time?
Recommended books from our library
Creating a Learning Society: A New Approach to Growth, Development, and Social Progress
Author: Joseph E. Stiglitz and Bruce C. Greenwald
Short review:
Creating a Learning Society examines how knowledge, learning, and technological development contribute to economic growth and long-term value creation. Joseph E. Stiglitz and Bruce C. Greenwald challenge the notion that economic development is primarily about accumulating more physical capital. They argue that society’s ability to create, disseminate, and apply knowledge is crucial to productivity growth and improved living standards. A key point is that learning does not only occur in schools and universities. It also occurs in businesses, through work, production, innovation, and the interaction between people and organizations. Knowledge can also spread from one business and one part of the economy to others.
The book thus provides an important perspective on why human capital, competence, innovation and learning must be understood as central parts of a society's ability to create value over time.
Why we recommend the book
We recommend Creating a Learning Society because it expands the understanding of what lies behind economic value creation.
Machines, technology and financial capital are important, but they do not create productivity growth alone. Behind the development are people who learn, develop knowledge, improve work processes, share experiences and find new solutions.
This makes the book particularly relevant to Invisible Capital and our perspective on value creation: A significant part of society's value-creating capacity is found in the knowledge, competence, and learning ability of the people who participate in the economy.
Stiglitz and Greenwald thus provide an academic foundation for one of the most important relationships in modern value creation:
The Value of Everything: Making and Taking in the Global Economy
Author: Mariana Mazzucato
Short review
In The Value of Everything, Mariana Mazzucato asks a fundamental question: What exactly is value – and who creates it? Mazzucato returns to the historical discussions of value in economics and shows how the understanding of value creation has changed. She challenges the notion that high income, high prices or large profits necessarily mean that correspondingly large values have been created. One of the book's most important contributions is the distinction between value creation and value extraction . Mazzucato examines the financial sector, the pharmaceutical industry, innovation and the public sector, among others, and argues that we must become better at distinguishing between activities that actually create new values, and activities that primarily extract values that have already been created.
The book also challenges the traditional notion that the private sector creates value while the public sector mainly consumes or redistributes it. Innovation and economic development often arise through a complex interaction between public investment, research, businesses, capital and people.
The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations
Author: Philippe Aghion, Céline Antonin and Simon Bunel
Short review
The Power of Creative Destruction is about one of the most important drivers of long-term economic growth: innovation.
Philippe Aghion, Céline Antonin and Simon Bunel build on Joseph Schumpeter's classic idea of "creative destruction" – the process by which new technologies, businesses, products and ideas challenge and replace existing solutions.
But the book is not just about the disappearance of the old. The authors examine why some economies manage to create continuous innovation and productivity growth, while others stagnate. Competition, entrepreneurship, research, education, institutions and public policy thus become important parts of the explanation.
Creative destruction also comes at a cost. New technologies and businesses create opportunities and jobs, but can also make existing skills, tasks and business models less relevant. The challenge is therefore to create societies that both promote innovation and enable people to participate in the transition.
Why we recommend the book
We recommend The Power of Creative Destruction because it shows why innovation is a fundamental driver of value creation .
Value creation is not just about producing more of what we already produce. It also occurs when people develop new ideas, technology, and ways of working that enable us to solve tasks better than before.
This makes the book particularly relevant to The Invisible Capital. Behind innovation are people with knowledge, expertise, creativity and experience. But Aghion's perspective also shows that human capital must be part of a larger system where competition, institutions, research, investment and policy create the conditions for new ideas to actually turn into economic and social development.
The book thus provides an important context in our understanding of value creation:
Knowledge → new ideas → innovation → productivity growth → long-term value creation.
Competitive Advantage: Creating and Sustaining Superior Performance
Author: Michael E. Porter
Short review
Competitive Advantage is one of Michael E. Porter's most influential works on how businesses create value and develop lasting competitive advantages.
One of the book's most important contributions is the value chain . Porter shows that a business should not be viewed as a single, unified activity, but as a series of interconnected activities – from development and production to logistics, marketing, sales and service. It is through these activities, and the interaction between them, that the business creates value for customers.
Porter also shows how competitive advantage can arise through, among other things, lower costs or differentiation. But behind these results lies the organization of the company's activities, expertise, technology, work processes and the way in which resources are used.
The value chain thus makes it possible to examine where in the business the values are actually created – and how different activities together contribute to the end result.
Why we recommend the book
We recommend Competitive Advantage because Porter gives us a perspective that fits very well into our broader understanding of value creation.
When we talk about a business “creating value,” it may sound as if the business does this as a single entity. Porter opens up the business and shows that value creation occurs through many activities that are interrelated .
And this is where people become particularly interesting.
Behind research, product development, purchasing, production, logistics, marketing, sales, customer service, technology and management are people with knowledge, experience, expertise and the ability to collaborate . The value chain is therefore also a useful way to highlight the human effort behind the company's financial results.
For Invisible Capital, Porter thus gives us another important part of the value creation picture:
People and resources → activities → interaction → customer value → competitiveness → value creation
Institutions, Institutional Change and Economic Performance
Author: Philippe Aghion, Céline Antonin and Simon Bunel
Short review
Institutions, Institutional Change and Economic Performance is one of Douglass C. North's most important works on why some societies are more successful than others in creating economic development over time.
North shifts attention from traditional factors of production such as capital and labor to the institutions that shape how people, businesses, and governments act and cooperate. Institutions are society's formal and informal rules of the game – including laws, regulations, norms, traditions, and established ways of organizing interaction.
These rules of the game affect the incentives that people and organizations face. They also affect investments, knowledge development, cooperation, transaction costs, and which economic activities emerge.
North also shows that institutions develop over time. History therefore matters: Today's economic opportunities are influenced by institutional choices and development paths that can stretch far back in time.
Why we recommend the book
We recommend Institutions, Institutional Change and Economic Performance because it explains a crucial aspect of value creation that easily becomes invisible:
Value creation needs good rules of the game.
People may have knowledge. Businesses may have capital. Entrepreneurs may have great ideas. A society may have natural resources and advanced technology. But outcomes are also influenced by the institutions that determine how people can collaborate, invest, compete, make deals, and develop businesses.
This makes North particularly interesting for our understanding of trust as part of invisible capital. Trust is not the same as institutions, but stable rules of the game, credible agreements, and well-functioning institutions can reduce uncertainty and make economic interaction easier.
North thus gives us another important part of the value creation picture:
Institutions → predictability and incentives → cooperation and investment → productive activity → long-term value creation.
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