Chapter 2 – Value creation throughout economic history
Value creation has never had one explanation.
To understand how economists and social scientists today describe value creation, we must first understand how the concept has developed throughout the history of economics. The view of what creates value has changed significantly over the past three hundred years.
Every school of economics has attempted to answer the same fundamental question:
Where do the values in a society come from?
The answers have been different, but each theory has contributed important insights that still characterize the discipline of economics.
The classical economists
In the 18th and 19th centuries, classical economists developed the first systematic theories of value creation.
Adam Smith described in The Wealth of Nations (1776) how division of labor, specialization, and free land
could increase productivity and thus the prosperity of society. Smith showed that value creation was not just about the efforts of individuals, but about how work could be organized more efficiently.
David Ricardo further developed this understanding through theories of comparative advantage and international trade. He showed how countries could create greater aggregate value through specialization and trade rather than producing everything themselves.
The classical economists laid the foundation for modern economics by linking value creation to production, work, productivity and trade.
Karl Marx and the Labor Theory of Value
Karl Marx took classical economics as his starting point, but developed a different understanding of how values arise and are distributed.
For Marx, labor was the fundamental source of value. He believed that value creation took place through human labor, while profit arose because parts of the value created by workers accrued to the owners of capital.
Although many of Marx's economic conclusions are still debated, his analysis had a great influence on later research on labor, capital, production, and distribution.
The Marginal Revolution
Towards the end of the 19th century, a fundamental change occurred in the field of economics.
Economists such as William Stanley Jevons, Carl Menger, and Léon Walras developed marginal theory, shifting attention from production alone to how people value goods and services.
Value was no longer explained solely through production costs or labor input, but also through the utility a good or service has for the person using it.
This understanding still forms the basis for much of modern microeconomics.
Joseph Schumpeter and innovation
In the 20th century, Joseph Schumpeter introduced a new dimension.
He argued that economic development is primarily driven by innovation.
Entrepreneurs develop new products, new services, new production methods, and new business models. Through this process, old solutions are replaced by new ones. Schumpeter described this as creative destruction .
Thus, innovation became a central part of the understanding of value creation.
This line of thinking later formed the basis for, among others, Philippe Aghion's research on innovation and productivity growth.
From industrial economy to knowledge economy
Throughout the second half of the 20th century, it became increasingly clear that economic growth could not be explained solely through labor and capital.
Research began to place greater emphasis on:
education
research
technology
competence
organization
institutions
management
innovation
Knowledge was gradually recognized as one of the most important factors of production in modern economies.
We find this perspective in, among others, Joseph Stiglitz, Michael Porter, Douglass North, Philippe Aghion and Kalle Moene.
Modern economics sees value creation as an interaction
Today, most leading economists describe value creation as the result of several interdependent factors.
A society's ability to create value is influenced by, among other things:
human capital
research and innovation
productivity
entrepreneurship
competition
institutions
legal certainty
trust
infrastructure
access to capital
international trade
This means that value creation cannot be explained by a single factor alone.
A competitive business community needs stable institutions.
Innovation requires research and expertise.
Productivity is influenced by technology, organization and education.
Trust reduces transaction costs.
Public infrastructure enables private value creation.
Value creation therefore appears as a complex interaction between people, businesses, institutions and society.
The transition to modern research
This historical development shows that the economics profession has gradually gained a broader understanding of what creates value.
From focusing on work and production alone, today's research also encompasses knowledge, innovation, institutions, human capital, and the organization of society.
In the following chapters, we therefore delve into the research of some of the economists who have had the greatest impact on the modern understanding of value creation. We begin with Nobel Prize winner Joseph E. Stiglitz , who has argued for decades that knowledge, institutions, and human capital are among the most important prerequisites for long-term value creation.
References
Adam Smith (1776). An Inquiry into the Nature and Causes of the Wealth of Nations.
David Ricardo (1817). On the Principles of Political Economy and Taxation.
Karl Marx (1867). Das Kapital.
Joseph A. Schumpeter (1942). Capitalism, Socialism and Democracy.
OECD. Publications on productivity, innovation and economic growth.
Stiglitz, J.E. Publications on the knowledge economy, institutions, and long-term economic development.
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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