Chapter 3: Why is there no clear definition of value creation?
Value creation – one of the most used concepts in economics
Value creation is a term that is frequently used in economics, politics, business, and public administration. It is used when discussing the competitiveness of business, when prioritizing public budgets, when promoting innovation, and when explaining a country's economic development. Despite its widespread use, there is no universally accepted definition of what value creation actually is.
This is not because economics lacks theories about value creation. On the contrary, different schools of thought within economics have developed different perspectives on what creates value, how value arises, and how it should be measured. Some focus on production and market values, others on productivity and innovation, while more recent research also highlights the importance of institutions, knowledge, human capital, and the public sector.
The first challenge in a professional review of value creation is therefore to recognize that the concept does not have a single definition, but several professional interpretations.
BI: Value creation is a concept without one precise definition
Professor Jørgen Juel Andersen at BI Norwegian School of Business points out that value creation is a term that is used very often, but without a single precise or generally accepted definition. He points out that the term is used to refer to everything from business profitability to social development, innovation and public service production.
Andersen emphasizes that value creation should not be reduced to a question of financial profit alone. Value can be created in many different ways, and the understanding of the concept will depend on the professional perspective used.
This is an important starting point. If the professional communities themselves emphasize that the concept does not have one unambiguous definition, it also becomes problematic to claim that value creation exclusively takes place in one sector of the economy.
Government: The term is not precise
We find the same recognition in public documents.
In a parliamentary bill, the government explicitly states that “the concept of value creation is not precise.” Furthermore, value creation is described as a broad economic concept that encompasses far more than traditional market activity.
This formulation is important because it shows that the Norwegian authorities themselves assume that value creation cannot be understood through one simple definition. The term is used to refer to economic results, productivity, resource utilization and society's overall ability to develop and maintain prosperity.
Business and economics
An important reason why the concept is perceived differently is the difference between business economics and economics.
In business economics, value creation is often analyzed at the enterprise level. Here, production, profitability, productivity, investments and competitiveness are central. Value creation can be measured through the enterprise's ability to convert resources into products and services that customers are willing to pay for.
The social economy has a broader perspective. It analyzes how society's total resources are used to create the greatest possible welfare over time. Productivity, expertise, research, health, education, institutions, legal certainty, infrastructure and innovation are all included as factors that affect a country's total value creation.
Both perspectives are important, but they answer different questions. Business economics analyzes how individual businesses create value. Social economics analyzes how society as a whole develops its overall value creation.
Value creation is more than value creation in the market
Many people associate value creation with goods and services traded in a market. This understanding describes an important part of the economy, but it is not sufficient if the goal is to understand how modern societies develop.
A competitive business environment requires, among other things, a competent workforce, well-functioning institutions, research, rule of law, physical and digital infrastructure, and a high degree of trust between people and businesses. These factors do not necessarily create market revenues directly, but they affect productivity, innovation, and economic development in the long term.
Modern economic research therefore treats value creation as the result of an interaction between markets, institutions, people, technology and the organization of society.
A concept that must be understood in a larger context
This article therefore assumes that a professional discussion about value creation must start with research, not with political slogans or simplified contradictions between the private and public sectors.
The following chapters review key contributions from some of the world's most influential economists and social scientists – including Joseph Stiglitz, Mariana Mazzucato, Philippe Aghion, Douglass North, Michael Porter and Kalle Moene. Although they represent different traditions within the discipline of economics, they all contribute to a broader understanding of how value is created, developed and maintained over time.
References
Andersen, JJ (BI School of Economics). What exactly is value creation?
The Government. Proposal to the Parliament no. 1 (2001–2002) – discussion of the concept of value creation.
OECD. Publications on productivity, innovation and economic growth.
Statistics Norway (SSB). Documentation on national accounts and gross domestic product.
➜ Chapter 4 - Value Creation in the Modern Economy
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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