capturing value

Years back in Managerial Economics, the very first class that I took as part of my MBA program, the very simple concept of capturing value was presented.  The example used to illustrate the idea was something like the following.

Person 1 wants to sell a car and Person 2 wants to buy a car. Person 1 values his or her car at $8000 and person 2 values that car at $10,000. There is therefore $2000 worth of value to be captured.  If Person 2 purchases the car for $2000 he or she has captured that amount of value in the transaction. If he or she purchases the car for $9000 both individuals capture $1000 of value.

With a few notable exceptions, most of the classes I took in that program could be boiled down to, "These are the strategies you take to capture the most value."  I even had one instructor who I respected a great deal state that a business person's primary objective is to collect the most margin dollars, which is another phrase for capturing the most value.  If you understand the nuances of this, you're more or less an MBA, I guess.

What is noteworthy to me is that this is slightly different than the economic story that I usually hear people tell laypeople.  One illustration I heard a radio personality provide was the following.

To understand Capitalism imagine I need $20. I then go to my neighbor and agree to exchange one hour of my time to mow his yard and he gives me $20 for that time. Through this arrangement we both get what we need. I get the $20 and he gets a mowed lawn.

On the very simplest of levels this works, but there's a reason that this is not the example provided to business students.  Business is not the art of creating value, but rather it is the art of capturing value. If I run the business I'm less concerned with who creates the value than I am with whether I get to capture that value.

When I hear someone present an illustration like the above I now figure that they haven't gone through business training, or I assume that they have a vested interest in their audience having an incomplete understanding about how business works.

This distinction is important for a few reasons.

First, the mowing example is typically in line with what parents teach their kids.  It's actually a good example to use to explain a minimum wage job.  It's probably not a good example to give someone who is looking to establish a career, though.  There are many types of jobs where the worker captures less value than the business.  All else being equal, it is in a person's best interest to look for fields in which workers are able to capture more of the value that they personally create.

Second, the mowing example implies that there's a yard out there to mow and that I have the skill to mow it.  While this has always been the case, automation is changing the economy such that the ratio of unskilled work to skilled work is decreasing.  Some people have the means to "learn how to mow" and some do not.

Third, this understanding is key to grasping the value or danger (depending on your perspective) of a union.  One of the things a union provides is a guarantee to capture a specific amount of value for the worker, and on the flip side a union causes a business not to be able to capture specific value from its operations.  FYI, I have no strong opinions of unions in general.

There are other reasons for understanding the distinction, I'm sure.  I'll stop at two for now, though.