Previously in this series:
Value Created vs. Value Extracted
A Brief Recap
I define creating value as the process of producing something new, something the world did not have before. I define extracting value as monopolizing something that already exists in order to personally benefit from denying others access to it.
I operationalize the difference between the two with a metaphor of an engineer who builds a bridge connecting two towns.
This bridge makes trade easier, cheaper, and safer than trade or travel by boat. Thus the engineer has created value.
Some years later, a troll happens by and decides to live beneath the bridge. This troll, Rob, forces any who would cross the bridge to pay a toll to him (or be squished by a large club). Thus Rob has extracted value from the bridge. This is bad and he should feel bad.
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What Did The Engineer Really Do?
Now, I say that the engineer created this value, but what does that really mean?
What did the engineer add to the world, that wasn’t there before? And how much of that is the engineer responsible for? What was her contribution?
Not The Atoms
Whether or not this particular engineer happens to be aware of the laws of thermodynamics, she certainly didn’t create the atoms that make up the bridge. They came from the earth, and can trace a proud lineage all the way back to the big bang.
That being said, it’s not controversial to point out that the value we find in physical matter is almost entirely in the shape of that matter, the arrangement of the atoms, rather than the atoms themselves. Computer chips are no different than sand and dirt, atomically, save for the arrangement of the atoms.
And the atoms that make up the bridge might as well have been living in their mother’s basement and eating nachos all day for all the productive impact they had on society, before the engineer shoved them outside and made them get a job.
Not The Work
Think about everything that went into the creation of this bridge, all the tasks and work involved.
The stones that make up the physical structure of the bridge had to be found and quarried, then cut and chiseled to the correct shapes to form the structure.
They had to be carried to the site where the bridge was to be built, involving quite a bit of manual labor, and hoisted into position so they could be laid together.
Whatever mortar binds the stone had to be gathered, mixed, and applied to the stones as they were set.
And all of this had to be organized, administrated, and funded—no small task, especially given that work had to take place simultaneously on two sides of a great river. Materials needed to be accounted for, along with expenses. Time needed to be managed, so that each half of the bridge neared completion at the same time, so the keystone could be set in the middle.
How much of this did the engineer actually do?
It’s quite likely that she didn’t extract the stones from a quarry personally, nor did she shape them with a hammer and chisel into the shapes necessary for the design of the bridge.
The engineer may or may not have been involved in the manual labor that placed the stones into position, but it’s more likely by far that she was involved in the logistics and organizing than the actual physical processes.
While it’s certainly possible that the engineer designed (came up with the structure for) the bridge, it isn’t necessary. She could have learned of such bridges in her past experiences or been taught about them in her education.
And while she certainly put forward her own time and effort, she likely didn’t finance the operation personally; she would have had to borrow the money from banks or get it from investors to make the project feasible.
Then What?
What the engineer had, that no one else did—the part that she and she alone was truly responsible for—was the vision. The engineer saw an opportunity, a gap between the-world-that-is and the-world-that-could-be, and she acted to transform the former into the latter.
That vision, combined with action, that we sometimes call leadership—that’s the irreplaceable part of the process, and it’s why we attribute the lion’s share of the credit to the engineer. In economics terminology, the other pieces of the operation were fungible.
While work was required, any worker with the right skills could have done it.
While money was required from someone, anyone’s money would have sufficed.
Switch any piece of the whole enterprise out for another, and as long as the pieces fulfill the same function, the enterprise still succeeds; remove the engineer, and the enterprise never happens in the first place.
This doesn’t mean that the engineer deserves all the credit—every part of the whole that contributed deserves some portion of it.
But much like the keystone of the bridge, it’s the engineer that holds the whole thing up, and so it’s the engineer that we talk about when we ask “who created the value?”
Investment, Labor, Vision
We can build on our discussion of how the engineer created the value by generalizing.
If the whole endeavor of building the bridge could be divided up into pieces, what would those pieces be, and who would accomplish each of them?
In the time-honored tradition of dividing the world along made-up lines, let’s divide the endeavor of building this bridge into three parts: investment, work (or labor), and vision. Investment refers to the resources funneled into the endeavor at the beginning to enable it. Work refers to the actual physical and mental labor that constructed the bridge. Vision refers to both the idea of the bridge in the first place, along with the leadership and will that sustained the project to completion.
We can then divide the people involved in building the bridge into three categories: investors, workers, and creators.[1]
The responsibility of the investors is to shoulder the risk of the project. Their contribution is the capital necessary to complete the project.
The responsibility of the workers is to perform the labor involved with the project. Their contribution is the work done to bring the project to fruition.
The responsibility of the creators is to be both the genesis of the project and its keeper from beginning to end. Their contribution is to both envision the project and to bear the weight of the project’s fate as a whole. They take on personal responsibility for the success of the project; if it succeeds, they get the credit, but if it fails, it’s on them.
Let’s compare.
Investment
Investors get shares while workers get paid, because the investors take on the risk. If the bridge was poorly designed and collapses at the end of construction, the investors lose their investment but the workers still got paid their salary.
Risky Business
All endeavors involve risk, from the largest to the smallest. Want to eat? You could choke, or get food poisoning, or discover a new allergy the hard way. Want to get the mail? You could slip and break your leg on the way there.
Want to build a bridge?
Anything could happen, from a design flaw causing the bridge to collapse during completion to a workers’ strike halfway through construction. A flood could knock the whole thing over; erosion on the banks could sap the foundations from beneath it.
Take a moment to think about the chain of events that result in the successful construction of the bridge—just how long and involved it is, how many moving pieces it has. Stone has to be quarried, shipped, and cut—what if the quarry collapses or becomes otherwise unavailable? What if the roads the stone is shipped on are prone to banditry or falling trees? And what about the construction itself? What if a batch of mortar is mixed incorrectly, or calculations in the design depend on assumptions that turn out to not hold in reality?
Any single break in the chain of events could result in the failure of the bridge. Some of these failures may be tolerable or recoverable, but many won’t be. And many links in this chain are completely out of anyone’s control—weather, absence of natural disasters or sabotage, etc.
Building a bridge—or any large project—is filled with risk, and this risk has to be carried by someone. Investors are those who, by contributing resources initially, shield everyone else from this risk by exposing themselves to it. Their reward for doing so is a share in the total value created by the bridge; they participate in both the upside and the downside of the endeavor.
Work
Workers get paid for their time, turning a constant amount of the latter into a constant amount of the former at a set rate.
Wages Are Unnatural (And That’s Good)
The notion of working a set number of hours and receiving guaranteed compensation is an extremely unnatural idea, precisely because it eliminates all risk for the worker.
Historically, a hunter was never guaranteed to succeed in the hunt, and a gatherer may simply not find what they’re looking for. Either could spend hours attempting to get food and fail, with nothing to show for their effort.
Farmers were never guaranteed to produce enough crops to live on; they were at the mercy of the weather and subject to famine if disease or insects destroyed their harvest.
In the above examples, the input was the same—the hunters, gatherers, and farmers put in the same amount of work—but the output could vary wildly.
Wages reverse the situation: how much actual work gets done can vary wildly, but the output (from the worker’s perspective) is always the same; the worker is paid their wage.
The former categories involve taking on the substantial risk that one’s efforts will be for naught, but the latter removes such risk entirely. Because a worker doesn’t participate in the downside of the endeavor if it fails, they don’t get a share of the upside if it succeeds.
It’s a good thing that individuals have this option; it makes planning one’s future much easier, for instance.
Vision
When it comes to small, simple things—everyday chores or little tasks—things can simply…happen. We don’t need organizational structures or grand ambitions to empty the dishwasher or run out for groceries. But when it comes to solving truly difficult problems, to creating things that require coordinated effort across large spans of time, or to completing difficult tasks, things don’t just magically fall into place.
Building a bridge between two towns is not the sort of thing someone could knock out in an afternoon, nor is it the sort of thing that one regularly does. It is an Endeavor, a genuine effort to coordinate various resources to add something to the world that didn’t exist before, at a scale beyond what any individual is capable of by themselves.
This sort of effort doesn’t just happen; well-engineered bridges don’t appear out of thin air or grow on trees. It requires coordination, and coordination requires leadership.[2]
The Prime Mover
In order for the bridge to be built, someone had to a) come up with the idea in the first place, and then b) take responsibility for building it. Technically these two things don’t have to be done by the same person, but for simplicity’s sake we attribute both to our engineer.
Here we reference Aristotle’s idea of the prime mover: the idea that, in any chain of cause and effect, there must be something or someone at the beginning that caused an effect without itself being caused. The creator is this person for us: someone who sets out to create or accomplish something without having been prompted.
But setting out to build something does not mean that it gets built; history is littered with the failures of great projects. The other necessary ingredient is leadership.
Someone has to take responsibility for seeing the project through, for filling in all the cracks between the investment of resources and the work to turn those resources into a completed endeavor.
Credit
Investors get shares, and workers get paid—what do creators get?
Well, often enough the creators are also investors and workers. Our engineer may have put some of her own money towards building the bridge, in which case she’s entitled to a share of the reward. She could have helped carry the stones and put them into place; she certainly did intellectual labor, and it’s entirely plausible she was paid a wage for that effort. Creators are also often paid in shares of the enterprise even if they aren’t investing their own money, but they are investing their time and effort (which could be exchanged for money).
But what the creator gets that neither the investor nor the worker receive is the credit. This is a non-monetary[3] reward similar in nature to fame.It usually involves name-recognition, and it carries its own value beyond straightforward currency. While everyone involved in building the bridge contributed, the general public will associate the bridge’s successful construction with the engineer herself, and she can parlay that into any number of different rewards.
In Summary
Endeavors (large projects requiring time and coordination) can be divided up into three parts: investment, labor, and vision.
Investment is provided by investors, who shoulder the risk of the project in return for a share of the reward.
Labor is provided by workers, who do the work involved in return for steady wages.
Vision is provided by creators/leaders/founders, who begin the project and bear the responsibility of its success or failure. They do this for a share of the reward, plus the non-monetary credit for the project, such as name recognition, reputation, and power.
When we say that the engineer creates this value, we don’t usually mean that the entire endeavor was completed by her and her alone; rather we’re referring to the fact that the engineer was responsible for the vision and leadership behind the endeavor, and that role is associated with the credit for the endeavor as a whole.
- ^
Note that people can be, and often are, in more than one of those categories at a time. Creators often invest their own money into their projects; part of a worker’s wages may be paid in some form of investment (shares, futures, etc.), and so on. More on that in the creator section.
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In humans, anyway. If we were ants and could self-organize to build complex structures through basic pheromones and emergent behaviors, this essay would be written very differently. Or not at all, given that I’d probably have better things to do if I were an ant.
- ^
There are usually plenty of ways to turn credit for a successful enterprise into money, from the reputational gains driving further business (the engineer is hired to build more bridges), to things like giving speeches, to being paid for the expertise gained during the enterprise (like being hired to a company’s board of directors).
I don’t see why this is true. What if the skills are actually rare, such that the worker or workers cannot be replaced? What if the materials are also rare?
On the other hand, what if building a bridge there is fairly obvious, so much so that, if this specific engineer doesn’t build it, instead of the entreprise never happening, it just happens one month later, the time for another engineer to randomly notice this bridge building opportunity?
You seem to arbitrarily separate between the character finding the idea—or, as you put it, having the vision—from all the other characters, and I neither see why nor believe that this particular character deserves that much credit.
I suppose the point I’m gesturing towards is that the person with the combination of (idea + follow-through) is the one we associate with the credit for an endeavor, usually; that’s a large part of their share of the reward and their incentive for completing the project. The people who do the work are compensated with wages, and the people who invest are compensated with shares.
Bah. Everything is both. The bridge-builder is taking advantage of exclusivity of good crossing locations, to the exclusion of competing bridges. The troll keeps traffic down, making the bridge last longer. On reasonable time scales, most creations are built on top of so many prior components that it’s silly to think they wouldn’t be made by someone else if the world were slightly different in such a way that prevented it happening the way it did.
In the modern world of fractional share ownership, investment (capital), labor, and vision are entwined. It’s VERY easy for individuals to move between roles, and to hold multiple simultaneously.
Financial flows are purely based on extraction. There’s some government or natural exclusion capability that forces payment for use. Many things get created JUST in order to extract value from, but the extraction itself is based on exclusivity. Reputation does have some value, but it’s confused between actual capability, good luck, and active PR manipulation.
While I agree to a certain extent that everything is both, it can still be very useful to distinguish and label these things. And just because someone else would have made something doesn’t mean the person who actually did make it doesn’t deserve the credit.
I agree completely—I specifically mention that these roles can be held by the same person. Perhaps I didn’t emphasize it enough.
I look forward to the follow-up post where it is actually feasible and useful to distinguish and label these things. I’d argue that it’s confusing at best, misleading at worst, to treat them as distinct and fundamental.
I should acknowledge that “deserve the credit” is a nonsense phrase to me. It would require a LOT of discussion to unpack what it actually means in practical terms, and probably not work even then. If that is a crux of your post, I should probably just step away.
I’ll do my best not to disappoint. Out of curiosity, would you mind briefly summarizing the argument that treating them as distinct is bad?
The initial impetus for me to try to write about all of this were multiple discussions I’ve had with people IRL about billionaires. It seemed to me that not only were other people’s thoughts on the issue muddled, I couldn’t formulate an effective counterargument because my own thoughts were lacking coherence. This series is my attempt to put all of these thoughts straight and see if they survive outside my head. I do appreciate the feedback.
My reasoning for thinking that treating them as distinct is a poor model is that it indicates a missing level of abstraction, or perhaps just an incorrect splitting of the reality of human interactions (both status and finance). It’s not carving reality at the joints.
I’d probably advise starting with the actual argument you want to make, and then generalize from that, rather than (or really, in addition to) first-principles pondering. If you’re trying to understand your intuition about billionaires, pick a few that you admire and a few you don’t, and see if you can identify the clustering criteria. My suspicion is that ALL of them are incredible organizers, visionaries, etc. AND incredibly privileged from birth, with no hesitation to make use of their extractive capabilities. So any differences in your opinion of them must be some other things.
Thanks; I’ll give this some thought. The initial conversation involved someone else arguing that the people working in Amazon warehouses deserved to be getting the money from Amazon, as opposed to Jeff Bezos, and that didn’t seem right to me, even though I couldn’t refute that the warehouse workers were doing a large percentage of the actual day-to-day work.
By thinking about it this way, I can refute with the point that work is compensated by wages, while investment is compensated by shares. Even though the warehouse workers (or stonemasons building the bridge) are doing labor, they aren’t bearing the risk of the enterprise, either monetarily (in investments that could become worthless) or personally (in years of their life “invested” in getting the enterprise started, or being the name in the headlines if it all fails).
Engineers are generally not the people who come up with the idea of building a bridge. Someone who wants a bridge there hires an engineer or an engineering company to design and build it. Few but engineering students and fans of bridges will be familiar with the name of the design engineer, except for a few household names from the 19th century like Brunel and Stephenson.
For example, the Cannon Street Railway Bridge was built by a railway company. The linked article mentions the engineering company but not any individuals in it.
Three road bridges across the Thames were built by private companies formed for the purpose. They recouped the cost from the tolls they charged (or in one case, failed to and went bankrupt). But no-one had to pay the toll: they could always carry on crossing by one of the existing toll-free bridges, as they would have done before.
Is a railway company “extractive” by refusing to let me travel on their train unless I pay their toll? Am I being “extractive” in refusing to give them any money unless they provide me with their service? Neither. The rest is Econ 101.
This is better explained in the previous article here, but the “engineer” is just a character in a story used to think about concepts relating to value. I could have used “creator”, “visionary”, or some other title, but I liked “engineer”; it spoke to me of someone who saw an opportunity for a way the world could be more efficient/better, and had the technical skill to capitalize on that opportunity.