Back after a long hiatus.
Years ago I worked with an individual who alerted me to the difference between what he called “value creating” and “value claiming.” I think he may have learned these concepts at Harvard Business School, but I am not sure. Anyway, I think they are very apropos to many of the issues and debates raised by the Occupy Wall Street movement.
Value creation is the creation of knowledge or wealth. Value creation includes scientific discoveries and technical inventions, but also the creation of new social relationships. A salesperson can be a value creator when they help a customer and a company build a satisfactory relationship. A manager can be a value creator when they help their organization function more smoothly. There is no domain restriction on value creation.
Value claiming is claiming credit for the creation of knowledge or wealth. Value claiming includes financial compensation — such as wages, salaries, commissions and bonuses — as well as gains in reputation and authority. A manager can be a value claimer when they convince others that a useful idea was theirs. There is no domain restriction on value claiming.
In some circumstances, the value that is created is easy to assign or attribute to those that created it. In baseball, for example, it is relatively easy to assign credit. Batters that get hits and pitchers that get outs create more value than those that don’t. So they should be played more. Better pitchers are used as starters, better batters play every day and hit higher in the order. To the extent to which winning generates revenue for the team, they should also be paid more. In other circumstances, it is much more difficult to assign credit. In football, for example, it is very difficult to tell whether line players or skill players are responsible for a successful play. Was it the running back or the blockers that created a 12 yard gain? Is the quarterback good or is he just getting time to throw and make good decisions? Often in these team oriented sports there is no meaningful answer. That is, the contributions are based on the interaction of both, not the creation of an individual. Tom Brady throws good passes because he gets protection from his line, but he gets protection from his line partly because he inspires them and gives them confidence, audibles to plays where they have a better chance of stopping the pass rush etc.
Because value creation cannot always be accurately or precisely attributed, there is an opportunity for value claiming. In particular, to the extent to which there is a system by which credit is assigned for value creation, but this system is imperfect, individuals can obtain credit by investing their skills and efforts in meeting the criteria for credit assignment rather than in creating value itself. For example, in football, pass rushers are rewarded for recording sacks. This encourages them to pursue sacks even when this means giving up other defensive responsibilities. In particular, the pass rusher is inclined to give up responsibilities that can be compensated for by others, such as other defensive linemen or linebackers. So the pass rusher gets more sacks, but another player is burdened with extra responsibilities. This weakens the team.
The classic tension between value creation and value claiming in business is between sales and production. Salespeople are evaluated on customer acquisition and satisfaction. Production processes, and the people who work in and manage them, are evaluated on efficiency or yield. Sales agreements are constructed around fixed prices. Production processes are targeted toward fixed, or at least reliable, standards of quality. Salespeople thus have an incentive give their customers superior quality at the fixed price, what we might call “special treatment.” Production workers have an incentive to create products that are easy to make, even if they are not desirable, forcing the salespeople to “convince” customers that this product is what they really want. In both cases, an individual can get “credit,” i.e. can successfully claim value, even when they are doing something bad, i.e., destroying rather than creating value. The salesperson books a sale by promising a product that is more expensive to make but more satisfactory to the customer. The production person insists that such a product ‘cannot be made,” and that an easier to produce substitute is the only alternative.
There is no formal, a priori system that can solve this problem. That is, the problem cannot be solved by creating a system of categories and incentives tied to these categories. This is because the problem is based on a fundamental information asymmetry: the salesperson knows what the customer wants better than the production person does, and the production person knows what can be made better than the salesperson does. This information asymmetry cannot be solved. First, based on talents, interests, and raw processing capacity it is not possible for every individual to know every detail of every part of a business. Think about the defensive lineman and the linebacker. How are they going to know what each other “could” or “could not” achieve on a play? The complexity of the chaos at the line of scrimmage is too great. Second, since information asymmetry is a key to value claiming, there is no incentive for individuals to be entirely forthright. If one individual shares all of their information and another does not, the former will be assigned less value and the latter more. If production people admit that they actually can make the “special product” for the salesperson, but the salesperson hides their customer’s true preferences, the salesperson can say “yes, that is the only thing they will accept,” when in truth, it is the easiest thing to get the customer to accept.
From these points it should be fairly clear that one can specialize in value claiming and, depending on the circumstances, succeed at receiving credit and resources even without creating much or any value. For example, a pass rusher who learns when and how to shift responsibilities to other players in order to rush the passer has an advantage over one that does not. With the same set of skills, he will get more sacks. Of course, coaches and teammates will monitor this. But their monitoring will not be perfect. To the extent to which it is imperfect, their gap may be exploitable. Furthermore, the opinions of coaches and teammates do not always matter for value assignment. If a player leads the league in sacks but is disliked by teammates and coaches for being “not a team player,” he may still get signed to another team for a big contract. The key question is not whether the player was in fact ‘shirking” to get those sacks but the standard by which the player is judged by the other potential employers. For example, the other team may believe that the player’s “bad reputation” is because he is a shirker who pads his own sack numbers at the expense of team success. But they may also believe that they player’s “bad reputation” is because of his personality. This suggests a strategy for value claiming players: if they mouth off to the media or otherwise look like they have problematic personalities, they may be able to enhance their value. This is because, even though they may lose some credit because they are seen as “difficult,” this “difficulty” validates their statistical record. Other teams believe that the player “gets a lot of sacks but is a loudmouth,” and rules out the explanation “the player gets sacks at the expense of his teammates.” If the salary for high sack, problem personality players is greater than for low sack, shirking players, then there is a value claiming incentive for a shirking player to cultivate the image that he has a problematic personality. This image will then serve as an explanation for the shirking based complaints.
People specialize in these sort of strategies in business all of the time. The clearest example was the use of the handle “.com” during the 90’s bubble. Many CEO’s figured out that, for the purposes of valuing their company, it was more worthwhile to invest resources in convincing other people that they were a dot-com than in producing a product that had value. The information asymmetry — the fact that investors did not know exactly what constituted a viable dot-com — invited this value claiming exploitation. That is, the strategies were too easily available and the value that could be claimed too great. People invested effort and resources in searching for these strategies, found them, and were rewarded for it.
The preceding has been provided to show that, logically, the value that an individual or company has acquired or been assigned is not indicative of the value it has created. It is indicative of the value it has created plus the value it has learned how to claim. In biology, we know this problem as the problem of parasitism. A parasite is a master value-claimer. For example, a parasite learns how to look like and act like something that is helpful so that it can gain access to the host. The host admits the parasite and gives it access to its resources because it is indistinguishable from a value creator. But it is not a value creator, it is a value claimer. It sucks resources from the host.
It is important to note that the problem is uncertainty, i.e. information asymmetry. Distinguishing a parasite from a value creating, symbiotic helper is difficult for the host. That an organism is in the host and drawing resources does not mean it is a parasite. It might be a vital organ. Cancer cells and vital cells look the same to the body. Indiscriminately eliminating those suspected of being parasites if just as dangerous, if not more so, than allowing parasites to flourish.
Nonetheless, it is important to remember that value assignment is not necessarily indicative of value creation. To get closer to the topic at had: Some rich capitalists are vital job creators; and some rich capitalists are parasites. The amount of capital or wealth they have accumulated is insufficient information to tell the difference. Some people made a lot of money by creating products that people need. Other people made a lot of money by convincing others they wanted products that are easy to create. Some people made a lot of money by showing people the value of products they did not understand. Other people made a lot of money by making junk products that were easy to explain and then invested resources in making further understanding confusing, painful, or expensive.
But the fact that wealth is an insufficient discriminator between value creators and value claimers does not mean that there is no way to distinguish between them, or, more properly, that there is no way to set of a system of incentives that increases the ratio of creators to claimers. This will be the subject of my next post.