Reading: Lesson 2: Value Must Be Produced

Description: 

Before something of value can be consumed it must first be produced. The only ways to obtain something of value are either to produce it yourself, trade for it using another value that you have produced, receive it as a gift from someone who has produced it, or steal it from someone else who has produced it. All but the last would be considered examples of value creation in the market.

In this lesson, students will learn about the entrepreneur's role in creating value in the market.  In a short video, Professor Benjamin Powell explains the difference between creating value and creating a work. In an article by Steve Horwitz we explore the difference between value creation and job creation in more detail.  In a brief activity, students will identify ways in which the business idea they selected in Activity 1.3.B - Serving Others in Your Community will create value for themselves and their community.

 

Time Required:

45 min

 

Required Materials:

Internet connection, writing instrument 

 

Prerequisites:

Lesson 1 - Value is in the Eye of the Beholder

2.2.A - Watch and discuss the following video using the questions below to guide your discussion [4 min]:

Video:

   
(EconFree, 2:16 min)

"Americans are searching for answers that will lead to lasting, quality jobs. Economics professor Benjamin Powell explains that past failures of jobs programs show that addressing the symptom instead of the disease has yet to lead to real job growth. Instead of talking about jobs programs, what needs to be discussed is how to provide the right environment for growth.”

Discussion Questions: How to Create a Job: Creating Value, Not Just Work

1.  What is value?

1. Value is the worth or usefulness of a good or service.
2. The value of a good is always the result of individual subjective value judgments. This is another way of saying that value is the result of individual preferences relative to other available alternatives. 
3. People value a good based on how much they desire or need it.
4. This valuation varies person to person, across situations, and may change with time.

 

2.  What is the difference between creating value and creating work?

1. Jobs themselves are not the end goal. The goal is the value the job creates.
2. Anyone can create work, but not all work creates value. The video provides examples of digging holes and then refilling the holes or digging with spoons. These activities can create more jobs, but they do not create value.
3. Note: In Lesson 3 we will discuss the concept of value in greater detail.

 

3.  Why do people engage in production? In other words, what is the ultimate purpose of production?

1. All goods we want and need must be created or produced before they can be consumed. Wealth does not just exist naturally in the world. Material resources must be harvested, mined, molded, shaped, combined, and arranged to fit our needs.
2. Production is a combination of mental and physical effort to create the things we want and need.   

 

4.  How does the entrepreneur create a job by creating value?

1. In the market, the entrepreneur has to create a good or service that a consumer is going to value.
2. According to Dr. Powell, if the value of the good or service provided by the entrepreneur is more than the cost of the inputs, the entrepreneur creates a job.

2.2.B - Read the following article and answer the questions below [15 min]:

Article: Creating Jobs versus Creating Value by Steven Horwitz (FEE.org)

"The next time anyone starts talking about job creation, stop listening. Jobs come into existence when entrepreneurs are free to create value. Aiming directly at job creation is a recipe for waste and poverty. Set people free to use their talents to create value for others and the jobs will follow.”

Discussion Questions: Creating Jobs versus Creating Value

1.  Why should politicians be more concerned about value creation instead of worrying so much about job creation? Why do you think politicians tend to focus only on job creation?

1. Value creation means producing things that people want and need. This creation of wealth raises standards of living and creates meaningful jobs. When people are free to create wealth, the jobs will follow.
2. A few reasons that politicians might tend to focus on creating jobs instead of creating value include:

• New jobs created by a specific government program are visible and easy to quantify. The unemployment rate reported by the Bureau of Labor Statistics is a highly politicized number. It is more difficult to measure the jobs that are destroyed or never come into existence as a result of scarce resources being redirected to the government program.
• Politicians can create jobs for politically favored groups, even if it is at the expense of people in the society at large. A recent example is the bailout of US automobile manufacturers during the 2007/2008 financial crisis.
• It is easier. Politicians can bring new jobs into existence with the stroke of a pen. This does not mean the jobs will use scarce resources in a way that creates value for people.

 

2.  In the example of Steve Jobs, why is the real job-creation impact of Apple much higher than the 43,000 jobs at Apple alone?

1. There are millions of ancillary jobs created through the invention of products like the Mac, iPod, iPhone, and iPad.
2. These jobs may include things like programming, web design, app design, hardware maintenance, accessories, and more.

 

 

 

 

3.  Explain what Professor Horwitz means when he says, "Aiming directly at job creation is a recipe for waste and poverty.”

1. Using a hypothetical example, Professor Horwitz explains that we could "...create millions of jobs quite easily by destroying every piece of machinery on U.S. farms.” Without labor saving machinery, there would certainly be more work for people to do. In fact, that was the case 100 years ago when 40% of Americans worked in agriculture.
2. However, we were a much poorer society 100 years ago without the "labor-saving, job-destroying technology.” It is the "higher farm productivity and lower prices” (via innovative machinery) that free up labor to produce of all of the new products and services that we enjoy today. The demand for all of these new goods "created many more jobs than were lost in agriculture” thus adding value and creating wealth.
3. Although modern jobs programs don't aim at destroying valuable equipment to create jobs, the tradeoffs involved with all government jobs programs are very similar to Professor Horwitz's hypothetical example. A jobs program can create thousands of jobs. However, as we see in this article, job creation does not mean we are using resources to create things that people want and need. Any time a government program uses scarce resources to create jobs, those resources cannot be used for other more productive uses.
4. Professor Horwitz explains that the path to wealth is creating an environment that "...enables individuals to find ways to use their knowledge and skills to create value for others and thereby create wealth for themselves.”

 

 

 

2.2.C - Complete the following activity and share your ideas with the group [25 min]:

Activity:  Creating Value (25 min)

For this activity, select a business you think you might like to start. If needed, go back to your list of business ideas you identified in Activity 1.3.B - Serving Others in Your Community. Take a few minutes to share the ways your business will create value with your group.

Teacher Tip: Examples may include bringing products or services that were not previously available, helping people save time, creating jobs, making the community cleaner / more beautiful, helping people in need, inspiring others, etc.

For your business to be successful, you must provide a product or service that other people find valuable. Begin to think how your business will add value for your customers and your community. As an entrepreneur, you have the opportunity to create value for yourself when you create value for other people. Answer the questions below as you think about how your business will create value for you and for other people.

1. How will your business create value for others in your community?

a..
b.
c..

  

Teacher Tip: Examples may include monetary profits, self-esteem, becoming a role model for others, experience of learning real business skills, networking to make professional contacts, great to put on a resume or college application, etc.

2. How will your business create value for you?

a.
b.
c.

 

 

3. Briefly describe how you think you might be able to tell if your business is creating value for people in your community:

 

 

Lesson Recap

• All goods we want and need must be created or produced before they can be consumed. Wealth does not just exist naturally in the world. Goods must be produced.

 

• There is a difference between creating work and creating value.

 

• The best "jobs program” is to provide the right environment for economic growth.

 

• "Jobs come into existence when entrepreneurs are free to create value...set people free to use their talents to create value for others and the jobs will follow.” - Steve Horwitz

 

• The path to wealth is creating an environment that "...enables individuals to find ways to use their knowledge and skills to create value for others and thereby create wealth for themselves.”

 

Additional Resources

Article: Creating Jobs vs. Creating Wealth by Dwight Lee (FEE.org)

"Remember the opportunity costs. Because people tend to think of jobs as ends rather than means, they are easily fooled into supporting government programs on grounds that jobs will be created.”

 

Article: Value Creation VS Regulation (FEE.org)

"The entrepreneurs who created Uber saw what they believed to be a great way to create value for city travelers: Uber's app could connect riders with the closest available car, show waiting riders their cars approaching, measure distances traveled, calculate the fares, bill the riders, pay the drivers, and let both drivers and riders leave reviews for others to see. What an idea!

They spotted an undiscovered market, which promised profits. So they went for it. Sure enough they are earning big profits.

Where do these profits come from? They come, like all profits earned in free and voluntary exchange, from creating value for others - in this case, providing a valuable service to city riders” 

 

Video:(Learn Liberty,  3:41 min)

"As technological developments increased farm yields over the last two centuries, the share of the US population employed in agriculture fell from around 90 percent to around 2 percent.”

 

Video:(Learn Liberty, 3:09 min)

"Does destruction create jobs? After natural disasters, terrorist attacks, and wars, some people argue that these disasters are good for the economy, because they create jobs and prosperity. As Prof. Art Carden explains, this is an example of the "broken window fallacy," a term coined by Frédéric Bastiat. When a shopkeeper's window is broken, he will spend money on a new window, which gives income and jobs for glaziers. This activity is "seen," but the "unseen" is just as important: the money spent on a new window could have been spent on other things. Wealth has not increased, but only been reallocated from some people to others, and society is worse off by one window.”