Sunday, December 02, 2007

Use value Vs sale value and Innovation

GDP, the scorecard of economic performance, does not adequately differentiate between Use value and Sale value. This can be illustrated with a simple example.

Use Value Vs Sale Value - Example

The GDP contribution of one coconut is sold is price of that coconut let say Rs 6/-.

A village buyer then drinks the water and eats the fleshy part of coconut, use outer fiberous cover as scrubber, uses the hard shell as a soap holder and later uses all of this as fuel to heat his bathing water.

A city buyer, typically, drinks the coconut water and eats the fleshy part and rest of it is discarded as garbage.

Now the use value of Rs 6/- is totally different in each case. This is what Karl Marx explained, in his paper called "Capital", the difference between use value and sale value. In this difference, or the divide between use value and sale value, lie many possibilities for innovation both for economic learning and entrepreneurial innovation.

Economic Learning opportunities - the hypotheses

First is related to computing GDP numbers. This divide implies that economies with higher ability to extract use value should feature higher than they actually do. Consequently, the algorithms used for estimating this value need to be tweaked to accommodate this difference.

Secondly, we need to interpret the GDP numbers carefully. A country may be actually creating more value than the GDP suggests.

Thirdly, I wonder if that is why economic development is accompanied by stress and loss of happiness (if it happens i.e.). Possibly in our hearts we know that by spending on packaged coconut water, plastic soap boxes and branded scrubbers we are actually in a loss (in terms of costs vs added benefit) than we were using plain old coconut.

Entrepreneurial Opportunities

On the other side, it also leads me to believe possibility of entrepreneurial innovation would be highest at the  innovations bridging this divide. An apt example can be found in the story of "Idea on a leaky platter". Entrepreneurs can gain immensely from bridging this divide.

Bridging this divide helps increase measured GDP. Secondly the adoption of these innovation is much faster (it already exists!), therefore easier to monetise (that the only thing entrepreneur has to do!). It also leads to productivity gain as firm-based efficiencies come into play.

In Sum

Innovation at the divide between use value and sale value holds a lot of promise in terms of success for investors and entrepreneurs. It is this area we should be concentrating upon. What say?