How to Identify and Create Value in the World
If you want to be productive and perform at a high level, you have to understand what value is and how it’s created. You need to understand this so that you spend your time on the most valuable things.
What gives a thing it’s value?
Frequently, each of us says things like:
“Wow, that’s valuable!”
“I value my (insert name of possession ['car!'] or state ['happiness!'] ) very much.”
“I value our friendship.”
We say these phrases like we think we know what they mean! And, really, we do. But when asked to articulate what it is exactly that gives a thing its value, can we say it?
And what makes one thing more valuable than other?
Clearly water is more valuable than diamonds, but why does a gallon of water cost a fraction of the price of a ten carat diamond?
Surely, value is subjective. That is, the value of something will vary from person to person. One man’s trash is another man’s treasure.
But why is that?
I think that a short note called, “Where Do Profits Come From?” by John Hussman can help us think about this.
The fundamental law of economics is that profits always go to those resources which are both scarce and useful. The value of those things which are scarce and in demand will tend to rise, relative to the value of those things which are abundant and less desired …. Profits are always earned by providing those things which are scarce and useful to others. Profits…reflect service to others. ”
Two key concepts in understanding value. Scarcity. Usefulness.
Let’s define them with some quick and dirty definitions.
Scarce = hard to come by; not infinitely available.
Useful = something desired, the employment of which improves living; alternatively, a thing is useful if, when possessing it, ones life it improved thereby
Now, let’s plot some items on a graph that have different quantities of scarcity and usefulness. The coordinates are scarcity on the X-axis and usefulness on the Y-axis. The higher the numbers on the axes, the more scarce and the more useful a thing is. Where they intersect we can locate a point of value.
I took 14 things in my life that I valued and then ranked them according to their usefulness to me, and their relative scarcity (or availability). Then I plotted them on a graph. You can try this exercise with yourself.
The upper right hand quadrant is where the most value will usually be found. In the lower left hand quadrant we’ll almost always find the things we value least.
So that explains the water vs. diamonds paradox. Water is far more useful that diamonds, but it is so abundant that in most areas of the world it doesn’t even move the meter on the “scarce” axis. However, to mine and then cut and polish a diamond takes real work. Beautiful diamonds are scarce, and they do have value as jewelry or as cutting tools.
Things that are more valuable (i.e. both scarce and useful) cost more!
Now, how can you use this knowledge to improve your lot in life?
If we can produce something that is both scarce and useful, it will be valuable to us and to others.
Think about your own life, your talents, your skills, your interests.
What can you offer to others that is both scarce and useful?
If you can find it, or develop it, you are well on your way to having a comfortable life. Need to get better at what you do so that it will be more useful? See the post “How to Get Better at Anything.”
If you haven’t yet chosen a profession, or would like to pursue a new one, you might look at providing a service that is very useful to a great number of people and where there will be supply constraint (whether because skills take time or great sacrifice to develop of because of some external constraint like discouraging regulations).
So, since you want to create value in your life in and in the lives of others, you must always be aware of scarcity and usefulness.
If you have a family, have children, I want you to think about what your family/children value in you.
You know what’s scarce in a spouse’s/parent’s life, especially a working one?
Time.
You know what useful to a child or spouse? Spending time with them. There’s a reason it’s called “spending” time, because when it’s gone it’s gone. Time is the most scarce good!
Want your child to value you? Spend quality time with her.
Want your spouse to value you? Spend quality time with him.
What are some of the things you value in your life? Can you identify why it’s useful to you and how scarce it is? Does it give you any insights into the way you see yourself and your environment?
If you need help to make your performance more valuable, contact me. I’ll review your needs at no cost and if I think I can help you, I will prepare a summary analysis and proposal for you. If you like it, we can move forward; If not, you keep the analysis at no charge. More information here.