Value is the engine that drives the vehicles of economies. Understanding value and how it’s exchanged and stored is absolutely crucial to understanding business and even life.

Simply put: Value is the result of a problem solved, it’s the solution applied. It’s the measurement of the benefit of a solution.

This means the deeper the problem (pain depth), the solution height (how well it solves it) and the more people who have it (the Total Addressable Market) the more value creation potential exists.

For example, ten’s of millions of people get a flat tire every year due to various reasons. Operating a mobile tire fixing solution like AAA, or selling new tires like America’s Tire Store, creates value because it helps put people back on the road and solves the pain point of a non-functioning car.

But inventing a tire that doesn’t go flat and still has all the benefits of a normal tire, is a much better solution to the problem of getting a flat because it doesn’t involve a temporary solution like patching. It’s a permanent solution, and therefore much more valuable.

Most people would think “well selling a permanent solution isn’t profitable because now they won’t buy another one when it gets flat”. But this is incorrect because people will continue to purchase cars and wear out their tires. Tire sales may go down a bit in the short term but the competitive advantage would be very high for you as the first mover etc.

Value is not labor (as Adam Smith and David Ricardo posited), since a car that took a lot of work to create does not maintain it’s value or worth if it’s in a wreck severe enough to ‘total it’.

Value is not complexity (as Friedrich Hayek posited), since a toothpick can create a relatively large amount of value for something that contains no parts other than one single material (usually wood) mass manufactured into a small stick which is only worth throwing away if it’s snapped or broken.

Value is utility. Utility is “the state of being useful, profitable, or beneficial”. Beneficial means “favorable or advantageous; resulting in good”. This is why a car that is “advantageous” and “results in good” to the owner, is valuable. As soon as the car isn’t useful (because say the car was totaled), the value drops to zero and potentially below zero (maybe because it has to be towed, or moved).

In fact, increased complexity often decreases value creation because it often degrades reliability, and something isn’t useful if it doesn’t work.

The more usefulness you can provide, to more and more people, determines the amount of value you can create (your “value creation ceiling”). Which determines how much value you can capture, or aka how much you can earn.

Also keep in mind that presently, and definitely more so in the future, people are often directly seeking a specific emotional state. And your product or service’s ability to change or improve people’s mental or psychological state is most likely the main value creation impact!

This post is Step 1 of “The Rich Man’s MBA