The current capitalistic economic model was designed in the industrial era to reflect the thoughts, culture, technology, knowledge and processes of that era. In fact, our current economic model has been optimized to reflect the technological (information processing) capacity of industrial era. The era of internet, however, requires a new economic model and new efficiency mechanisms. In order to understand the notion of value equation, it is important to understand the value cycle and the efficiency mechanisms of the current economy.
Value cycle refers to the processes of how value is created, exchange, distribution and accumulated in the economic system.
Fig: Value Cycle
Value creation refers to what we call “use-value” in economics. People contribute in the value creation process by providing time, ideas, financial capital, labour, etc and value-streams (or relationship between contributions) are built during the value creation process, which often involves a (large) number of people, in order to satisfy present and/or future needs and wants of the market. Once sufficient value is created, it becomes Goods, Product and/or Services including knowledge (GPS) that can be exchanged for another GPS, which has undergone a value creation process by a (large) number of people. The issue is that the value exchange among GPS becomes a matching problem. That is, 5 apples = 3 oranges = 7 bananas = … varied by personal subjectivity; this is why money exists to simplify and create efficiencies in the value cycle. Afterwards, the exchanged GPS (ex: money, apples, etc) needs to be distributed (reward, salary, labour hours, etc) among a (large) number of people. Lastly, exchanged GPS or value is stored and re-used for future value creation processes (ex: savings, seeds, etc).
See the original post written by Yasir Saddiqui, co-founder of CAKE