Value Creation is the Crux of Capitalism

Yet another missive today on the fallout from the housing bubble. This time it is the IMF waxing prosaic on the debacle.

I have looked at purchasing a house several times this century and each time I have come away from the excursion with the uneasy feeling that there was something fundamentally wrong with the economics of housing. I could not emotionally reconcile what I perceived to be the intrinsic value of the asset with its price. It just wasn’t right to me.

Today, as I read a blurb regarding the housing market’s indeterminate duration for recovery, it suddenly struck me that the housing bubble is not the disease- it is merely a grave symptom. The “disease” that threatens the U.S. economy is a lack of value creating activity as the primary organizing principle in our economic lives.

Instead, we have slowly, unwittingly become conditioned to be consumers. In my mind, it is this fundamental and subtle shift that threatens our economic health at its core- now and in the future.

If we have lost our ability to be entrepreneurs, then we have lost ability to innovate and adapt to changing economic conditions. We have stepped off of the course that has led to mankind’s greatest advances since we joined into communal societies thousands of years ago. By not participating in the entrepreneurial process we have abdicated our right to infuence our circumstances and gain wealth through delivering products and services that others value.

Instead of the hard and risky path to financial wealth through entrepreneurship, an alternate vision was offered. It was an illusory view that all that is required to consume more was to somehow, anyway, get a hold of a house.

So the cycle was:

  • little to no down payment on a house
  • add water, mix and wait
  • enjoy appreciation of the house by refinancing and extracting capital while gaining equity
  • buys cars, flat-panel TVs, iPods, iPhones, boats, etc…
  • repeat

Somehow, in all of this, we forgot that to gain wealth, we actually need to produce something with our talents. And while arbitrage opportunities do appear to arise from time to time and persist long enough to really irritate financial economists, they inevitably end and we revert to the intrinsic value of things. Which brings us to today.

The question is, “do we return to the fundamental value creating activity of entrepreneurship?”

The answer to this question on a large scale will determine if the markets correct (albeit painfully) and then move on, or whether we remained trapped in the mire for an extended period.


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