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Robbing Peter to pay Paul

Markets need the right structures and incentives to avoid a harmful focus on value transfer without real growth

In the Great Train Robbery of 1963, Bruce Reynolds and his gang of 16 robbed the Royal Mail in Britain of £2.6 million. In today's terms, that's about £60 million, or £3.75 million per head. Not a bad day in the office. The gang relied on inside information and careful planning to pull off the heist.

Unfortunately for the would-be millionaires, police found their hideout following the robbery and convicted most of the gang. The ringleaders received 30-year prison sentences.

The Great Train Robbery is a classic and very direct (and illegal) example of value transfer. The process of extracting value from somebody else's pocket. Most value transfer is more subtle e.g. being a shareholder in a company.

The entertainment offering created following the Great Train Robbery through movies, books, and other media represents value creation. Though no doubt Reynold's gang were hoping nobody would ever read a book about their misadventures.

This article offers a way of thinking about the generation of financial value in the economy. Frankly, it's a bit of a thought experiment.

Broadly speaking, three approaches for realising financial value include, but are not limited to:

  • Creation - build something new that people consider worthwhile - i.e. an incremental improvement on the status quo.

  • Transfer - taking or receiving value from someone else.

  • Leverage - utilise what someone else created differently to create new value.

On a practical level, these activities often get mixed together. So it gets a bit muddy. Stating that any single activity is purely one of the three above is difficult so this article will talk in generalities.

You can think about value creation as building a new machine that creates more widgets faster. Value transfer is creating a similar widget machine. Value leverage is adapting the machine to create more screws faster. More simply, you get economic activity that takes a slice of the pie, or grows the pie.

This article primarily focuses on value transfer.

No approach to realising financial value is necessarily 'better' than another for any individual, though it is important for an economy to have balance. Value creation, leverage and transfer should be incentivised and treated differently.

Value transfer is by far the most common approach

Pretty much everywhere you will see value transfers of some form. It could take the form of welfare payments to retirees. Or setting up a coffee shop opposite a competing coffee shop. It is by far the most common method of realising value.

Efforts to realise value through transfers often take the form of competition with companies trying to capture greater market share through marketing or promotion, rather than creating something entirely different for consumers.

Value transfer is neither good nor bad, it depends on who the benefit accrues to. Uber is a classic example of a company enacting value transfer on a large scale, and there is a clear set of winners and losers. Uber built a network through its app that has had multiple effects, for example:

  • established a huge pool of potential customers in need of transport

  • increased competition by allowing effectively anyone to offer transport with personal vehicles

  • reduced prices for transport (particularly when surge pricing is inactive)

  • improved convenience and security through price estimates and automatic payment with credit cards rather than cash

Uber has created value for consumers and through this offering. But it's not so good for taxi drivers as there is more competition, lower prices and a portion of each fare goes to Uber. There is a winner and a loser. Uber have both grown the market but also taken a large chunk of it. I appreciate that isn't the full story when it comes to Uber, it's part of it.

Entrepreneurship is often about value transfer through improvements for end consumers, rather than direct efforts to make the market 'bigger' and offer radically different functional value. For example, automated ordering at a fast-food outlet can be more efficient for consumers,which is a good thing, but it doesn't change the way a burger tastes.

Too much focus on value transfer instead of value creation can be a bad thing

When markets become mostly about value transfer with little improvement for consumers it is problematic. Particularly when there are 'one-sided' incentive structures, value transfer can become the means through which people and companies seek growth, potentially at the detriment of wider society.

The NZ housing market is an example, check out this article if you want to know more about the 'why', but I won't dive into it here.

In NZ, there is considerable housing speculation and trading in houses to turn a profit - often with limited actual improvements to the house. Of course, this isn't real growth in quantity and quality of living - it's just transferring. It doesn't change the fact that there are people living on the streets while others speculate. It isn't real.

The market is effectively designed this way because of how the incentives work around housing supply, location and taxes. Greater efforts need to be made across successive governments to change the whole basis for the market.

Governments and organisations need to implement appropriate market structures

Perhaps if it was highlighted to Reynolds and his gang that crime doesn't pay they would have less reason to have attempted the Great Train Robbery in the first place, and sought financial reward elsewhere.

Economic agents and governments have a responsibility to incentivise value creation, and dissemination of new things that create improvements for consumers.

Governments use various tools to incentivise value creation. Patents are a good example, giving entrepreneurs the opportunity to profit from their creation without competition for a set period. The internet is a brilliant device for leveraging value through the exchange of ideas. Within organisations, value creation might look like rewards for creating new products or services that benefit consumers.

Addressing market-wide challenges requires a multi-faceted approach bringing in industry, government and consumers to build market structures that work more effectively.


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