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This essay is about value.  As background I will provide a brief summary of the conclusions of the first essay in this “Invisible Hand” series which examined the physical object nature of our money and some of the unfortunate consequences of that nature.  I will be concise so this review won’t take long.

All money in history (and prehistory) has been considered to be or to represent physical objects such as a basket of grain, a cow, a coin, or a paper bill.  Today most money is in computer accounts and though it zips around the world from account to account at almost the speed of light, it still is treated as if it were a physical object of some sort.  Because we treat money as if it were a physical object, anything which is true of physical objects in general will also be true of money.  This obvious point is ignored by economists and others who talk and write about money even though it is the most important truth about money.  The importance of the physical object nature of money cannot be overstated.  What follows are some of the consequences of that physical object nature.

First, money is like other physical objects in that it can be taken from its owner against that owner’s will; by force, fraud, or stealth and it can also be lost or destroyed.  This means that you need to suspect almost everyone of trying to get your money by fair means or foul.

Second, money must be amoral because all inanimate physical objects are amoral.  Even animals are amoral, in that they have neither an ethical sense nor morality, especially when they are used as commodity money.  You can use your physical object money for anything, good or bad.

Third, the money supply is independent of the supply of goods or services for sale because the supply of one physical object is independent of the supply of other objects.

Fourth, money falsely simulates a zero-sum game in monetary transactions because the money gained by one party must be lost by some other party or parties.  Money makes us think that other people can gain money at our expense and that we can only gain money at their expense.  It makes us treat others as if they were competitors, rivals, opponents, or even enemies.

Fifth, money is almost impossible for a society or nation to control.  In every nation that attempts to limit, regulate, or tax trade a black market comes to exist; and organized crime flourishes in all nations.

Sixth, money transactions are two-party interactions.  Two-party interaction is inherently unstable because if one party gets an advantage in power such as having more money, the stronger party can use that power to gain still more advantages.  This is particularly true of money.  The old saying “them as has, gets” is true.  Possession of money does make getting more money quite a lot easier.  Naturally, the weaker party in such two-party interaction will eventually want to end the interaction.  Thus the relationship is unstable.

Keeping that in mind, let’s consider value.

When dealing with a concept I like to begin by defining the term.  In this case, the term has several definitions.  The mixture of ideas represented by a single word is part of what I wish to discuss.  To begin I turn to my trusty Webster’s Seventh New Collegiate Dictionary.  (Yes I have owned this book since I was in college back in 1963.)

Value is:

  1. A fair return or equivalent in goods, services, or money for something exchanged.

That sounds like price and who’s to say what “fair” is?

  1. The monetary worth of something.

That’s definitely price.

  1. Relative worth, utility, or importance.

Utility, now that’s a different idea from the other two but it’s all relative.

  1. Something intrinsically valuable or desirable.

That’s using the term to define itself so we’ll ignore that word “valuable”.

I have skipped several definitions which were not relevant to our topic this time.

In economics the term value can take on any of these four meanings.  Sometimes, from context, one can determine which is meant.  But the term can become slippery if, during a discussion, the speaker uses the term in one sense in a chain of reasoning and then in some later link in the reasoning chain talks as if it had some other meaning in the previous link.  I believe that in most cases the speaker is not even aware of the switchover from one meaning to another.

In particular, when an economist talks about the value of some resource or product referring to utility or to importance and then refers to the price currently being paid in the market as if that were the same thing.  Obviously, price and utility are not the same at all.

In the first definition of value I gave, the definition referred to a fair return.  The idea of fairness is one somewhat foreign to economics.  A supply and demand curve doesn’t mention anything about fairness.  Explanations of economic events do not use fairness as a causative factor.  So from an economics perspective I say we can junk that first definition as being unrelated to economics.  It would be nice, though, if economic processes and practices were fair.

So we are left with three concepts: price, utility/importance, and intrinsic desirability.  We’ll keep these three ideas for our discussion and see how they play out with concepts of value taken from economics. The following seven definitions are from Wikipedia.

Our first definition from economics, Subjective theory of value, is quoting Wikipedia in each case, QUOTE “the idea that the value of a good is not determined by any property of the good, nor by the amount of labor required to produce the good, but instead value is determined by the importance an acting individual places on a good for the achievement of their desired ends.”  UNQUOTE

Second, Economic value is QUOTE “a measure of the benefit that an economic actor can gain from either a good or a service.  It is generally measured relative to units of currency, and the interpretation is therefore ‘what is the maximum amount of money a specific actor is willing and able to pay for the good or service’?”  UNQUOTE

Third, Use value is QUOTE “the utility of consuming a good: the want-satisfying power of a good or service in classical political economy.”  UNQUOTE

Fourth, Exchange value is QUOTE “other commodities it will exchange for, if traded.”  UNQUOTE

Fifth, Labor theory of value  QUOTE “is proportional to how much labor was required to produce it, including the labor required to produce the raw materials and machinery used in the process.”  UNQUOTE

Sixth QUOTE “Cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it.  The cost can comprise any of the factors of production (including labor, capital, or land) and taxation.” UNQUOTE

Seventh, we also have the idea that QUOTE “Value is intrinsically related to the worth derived by the consumer.”  UNQUOTE

Well, that’s quite a mess, isn’t it?  From the attention paid to the idea of value by classical authors and schools of economics, one would think that it was important to understanding economic activities.  But let’s make one thing very clear, value is in the human mind.  Value is in the eye of the beholder.  Value is not something one can use physics to measure about some physical object.  Let’s examine each of these definitions with that in mind.

Subjective theory of value equates value with the importance that an individual places on a good.  That’s certainly subjective, all right.  Psychological research into how the human mind works shows that people almost never associate a degree of importance with a good.  You will notice that there is no scale for importance.  You don’t know what four degrees of importance mean and neither do I.  One can use modifiers for the noun.  “That’s very important.”  That’s hardly important at all.”  But about the most one can do with the idea of “importance” is to compare the relative importance of two goods in a three value scale.  A is more important, less important, or equally important than B.  That’s about all you can do.

But let’s enter into the mind of that acting individual.  If he has considered importance at all with respect to that good, his subjective evaluation is probably different in its emotional intensity from minute to minute and different in intensity from the evaluation of anyone else considering the same good.  In other words, the value so defined is just about worthless for an individual.  It’s only when we get groups of individuals considering similar goods in a market setting that it could be of any use.  And even then it would be something inferred, not something measured.  An MRI scan of the human brain will not tell you what subjective value that brain is expressing.  So the concept as defined is actually an after-the-fact inference of some outside observer who is watching an auction.  The observer might as well just use the term “price” and be done with it.

While we are thinking about subjective things, let’s consider that next definition, the definition of economic value in which value is a measure of benefit an economic actor can gain.  They give away the game when they admit that it’s just another term for “price.”  Remember that the interpretation is the maximum one is willing to pay for the good or service.

Onward to use value:  That one claims to be the utility of consuming a good; the want-satisfying power of a good.  That’s the idea of utility again.  We’ll consider it a synonym for utility and move on.

Exchange value is what you can get in trade for a good.  That doesn’t tell us anything measurable since there’s no standard unit of account in barter.  It simply shifts the idea of value from one item to another like rearranging the deck chairs on the Titanic.  So we’ll skip it altogether.

Labor theory of value seems to have promise at first.  That “how much labor” phrase is the heart of the definition.  This shifts the measurement from the concept of value to the concept of labor.  We measure labor in a number of ways.  What is implied in this definition is hours of labor.  We are rather good at measuring time.  Is your time spent laboring of the same value (for this definition) as my time?  If you are accomplishing twice as much as I am in the same time, doesn’t that affect value in some way?   It seems to me that it should.  Then, too, there’s the fact that you can perform labor which requires far more skill than the skill I possess.  Shouldn’t that higher level of skill required to do the job count for something?  And if we’re bringing in skill, shouldn’t we include the time it took for you to acquire that skill and the labor of others who helped you acquire that skill?  Seems to me we should.  But there’s also the consideration of what the work is.  Breaking stones with a sledge hammer is providing a product that appears to be subjectively worth a lot less than doing brain surgery.  So the initial promise seems to break down when we study the issues associated with how much labor.  It isn’t actually gaining us anything.   It’s just shifting our attention from one thing we have trouble measuring to another thing we have trouble measuring.

Cost-of-production theory of value is something that we can definitely measure since it’s defined in terms of prices.  So it’s just another way of saying “price.”  Not only that, as we know from cost overruns on government contracts, the cost of production may get extremely high for something nobody really wants.  So it seems to have the cart before the horse.  It’s saying that no matter what we pay to produce this thing it will be worth that amount, literally, and exactly.  Cost of production sounds like a silly idea besides being just another way to say “price.”

Next we have “Value is intrinsically related to the worth derived by the consumer.”  That sounds great until we think about defining “worth.”  Good luck with that.  Worth is a synonym for value.  There’s little difference between saying “What’s it worth?” and “What’s its value.”  The worth question implies to me worth in trade or a comparison.  The value question implies to me some fixed scale.  But that’s just me.  My point is that they are very similar.  But let’s ignore that aspect and look deeper at the definition.

The phrase “worth derived by the consumer” is also almost impossible to measure.  What scale can you use?  I would contend that the worth is a subjective thing which will not be constant in the mind of the consumer.  We might venture some guess as to what the consumer expected to derive at the point of sale but the consumer’s expectation compared to worth derived could be entirely different.  Also, how long will we give the consumer to derive worth?  If the item lasts for 20 years in the consumer’s possession do we have to wait for 20 years to find out that worth was and thus the value?  And what data will we need to collect over the course of that 20 year span to sum it up at the end of that time?  It’s just about impossible to determine.  So this definition also falls flat.

That’s a clean sweep.  I wiped them out, every one of them.  Well, perhaps there are 50 definitions that exist in economics that I missed.  I am certainly not an expert on economic theory or the history of the field.  But since these were the concepts which Wikipedia presented; I have to infer that they are considered by most authorities much better versed than I in the details and intricacies of economics, to be the most important current definitions.  If this is the best they can do in economics they aren’t much ahead of fields like sociology.

Let’s return, therefore, to those dictionary definitions’ three concepts: price, utility/importance, and intrinsic desirability.

Price is sound, it’s easy to understand, it’s a “primitive term” in that everyone already knows what it means so it requires no definition, and it’s quite useful in theories about what happens during transactions involving money.  I like price.

Next we have utility/importance.  This is far less definite.  There’s no scale to use, such as is provided by money in its standard unit of account, which lets us generate the price.  Utility and importance also are independent of the item itself because they involve and are affected by context.  A crowbar is very useful in opening a wooden crate but worse than having nothing when one is trying to tread water after the boat sinks.  In other words, this concept is also not going to generate a scale or a unit of measure for us to assign values to a thing, whether a good or a service.

And finally we arrive at intrinsic desirability. Desirability is purely a product of the properties of the object, whether it’s a good or a service.  Independent of all considerations of context or circumstance, the intrinsic value of a thing stands alone.  There is nothing one can do to alter this value without changing the object itself.  Fine!  That’s all very well and good.  But the word desire strongly suggests a human being in there somewhere feeling an emotion.  That hardly seems to be intrinsic to a good or service.

Value is clearly NOT a property of the item, the product, the good, or the service.  Note that with no change at all in its physical properties a ticket for a box seat at the Super Bowl goes from being worth hundreds of dollars one day to being worth nothing or negative the day after the game.  Note that a drug can go from being a valuable property one day to just a generic in a few weeks’ time as the patent runs out.  So clearly value is not a property of the product.  Value is in the relationship of the product to some human being.  This relationship can change and does change over time.  Also, this relationship is in a context, a set of circumstances for each individual and that context can change… which will change the value.  We cannot assign a value to anything.  The best we can do is to compare the relative values of two things.  This might allow us to rank the values of a set of items… or it might not.  A might be greater than B and B greater than C but C greater than A.  Even then, the relative values will almost certainly change over time and will almost certainly change from person to person.  Values have a large subjective component.

Given these truths, there’s no point at all in setting a value independent of price on any good or any service.

So what do we have left?  Only price:  Is economics thereby diminished?  Does this mean that economics is no longer of any value?  Was the concept of value of any value to economics?  I think not in all three cases.  The idea of value is something economics should never have considered in the first place.  It seems to me that the concept of value was borrowed from philosophy, and grafted somewhat awkwardly onto what should be a science… in order to say that some prices are wrong in some sense.  You might as well say that the observed temperature or time of high tide is wrong in some sense.  A price is what it is and to say that it really ought to be something else is just silly.

The problem with price is that it varies in ways we don’t like.  Prices change for a host of reasons.  Some of those reasons we would like to eliminate.  We would like to eliminate fraud as a source of price changes.  We would like to eliminate the inflation and deflation which are products of government tampering with the money supply.  We would like to eliminate price fixing.  We would like to eliminate monopolies.  All of these sources of price changing (or setting) interfere with and prevent a free market.  All of them limit trade.  All of them cause poor investment of resources, with a corresponding level of waste.  And all these reasons for changes in price are products of the physical object nature of our money.  All are consequences of physical object money (hereafter abbreviated as “POM”).  However, we would like to retain price changes to provide appropriate feedback to those who invest their resources: so that they can decide whether and how to change what they are doing.  Nonetheless, in the absence of a proper free market, there exists no such mechanism to provide appropriate price changes.

Let’s assume and pretend that we were able to adopt a non-POM.  With non-POM a real free market would be available to set prices.  But note that the only prices we need to set are those which provide feedback to people who invest their resources.  That is, we only need to have the free market set the compensation for producers of goods and services; we don’t need to have price changes for other situations.  Yes, I know that’s a difficult idea to accept… so just go with the flow here for a while.

Prices have always been applied, one way or another, to everything we consume.  Even the things we get “free” from the government such as roads, schools, and police: we pay for these things through taxes, either directly (as in income or sales tax), or indirectly (as in paying rent).  There’s no such thing as a free lunch.  Somebody’s paying for that lunch one way or another.   The necessities we consume are necessary to us.  We must have food, clothing, shelter, medical care from time to time, and education; without them we die sooner than necessary.  Inasmuch as their value, worth, utility, and intrinsic value are infinite to each of us; there’s no point in putting a price on necessities for the consumer.  Whatever the cost – we have to pay it or die.  So in an efficient economy, in an economy which maximizes its resources, the necessities would not need to have prices for the consumer because we already know that we must allocate the resources to produce those goods and services.  Therefore we must set prices for the production of necessities high enough to guarantee the allocation of sufficient resources to produce them.  Free markets are by far the best way of setting these prices.  With a non-POM, free markets for producers of necessities in which they are paid based on the consequences of their production seems to be the most appropriate system.

Moving on to capital goods: we know that we must have capital goods.  Without tools we cannot produce or maintain the material objects we need in order to survive.  Without capital resources we have no materials to create the goods we need.  We must produce these things; but capital goods, resources, and labor are not infinitely fungible, they’re also not mutually interchangeable… they cannot all be used to produce just anything, nor are they all of equal utility.  Therefore we do need a price mechanism to influence allocation of capital resources, both labor and materials.  We need some mechanism of feedback which constantly adjusts and modifies the prices of something so that those who own capital goods or labor can make relevant decisions.  But what should that thing be whose price does get modified?

We used the consequences of production as the basis for setting prices in a free market of necessities producers: that same system should work for capital production as well, considering that producing capital goods and services for use in necessities production would already be covered.

That leaves only luxury goods.  Since those are also consumer goods, setting prices for their production can also be a free market artifact.  Of course, not being necessary, the resources allocated to their production can be what one might call “leftovers”.

When we set a price for the consequences of necessities production we specify the pay for nutrition in the case of food, bodily protection and comfort in the case of clothing, safe and comfortable environment in the case of housing, basic medical treatment in the case of medical care and for education.  If a food is produced which is consumed and provides appropriate nutrients to the consumer (we would not want to pay for giving a person food to which they were allergic, for example) then those who contributed to that production and distribution should get paid accordingly using the non-POM.  Note that from the producer’s point of view, it doesn’t matter how the money comes to exist as his property.  It doesn’t matter whether it is transferred from some other person or just magically came into existence in his wallet or in his bank account.  So long as there is a strong association between producing the consequence of a benefit of nutrition and the producer’s coming to own more money, the motivation and the feedback are present.  When you are paid for your work, do you really care which account was debited to transfer money into your account?  Do you even know which bank account it comes from?  My social security is direct deposited in my checking account but I have no idea what account in what bank that money comes from and I really don’t care.  It’s not my concern, so long as the right amount is deposited every month.

The same thing will be true for the production of all additional necessities, and for the other two kinds of production (luxuries and capital).  So long as the consequences of the producer’s efforts determine the pay the producer is getting, if any; then the producer is receiving appropriate feedback and powerful motivation to adjust his actions according to that feedback.  Note that the producer is not being paid for effort or for time worked but only for the consequences of his actions.  He’s like a salesman working strictly on commissions.  It won’t matter how many doors the salesman knocks on or how hard he tries to please the customers.  It only matters how much he sells.  If he tries hard for a long time and sells nothing, an experience I have had, he is not paid.  On the other hand, if he’s lucky or really good at selling, he can make a lot of money with little time and effort expended if he sells a lot of merchandise.

Since consequences are the basis for pay in all cases, it is relatively easy to more closely approximate fair pay.  It’s impossible for pay to be completely fair in all cases in any human system.  But since most pay these days and all through history has been before the fact, long before the consequences could be known, pay simply could not be as fair as this non-POM system can potentially provide, which pays only after the fact when some of the consequences can be known.  And with the free market setting the prices (the compensation) will be more likely to appear to be fair.

Since non-POM does use free markets, anyone can participate in the production of benefits.  Since non-POM uses consequences of actions and everyone’s actions produce consequences, everyone will be eligible to receive pay.  This means that all the labor which people provide now that goes unpaid might be paid with non-POM.  This also means that one need not get permission from some person who will pay before working to benefit others.  In other words, if you see something that needs to be done that you can do; you just can do it and be confident of getting paid if that action results in benefits.  The prices paid for those benefits will be sufficient to provide all the information needed for efficient resources allocation.  We don’t need to bring in the concept of “value” at all.  Price alone is sufficient.

With the free markets of non-POM, the allocation of resources will be made without central direction, without the need for a top-down command structure, without need for any central planning committee.  All the former means of allocating resources which were in every case top-down and not using a free market will cease functioning: They will simply be irrelevant and ignored.  There will be no need for any uprising of workers or violence.  The change of context, of the circumstances in which people act will result in these differences of behavior without need for force or the threat of force.  The dream world of libertarian theorists will be achieved, just not in any way they might have expected.

But how does it work, this non-POM price thing?  Remember that prices set in a free market do not in any way measure anything about value.  They indicate the point at which people are willing to trade.  We know that the buyer was willing to give up at least that amount of money to gain ownership of the product and that the seller was willing to accept that amount of money in exchange for ownership of the product.  So when the product being bought is net benefit, we only have to meet or exceed that minimum amount of money to get people to produce those benefits.  We don’t know or care what the true value is in some sense of the benefits.  We only care that the benefit was produced and the producer was willing to contribute for that amount of money.  Note that there is only the one product, net benefits.  The benefits can be consumption of goods and services designated as necessities or they could be gaining possession of goods or services designated as luxuries.  People do benefit from pleasure, you know.  If the going rate for nutrition is sufficient to result in enough nutritious food being made available to and consumed by people to satisfy the needs of the public, then that’s the price for those benefits.  If it is not sufficient, then the price will rise until a sufficient level is reached.  Remember: it’s a free market so there are no barriers to entry.  Anyone can produce or aid in the production of any benefit.  If one group of farmers chooses not to produce food or withhold their food from the market, others can take up farming to fill the need.  It’s the traditional understanding of supply and demand which actually will work, because it’s a free market.  People will have a pretty good idea of what they can expect if they enter the market, because the information is readily available.  There is no concentration of power so the decisions are made by the market; not by any individual, group, or authority.  The only prices that need to change are the prices of the production of net benefits.  Prices paid by consumers need not change.  But that’s another story.

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