Tuesday, January 09, 2007

Understanding Economics: Value

One of the most basic concepts in economics is value. We regularly use this concept when we say that goods or labor have value. But where does this value come from, and how do we determine what it is? (I should point out that I am discussing economic value, not moral value or some other type of value.)

Various theories of value have been proposed and debated. The correct theory of value is subjective value. This means that things have value because we value them. Things are valuable because of their usefulness to us. They do not have inherent value independent of this.

Various incorrect theories of value attempted to assign value to things based on the cost of production or various factors in that production. However, the fact that materials and labor have been used to produce something does not make it valuable. It may simply be junk.

One essential point about value is that things have different values to different people. Given that value is subjective, it could hardly be otherwise. For example, Opera tickets may be very valuable to one person and worthless to another person.

This leads to another essential truth. People can trade things and both benefit. Suppose person X owns object B and person Y owns object A. If person X values object A highly and object B lowly, and person Y values object A lowly and object B highly, then they can trade objects and both come out ahead.

This leads to a second sense of economic value. The first type was value for use by that particular person. The second type is value in trade. Thus objects that are not valuable for personal use still have value since they can be sold. Through the use of money, this trade, or market value of an object can be quantified and compared to the value of other objects.

One particular false theory of value is the labor theory of value. Unfortunately, this error has a long tradition. It was employed, though certainly not invented by Karl Marx. Marx argued that since labor made goods valuable, workers should own the goods they produced. Since they didn't, they were being robbed by their employers.

Of course, this is a fallacy.

Consider what is needed to make a car. All the labor in the world won't make a car without the materials needed to construct it. All the labor and materials in the world won't make a car without the knowledge of how to build one. Each of these factors is important, but since the ability to design a car is scarcer than the other two, it is more highly compensated.

There is no morally "right" price for anything. There is only the real price. As Rush Limbaugh used to say, something is worth what someone will pay for it.

1 comment:

Anonymous said...

The point you make concerning Marx’s interpretation of the labor theory of value is slightly incorrect. Marx did not contend that labor should "own" the products it helps to produce. His contention was that labor was entitled to the "surplus value" of such commodities. The logic behind his thinking said that if the materials used to build a chair cost $20 and the final chair itself cost $30, the input of labor resulted in an extra $10 in value. The $10 is then expropriated by capital, which took no part in the conversion of material into product. Labor's wages should reflect this $10 according to Marx and this is a major point in his critique of capitalism. Though it may be easy to see the fallacy in this argument using your points, it is important that you are correct in the arguments you are trying to refute.