What is Value?

July 10, 2008

A friend of mine was reading New Ideas from Dead Economists, a book by Todd Buchholz that explains and critiques economic thought from Adam Smith to Keynes. In it, there is a section about Karl Marx and his theories. In explaining Marx’s labor exploitation theory, Buchholz points out that Marx rests his claims on the premise that the value of a product is determined by the amount of labor needed to produce it. (Classical economists like Smith and Ricardo also believed this.) Buchholz writes later on the page that critics of Marx argue that this premise is wrong, but he does not go on to explain any of these arguments. My friend asked me what these arguments were, so I did my best to explain them for him. 


First, there are different variations of the labor theory of value. Basically, they all say that the value of a good is directly proportional to the amount of labor used to produce it; i.e. a watch that takes 20 hours to make is twice as valuable as a watch that takes 10 hours to make. Like I said, there are some variations and I am not going to hit on those. I am just going to show that the basic premise here is flawed. 


Whether I spend two weeks or four weeks carving a statue is irrelevant to its value. Given that the two-week statue and the four-week statue are similar in every way except for the amount of time that I put into them, which one do you think has a higher value? A passerby looks at them and, seeing no differences, values them the same. I, however, value the four-week statue more than the two-week one because I spent more time making it. Even if I told the passerby that I spent twice as long making one of the statues, since he does not see a difference in them, chances are that he is not going to change how he values them. Why the difference in the way the two of us value these statues? Values are subjective. What then, constitutes value if not the labor added? Austrian School thinkers assert that to possess value, an object must be both useful and scarce, and how much one values that object is dependent on one’s preferences and how well that object satisfies one’s wants. To quote Mises:

Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment. Neither is value in words and doctrines, it is reflected in human conduct. It is not what a man or groups of men say about value that counts, but how they act. 
-Ludwig von Mises


The closest thing we have to determining the average value of an object is price. The prices that are seen for goods in the market are formed by the aggregate subjective values of the people acting in those markets. Taking scarcity into account, higher prices reflect higher values among acting people. Something worth being pointed out is that prices tell us nothing about the reasons behind people purchasing an object. All that can be said is that in the absence of coercion, if I pay $10 for a DVD, I value the DVD more than $10 and the seller values the $10 more than the DVD. 


What does this mean? I leave you with an example from The Quest for Reason blog:

If there is a wooded area that gets bulldozed (excluding government coercion and forced sales which are so often present) to put up a housing community, the housing community is more valuable than the wooded area in its natural state. For if the natural wooded area were more valuable, acting people would have prevented its alteration from occurring.

To the observer, witnessing something you think is beautiful being destroyed is unfortunate for him personally. The problem, like Mises said, is that value is only demonstrated through action. All the silent well-wishers for nature in the world have no impact on the value of things unless they demonstrate it through action.


If this is unclear or you have any questions, please leave a comment with your concerns. I will do my best to clarify and/or answer questions.