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  • Zachary Collier

Where Does Value Come From?

In out last entry, we explored the nature of value, and the relationship between value and the related concept of utility. We concluded that value is dependent on two main factors – first, the perceived ability of a thing to satisfy certain felt wants (i.e., utility), and secondly, the scarcity of the item.


But where does value originate? The origin of value has puzzled economists for a long time. The early classical economists like Adam Smith and David Ricardo theorized that value was something intrinsic to a good. This idea later developed into the debunked labor theory of value, which proposed that the value of a good was based on the amount of labor (and other things like land and capital goods) used to produce the item. Clearly this theory has several challenges. For example, how exactly does one measure and compare different amounts, intensities, and qualities of labor? (1) This would imply that an ounce of gold that was extracted from a mine, which takes countless hours to excavate, process, etc., would somehow be more valuable than an ounce of gold that someone discovered just lying on the ground. Even if we could somehow compare labor factors, it still doesn’t change a second consideration – just because something takes a lot of labor to produce doesn’t mean that it provides a person with any utility.


As it turns out, value does not reside within objects, but rather in our own assessments of them. Value is a subjective assessment, made by individuals, about various goods. Economist F.A. Harper described the subjective nature of value in this way:


“For any item at any given instant of time, each person sets his own value in a way that is of mystery to all others. He takes into account a vast range of considerations, many of which are peculiar to him alone and which may be so deeply subjective that he cannot even describe them to another person. Certain qualities of things are, to be sure, intrinsic and measurable, and affect value for this or that person. But they affect value in different ways for different persons, and are at best only a part of the origins of value.” (2)


This view makes sense if we think back to the factors that give rise to value in the first place – utility and scarcity. Utility is clearly a subjective concept – what is useful to one person might not be useful to another. We all have different tastes, preferences, and wants, and so it makes sense that the same item would provide different utility to different people. A vanilla ice cream cone might have high utility to someone who really likes vanilla, or to somebody on a hot day, but low utility to someone who, say, is on a diet, or simply prefers chocolate ice cream.


Scarcity can also be a subjective factor as well. The relative abundance or scarcity of a good might depend on where a person lives (e.g., green chilies are abundant in New Mexico but scarce in Alaska), knowledge (or lack thereof) about how or where to acquire a good, or perceptions about the difficulties and costs associated with the acquisition of the good. Since scarcity implies that we ultimately have to make tradeoffs in life, not only do we have subjective opinions about what we stand to gain, but importantly we have subjective opinions about what we must give up to get it.


As Harper notes, value is a relative judgement. We make these comparative value judgements all the time when we are shopping, without being conscious of it.


“In other words, the loaf of bread does not have an independent value separate from all other things for Mrs. Jones. The value of the loaf of bread is the relationship of the bread to something else Mrs. Jones wants. More specifically, in the market of a money economy, she will usually think of the relative value of bread in terms of money - the particular form of value to which we refer as "price". She will decide whether the bread has a superior or inferior value to the 29¢; if superior, she may buy the bread, if it seems to her the best use for the 29¢; if inferior, she will keep the 29¢ to buy something else.” (2)


The fact that value is subjective and relative is surprising good news, as it turns out. The fact that we subjectively value different things according to our own internal scales of value is what makes trade possible. In the above example, if Mrs. Jones buys the bread, it implies that she values the bread more than the money she traded for it. On the other side of the equation, the fact that the store owner accepts the money in exchange for the bread means that the owner values the money more than the bread. Since both parties to the exchange traded something they subjectively valued less in return for something they valued more, both of them ended up better off from the trade.


In summary, value can be thought of as a mini benefit-cost analysis that goes on inside our minds. We subjectively weigh the benefits of a thing against the costs of what we have to give up to attain it. In particular, value is not a thing that exists in its own right, but rather is a personal, context-specific assessment of the relationship between benefits and costs. (3) Importantly, these subjective assessments are what allow us to gain from freely trading with each other, allowing net wealth to increase.


At Collier Research Systems, we can help you attain the goals that are of value to your organization. Call Collier Research Systems today to learn more about how we can help, or visit our website: www.collierresearchsystems.com.


References:

(1) William Smart. 1910. “An Introduction to the Theory of Value.” Second Edition.

(2) F.A. Harper. 1967. The subjective theory of value. Innovator, 38-41.

(3) D.S. Thomson, S.A. Austin, H. Devine-Wright, G.R. Mills. 2003. Managing value and quality in design. Building Research & Information, 31(5), 334–345.

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