Value - the Soul of Economics
SEPTEMBER 01, 1969 by W. H. PITT
Mr. Pitt, of Bayswater in Victoria, Australia, describes himself as a "publicist for freedom." He is a frequent contributor to journals such as The Australian Financial Review.
The processes of the market are those of a free-running, frictionless machine; and the insertion of "anti-economic" frictions into the mechanism—what is this but the most disastrous vandalism?
It seems to me that there are two stages in the formation of "value" and that it starts with a subjective, personal, evaluation, by individuals, of the usefulness of an article for the satisfying of their desires. Some of us, having a particular desire for an article, make our subjective evaluation of it in deliberate fashion; others, lacking the particularity of that desire, or perhaps not requiring the article quite so urgently, make only subconscious measurement of its usefulness, that is, of its utility.
The second stage occurs when those with immediate purpose for the article cast around for the means of acquiring it. A few will manufacture it for themselves, even though this, in terms of time and effort, is probably the most expensive process. Others, economizing a little, will combine their efforts in a cooperative production. But most of us, on desiring something, but not being in such desperate need of it as to warrant our manufacturing it for ourselves, will get it "in the market," doing so by exchanging for it some other article or service for which our regard, as vendor, is not at that moment so high. While those manufacturing the item for themselves may seem to have but little effect upon "the market," their outlays in time and effort are nevertheless seen and noted by everyone, and form the ultimate base for the price structure. In the market, you see no concern for the reasons, whatever they be, that activate individuals to expend their effort; the concern is for the amount of our effort, were we manufacturing the article for ourselves.
In deciding upon an exchange in the market, we commence from our knowledge of the cost in time and effort were we to make the article for ourselves, either individually or cooperatively. But being rational, intelligent humans, we seek always to satisfy our desires with the least expenditure, whether this be measured in time, effort, money, or in other commodities or services. Therefore, we seek out those who, with an abundance of the article, or having a facility greater than our own for its production or, having a desire greater than our own for the commodity or service which we can provide in exchange, will offer the article we desire at a price that will give us a saving in our exertion.
When there are several who will thus offer us the article, the desire to minimize our exertion induces us to seek the best offer, thereby testing the market to its limit and attaining the greatest possible saving. The market is thus a mechanism for the economizing or conserving of human energy—the most excellent mechanism of all, not only in that it permits the immediate conservation of energy, but also in that, by acting as a register and indicator, it steers the whole community toward a constantly increasing conservation of energy. It thus promotes the maximizing of results and the minimizing of effort.
The Objective Expression
In order properly to appreciate the functioning of the market, there has to be recognition of the fact that everyone who "goes to the market" and participates in the exchange of goods and services, does so in order to save himself effort. Any proposed transaction must offer a benefit to both vendor and purchaser, otherwise it will not take place. This is so even when an article or service is offered at a price well below "true value." In every case the offerer is satisfied that in making the deal he is receiving a benefit and is achieving something that he otherwise could not. He may regret that he takes his decision at a time when the article or service with which he is parting will bring him less in return than it might at some other time: but at the moment of decision he sees it to be advantageous that he should sell. The advantage is that failure then to make the decision could involve him subsequently in a greater exertion. The market, thus, is a place where goods and services are evaluated, subjectively, by individuals, the evaluation then being made evident, objectively through price, to others. Price, one might say, is the indicator, the objective expression of and the evidence of value: and value roots in, and is at every stage concerned with, the saving or economizing of effort.
Money, the Ultimate Refinement
That this view of value is correct receives support from the everyday meaning that attaches to the word "economics." Where this word occurs on its own, it is, in general, used in its deepest and widest meaning and, concerned for the prosperity of the community as a whole, deals with the fruitfulness of our over-all activity and therefore with our over-all economy of effort. But when specific fields of activity are in mind, an appropriate definitive is used: we talk, for example, of "the economics of the sugar industry" and conclude that prospects for the industry here in Australia will be good if, or even because, the political or climatic conditions in other sugar areas are disastrous and throughout the world there will be deleterious effect upon both other sugar producers and all sugar consumers.
In either the particular case or the general, it is the maximizing of results through the economizing of effort that is our concern. It is our instinct for economizing effort that has led to the use of one or another particular commodity as a unit for the measurement of values. Through the subsequent use of tokens for these commodities, what we now call "money" has developed and it is its potency in the economizing of time and effort that makes money the ultimate refinement in the mechanism of the market and the greatest of all our servants.
"Price" cannot be the same thing as "value." It is the measure of value and the objective indicator for the monetarily acceptable figure, dictated by all our varying individual evaluations, at or around which transactions customarily occur. It is a characteristic of "price" that it allows of a benefit for both the vendor and the purchaser, being above the evaluation of the vendor and below that of the purchaser, each of whom, necessarily, approaches the market in search of different satisfactions. Like all mechanisms, the market, with its function for the economizing of time and effort, is servant alike to the good, the compassionate, and the perceptive as well as to the evil, the inconsiderate, and the oblivious. We interfere with it at our peril, for the interference is interference with the economizing of time and effort, the penalty thus being automatic, wide spreading, and assured. This is the lesson of the ages as well as of our immediate logic.
In an inquiry into economics we must commence with the question as to just what it is that we are economizing. Clearly, the answer is that our inquiry concerns the process whereby human beings economize in their time and effort, that is, in their exertion; for the economizing of time and effort is the mainspring of rational intelligent human activity. With this in mind, we can accurately determine what value is and how it is to be measured, what price is and how it is expressed, what the market is and how it operates, what the true rights of property are and how these rights are not only violated by long-established legal wrongs but also threatened by further legalistic damaging of the automatic processes of the market. These processes are those of a free-running, frictionless machine; and the insertion of "anti-economic" frictions into the mechanism—what is this but the most disastrous vandalism?
The Essential Simplicity
It seems to me that correct theorizing in the realms of economics is an essential prerequisite to the preservation and growth of freedom in its beautiful entirety or in any of its sparkling facets. Until there is a widespread understanding of the essential simplicity of each section of the market mechanism, there cannot help but be unending attempts at interference with the market. These interferences can, of course, never be such as wholly to destroy the market (and freedom) but they can never fail to harm it. Understanding of the processes of the market can come only with appreciation of two facts, the one that the science of economics has as its concern the economizing of our time and effort, and the other that value, which the most percipient perhaps of my friends calls "the soul of economics," can have reference not to cost in terms of labor or effort, not to either of utility or gain, not, although the relationship gets closer, even to scarcity, but only to the saving or economizing of effort.
Summarizing, then: articles of trade are evaluated, subjectively, according to the amount of exertion which their possession will save for the possessor: and their price, manifested objectively in the market, must always be above their desirability as evaluated by the vendor and below their desirability as evaluated by the purchaser. Exactly the same processes of subjective evaluation and objective pricing occur with services. In the case of services the outcome of exertion is intangible and is promptly dissipated, whereas in the case of articles of trade (commodities) the effect of exertion is applied to material substances and is there for a time stored up in tangible form. In each case, both vendor and purchaser, both practitioner and client, first consider the effect of past exertion and then aim to conserve future exertion. In the estimation of future conserved effort lies the core and center of value.