The Economic Way of Thinking, Part 2
The value of any economic good is no more and no less than what some individual will offer in exchange for it.
NOVEMBER 01, 1993 by RONALD NASH
Dr. Nash is a contributing editor to The Freeman and professor of philosophy and theology at Reformed Theological Seminary in Orlando. He is the author or editor of 25 books including Poverty and Wealth (Probe Books) and Social Justice and the Christian Church (University Press of America).
In the first part of this eight-part series, we learned that economics is the basic study of conscious, purposive human behavior. We also learned that the unavoidable fact of scarcity in life requires human beings to rank the things they regard as important and then make choices. The subject of this month’s essay is the fact that all economic valuation is subjective.
Objective Theories of Economic Value
Anyone who observes how human beings act in economic exchanges can easily see how various things are thought to have more value than others. It is natural to wonder about this fact. What is it about one thing that makes it more valuable than another? Why do people want some things more than others? Why are some things so valued that people are willing to make significant sacrifices in order to obtain them?
Until the late nineteenth century, economists and philosophers tended to regard economic value as objective. That is, the value of the economic good was thought to be inherent in some way in that which was valued. One of the most influential of these objective theories of economic value appears in the writings of Karl Marx. Marx believed that the value of a good or service is determined to a great extent by its cost of production. Suppose, for example, that all of the production costs (including the cost of supplies, labor, and everything else) to make a pair of shoes amount to $40. The value of those shoes (while new) then can never be less than $40, according to this view. The value here is objective in the sense that a number of factors, having nothing to do with human preferences and wants, have given those new shoes that value.
Marx and others set forth a labor theory of value which held that economic goods derived their value from the quantity of labor required to produce them. Thus, even the machines used to manufacture shoes were valuable because they were “frozen labor time.”
A little reflection should quickly raise doubts about any theory that holds that economic value is inherent in the good or service. For one thing, consider how many times retail merchants end up selling for less than their cost.
I happen to be a stamp collector. About a year ago, I paid $3.00 for a recently issued U.S. stamp in a strip of three. The person from whom I purchased the strip of three coil stamps had paid 30 cents for them at the post office. Just last week, a similar strip of three stamps sold at an auction for over $100. What happened to make these stamps different was a set of tiny plate numbers that appear once every 50 or so stamps in a coil roll. In this case, stamps with this particular set of plate numbers have turned out to be extremely rare. What is the “true value” of stamps like this? Is it the 30 cents charged by the post office or the $3.00 charged by the retail merchant I dealt with or the much higher price at which strips like this are now traded? The simple answer is that the value of any economic good is no more and no less than what some individual will offer in exchange for it.
Another way to see the flaw in the belief that economic goods possess some intrinsic, objective value is to attend an auction. Items can bring prices far above or below their original purchase price, depending on how important that item is to the people attending the auction. The same principle is at work in the case of pawn shops and flea markets. Suppose one day that you are browsing through such a place and come across something that used to belong to your family; perhaps it is associated with important events in your childhood. Since the person who sold this object to the merchant may have not attached the importance it has for you, he may have parted with it for a few dollars. Because of the value you impute to the object you might, if necessary, be willing to pay several hundred dollars for the same object.
Or consider two diamonds of equal size and quality. Imagine that one is simply found on the ground by chance; no effort or danger was involved in its discovery. Imagine that the second diamond comes out of a diamond mine where an enormous investment has been made in building and operating the mine. The men who work in such mines have a difficult and dangerous job. And so we have two diamonds: one cost little or nothing, while the second was produced at enormous cost. Imagine next that our two diamonds happen to be offered for sale at the same auction. The two diamonds might easily sell for similar prices. What this shows is that the value of the two diamonds bears no relation to their respective costs.
At this point, someone might raise an objection to the conclusion I draw from the diamond example. My example illustrates the fact that value and cost are not necessarily related. But does it not show, my critic might say, that value still bears a relationship to the objective properties or characteristics of the thing? My example stipulated that the two diamonds were similar in size and quality. Does it not follow that their similar “value” reflects the fact that their objective characteristics are so much alike?
It is true that the two diamonds had similar objective properties. It is also true (in my example) that they sold for prices that reflect a similar value. In this particular case, the closely related prices only reflect the fact that two buyers placed much the same value on them; this might well have been a function of the objective features of the diamonds. After all, if two things are practically the same, they can be substituted for each other. The hamburgers I can buy at the McDonald’s on the north end of town are indistinguishable from those I can buy from the McDonald’s at the south end of town. Because they are so much alike, most potential buyers will treat them as equal in value. But the economic value is not inherent in the hamburgers any more than it is in the diamonds. The value is imputed to the thing by an individual valuer. Obviously, people take the objective features of things into account when imputing such value.
It would be a mistake to assume that just because two diamonds or two hamburgers sell for the same price, they must therefore be equal in “objective value.” What two buyers are willing to exchange for an article reflects their separate personal valuation of that good. It is possible that two diamonds of different size and quality might sell for the same price. Any number of personal, subjective considerations might lead two buyers to offer the same price for goods with different properties. On the other hand, two similar diamonds might sell for different prices at auction, if buyers do not impute similar value to them.
In the last third of the nineteenth century several economists began to argue that economic value is entirely subjective; it exists in the mind of the person who imputes value to the good or service. If something has economic value, it is because someone values it; it is because that good or service satisfies a human want. The idea of imputation became central in economic thought.
The older, objective view of economic value tended to focus exclusively upon physical things and the ways humans sought to fulfill their purely material desires. It also gave inordinate attention to the role that money played in human efforts to bridge the gap between what people had and what they wanted. However, the subjective revolution in economics changed all this. Once economists recognized the personal and subjective ground of economic value, economists broadened their horizon to include all purposive human actions in their field of study. The scope of economics was expanded to include things other than money and material goods.
Many people value such things as truth, love, honor, friendship, virtue, and charity more than they value money, cars, clothes, and houses. Because such people rank truth, love, and honor so high in their personal value scales, their economic choices will reflect this ranking. The conscious, purposive actions of such people can be explained by economists who hold to a subjective theory of economic value. All the values a person holds affect the decisions he makes.
It is important to recognize that when economists state that economic value is subjective, they do not restrict the subjective ground of economic value to personal tastes. The fact that Jones and Smith impute different value to the same good does not necessarily reflect their differing tastes about the good. The value that people impute to things is also related to such factors as different information, different interpretations of information, different expectations, and different quantities they already possess. It may also reflect varying degrees of alertness to new opportunities. Far more is involved in the subjective approach to economic value than personal taste. But what is clear is that economic value is always imputed value.
A Religious Objection
Many religious people who are not economists find it difficult to reconcile claims that economic value is subjective with their conviction that value is always objective, absolute, and unchanging. Some might think that accepting the view expressed in this essay would commit them to believing that all values are relative and subjective. The fallacy in such reasoning should be obvious. Even if we should discover that some values (in one sense of the word value) are subjective and relative, it would not follow that all values are.
Much of the problem at this point arises from the fact that the word value is ambiguous. It may refer (1) to that which people do in fact value or (2) to that which people ought to value. We all recognize that many people value things that they ought not to value, and that they fail to value things that they ought to value.
We sometimes express the difference between these two senses of value by using the words desired and desirable. All that is required for something to be desired is for someone in fact to desire it. But just because something is desired, it does not follow that it is desirable, that it ought to be desired. In economics, value reflects the extent to which something is desired; it does not mirror that thing’s desirability. Economists have ways of measuring the degrees to which people desire things; obviously, this is something quite different from attempting to measure how desirable it is. No matter how much people ought to desire something, the economic price of that thing will reflect only how much some individual is willing to pay for one additional unit of it. The price of an economic good reflects the extent to which individuals desire it; and this is something quite apart from the question of how desirable or worthy it is.
Religious people, whether they are economists or not, need to keep two things distinct. The first is the degree to which an individual may want X, a fact that reflects where X ranks in that individual’s personal scale of values. The second is the need of individuals to alter the rankings in their personal scales of values to conform to what they ought to want. Christians, for example, are undoubtedly correct when they judge that their Scriptures oblige them to change the evaluations of themselves and others in order to bring them more in line with the evaluations stated in the Bible. While this task is clearly important, it is an activity that falls under a different heading than economics. Economic exchanges in the real world will mirror only the actual subjective value that individuals have imputed to the goods being exchanged. Any number of things, including conversion, may affect the way people rank things in their personal value scales. Whenever such a change in subjective value occurs, it will have an obvious impact on the judgments people make about the costs they are willing to incur to have one more or one less unit of some good. The result is that the array of goods produced and traded in the market will change as the personal value scales of individuals change.
The theory of subjective economic value does not imply that all economic choices are equally good in a moral or religious sense. Anyone is within his philosophical and theological rights to criticize particular economic choices. No defender of the market economy is required to defend all the goods produced by the market. It seems clear, therefore, that any objection to the theory of subjective economic value on theological or moral grounds is mistaken. In fact, it is from Christian theology that economics borrowed its central concept of imputed value. Telling people that certain values ought to be ranked higher in their preference scales is the proper task of the pastor, moralist, theologian, or spiritual counselor. The economist simply deals with how people do in fact make their choices with regard to the allocation of scarce resources.
Because of its importance, the notion of subjective economic value will be encountered repeatedly through the rest of our eight-part series. The ability of the reader to recognize these appearances will be an important sign of developing adeptness in the economic way of thinking.