Values, Exchange, and Profits: The Bedrock of Economic Science

How value is determined and the factors making an item more valuable.

The most basic questions in eco­nomic theory are those concerning value. What determines value? What are those factors that make a mere item have a value? A com­mon error is that of speaking about values out of context. For example, if someone were to ask: “Does that rock have a value?,” one’s immediate reaction should be, “A value to whom for what pur­pose?” If that rock cannot be used (a) by someone (b) to achieve some goal, it has no worth.

Thus, the very employment of the term value presupposes the question, “Of value to whom?”; the concept “value” must be used in context. A given individual has a certain hierarchy of values, whether explicitly or implicitly held in his own mind. However, these values are ultimately referable to the purposes set by that person for himself. A fisherman may consider fishhooks and fishing-line as quite valuable since they have a high degree of importance relevant to his purpose of fishing. A writer will not find fishhooks of much use at all; he will want writing instru­ments; their worth to him is de­rived directly from the goals he has chosen. Thus, an individual’s hierarchy of values is based on two things: (a) his hierarchy of pur­poses and (b) the degree of rele­vance to those purposes of the ob­jects to be valued.

But then what is the relation of prices to value? It must be kept in mind that the existence of prices presupposes the existence of exchange. Without the latter, the former would be unnecessaryWe must ultimately refer to individual values.. Thus, in order to understand ex­actly how prices relate to ex­change, the nature of an exchange relationship must be closely ex­amined. Once again we must ulti­mately refer to individual values, always remembering that these only reflect that person’s goals which he has chosen for himself.

Each Trader Gains

A voluntary exchange, by its own nature, always results in the mutual advantage of both parties, at least in their eyes. In terms of an individual’s hierarchy of val­ues, he will not tend to be willing to accept a lower value in ex­change for a higher one. He will only be willing to act if he will be better off as a result of that ac­tion, i.e., if he will profit by it. In a barter economy, an exchange will only take place if each party con­siders himself better off in terms of his value-preferences as a re­sult of the trade. If I have a po­tato and a friend has a pair, it would only be to our mutual ad­vantage to trade if he wanted the potato more than the pear and I the pear more than the potato. Both of us would consider our­selves to be better off after the trade. When a medium of ex­change is introduced, longer-range and more complex exchanges are made possible (thus enabling men to plan long-range and hence to expand their potentialities), but the principle remains the same. Voluntary exchange still works to mutual profit, by its very nature.

A common error is that which views exchange as involving two commodities of equal value, thus dropping the context of what a value is. This notion forms the basis for the conclusion that one man’s profit must be at another’s expense. However, one man cannot gain at another’s expense by free exchange. Only when an exchange is coerced may one party to the trade incur a loss.

Note that coercion is only nec­essary if the exchange wouldn’t have taken place otherwise, i.e., if the exchange was not to mutual benefit. Thus, coercion is being used to create conflicts of interest rather than to resolve them, by using force to enable one person to profit at the expense of another. If each stands to gain by the trade, it will most likely take place of its own accord.

But how do prices fit into this framework of free exchange? The use of a medium of exchange in the economy facilitates trade relation­ships between men — this is the source of the value of money; it is good for the purpose of trade. However, money is only of worth to an individual consumer in that it can be exchanged for values; the degree of its value is only meaningful in the full context of the worth of the many commodi­ties it can be traded for. But what is the relation of prices to the consumer’s values and goals? The price of an item is not its value; they are related but not identical. As previously observed, the item acquires value only in relation to the consumers’ goals, and money gains its value from the worth to the purchaser of the things he can buy with it. Then the price only affects the relative gain to each party from the exchange.

Choosing Among Alternatives

However, the individual con­sumer runs into many problems in deciding what specific ex­changes to make. One of these is that of calculating a value pre­vious to use, i.e., previous to ex­changing another value for it. One person may buy a book for 950 which changes his life, gives him a whole new approach and outlook, and ultimately shows him the way to achieve happiness. An­other may buy the same book and after reading it decide that he was gypped. The first person prof­ited immeasurably from the ex­change, and the second person’s action resulted in what he con­sidered a loss. However, at the time of purchase both bought the book because they felt that they would be better off from the ex­change. This is a difficulty that many socialist planner-theorists seem to overlook. In a market based on free exchange, at least, a con­sumer occasions a loss only from his own miscalculations, and may even learn from them and apply that knowledge to future choices, so as to avoid repetition of error. The chances are, however, that the consumer will gain from ex­changes, unless he is completely irrational in his choices, because of the way the market operates on producers’ profits. We saw that both parties gain from a volun­tary exchange; the price merely determines the relative degree that each profit. But in a com­petitive economy producers’ profit rates tend toward an average minimum. From this observation, it could be argued that the largest profits in the free market are those that accrue to people as con­sumers!

Thus, it is my contention that the conventional view of profits as only accruing to the businessman’s end of the exchange relationship is too narrow; that it gives a false picture of the true nature of vol­untary trade. There is no conflict of interests inherent in trade rela­tionships. Mutual profit provides the incentive for people to produce and trade; it is the all-important fuel which keeps the economic en­gine progressing through human action toward the betterment of everyone.

Satisfy the Customer

In the light of my approach to values and demand, then, what is the source of producers’ profits? If the use of coercive measures is not open to him (i.e., if the gov­ernment acts to protect free ex­change between individuals rather than to inhibit it, and does not en­gage in policies of protectionism, etc.), he has only one means by which he is able to make money. He must seek out and identify un­satisfied demand and attempt to fulfill it. He must seek out and identify unsatisfied demand and attempt to fulfil it.This he can do by creat­ing a new product which people will value in that it aids them in achieving their goals (thus mak­ing them better off); or he can raise his own efficiency in produc­ing commodities already being produced and undersell the other producers, thus giving the con­sumer a better deal in the trade than his competitors have; or he can devise a new invention which will raise the efficiency of others’ production and lower their costs and thus their prices and thus ul­timately helping the consumer in that way.

There are many ways of making profits as a producer in a free exchange economy, but all of them have one thing in common. They all ultimately must aim at improv­ing the well-being of the consumer. Through the legal protection of property and of uncoerced ex­change, producers are rewarded by the free market commensurate with their ability to and success in satisfying consumer prefer­ences.

However, I have been very care­ful about qualifying my conclu­sions relative to free exchange: what happens if these voluntary exchange relationships are in­hibited by governmental coercion? What happens in a socialist or even a mixed economy in the light of my conclusions? It would ap­pear that, at least in the consum­ers’ own eyes, they would be not better but worse off than under a free-enterprise system because if an exchange is to be mutually profitable it must be uncoerced. And goods must be produced to be consumed, so producers’ profits are as important economically as con­sumers’ profits.

Who Is to Judge?

But here we run into the moral question: are individual consumers competent to decide what is in their own best interests, i.e., what will improve their conditions of existence? Are they competent to decide their own purposes for their own lives? Or, will the planning of production by someone else more nearly reflect the best interests of “society,” i.e., of all individual members?

This question has been argued and will continue to be; it remains one of the more basic issues in the conflict between free enterprise and socialism. But if economics as a science is concerned with setting up conditions under which every­one will be better off, in their own estimations, then we can examine the effects of governmental inhibi­tion of free exchange, whether it takes the form of interventionism, fascism, socialism, communism, or any of the many variants of each.

Exactly how is this harm done? For example, what are the effects on business decisions of govern­ment price-fixing?

Consequences of Price-Fixing

One consequence is that the price is no longer a direct indicator of the dynamic balance between changing consumer value-prefer­ences and evolving production con­ditions. The price thus is no longer meaningful in the context of mar­ket conditions. Thus, the scope of business decisions is considerably narrowed. Business managers no longer must view the price as an indicator of a great many other changing factors; they need only focus on the price itself, relative to their own production costs. Where­as beforehand they based their de­cisions ultimately on varying con­sumers’ preferences and attempt­ed to anticipate new wants and ful­fill them (thus producing directly for the consumer), once prices are planned, the scope of the factors upon which decisions are based is constricted and altered.

As for a mixed economy, the de­gree of interference will determine the extent of the change. Business decisions weigh heavily on price predictions, which in turn under socialism depend on the vagaries of economic planners with near-arbi­trary control. Price controls are a means of directing productionThus, as a result of this redirection in emphasis, in or­der to better his position the busi­nessman may aim more at gaining political influence so the price can be adjusted to his advantage (at consumers’ expense) rather than aiming solely at improving a lot of the consumer by the more efficient production of values. Granted, price controls are a means of di­recting economic production, but let us not rationalize it by saying that it is “in the best interests of the consumer.”

Once again we get back to the same basic question. If values are ultimately referable to individuals’ purposes, then they cannot be quan­tified, calculated, and planned by anyone except that individual, and especially not by any central body. Production of values is best done by letting producers aim solely at satisfying consumer demand, in an uninhibited market economy. The final issue remains one of whether a central planner can better decide what is in people’s interests than they themselves can; i.e., whether businessmen should act according to the dictates of the consumer or of the planner.

The More Complex the Society, the More Need for Freedom

If values are ultimately referable to individual purposes, they are not calculable or quantifiable in a de­veloped economy. Possibly in an un­developed, subsistence-level econ­omy, values are to some degree pre­dictable in that, by the very nature of life, survival requires certain actions of men. But when choices and alternatives become more com­plex, and men are not living a hand-to-mouth existence, men de­velop longer-range, more diversi­fied purposes. Thus their value-hierarchies become more compli­cated and varied, and unless one aims at directing the very pur­poses of people’s lives, it is best to leave it all to them. We are living in a highly integrated, complex society.Since we are living in a highly integrated, complex society, we must direct our focus on to the problems of so­cialist planning in that context, in order to cover two final points. First, since attempts at “plan­ning” do get so complicated, and require so much gathering of in­formation, many man-hours must be dedicated to this task. Would not these planners do more good for consumer well-being if they, too, directed their efforts toward the production of values?

Furthermore, a highly-devel­oped and specialized economy is one in which many lives are cru­cially and intricately dependent upon exchange relationships and their fluidity. Men’s professional purposes are so specialized that the fruits of their work may only be of value to a small number of others. The fluidity and sensi­tivity of a market economy en­ables these men to seek each other out — thus, men are free (to a cer­tain extent) to specialize and ex­change their productive work for other values, always to the mutual benefit of both parties. But it might be quite difficult to con­vince a “disinterested” planner that this highly specialized work was useful (he might not see things in the same light as the person to whose purposes this man’s work had value). In such an instance, who is blocking “prog­ress”? This problem might be intensified all the more in that socialism is partly based on the idea of intrinsic values, which, in the planner’s eyes, this work might lack.

The practical problems of socialist planning seem to be with­out limit in their number and complexity. My purpose in this essay has not been primarily to enumerate those difficulties, how­ever, but rather to present my own claim that much socialist and interventionist theory is ulti­mately based (a) on an erroneous theory of the nature of value and (b) on a subsequent misunder­standing of the nature of ex­change and profit. My analysis of the nature of prices and the value of money merely follows from my other conclusions, as well as my espousal of a free exchange econ­omy as the most efficient creator and protector of “social wel­fare.”

Profit-Seeking Business

The entrepreneurial function, the striving of entrepreneurs after profits, is the driving power in the market economy. Profit and loss are the devices by means of which the consumers exer­cise their supremacy on the market.It makes a man more influence in the direction of business activities. The behavior of the con­sumers makes profits and losses appear and thereby shifts ownership of the means of production from the hands of the less efficient into those of the more efficient. It makes a man the more influential in the direction of business activities the better he succeeds in serving the consumers. In the absence of profit and loss, the entrepreneurs would not know what the most urgent needs of the consumers are. If some entrepreneurs were to guess it, they would lack the means to adjust production accordingly.

Profit-seeking business is subject to the sovereignty of the consumers, while nonprofit institutions are sovereign unto them­selves and not responding to the public. Production for profit is necessarily production for use, as profits can only be earned by providing the consumers with those things they most urgently want to use.