Principles of Market Fundamentalism, No. 1: Value
Call us what you like. But those who appreciate the economic way of thinking know that dismal science, too, cannot suspend certain realities.
If we are to develop a comprehensive decentralist doctrine, we cannot overlook basic economics. However, as economic science can take us to disciplinary depths rather quickly, we must set out a set of grounding principles. These can double as institutional design heuristics. The Nine Principles of Market Fundamentalism in this series should equip us to see through much of the fiction that passes for analysis, particularly as the dark spells cast on ordinary people are based on inscrutable maths and models. Such hides legerdemain or omits critical aspects of reality. At the very least, we can go forth into the world armed with principles that, when abandoned, indicate a theoretical house of cards. So equipped, we can begin to apply the economic way of thinking.
Value <
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Entrepreneurship
Inequality
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Emergence
Transaction Costs
Principle One: All value is subjective.
Through the ages, the world’s finest minds have built entire theories on the idea that value is objective. They thought it was possible to use, for example, labor and capital inputs to derive value. But they were wrong. The cost of the inputs doesn’t simply add up to value. From Adam Smith or David Ricardo—to any number of contemporary thinkers—the idea of objective value supplies a foundational premise. Remove that foundation, and the rest of the theory risks collapsing.
Consider this simple illustration.
Two different manufacturers make two shirts, each producing the shirts using the same labor hours, materials, and dyes. In other words, the inputs are exactly the same. The only difference is that there is a picture of Karl Marx on one shirt. On the other, a picture of Carl Menger.
There is no such thing as intrinsic value, according to Menger. And he’s right. Despite the fact that Menger was right about the nature of value—and Marx was wrong—we can use Mengerian insights to predict that then, as now, Marx is far more widely known and sadly more fashionable. So, the Marx shirt is likely to fetch a higher price. The inputs are simply immaterial to the question of value.
Why? Value is always in the eye of the beholder.
If circumstances change, one’s valuation might change. For example, if Taylor Swift were to wipe her glistening brow on the Menger shirt, the market value of the Menger shirt might change. Indeed, it only cost the celebrity sweat, so if the market value of the shirt went up by a factor of a hundred, we wouldn’t be able to argue that the celebrity or the shirt manufacturer exploited anyone’s labor. It would simply be the case that someone was willing to pay for a celebrity-sweat-soaked Carl Menger shirt.
Again, the costs of the inputs are wholly irrelevant to market valuation.
The Relentless Subjectivity of Value
WARNING: Four days left on the Constitution Contest. Enter now. Jack Sprat could eat no fat, His wife could eat no lean. And so betwixt them both, They licked the platter clean. Time. Context. Perspective. All are aspects of the way we value something—or, better, the way
What about a basic resource such as water? Surely, that is objectively valuable due to our universal need to hydrate. I may want to take that water bottle and put it to my parched lips to survive. You may want to load your squirt gun. I’d pay a hundred dollars for that water in the right circumstances, for example, after a jog in the desert. You might only be willing to give a buck. Maybe we can agree that the circumstances of time and place can prompt us to value things differently.
But matters run deeper. We are different, you and I—on the inside. We will likely value any given thing differently, even in identical circumstances.
Happily, that impels us to trade—your Crème Brûlée for my Mousse au Chocolat.
Jack Sprat could eat no fat,
His wife could eat no lean.
And so betwixt them both,
They licked the platter clean.
Despite the cries of lettered economists, there will never be any such thing as intrinsic value—at least not in the deepest philosophical sense. There might be intersubjective agreement about value, but that is ephemeral. Value does not inhere in things. It never can. It never will. Value is a feature of our subjectivity. And the relevant unit of analysis is choice in a particular time and place.
How are prices determined? Is it cost of production or utility, marginal cost or marginal utility? The by far best writings on this topic have originally been provided by Carl Menger and Eugen von Böhm-Bawerk. Menger was the founder of the so-called Austrian School of Economics and also of the theory of marginal utility, a theory he published independently the same year 1871 as Walras and Jevons.
The basic idea is two or more buyers on the one side, and two or more sellers on the other side. The buyers tend to bid up prices towards their individual perceived utilities (objective or subjective) as they compete at getting the good or service at hand, while the sellers tends to bid down the price towards their cost for the good or service. Since it’s not the average seller or buyer that finally determines the price, but rather the people acting on the margin, we can refer to these buyer and sellers as marginal pairs and note that it’s the marginal utility and marginal cost that’s involved, not the averages.
Now, if there is only one buyer there might be very little of bidding up the price, and if there’s only one seller, there might be very little of bidding down the price. In most real-life situations there often is an element of buyer or seller power influencing the price determination.
One thing that I think few people can answer is how the (marginal) cost itself is determined. This is where Eugen von Böhm-Bawerk enters the picture. He wrote extensively on this, and it’s very clear and easy to follow. In his essay Value, Cost, and Marginal Utility, he has a chapter called ‘Which Is “More Ultimate,” Costs or Marginal Utility?’ that deals with this. The basic idea is that the marginal utility of a good or service to the seller also affects whether the price is bid down by sellers. The raw materials etc involved often have an alternative use that also plays a role in this. For example, we cannot drive a car without a steering wheel, so the utility of the steering wheel must make the price of it very high, right? Not really, since the marginal utility of the seller of steering wheels of this particular marginal steering wheel is very low. The seller likely has thousands of it, and perhaps even wouldn’t miss it if it was stolen or lost from inventories. However, the seller isn’t prepared to sell it at the price of zero, since he has bought inputs like plastics to make it. So how much is this plastic worth? Well, it depends on all the other potential uses of such plastics and the marginal pairs involved in determining the price of the marginal potential other uses. In practice, the seller of steering wheels often just takes the price of plastics for granted and puts the price at the marginal cost plus a mark-up to earn something. Nevertheless, there’s more to it than meets the eye, as Böhm-Bawerk explains to us so well.
It should be noted, that there’s very little about this in standard text books about economics. But understanding marginal pairs is important for many reasons, like for example bid-ask-spreads when trading stocks.
An excellent starting point. I will be following this series keenly.