Thursday, September 17, 2015

Value: From Where does it come?

What is value? For centuries, many thinkers pondered this concept. Economists from Adam Smith, David Ricardo and many others attempted to answer the famous, "Diamond/Water" Paradox, as this was related to the notion of value. Why are diamonds more "valuable" than water? Yet, water is needed for the survival of humans? This sort of questioning was central to these thinkers process in attempting to define "value".

Fast forward into the 1800s, and the seminal work of Karl Marx, "Das Kapital".  Marx argued that the value of the end product, was based upon the value of the labor that was used to bring that product, or service, to "market".  While Marx was not the first one to propose this notion, as Ricardo and Adam Smith had a similar position, many followers of Marx strongly believed that labor defined the value of the end product. And, these followers also believed the "Capitalists" were exploiting the workers by not "sharing" in the profit of the workers labor. 

Price: Does it determine "value"? 

Many individuals take the position that the higher the item's price, this, in turn, means the product(service) is "valuable".  Consider this example: Suppose one purchases a Diamond for $10,000, and a bottle of water for $1.00. For human survival, is the diamond more "valuable" than the water? Of course not! Yet, the diamond has a higher price! With conventional thinking, or the way the previous thinkers opined, the diamond was more valuable. 

In short, price has little or nothing to do with value, per se.  The retail price sold also does not express the actual labor used to make the product. Let us consider this example: Suppose that a store has more than its supply of bottled water. The store decided to lower the price from $1.00, to 50 cents due to excess supply of bottle water.
Prices are simply a tool to communicate to parties involved in voluntary exchange to other things: scarcity and value relative to other resources. So, yes, it is related to value, but it does not express value soley.

The Marginalist Thinkers figure it out

Thinkers in the late 1800s began to re-examine the Diamond vs Water paradox, as it relates to the notion of value. Thinkers like the following: Stanley Jevons, Carl Menger and Leon Walras, worked independently and drew similar conclusions regarding value. It was determined that value was subjective, and the end product or service did not determine the price from the value of its inputs. Since value is subjective, it simply can not be quantified on prices alone.  It is all based on how we "rank" those items in order of preference.


Value is something that we as individuals subjectively rank, file and view in our minds. This is based on other items outside the scope of economic analysis. It drives deeper into the beliefs, morality, psyhcology and etc of us. 

No comments: