More on economics and value

I’d planned to do this with my post on beating the recession, but since no one seems to be interested in that topic (who knew?), I’m instead going to post some comments from my thread from earlier this month on economics and the true meaning of “value.” In my original post, I asked:

This, however, leaves unanswered the question of what we mean by “value.” Since we’re not, in fact, talking about money, what is it? And what makes more of it possible? Is it technology alone? New workers? Education? Some combination of all of the above and more?

Josh Futrell chimed in with a helpful review of microeconomics, excerpted here:

I think that “value” is result of the human energy and creativity to manipulate raw materials and create utility where there was none before.

Let’s say that I am a farmer in the example above who transforms the land to grow crops, which then provide value to them in the form of food. If I did not do so, my family and I would risk starvation or have no commodity to trade for other goods and services. So, through our work, we are adding value to own lives and, as a result, to the society as a whole. This is on a purely substantive level.

[...]

Finally, let’s say that I am a farmer who admires the jewelry made by my counterparts. I see value in it because of the way it looks and the way it makes me feel when I see it, wear it, or give it as a gift. Further, let’s say that I cannot make this jewelry on my own: either I do not have the innate skill necessary to create an object that elicits the same utility or the effort/energy to acquire the skills and tools to make such an object greatly outweighs the price the other farmer is asking in trade. I offer a trade and if the basket maker sees value in my offered trade (be it food or a basket), they accept. Value is then created for both.

This is how the artist traditionally adds value.

[...]

I think that the bottom line is that it is the exertions that we, as human beings, make improve our lives and welfare beyond the bare minimum needed to sustain life that create value. We do this by 1) making a living by exchanging our effort, time, and knowledge for goods or money, 2) purchasing goods or services that have utilitarian purposes or creating entities that provide them, and 3) purchasing goods or services that have emotional/artistic value or developing the skills needed to provide them.

To which I responded:

Thanks, Josh, this is great. I realize now that I was a little imprecise at the end of my post. You’ve basically said that value = utility, whether utility in the sense of efficiency (i.e., I can be more productive with the time saved from my basket), or a psychic utility like happiness. OK, I agree with you. The bigger question for me, though, is the second one: what makes more of it (value/utility) possible? We’ve identified a couple of examples already. Baskets are a technology. It improves productivity, which means that I can do more work in the same amount of time. That increases value, assuming there’s a market for the additional work. (But what if there isn’t? Does that make the technology useless? I guess so–until someone else adds value by building off of it to make something that people will use.) Jewelry is a new product. There’s no direct productive use for it, but it makes the customer happy. It makes the customer happy, presumably, in a way that wasn’t possible before. So we have created value. But what if the farmer doesn’t like the jewelry, and therefore it goes unsold (=0 value), but then 30 years later after the jeweler’s dead, the farmer’s son discovers it in his abandoned house and wants to keep it? Does the jewelry suddenly gain value simply because now there’s a customer for it? But how would we know, since there was no transaction to record how people valued things?

This is where the arts and economics start not getting along so well. Despite having dissociated the notion of value from the notion of money in theory, in practice any kind of real-world economic analysis has the two intimately linked. Which means that if some kind of transaction or activity doesn’t involve money, it doesn’t get counted – even if it creates, as Josh describes, a whole lot of utility. Certainly lots of artmaking falls into this category – as does volunteering, in-kind donations, and open-source software development, all things that can clearly increase value (especially if there are productivity gains involved). Now, that value will most likely show up in economic transactions somewhere, eventually – whether it’s by businesses that are made possible by the existence of Linux, or real estate values that go up because of the contributions of artists, etc. – but the problem is that the source of that value is exceedingly hard to track. Especially in tricky network economies in which every new entrant makes everyone else’s membership in the network more valuable.

As far as I can tell, value comes from two things: 1) productivity and 2) happiness. They are not the same thing, and can sometimes be in conflict. I’m not sure what exactly the right balance is, nor exactly how one would go about figuring it out. But here’s what I am thinking:

  1. I would like to know what economists think and say about volunteerism, specifically how they value people’s time when they aren’t getting paid for that time. What is used as the baseline?
  2. I would like to know more about “happiness economics” (which I understand is big at Princeton) and Bhutan’s concept of Gross National Happiness.
  3. I would like to think about what kinds of things make more productivity possible. Not just the obvious stuff (more capital! more labor!) but looking beyond that: what makes more capital possible? what makes more labor possible? what makes efficiency improvements possible?
  4. I would like to learn more about how the monetary supply and the overall value of things (“quality of life,” I suppose) are kept in balance with each other, if indeed they are.

Stay tuned.

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One Comment

  1. Will
    Posted July 23rd, 2009 at 9:02 pm | Permalink

    My first reaction has to do with negative values that aren't tracked — ie: hidden costs such as environmental costs. One that comes to mind is coal. Coal's value is regulated in a marketplace that doesn't have to bear the environmental costs of mountaintop removal [landscapes destroyed, streams made permanently polluted, etc.], or atmospheric mercury and carbon pollution for that matter. One person's happiness [electrical power] at the expense of another's [natural beauty and utility of one's local region destroyed, streams polluted etc. etc.].

    It's why macroeconomists speak of things like a carbon tax, to bring these hidden, negative costs to bear in the narrower, dollar-driven marketplace.

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