(Part 1) (Part 3) (Part 4) (Index)
I began this essay by noting that humans have intrinsic value. However, goods (and the labor entailed in making them) do not. Goods and labor have instrumental value. Let us explore this in more detail. Two clarifications before we begin.
First, I want to distinguish between goods and natural resources. Goods are the things we use to meet our particular wants and needs. Resources are the materials, energy, plants, and animals we form into goods. Nearly all goods have an element of human labor contributing to their value. While natural resources are abundant, the quantity of goods is directly connected to humans' productivity, transforming natural resources (and, more recently, data) from less useful forms into more useful forms.
Second, there is a difference between the value of any particular good to a particular individual and the value of a category of goods to the community. The value attributed to a stapler may vary considerably from individual to individual at any given moment, but the market price tells us the collective value the community places on particular goods at a particular time. (More to follow.) For our purposes here, I'm concentrating on the communal value as reflected in a market price.
So what value do goods have? It has long been a confounding question. Some people have said that goods have intrinsic value and can be stated in terms of a market price. Other people have seen more subjective factors at work, believing the more important a good is, the more value it should have. Still, others have observed that the supply of a good is key to understanding its value.
Many thinkers have wrestled over the years with making sense of value's subjective and objective aspects but not to very satisfying conclusions. Since most economies before the seventeenth century were relatively stagnate and trade played a smaller role, life seemed to move along just fine without the precision of thought in this area.
From the late Middle Ages of Europe into the early stages of industrialization, thinkers began to appreciate that the value of goods and labor was not as fixed as previously thought. Economic data began to be collected and scrutinized. Accelerating Change in productivity, coupled with the Enlightenment's push to make rational sense of human affairs, pressed thinkers for a more precise understanding of how value is determined by the eighteenth century. Thinkers, most notably Adam Smith, saw labor as the key issue. One hour of labor by any person was seen as mostly interchangeable with an hour of labor by any other person. An hour of labor was understood to have intrinsic value. Price was not inherent in the thing itself; instead, the price of a good was set by the amount of labor applied to creating it. This was the labor theory of value. (Both Adam Smith and Karl Marx subscribed to this idea.)
However, by the late nineteenth century, a profound reality dawned on thinkers: The communal value of a good is whatever price the buyers and sellers agree to through exchange. This was not a new idea. Thinkers of the past had stumbled upon it. Several Scholastic philosopher-theologians had written about this, dating back to Thomas Aquinas in the 13th Century, but they seemed to have little influence on economic affairs.
This revolution in understanding meant that goods, and the labor that produced them, have only instrumental value. Instrumentality is a subjective judgment. But these more recent theorists understood that an objective reality also influences a good's value. The intersection of two variables determines the general price of a good:
- The subjective value a community places on that good.
- The objective reality of the availability of that good.
This means that the value is dynamic. It is subject to the changing needs and wants of the community and the quantity of goods available for use. But when we understand the value of things this way, something even more remarkable occurs. Prices (i.e., value stated in terms of a currency) form a continuous feedback loop between buyers and sellers. Why is that important?
On any given day, each individual has a fixed number of hours, a fixed level of technological understanding, and a fixed number of resources available for producing goods. The latter two can be altered over time, but on any given day, they are all fixed. A community's productive capacity (whether a village or the entire planet) is the sum of these individual capacities. Priorities must be set because capacity is limited. Otherwise, we will end up with too much of some things and too little of others. Material resources and labor will be wasted, and needs will go unmet. This is a challenge for any society.
Management of economic activity may not pose a particular challenge in a face-to-face community of a couple of dozen people. If there is community solidarity, each individual is likely known to the others. All individual needs can be known and considered. It will be clear how well each person is working, who is incapacitated, and who is best suited for which jobs. It will be known who needs what and how much.
However, this natural information system breaks down when communities grow much beyond a few dozen people. There is no way to be well acquainted with hundreds of people, much less thousands or millions. Not only is it beyond our capacity to know so many people but each of us has economic priorities that are constantly shifting. Discerning and planning for the community becomes unmanageable. Prices derived through market exchange become the real-time communication channel through which we can coordinate our work with the world beyond our face-to-face communities to meet each other's needs. Distorted prices mean distorted communication.
Imagine we own a factory that makes toy wagons. Two workers make wheels. The workers are equally earnest employees who work the same hours each day. But one worker meticulously crafts perfectly square wheels while the other worker, with equal diligence, makes perfectly round wheels. Are we to say that each hour of labor has intrinsic value and each worker should be compensated the same? No.
The labor of the worker making round wheels is clearly offering something of value that the other worker is not, to us as the employer and ultimately to the consumer. While the square versus wheel example is an extreme case to make a point, the issue is that one hour of labor is clearly not identical to any other hour of labor. Compensating the workers according to the value of their work motivates them toward an activity that the community values and away from activity it does not. The maker of square wheels has the incentive to alter her labor to provide products that bring more value to others, while the maker of the circular wheels has the incentive to get even better at the craft and earn more.
If a genuinely open market exchange happens, then the price of goods and labor will reflect the community's priorities. Attempts to distort the prices up or down will lead to some distortion of what the community has said it values in favor of some individual or group, possibly leading to waste and poorly met needs.
Please note that I began the first sentence of the above paragraph with "if." That is a huge "if." Furthermore, are we saying that the community always values all things correctly? And what about those who simply can't offer labor that earns them enough to sustain life? All good questions, and we will come to them. But we first need to finish the discussion of value. I've opined on the subjective value component. Now we turn to the objective aspect of value. It adds a significant wrinkle to our discussion.
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