(Part 1) (Part 2) (Part 4) (Index)
Human beings were made in the image of God. Each person has intrinsic value. Our value is unrelated to the economy. But goods, resources transformed from their natural state to a more useful state, have instrumental value. The same is true for the labor used to make them. That was the subject of the first post.
In my second post, I said two factors influence the value of a good:
- The subjective value a community places on that good.
- The objective reality of the availability of that good.
The community places a value on a good through market exchange. The value fluctuates as collective priorities shift. The price mechanism creates a real-time feedback loop about community priorities.
Today, we need to look at the objective aspect of value. The availability of goods or specialized labor to accomplish some task impacts its value. Compare a bottle of water and a diamond. Water is far more important than diamonds. You cannot go more than a few hours without water, but you can live long without seeing a diamond. Yet diamonds are far more expensive. Why? Diamonds are far less plentiful and more difficult to procure than a few ounces of water. The limited demand for highly inaccessible diamonds makes the next diamond consumed expensive, while the universal demand for the next twenty-four ounces of abundant water does not.
I frequently hear conversations lamenting that teachers are paid so little while professional basketball players (CEOs, entertainers, or whoever you might want to insert) earn millions. Note that the underlying presumption is that salary should be correlated with the importance of work. What about the supply of workers who can do the work? Let us do a comparison.
The average annual salary for a schoolteacher is $56,000. Kobe Bryant, the highest-paid player in the National Basketball Association, has an annual salary of $30,000,000. Which of these two professions is more important to the life of our community? Most people say it is a schoolteacher. So if the value of the labor comes from the subjective value of the community, isn’t this compensation horribly out of line with what we say we value? Not necessarily. This is similar to saying twenty-four ounces of water should cost much more than a diamond.
There are 3.7 million schoolteachers in the USA. There are likely millions more people who could do a competent job educating children after receiving appropriate training. But each teacher can only serve a few dozen students a year. Consequently, finding one additional teacher is relatively easy, and adding one additional teacher to 3.7 million teachers has a marginal impact on the overall task of educating children.
In contrast, there are 150 positions for starting players in the NBA. Each player can potentially provide millions of people with a service (i.e., entertainment). Someone who can play exceptionally well can draw in more than the average player. The supply of Kobe Bryants (or his equal) is very scarce, and the contribution of a Kobe Bryant to the overall business is very large.
The divergence in salaries between teachers and basketball players is not because someone is more important and not because someone’s labor meets a more important need. It is driven by the labor supply to meet each type of need. Furthermore, reducing the size of NBA salaries will not lead to an increase in teachers’ salaries. The dynamics of a relatively large supply of potential teachers, with each additional teacher having only a marginal impact on the overall service, still doesn’t change.
In summary, then, the price of goods and labor is set by the collective value of the community as it interacts with the objective supply of these things. The fact that human beings have intrinsic value does not mean their labor has intrinsic value.
Furthermore, and this is key, the market system is the only mechanism we have that directly connects what gets consumed and produced in real time. In the past, the price was set by custom, some notion of intrinsic value, or to suit the appraisal of some official. These methods, as well as communist models that seek to eliminate the market, require some form of conjecture that inevitably leads to chronic oversupplies and shortages. The market system is unique and vastly more efficient in coordinating economic activity between countless participants.
Now it would be very easy to stop here, singing the praises of market exchange. Many do. But there is much more that needs to be said.
Markets are a poor substitute for face-to-face community where people know each other and can coordinate economic decisions incorporating personal knowledge. For instance, suggesting that all family interactions be conducted on a market basis is an inferior form of family decision-making. But once communities grow beyond a few dozen people (more than 100 probably stretches the limit), it is humanly impossible to maintain intimate connections. Markets allow for coordinating behavior between countless strangers.
Markets are a remarkable human achievement, but markets are far from perfect. Ideally, markets have complete transparency, participants have complete mobility, and there is no coercion. These qualities never perfectly exist. There are some circumstances where markets do not work well at all.
Public goods - Weather forecasting … incorporating satellites, radar, countless weather monitoring devices, computer technology, etc. … greatly benefits a whole community. But if one person specializes in this work, everyone benefits for free, and all the cost ends up on the one specialist. The practical way to overcome this is to assess a levy to the whole community to cover the costs.
Market power - Sometimes, there is inordinate market power in the form of monopoly (one seller, many buyers) or monopsony (one buyer, many sellers). Those with market power can distort the price of goods or labor because they know the other party has no alternatives.
Externalities - This is where part of the cost of a transaction fall on someone external to the transaction. When a factory dumps pollutants in a river, it degrades the river’s use for people who live downstream. The people downstream end up bearing part of the cost of a transaction between the factory owner and the factory’s customers, to which people downstream had no say or benefit. Alternatively, when my neighbor hires someone to landscape his yard, he increases the value of my home. His aesthetic improvements spill over to the value of my property. There is likely some measure of positive and negative externalities to almost every transaction. They are incidental in most cases, but they seriously distort valuation in some cases.
Information Asymmetry - Sometimes, one party has better information than the other just by the nature of the product or industry. That can lead to the less informed party making an erroneous valuation relative to what they thought they were getting.
Even with a world of perfectly virtuous people, the market alone would be insufficient for managing our economic processes. But it is equally true that we could have nothing approaching the modern world without robust market exchange. If we all lived in self-contained face-to-face communities of a few dozen people, we might know each other well enough to manage our economic issues without prices or currency. But when we talk about cooperation beyond face-to-face communities, there must be a dynamic information loop, and the market uniquely meets that need. Critics of the market are quick to point out market limitations. Fair enough. But they are not serious about economics or justice unless the critic can offer an alternative method by which a dynamic economy can function.
To summarize, human beings are made in the image of God. As such, we have intrinsic value apart from any economic consideration. Our labor and the goods we produce have instrumental value, and that relative value is set by the community through exchange in the marketplace, incorporating subjective and objective information into a real-time feedback loop. The market is far superior to the alternatives in setting value but far from perfect. That means there is “noise” in the feedback loop. But from the standpoint of Christian ethics, market imperfection isn’t the only source of noise in the market. (continued)
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