The Source and Measure of Value

Before I continue with my assessments of socialism and capitalism, I must return to a subject that I will touch on many times on this blog: the source and measure of value.

For an economic system to operate, market participants must have a consistent and reliable measure of value. They must know the value in order to allocate resources effectively and efficiently. The need for a consistent measure of value holds true regardless of what economic theory you advocate.

Marx: Labor Value

Karl Marx proposed what we call the “labor theory of value.” In simple terms, this means that the actions of labor put value into goods and services. It sounds like a good theory when you consider that all goods and services require labor in addition to land — and the byproducts of land.

The labor theory of value, however, breaks down when you try to apply it to actual forces of production. The value of labor has neither a consistent source nor a consistent measure. If labor provides the source for economic value, how can you have a consistent source when no two laborers produce the same product? Measuring labor value has a related problem. How do you measure the value of labor on interchangeable products? For example, if two cabinetmakers build essentially identical cabinets yet one cabinetmaker takes twice as long as the other, does that make his cabinet twice as valuable as that produced by the other cabinetmaker.

Karl Marx himself tried to address this discrepancy, but never succeeded in producing a reasonable adaptation to his original labor theory.

Intrinsic Value

Many other value theories start with the basis of intrinsic value. Any good or service has intrinsic value as a part of its nature. It has that value before it’s owner even offers it for exchange. The problem with intrinsic value originates with the source.

People buy and sell goods not because of their nature but for their utility. A carpenter who uses a hammer to make his living might value of hammer a lot more than a homeowner who wants to use it as a doorstop.

Likewise, if a good always has a certain intrinsic value, it would always trade at the same price (in terms of goods or money). Anyone with the smallest familiarity with commodity markets would recognize that the same good frequently does not have the same value at different times in different places.

Subjective Value

Only the subjective theory of value remains consistent as to source and measure. This theory establishes that always and everywhere individuals provide the source and the measure of value. Individuals provide the source because the judgment as to value comes from nowhere else. Individuals provide the measure because only an individual can establish the relative value of one good over the other. And no one, not even the individual making the value judgment, can quantify that relative value. Keep this important point in mind.

The subjective theory of value proves difficult for many people to either comprehend or internalize. Some people reject the theory entirely because they have blindly accepted other theories of value. Many others seem to know and comprehend the subjective theory of value but they fail to understand and internalize it.

I frequently read articles by people who can give a clear and concise definition of the subjective theory of value, but in the next sentence, they make a statement that attributes value to a source outside the individual. One must remember that always and everywhere value the individual provides the source of value and measures it by his relative preferences.

In order to compare and contrast socialism, free-market capitalism, and whatever mixed system operating in the United States, I must use the only consistent value theory — the subjective theory of value. I cannot deny the importance of labor and land in the creation of marketable goods and services. But, it makes no sense to use labor, which varies in its consistency, and land of variable quality as the sources of value in economic transactions.


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