Introduction

All economic theory rests on some assumption about value, but, similar to Newton’s vague allusion to gravity, few economists clearly and precisely define the source and measure of value. Even my friends who espouse the Austrian methodology tend to regress to some intrinsic theory of value after they have given a clear and concise definition of subjective value.

Always and everywhere, individuals provide the source and measure of value. Only an individual can determine whether one thing has more valuable than another.

In this article, I will provide several examples of individual judgment, illustrating the source and measure of value.

Dollars Not Value

Before I begin with the examples, I need to clarify a common misconception. Dollars (or whatever monetary unit you use) do not measure value. A dollar represents a measure of weight. For example, in 1944, the Bretton Woods agreement set the price of gold at $35 per ounce, which equated to $1.00, amounting to 0.0286 ounces of gold.

Over the years, people have become confused by the somewhat antiquated reference in the Constitution that sets the “value” of the US dollar. The authors of the Constitution intended Congress to establish how many ounces of gold would amount to a dollar.

Consumers

As a consumer, you can test this assumption yourself. When you make a purchase, who decides how much money you’re willing to give up for the items you buy? If the per-pound prices of pears and bananas are the same, and you only have enough money to buy one, how do you decide which to purchase?

If at the checkout counter you give up your money for the bananas, both you and an objective observer can say with certainty that you prefer (or value) bananas over pears.

Workers

Economists tend to equate all workers. Several factors contribute to determining the subjective value of work. A worker with a specific skill set will ask for compensation that reflects his individual assessment of the value of his labor. The employer will offer pay that equals what he estimates the worker will contribute to the business’s revenue. In the end, the worker and the employer settle on a pay rate at which the worker receives pay that exceeds his assessment of his work’s value, and the employer values the work of the worker more than the money he pays the worker.

No one gets “ripped off.”

Producers

Producers at all levels (Retail, Distribution, and Manufacturing) establish prices based on their individual preferences. They have no bat signal (i.e., supply and demand curve) that appears in the night sky to tell them what prices to ask. They must study sales volume figures over time to make judgments about price.

If unit sales volume rises, they can probably increase prices over time. Conversely, if sales volume trends lower, the producer may need to lower prices.

Prices

I cannot overstate the importance of price patterns in the effective and efficient operation of a market. Consumers set prices at the consumption level through their buying or non-buying decisions. The market at the consumer level operates more like an auction than many people realize. Retailers post their “offering prices” on price tags. Consumers enter their “bid prices” by either buying or not buying.

Prices create signals that pass through the structure of production, informing producers whether to increase or decrease production levels and “offering prices”.

Government

Government represents a huge form of subterfuge in terms of value. Politicians campaign on the promise that they will represent the economic values of voters. Executives and legislators at all levels of government CANNOT know what each voter they “represent” values. They will, in all cases, exercise their authority based on their own value—not that of any voter. Politicians run for office because they think they know more about what you prefer than you do.

Government authorities become particularly dangerous when they interfere with markets. They cannot make decisions in the market for one simple reason: they lack a price mechanism by which to make production/consumption decisions.

Two examples of the government’s inability to make sound market decisions are about to be exposed. First, tariffs have, and will continue to, distort the allocation of resources in this country by imposing artificial costs on American producers and consumers. Second, the rise of socialism in the country (in New York and other parts of the country) will cause extreme forms of misallocated resources.

Financial

The “financialization” of the American economy has and will cause damaging effects on perceived market value. As the government continues to pay for its excessive spending through the expansion of the money supply, the price signals that I referred to remain unreliable signals for consumers, producers, and financial markets. As the prices of individual goods and financial instruments rise, people falsely believe all is well. The correction will cause pain (for a few or many) when it finally comes.

Conclusion

The only value theory that passes the test of reason attributes value to the subjective judgments of individuals. The premise proves true always and everywhere—from consumers to producers to politicians and financial markets.

We must recognize that market power, political power, and financial power always reside in individuals.