Introduction

“Subjective valuations of goods and services determine the demand for them; in turn, consumers determine types of goods, quantities, and prices.” Author Unknown

The scale of tastes and preferences provides the only measure for economic value.

If the subjective judgments of individuals determine all economic value, how do we measure relative values?

If you think that classical economics gets confusing regarding the source of value, it gets really twisted when discussing the measure of value. They often apply units of another economic good, e.g., money, as a unit of measure for value. This does not work because money is an economic good, and its value rises and falls with individuals’ preferences.

Only individuals’ preference scales can provide a consistent measure of relative value. This measure is ordinal in nature and may not even be known to the individual until he acts.

The idea of measuring economic value using an ordinal scale makes many people uncomfortable. How can one make economic calculations based on measures that cannot be quantified? The answer lies in the concept of prices—discovered only through transactions.

I will discuss the concept and importance of prices later.

Body

There exists a popular saying in the business lexicon: “If you can measure it, you can manage it.”

Since legislators think they should manage economic activity throughout the country, they have turned to a common medium of INDIRECT exchange as a proxy for “value.” Despite their universal acceptance, “money dollars” are commodities, not measures.

You don’t go to a restaurant and request 1 chicken’s worth of steak. Chickens and steaks have different values for each customer in the restaurant.

If, on the other hand, you order a pound of steak, that steak will weigh a pound no matter to which customer the waiter delivers it.

When government statisticians say the country produced $3 billion more steel this year than last year, they tell you nothing about the quantity produced.

The financial statements of individual businesses, governments, or the aggregation of either of those two tell only the quantity of dollars exchanged; they tell you nothing about the quantity of any good for which those dollars were exchanged.

Conclusion

I have a difficult time explaining that the number of dollars involved in an exchange tells nothing about the tastes and preferences of the people involved in those transactions. To get an idea of tastes and preferences, you must have prices—the exchange of one good (usually a money good) for another good—which business managers can use to get an objective expression of relative tastes and preferences.

I will read comments and attempt to clarify the subject of individual tastes and preferences.