Tag: measure

Measure, as used on this blog, refers to the quantification of any stock or flow in an economic system. I frequently use the term in referring to the measure of economic value, which one can only measure individually and ordinally.

The Source and Measure of Value

~ Jim Berger ~ Leave a comment

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.

 

Value Measure-Review

~ Jim Berger ~ Leave a comment

Because I will frequently return to the subject of value, and its measure, over the course of these blog posts I have decided to publish the text of the same article I posted May 16, 2016 (with some edits).

If individuals provide the only sources of value, how do those individuals measure value? Does every person have a standard unit of value to compare the economic value of one good to another?

In fact, value has no unit of measure. Unlike height, weight, volume, etc., people have no way to compare their values with those of other people — or, indeed, with the goods they value themselves. Value has no objective source; and value has no objective measure. Only the subjective preference scales of individuals provide a measure of economic value. An individual can only value one economic good more or less than another economic good. A person cannot quantify how much more, or less, he or she the values that good.

Example

Preferences
Hypothetical Preferences

A hypothetical example (see right) might prove useful. This list shows the preferences (listing the most preferred at the top) of one individual for some fruits in a selection at a specific time and place.

The order of these preferences might change in a different time or place. Also, this person cannot tell how much they prefer the peach to the pear.

Important Factors

I will touch briefly on several important factors about preference scales—like this example.

First, preference scales only exist in an instant. A person can prefer ice cream to cantaloupe in one moment and cantaloupe to ice cream in the next.

Second, the unit of measure (e.g. quantity, volume, length) of a good affects its place on the preference scale. A person might place a bowl of ice cream high and their preference scale but a gallon of ice cream relatively low.

Third, distance affects preferences. Goods nearby have more value than goods in the distance.

Fourth, time likewise affects preferences. A good in the present has more value than the same good in the future.

Fifth, each additional unit has less value than the previous unit — all at the same time and place in the same units. The second bowl of ice cream has less value than the first. The 100th bowl of ice cream has less value than the 99th, the second, and the first. Not after eaten, but in the moment when the individual decides to buy them.

Sixth, context — weather, hunger, social situations, etc. — has an effect on relative value. A cold man might place more value on an ugly coat than a warm man, who might prefer a more fashionable coat.

Other factors can affect value scales, but these are some important ones.

Summary

  • Individual preference scales provide the only measure of value.
  • Those preference scales have no units of measure; only ordinal ranking.
  • Preferences exist only at a point in time.
  • Many factors affect preference scales including space, time, units, and context.

In the next post I will address the relationship between value and price.

Money Not a Measure of Value

~ Jim Berger ~ Leave a comment

Some people argue that money—or a monetary unit e.g. dollars, pounds, lira—plays the role as a measure of value. A money commodity cannot measure the value of economic goods because money commodities are also economic goods. To say that a dollar is worth a dollar becomes a statement of meaningless circularity. You cannot use the item being measured as a unit of measure.

But, why do we say things like, “that car is worth 23,000 dollars” or “that stock is worth 45 dollars”?

I suspect that the idea that a monetary good could represent a unit of value finds its origin in the mistaken idea that exchanges occur at an equilibrium of value.

I remember in my undergraduate economics classes trying to learn the concept of indifference curves. As I recall, if you calculate and plot the quantities at which persons don’t care (have an indifference) whether they have product A or product B you create an “indifference curve.” The curve expressing the indifference for A vs. B might represent the “supply curve” and the curve expressing the indifference for B vs. A might represent the “demand curve.” At the point where the supply curve intersects the demand curve each party values both goods the same—they have an indifferences at to which good they have. For some reason, according to classical theory, at that those quantities, they will want to make an exchange.

Forgive my somewhat confusing explanation, but it never made sense to me in the first place.

Classical economic theory makes this argument: that exchanges occur when the quantities of two goods reach an equilibrium of value. Thus, since we don’t have a unit of measure for value, it might seem fair to say that, when they are exchanged, A has the value of B, or vice versa. Based on that reasoning it would also make sense, when most exchanges involve a commonly accepted medium of indirect exchange (like a dollar), to replace that unknown unit of measure for value with the quantity of dollars exchanged.

This whole chain of reasoning, however, falls apart when we come to realize that exchanges do not occur at an equilibrium of value. When a person trades a dollar for a pack of gum, he makes that trade because he values the pack of gum more than the dollar. If the buyer valued the dollar exactly the same as the gum, he would have no reason to make the exchange. He will make the exchange only when he sees a greater value—no matter how small—in having the gum over having the dollar. Therefore, a dollar cannot represent the value for an item of less value than a dollar.

We should correct the hypothetical statements I made above: “to the buyer that car is worth more than 23,000 dollars” or “to the buyer that stock is worth more than 45 dollars.”

We also need to correct our understanding of widely publicized economic data. GDP for example: “GDP represents the monetary value of all goods and services produced within a nation’s geographic borders over a specified period of time.*” But, it does not.

More precisely GDP represents the total amount of money (in the local currency) spent for goods and services valued more than that amount of money exchanged by the individuals for those goods and services.

Think about it.

 

Finally, we moved to the only plausible theory of economic value: The Subjective Theory of Value

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* From InvestingAnswers: http://www.investinganswers.com/financial-dictionary/economics/gross-domestic-product-gdp-1223

Value: The Measure

~ Jim Berger ~ Leave a comment

If individuals provide the only sources of value, how do those individuals measure value? Does every person have a standard scale of value to compare the economic value of one good to another?

In fact, value has no unit of measure. Unlike height, weight, volume, etc., people have no way to compare their values with those of other people — or, indeed, with the goods they value themselves. Value has no objective source; and value has no objective measure. Only the subjective preference scales of individuals provide a measure of economic value. An individual can only value one economic good more or less than another economic good. A person cannot quantify how much more, or less, he or she the values that good.

In my next post I will discuss how the subjective values of individuals become useful to other people. But first I want to touch briefly on several important factors about preference scales.

First, preference scales only exist in an instant. A person can prefer ice cream to cantaloupe in one moment and cantaloupe to ice cream in the next.

Second, the unit of measure (e.g. quantity, volume, length) of a good affects its place on the preference scale. A person might place a bowl of ice cream high and their preference scale but a gallon of ice cream relatively low.

Third, distance affects preferences. Goods nearby have more value than goods in the distance.

Fourth, time likewise affects preferences. A good in the present has more value than the same good in the future.

Fifth, each additional unit has less value than the previous unit — all at the same time and place in the same units. The second bowl of ice cream has less value than the first. The 100th bowl of ice cream has less value than the 99th, the second, and the first.

Sixth, context — weather, hunger, social situations, etc. — has an effect on relative value. A cold man might place more value on an ugly coat than a warm man, who might prefer a more fashionable coat.

Other factors can affect value scales, but these are some important ones.

Summary

  • Individual preference scales provide the only measure of value.
  • Those preference scales have no units of measure; only ordinal ranking.
  • Preferences exist only at a point in time.
  • Many factors affect preference scales including space, time, units, and context.

In the last two posts I covered the essence of the subjective nature of economic value. The complexity of the subject runs a lot deeper than my coverage so far. I shall return to the subject of value frequently as I add blog posts.

In the next post I will address how the subjective values of individuals become useful to an economic system.