On value

Nowadays people know the price of everything and the value of nothing.

Oscar Wilde, The Picture of Dorian Gray

Following on from last week’s discussion of wealth, I want to investigate the related notion of value. As Oscar Wilde pointed out, we often tend to conflate value and price, but these things are distinct in important ways and confusing them blinds us to much that we need to be aware of. I want to tease out some of these distinctions and some of the things we miss by ignoring them.

A price is a number that is supposed to correlate with or describe value. It is expressed in monetary units, which are an abstract representation of value. Prices are supposed to be determined by markets, which will be getting their own blog post in due course, and these determinations are considered to be infallible.

Now confusing the representation of a thing with the thing itself is a fundamental error. (The philosopher Gilbert Ryle coined the term “category-mistake” for this kind of thing.) Ordnance Survey sheet 158 is not the town of Newbury. It is a description of Newbury, which necessarily leaves a great deal out. Nobody lives in Ordnance Survey sheet 158. It has no MP, pays no taxes, and is only 1/50,000th the size of the real thing. Even in these times of economic difficulty, I don’t think you could buy the town of Newbury for £8.99. Clearly nobody would confuse the map with the actual town. But we make essentially the same basic mistake when we confuse price with value.

I mentioned the price of the map because that is supposed to stand for its value. But of course its value is not a constant thing. Ordnance Survey charge £8.99 because they hope they can sell enough at that price to cover the cost of producing it and make some profit on top. That’s its value to them (and even so, they charge the same for all of their 1:50,000 scale maps, and no doubt some sell much more than others).

But what is its value to you? Unless you live in the Newbury area, or are planning to go there, probably not much. Even if you do fall into that category, is it worth £8.99 of your hard-earned money? To answer that question, you must compare two values: the value of the map, and the value of £8.99.

For the value of £8.99 is not fixed. If you are a multi-millionaire, it is to all practical purposes zero. If you are a rough sleeper with no source of income, it represents a small fortune. You are probably somewhere in between those two extremes, but you will still have a sense of what £8.99 is worth to you.

This brings out the point that although we express prices arithmetically, they are not absolute in the way that arithmetical values are. The number 42 is always and everywhere 42. It is never 43 or 41. My 42 is the same as your 42. Some thinkers would indeed argue that 42 has its own existence, independent of there actually being 42 of anything, but be that as it may we can I think all agree that 42 is always the same thing.

But £42 (or $42 or €42) is clearly not always the same thing to all people. In England in the early fourteenth century, for example, £42 would have represented twenty-one years’ wages for a labourer. By 1900, according to one source, it would be equivalent to £3609.26 in 2021 terms. And of course the value of £42 to someone in a non-sterling country is subject to the further vagaries of foreign exchange. So price looks as if it expresses some eternal mathematical truth, especially to economists, but of course it doesn’t.

Economists, of course, will riposte that the eternal mathematical truth in question is not price as such but the law of supply and demand. That is to say, a good or service is worth what someone will pay for it. The market determines price. On Planet Economics, we all go around making free contracts with one another on the basis of perfect information, and thus we invariably arrive at the correct and fair price for everything. It’s marvellous.

Of course, this rosy picture is far removed from reality. It has the advantage of being a lot easier to model mathematically than reality is, but that’s about all that can be said for it. If you are an economist and your job consists of building mathematical models then this will be sufficient reason to adopt this notion, but the rest of us would probably prefer something more realistic.

Prices are rarely correct or fair. We all recognise this when we say that something is cheap or expensive; we’re saying in effect that the price is lower or higher than than the value it represents. And in a world of perfect information, there would be no such thing as arbitrage, let alone insider trading.

The economist’s definition does have one virtue, though, in that it reminds that a price applies to a specific transaction at a specific time between a buyer and a seller. If nobody wants to buy a good or service, then it has no actual price. (The vendor can offer it at a price, but if nobody’s buying then it’s meaningless.) Likewise, if nobody is selling a good or service, it doesn’t have a price either. You can offer me as much as you like for my first-born child; it will avail you nothing, not least because I have no children.

Now, money in the sense of an abstract representation of value is quite a recent development in human history. Value is both logically and historically prior to price, and distinct from it. Many things don’t fall into the category of things that can be bought and sold, and some of those things are the most valuable of all.

In the industrial world, we have tried to address this by trying to bring as many things as possible into the marketplace. Consider if you will the almost religious awe inspired by Gross Domestic Product. This is an entirely monetary measure and has much less basis in reality than is commonly supposed. Yet GDP growth is the only thing we seem to care about. When GDP goes up, things are assumed to be going well; if it goes down, things are going badly. But it ain’t necessarily so.

For example: consider a couple with a young child. In Scenario A, one of them goes out to work and the other provides unpaid child-care at home. (It doesn’t matter which of them it is, which gender they may be, or whether the couple is gay, straight or what have you.) In Scenario B, they both go out to work, and pay some proportion of what they earn to a third party for child-care. In monetary terms, Scenario B is to be preferred, because more money changes hands and GDP goes up. In terms of quality of life, though, and arguably the best outcome for the child, Scenario A is better, even though GDP isn’t increased. But we can only see the numbers.

An even more egregious example of this thinking is the (in)famous 2013 report which valued the planet’s natural assets at $7.3 trillion US. Now as we have seen over the last year, US dollars can be conjured from nothing in arbitrary quantities – $3.5 trillion or so already – so it is quite conceivable that the Federal Reserve could come up with $7.3 trillion to buy another planet’s worth of resources. The only slight problem with this wheeze, of course, is finding a vendor.

Prices are supposed to perform the miracle of measuring the relationship between incommensurable things. On Planet Economics, it’s supposed to go like this. I have a sack of potatoes. You have an electric toaster. I want the toaster but you are allergic to potatoes. What can I do? Well, by turning my potatoes into money – i.e. selling them to someone else – I will have something to give you for your toaster that you are bound to want. (They’ll need to be pretty expensive potatoes to pay for a toaster, but that’s another discussion.) I give you some nice pictures of Her Majesty Queen Elizabeth the Second, you give me the toaster, and everyone goes on their way rejoicing, with the possible exception of the sucker who paid twenty quid for a sack of spuds.

This kind of story goes back all the way to Adam Smith. It is of course nonsense; Adam Smith himself knew it to be nonsense; even economists must realise it’s nonsense, but they’re still telling it today to explain the origin of money. In reality, as the late David Graeber showed in Chapter 2 of his excellent book Debt: The First Five Thousand Years (Melville House Publishing, 2013) this has been a non-problem for almost everyone throughout history, because this kind of transaction is the exception, not the rule. As with the map of Newbury, this story leaves a lot of things out.

What sort of person, for example, only has potatoes? I’ll tell you: someone at a market with a potato stall. (And when have you ever seen a market stall that only sold potatoes?) The rest of us have other things, and we meet in other settings than the marketplace. You have a toaster that I want. We can have a conversation about what goods and/or services you would be willing to exchange for it. After all, in the real world, we probably know one another. (It’s an artefact of industrial civilisation, and another historically recent development, that so many of us now live surrounded by strangers.) Maybe I have a pregnant cow. I might consider giving you the calf, provided you throw in that comfy armchair and a bottle of your home-made vodka. And because you know me, you’ll be willing to give me the toaster now on the strength of the future calf, and we trust one another enough that if the cow miscarries we’ll sort it out.

We may not even discuss the bottle of vodka or the chair. We understand that calf is a lot more valuable than an electric toaster, even if it can do bagels. When I give you the calf, you’ll owe me… something. Or perhaps you won’t, because we already have a history of mutual credit, and I already owe you… something else. We’ll work it out.

We need prices as a stand-in for value because we live in a commoditised, impersonal society that is in love with numbers and abstractions. This is a highly abnormal, even perverse, way to live. It only seems normal because we grew up with it and it is everywhere. Like so much in our industrial civilisation, however, it is gives us a distorted view of how things really are.

Remember that the next time you buy a toaster.

Comments are welcome, but I do pre-moderate them to make sure they comply with the house rules.