Wednesday, July 25, 2012

Value is Always and Everywhere a Subjective Phenomenon

I am reading through a delightful book written by Faustino Ballvé, entitled “Essentials of Economics: A Brief Survey of Principles and Policies.”

Following is taken from Chapter 2: The Market.  From this chapter, I will focus on the comments made by Ballvé regarding value.

Value always expresses a judgment of the estimation in which something is held, because a thing has value if and only in so far as it is wanted or desired.  For example, a millionaire can buy a diamond for a hundred thousand dollars and find himself dying of thirst in the desert and unable to obtain even a glass of water in exchange for his diamond, which there lacks all value.

I like this guy Ballvé.  He makes a great point, one that I tried to make (with less success) during one of my many conversations at the Daily Bell:

But you try an experiment. Go out in the desert for two years. You will see no other human being, and have no chance for rescue. You can take either a water truck or a London good bar of gold.

Which do you choose? Do you do so intrinsically or subjectively?

He addresses those who attempt “to find in labor a measure of the value of things.” He outlines the fallacy of this – both in terms of the so-called value to produce as well as the so-called value of labor saved by the product.  He asks “…who is to fix…” this value of labor?  Is it the government? 

He points to supply and demand in a free market as that which determines the value of any good – value as expressed in terms of another, neutral commodity: money.  It is value derived by market means – prices developed based on supply and demand, with competition between suppliers on the one hand and competition between consumers on the other – that is the key; and such competition is the means by which the consumer (meaning each and every individual) is sovereign.

And as the consumer is the public in general, without distinction of rank or fortune, the free market is the most obvious expression of the sovereignty of the people and the best guarantee of democracy. 

It is interesting that Ballvé identifies this process as the best guarantee of democracy.  Each individual gets to freely vote with his pocketbook.  What is interesting is that in today’s world a defining feature of so-called free-market democracies is the installation of a central bank – an institution designed to use government-enabled monopoly power (there is no other type of monopoly power) to centrally plan the single most important commodity to the free market: the commodity of money.

When governments intervene in the process of free-market price discovery, Ballvé writes that the individual falls from the status of being a sovereign to that of being a slave.

Control of the market by governmental authorities is the instrument of modern dictatorships, much less cruel in appearance, much less spectacular, but far more effective than the police or naked force.

Ballvé concludes with some very insightful and meaningful points:

Nothing has value in itself.  The consumer confers value on it by seeking to acquire it.  Hence the value of a thing is never objective but always subjective.

The consumer confers the value – not the producer, not the cost to produce, not the labor stored in the good.  Only the consumer.

Many seemingly otherwise in the free-market world describe gold as having intrinsic value.  It does not and cannot.  Dr. Gary North wrote a wonderful piece describing this:

Gold has intrinsic properties that make it valuable. However, it does not have intrinsic value.

I mention this, because, at some point, you will read about gold as a store of value. You will read of gold's intrinsic value. Every time you read either of these phrases, you will know that the author does not understand economic theory.

There is a widespread mistake in economic analysis within those circles that are called the hard-money camp. People are under the impression that gold is a standard of economic value. This concept is foreign to economic theory.

Yes, we speak this way. The Bible says that a virtuous woman is worth more than rubies (Proverbs 31:10). But it does not say exactly how much more valuable than rubies she is. It does not offer a formula. There is no good virtuous-woman-to-rubies ratio that is normal. The price of a virtuous woman on a free market does not fluctuate around this ratio.

We read that the price of gold has not changed. Only the price of the dollar has changed. Again, this is obvious nonsense. The price of gold went over $1,000 in March 2008, only to fall to about $750 five months later. Yet consumer prices did not change.

The lesson here ought to be that gold is not a measure of value. Then what is? Nothing is, any more than there is a measure for the value of a virtuous woman.

Individuals impute value. They think something is valuable to them at this moment. This can change, moment to moment. People are constantly changing their assessments of what items or services are worth to them.

Back to Ballvé:

It is an error to believe that he who buys a thing wishes to give for it an equivalent value or that he who pays two hundred dollars for a cow thinks that a cow has the same value as two hundred dollars, or vice versa.  In the market the buyer as well as the seller gives less than he gets….  If this were not so, no exchange would take place: each one of them would keep what he already has.

This is quite simple and yet not recognized by many.  I want a candy bar.  The store owner wants my dollar.  After the exchange, we are both richer – a win-win proposition!  It is only when one of us is forced into the trade that the net effect is a zero-sum game – a win-lose if you will.

Economic dictatorship arises when production and trade are withdrawn from the mechanism of the market by the action of the governmental authorities.

First and foremost, this dictatorship is applied through control of money – the single most important commodity in the market, virtually always one side of every trade in an advanced economy.  More so, the dictatorship is revealed through various regulations, rules, and laws that hamper the otherwise free, non-coercive exchange of goods. 

The Daily Bell always argued that every regulation and law was a price fix.  This is quite true, as every regulation and law in some way hampers the buying and selling of goods that would otherwise be demanded and produced in a free market.  With this “hampering” comes changes and distortions in prices.

Much of the world economy is blanketed by central banking and regulation, resulting in price fixing by non-market actors.  As outlined by Ballvé, these are the characteristics of an economic dictatorship.

However, to return to the main theme of this chapter: all value is subjective.  There is no good that holds a constant value.  In each good, two individuals will see different value; the same individual will see two different values on two different occasions.  What is valuable to life near a river might be worthless to life in the desert. 

Even money, the commodity most universally in demand, does not hold constant value.  This most certainly holds true for gold: the commodity that, when left free, has most often served in the function of money in a division of labor society.

All value is subjective.  Fully understanding and applying this principle allows sovereign power to each individual.  That governments have worked tirelessly to hide and ignore this principle suggests the desires for dictatorship of those in power – a dictatorship that, according to Ballvé, is “far more effective than the police or naked force.”

It is truly more effective, because it leaves most of its victims believing that they are living in freedom, while all the time they are serving their masters.

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