Prices and Value

Writing about actions to control the spread of the coronavirus, a lawyer recently wrote, “Value counts more than price during an emergency”. He then misquoted Oscar Wilde. What Wilde actually said was, “A cynic knows the price of everything but the value of nothing.

From an economic point of view neither statement makes sense. The problem is that value is a subjective thing. We all put different values on different things and experiences. An absolute standard of value does not exist, except in the mind of God. He is omniscient, so he can assess the goodness of everything.

Humans are left with their subjective valuations. You might place a high value on rock music, whereas I might think that classical music is more valuable. There is no way of comparing the strength of the valuations of different people, and no way of aggregating the valuations of different people.

We could get large groups of people together and debate the value of things, but that would not get us anywhere.

It is not perfect, but in this situation, price is often the best indication of value that we can get. If a rock album sells in reasonable numbers for $10.00, that indicates that a significant number of people value the record more than they value other things they could get with $10.00. On the other hand, the people selling the album are willing to take that price, because they value the album less than what they could buy with $10.00. This implies that $10.00 is not a bad estimate of the value of the album.

Of course, there will be exceptions to this. If no one actually buys the album at the price, that would suggest that most people consider its value to be less than $10.00. The producer would have to shut sales of the album down because it over-estimated its value. If only rich people are willing to pay $10.00 for the album, then this price is a poor estimate of the value of the product.

However, in most situations, where a product is buying and selling in a relatively free market, the price is a reasonable indicator of the value that a large number of people assign to it.

When making decisions about what to do, prices are useful information, which should be included in the decision-making process. They are not perfect, but they are indicative of value. Making a decision without taking costs and prices into account is foolish, and will often lead to bad decisions.

Sandel and Value

A few months ago, I read What Money can’t Buy by Michael J Sandel. He is a good communicator and I have really enjoyed some of lectures on justice on TV. This book is worth reading, because it show western culture in a different light.

In this book, he argues that markets are valuable for organising productive activity, but his concerned that market are seeping into aspects of life, where they do not belong. He wants a debate about the role and reach of markets. He wants decisions about which goods should be bought and sold. The aim should be a market economy, not a market society.

The problem with this is that it is not clear who would make the decision about what can be bought and sold. I presume that he assumes that governments can do this, but this will not work. Decisions about what can be sold are made by the person who chooses to sell. Decisions about what will be bought are make the people doing the buying. Unless they are doing something immoral, it is hard to see how they can be prevented.

The examples that he give are interesting. I think they show how hollow western culture has become. The answer is not more laws, but better values and more virtue.

Sandel speaks about market values, and suggests that they corrupt some good things. He says that when some things are sold, their value is contaminated. The problem here is that he assumes a concept of objective value. He does not realise that values are subjective. This is a core principle of economics. Different people place different value on the same things. This is why trade is possible. A sale of a good takes place, because the person buying values it more than the person selling it.

The price at which a particular good is sold in a market does not tell us its value. It does not tell us how most people value it. It does not tell us what value the buyer and seller put on it. All we know is that the buyer valued it more than the price and the seller valued it less than the price. But we do not know by how much.

Human valuations are subjective. The only person who can express objective values is God, because he is the only one who is unchanging.

Free Markets (20) - Theology and Value

Theologians are expert on values.

• God is good
• Murder is evil

They understand these values, but when it comes to economic issues they get confused. Free markets allow business to create value, yet theologians make statements like these.

• Free markets are morally flawed.
• Capitalism is evil.
• Making money is wrong
• Profits are bad

They tend to support actions that destroy value and object to institutions that add value. Despite their expertise, they seem to be confused about value.

Theologians tend to see profits as a sign of immoral behaviour. They assume that money is made by cheating people. This is not true. Successful businesses must offer things that people want. This is not easy, because people will only buy products that:

• are more valuable to them than the price they have to pay for it;
• are more valuable to them than any other product at the same price;
• makes them better off than they were before making the purchase.

If a business cannot produce things at a price that fulfils these conditions, buyers will go to other producers or buy different products. Producers who do not make people better off will not make a profit for long.

Adding Value
Profit is a crude measure of the extent to which the business has made people better off. The costs of production reflect the value of components, materials and labour used in production. The price received reflects the value to buyers purchasing the product. The difference between sales and costs reflects the additional value created by the producer.

Profit = income – expenditure
Profit ≈ value added

This is new value that did not exist before. The producer created the value by making the product and by finding people who valued it.
To make a profit, a business must add value. They must take some components and put them together in a way that makes them more useful to other people. The components must be worth more when put together in the product than they were worth separately. That is adding value.

We want producers to add value, so we implicitly want them to make a profit. Therefore, profit is good. This is acknowledged in the scriptures.

All hard work brings a profit, but mere talk leads only to poverty (Prov 14:23).

The plans of the diligent lead to profit as surely as haste leads to poverty (Prov 21:5)

Businesses make money by adding value. They must have produced goods or services that made people better off, so making money is good.