Misunderstandings in Value Theory
The third worst child of the dismal science
Value theory in economics is a largely “settled” concept. By this I mean that most economists, when asked, will tend to give the same general answer, the answer that “value is subjective”. This of course is correct! Value is most certainly in the eye of the beholder, it most certainly is subjective. But when delving into nuances, into the nitty-gritty of it all, opinions, reasonings, and analyses diverge. Some people can’t settle on how people value stocks of goods, some people don’t think marginal utility is necessarily always diminishing (yes, I would consider marginal utility and its corollaries largely a part of value theory), and some others just straight up can’t explain why it is that value is subjective. So I have decided to use some of my dear, precious time on explaining to you—the dirty unwashed masses— certain aspects of value theory.
Value is a verb, not a noun.
This is a saying I got from the admin over at Austrian Economics Online Newsletter, who in turn got it from the great Peter Boettke. The saying means exactly what it says; “value” is not a thing that exists. You cannot hold value in your hand. You cannot imagine what the essence of “value” is. It is not something physical, metaphysical, mental, it is not anything (this holds even if you’re a degenerate physicalist)! Value instead is a process; an action.
Imagine you’re walking down an aisle at a store, and you see two different boxes, cartons? I don’t know the term, I’ll use carton, so you see two cartons of juice. One carton of juice is mango-flavored, presumably due to the fact that the liquid inside was extracted from mangoes. The other carton of juice is orange-flavored. You go ahead and reach for the carton of mango juice (presumably because you’re not an orange-juice drinking slob). In reaching for that particular juice you have learned what it means to “value”. You decided which one you liked more based on your own preferences, your personal, individual situation. In brief, you valued (notice the verb-like usage there). You did not choose the mango-juice because of how much labor went into it. You did not choose that mango juice because of how much capital, or land went into it. It was simply due to you deciding you liked it more. So, to all the prospective or current economists reading, internalize this message. Do not go out and treat value as a thing to do mathematical operations on, don’t treat it as a noun. Just treat it as the verb that it is.
Yes, marginal utility is necessarily always diminishing
There’s been a new fad in the economics profession lately. Fads in economics are almost like fashionable hats, maybe because they’re just fashionable beliefs. This fad has been an odd one though, because it almost encourages purposeful misunderstandings..? At least to me it does, because I don’t see how else someone would believe it. Well regardless, this fad is that of claiming “marginal utility isn’t always diminishing”. Wow, you really owned the deductive-economists there you cool and hip mainstreamer! Now everyone knows how fashionable your fad is (the popularity of fads is largely based on how much it goes against what previous economists said. So the more a fad criticizes the past theories the cooler it is, because it seems like you’re actually making progress in developing econ as a science when in fact you’re devolving it)!
Anyway, my tirade about fad beliefs has to be relegated to another article, so let’s move on to the actual issue here. The critique, or the claim of marginal utility not always diminishing goes as follows:
Marginal utility isn’t always diminishing across a homogenous stock of goods because people can find two gloves more useful than one glove. Clearly this idea of items needing a pair to work means marginal utility isn’t always diminishing
The fundamental issue with this critique is that it misunderstands what a good is (an incredibly common problem). This critique relies on the idea that a pair of something is the same good as one of that thing, but that’s not the case. One glove and a pair of gloves are not the same good because they are treated differently in the actors mind (which is the only place where goods exist). An actor may use one glove for the task of lifting a hot lid off a pan, but would use two gloves to lift the pan itself. The fact of the matter simply is that they are not homogenous because the person using them treats them differently.
These are just two of the many common misinterpretations of value theory which I see. From not being able to defend the subjectivist theory of value, to not knowing what constitutes a homogenous stock of goods, economists have really got to get their act together. In any case, hopefully this article serves as a much needed reminder on basic value theory. Also, point #1 about value being a verb, not a noun, is something I’m going to use to launch a devastating attack on Marxian value theory, so hopefully that article will be out soon.