Sometimes it seems as though the concept of “value” is just as misunderstood as it is fundamental to economics and to our society in general. I’m not sure why it’s misunderstood. It’s a very simple concept and even familiar to all of us, except when it gets mixed up with technical definitions in the context of “economic theory” or sociology.
I do wonder occasionally if those people who promote overly complex, convoluted and mathematical definitions of “value” lack an understanding of its simplicity or if they consciously contrive their characterizations of it in order to promote an agenda.
Also: “value” is most definitely not the same as “price.” And we’ll get into that here, too because those two things get conflated a lot.
And we’ll look at an example of a transaction where we specifically derive both “value” and “price” to see how a rational economic transaction works. Because, for some reason, there is confusion about this simple concept.
The concepts of value and price are even sometimes confused to the extent that some people insist that a sales transaction in a capitalistic system must, by definition, have a “winner” and a “loser” — which, even though it is one of the most fallacious ideas in the world of economics, seems to be popular among some people who criticize our capitalistic free market economy.
So, let’s start at the beginning by looking at the basic dictionary definition of “value.”
- As a noun, the word, “value” means: relative worth, merit, or importance; or material worth, as in commerce or trade; the worth of something in terms of the amount of other things for which it can be exchanged.
- As a verb, the word, “value” means: to consider with respect to worth, excellence, usefulness, or importance.
And that’s it: Value is something that humans make up in their minds and desires about a thing which they may or may not want to possess or use. And it has a quantity or a magnitude that can be compared to the amount that they “value” some other thing.
In essence, value is a feeling.
But that can’t be it! Can it?
That definition is awfully squishy and subjective. What about it being the basis for economics? Economics has a lot of fancy mathematics. Where is the technical, mathematical definition of value? There has to be a mathematical definition, right? An important thing like “value” has to have some sort of precise mathematical formula relating it in some hard and fast way to some principle or physical set of things in the real world, doesn’t it?
Nope. Not really.
At its very fundamental level, value really is just a concept that people make up in their minds for basically how much they like a thing – or how useful it is to them. And, for a particular thing, every single person in the whole world can have a different idea about it from any other person. And not only that, they can change their mind about it any time they want to or find it useful to do so.
It’s entirely subjective.
It’s probably the most subjective thing in the entire universe.
In fact, the definition of “value” pretty much embodies the definition of subjective.
And yes, that’s exactly how it stands as basically the foundation of all of economics.
Economists & sociologists can aggregate totals of approximations of value as people relate it to amounts of money when they buy things. But they’re fooling you if they claim that they are actually measuring “value” directly. Because “value” has a very subjective relationship with regard to each individual person who values things in their life … or in their business.
Let’s set up a little example that we can run some alternative scenarios on that should drive some important points home:
Say you’re sitting in bed and there are two things within your reach in your room: Your laptop and your great grandmother’s precious antique book collection. Now let’s say a fire breaks out and you need to leave but you only have time or capacity to save one of those two things. Which one do you grab and take with you?
That is the one that you “value” the most.
And that right there is basically all there is to the definition of “value.”
If you think about it, that’s obviously all there can be to the definition of “value” because – where would any other source of the “value” of a thing come from aside from your desire for it based upon your thoughts about it and its utility to you?
So, let’s change the situation a little:
Now say that on one side of you is your great grandmother’s precious antique book collection and on the other side of you is a pile of cash. How big would the pile of cash have to be in order for you to grab it and save it instead of the antique book collection? One penny less than that amount is the antique book collection’s monetary value to you.
But you object and say that it’s hard to determine how much cash you might feel that your grandmother’s antique book collection is to you at any point in time. One day when you are feeling particularly interested in history, you might be willing to save it instead of saving a $10,000 pile of cash. But a while later, after you’ve seen to books just sitting there not being used for a while, and you’ve been dreaming of getting that brand new iPhone, you might leave behind the books for less than $2,000.
Yup. Value is like that. It can change at your whim any time you change your feelings about a thing.
And yes, we are talking about the same thing as the true economic value of a thing.
So now let’s change the situation one more time:
Let’s say that, last Thursday, you finished reading the last of the books in your great grandmother’s precious antique book collection. And you don’t like them. You think they’re just awful. You have no desire to ever see them again. You can’t understand how your great grandmother ever enjoyed reading such trash. And she’s not around anymore and nobody else wants them. Now how big would the pile of cash have to be in order for you to choose it instead of grabbing and saving the book collection? It wouldn’t have to be nearly as much as before, but now you’re certainly going for the cash in any case and you’re ditching the book collection even if you don’t get much cash out of it.
So you’ve totally reconsidered the book collection’s monetary value to you and you’re definitely ready to sell it.
So now, in addition to emotional value and its derivative, monetary value, we are now ready to talk about “price.”
Price is related to value. But they’re absolutely not the same thing.
Let’s look at how it works:
Let’s say you still have your great grandmother’s gawd awful nearly worthless precious old antique book collection. You don’t want it anymore and you’ve decided to sell it. It’s not completely worthless to you because you’ve figured that, if you fail to sell it, you can glue all the books together with some epoxy resin and make an object d’ art. Maybe you can use four columns of epoxy resin encased books to make the legs for an avant-garde coffee table or something. But they’re still not worth much to you. Maybe twenty five bucks. Yes – that’s it. If there was a fire, you might save the books instead of the cash, but only if the pile of cash was less than twenty five bucks. So twenty five bucks is now the monetary value to you of great grandma’s precious old antique book collection.
But twenty five bucks is not its price. Not if you’re smart.
Because some other
dumb sucker antique book connoisseur might actually want them. Because he
or she might have a different value system than you have. Maybe the books were
written by the person’s favorite author. Or maybe they have some glitter to put
into their resin when they make the books into an odd object d’ art or
something. It doesn’t matter to you as long as they are willing to pay you enough
for the books.
So you post an advertisement on Gregslist on the internet saying, “Precious old antique book collection for sale. Come by at 2:00 PM to see the books if you might want to buy them.”
And at 2:00 PM some dude shows up and looks at the books. He’s got a hundred and fifty bucks in his pocket. But, after looking over the random pile of books, he thinks to himself, “I’m not paying more than a hundred for these things.” So, to him, the monetary value of the books is a hundred dollars.
And less than a minute later a lady comes by. When she left her house, she stuffed three hundred and seventy five bucks in the bottom right pocket of her cargo shorts. Because she saw the picture that you posted and she knows about these books and she’s done a careful calculation and figured out that the monetary value of the books to her is three hundred and seventy five bucks. Because she knows some book connoisseurs who own a bookstore back east who think that Lucy Diamond is the best author in the world and they’re willing to pay five hundred bucks for the books. And the lady at your front door in the baggy cargo shorts has calculated that if she pays three hundred and seventy five bucks for the books and if she pays to ship them back east, the left over profit will be just enough to cover her time for doing the job.
So what’s the price of the books?
That gets calculated like this:
The lady comes in and offers you seventy five dollars for the books.
The dude speaks up and says, I’m willing to pay you a hundred bucks for the things, but absolutely no more than that.
So the lady tells you, “Okay. I’ll pay you a hundred dollars and one penny for the books.”
And there it is: The price of the books – in that situation and in that situation only – is a hundred dollars and one penny.
- The monetary value of the books to you is $25.00
- The monetary value of the books to the dude is $100.00
- The monetary value of the books to the lady is $375.00
- And the price that you sold the books to the lady for is $100.01
The source of the “value” of the books is each person’s desire for the books based upon their thoughts concerning the utility that the books have to them.
And the “price” in a rational sales transaction is such that:
- The seller always gains because the price exceeds his or her monetary value for the item.
- The buyer always gains because the price is equal to or less than his or her monetary value for the item.
- And the final price of an item of limited supply is governed by market competition such that it is bid up by other buyers until it exceeds the amount that they are willing to pay.
Now notice one more thing in all of this:
Some people talk about the “intrinsic value” of a thing (or a commodity, especially a commodity of exchange like gold). But “intrinsic value” is not what people often think it is.
Nothing has an intrinsic value that is a specific, set amount. Something having intrinsic value merely means that it has some sort of potential value based upon its average utility to people and not just based upon what people say it is worth or that government mandates it is worth.
Value is never “intrinsic” to a thing. Value comes entirely from the desire that people have for the thing.