Notes on the Theory of Value

Conservatives can be quite entertaining. Consider conservative “values blather” to use George Will’s phrase. More specifically, consider the conservative reaction to statements regarding the relative nature of cultural or moral values. Conservatives don’t like “relativism”. They believe in “moral absolutes”. They believe in the “objective superiority” of cultures – specifically their culture. Of course their “moral absolutes” are no such thing. They believe is absolutely wrong to tell a lie – except in the case of lies told by CIA operatives for purposes of “national security”. Then it’s OK to lie. Thou shalt not kill – except in war, as punishment for crime, in the case of a police officer discharging his duty, in lawful self defense, and maybe a few others exceptions. Don’t bother explaining to a conservative that “absolutes” don’t have exceptions. They don’t understand that.

As for “cultural superiority”, it is an absolute necessity for conservatives. Cultural “superiority” is the only way they can justify taking land away from Native Americans, or putting Indonesian wage earners to work for two dollars a day. The “inferior” culture of people is what makes them ripe candidates for exploitation.

So being believers in the absolute nature of moral and cultural value, what do conservatives believe about economic value? Oh, well, economic value is relative. We’re not exploiting those half-naked primitive in Indonesia. They’re happy to work for two dollars a day – never mind that striking Indonesian workers have been driven back to work at gunpoint. The value of a day’s work is subjective, say the conservatives. If you are willing to accept literally pennies to produce a pair of shoes with a market value in excess of a hundred dollars, well its up to you to decide the value of your time and energy.

Let’s have some fun. Let’s make monkeys out of the conservatives. We begin with a really simple question, the conservative answer to which is predictable, and the consequences of which are devastating to them. What is the purpose of engaging in business? I’ll give you a hint. One word. Starts with “P”. If you said “profits”, you win the cigar. How much profit is “enough”, from the conservative point of view. That’s like asking a conservative about division by zero. There is no such thing as “enough” profit. The conservative is a believer in maximization of profit. He believes to the depths of his very being the absolute legitimacy of getting “all you can” in a transaction.

Conservatives wax poetic about the incentives of maximizing profits. Maximizing profits is the very engine of economic growth and economic development. Limit the profit from an enterprise, and you limit the incentive to engage in that enterprise.

So what do conservatives think about labor maximizing its profit? Does that same analysis hold for maximizing wages? Not exactly. Apparently, labor needs no particular incentive to work in an enterprise. Actually they do. Its called “starvation” – which conservatives are perfectly willing to use as the sole incentive to induce a wage earner to work for peanuts. But the point, when we are talking about say Indonesian wage earners, is that conservatives are perfectly happy deciding how much profit is “enough”. Then they do something really interesting. They say that those earners are “happy” making two dollars a day.

Which completely misses the point. If we assume that Indonesians making tennis shoes are “happy” earning two dollars a day – and they apparently weren’t happy, because they went out on strike – how much happier would they be making four dollars a day, or making two dollars an hour, or making ten dollars an hour like their American counterparts before Nike closed up shop and went to Indonesia. How many Indonesian wage earners would turn down a chance to earn the same wages as American wage earners?

You see wage earners are just like capitalists. They want to make all they can. In fact, this is a principle well understood by conservatives and capitalists. And get this. They resent it. In actual fact, they believe that “maximization of profit” is a privilege that simply can’t be afforded to everyone. You can see this belief in the things they say about wage earners. Why does the CEO make millions of dollars, while an Indonesian makes 20 cents an hour? Well, the CEO is “more valuable” to the company. You mean objectively? I thought the market place determined value. After all, that is the reason for forming a union. It seems the “market value” for labor is a bit higher when labor sticks together and demands a higher wage. So do conservatives and capitalists acknowledge that labor’s value is higher depending on market conditions – like their inability to find labor willing to work cheap? They recognize no such thing. In fact, when pushed conservatives discover that economic value is objective, after all. The value of labor is objectively cheap according to them.

They talk about the “market place”,and the relative nature of value when it justifies paying labor peanuts. They believe that the “market place” should be structured to allow for minimal labor costs. In fact, conservatives are believers in oligarchy. Their belief in their “inherently superior culture” translates into economic terms as a belief in the inherently superior economic value of social and economic elites.

Which squarely presents the question that is the subject of this essay, namely whether there is any such thing as an “objective” value of goods and services. I say there is such a thing as objective economic value, and the proof of such objective economic value is devastating not only to the conservative lust for oligarchy, it is devastating to capitalism, itself.

Evaluating Existing Theories of Value

The place to begin is with the value of finished goods to the end user. This may appear to deviate from the classical theory of value, which traditionally defines value as the “quantity of labor which it enables him to purchase or command.” First of all, Adam Smith can be forgiven for expressing value in terms of “labour”, since “labour” was almost the sole energy source for all production when he wrote. Since that time the technology of industrialization has matured to the point where products are supremely useful which require very little “labour” to use, which require a considerable amount of labor to produce, and which yield a tremendous amount of “labour power” – by which we mean energy. The automobile is perhaps the most obvious example. So I propose, that “energy” be substituted for “labour power” in any discussion of value, since energy may be produced by human labor, and a variety of other more productive sources besides.

Of greater significance, looking at the brief definition in The Wealth of Nations – which contains much more detail to be sure – is a little noticed distinction.

“[W]hat everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it . . . is the toil and trouble it can save to himself . . .”

Thus, a distinction is drawn between the “cost” and the “worth” of a commodity. Cost is the input to acquire a commodity, and “worth” or value is the output received as a result of having acquiring it. Stated in terms of “cost/benefit” analysis, the value of a thing is the benefit it confers. Ultimately, that value must be determined by reference to the benefit conferred on the end user. If I am in the business of producing or reselling goods, I am only in that business to the extent that those goods confer some benefit on some ultimate end user. That benefit is what creates demand for the goods. Without demand, there is no reason to create any supply.

The labor, as well as the other inputs that produce a commodity are the cost of that commodity. They are not its value. In fact, it is an error to describe the value of anything in terms of its cost – particularly its labor cost. This is the error in reasoning that produces exploitation. Once you begin to think of value in terms of cost, you begin to devalue the labor – and any other input besides – that goes into producing a commodity. You begin to think in terms of the “value” of the people who produce the commodity. Thus the value of Nike tennis shoes is translated into the inherent value of the “primitives” who are conscripted to make those shoes. When Nike pays an Indonesian working man twenty-four cents an hour to produce tennis shoes that sell for in excess of a hundred dollars, they make a value judgment about the value of the people making them not the value of the shoes. Interestingly, this gives capitalists like Nike an interest in finding – and preserving – low value human beings. This perhaps explains the inherent hostility of conservatives toward public education and any effort to improve the living standards of wage earners. After all, if you improve the quality of the people doing the work, the value of their labor goes up.

All of that analysis is complete nonsense. The value of labor is the value of what labor produces, not the value of the effort itself, and certainly not the “value” of the people doing the work. With respect to the effort, a simple illustration suffices. Marine drill sergeants frequently require recruits to perform such tasks as moving a pile of dirt from one place to the other. The outcome of the task is completely valueless – and therefore the labor put into accomplishing it is equally valueless. You would not pay anybody anything to perform such a valueless service – no matter how much effort went into it the task. Capitalist likewise don’t pay people to render valueless services. They love to perceive themselves as “benefactors” “providing jobs” – as if the labor they hire produces no value. In fact, as the case of Indonesia demonstrates – labor can produce tremendous value relative to its cost. In fact, that’s the point.

The value of goods and services – by which we mean the benefit to the end user of owning them – is objective. At least it is objective with respect to the “toil and trouble which it can save” the end user. Whether a particular end user has any use for the particular application is a different question. I have no need for a combine that harvests wheat. I don’t grow wheat, or anything else, so the time and energy a combine would save me is zero. But the combine will save a farmer a tremendous amount of time and energy. More to the point, it will save every wheat farmer similar amounts of time and energy. Its overall potential for such savings is the same for anyone.

Now let us consider three different but related products, namely tennis shoes, bicycles and automobiles. We can, with a little effort, establish the relative values of these commodities. In fact, we can even quantify that value. Let me propose, as the starting point for determining the values of these commodities, the concept of “range”. The baseline for our analysis is the range a human being can travel on bare feet. Of course, human beings living in hunter-gatherer societies will have a longer range than those living in industrial societies. But here is something interesting, shoes are one of the earliest technologies found even among hunter-gatherers. As an experiment, walk out of your house in your bare feet, and walk until you’ve had enough. I’ll handicap your range at less than a hundred yards. If you just had to, you could probably walk a couple of miles. I guarantee you wouldn’t do it more than once. So lets establish your effective range at a quarter mile – to be generous. We can also establish a mandatory range – if you had to – of five miles, again to be generous.

Now let’s give you a pair of shoes, and just to expedite the illustration, we’ll go ahead and put a pair of those Indonesian made Nike’s on you. Believe it or not, Nike’s and other high end tennis shoes are expensive for a reason. They are good shoes. Anyone who has ever spent a day on their feet wearing uncomfortable shoes knows what I’m talking about. With the simple addition of a pair of hundred dollar tennis shoes we increase your effective range – which I define as half of the round trip distance a reasonably fit person can travel, and still be in any kind of shape to do any other useful work. By that definition, your effective range walking in a pair of Nike’s is five miles – ten miles round trip. Your mandatory range – again if you had to – is twenty five miles, the distance you can reasonably walk in a day.

The simple addition of a decent pair of shoes increases your effective range by a factor of twenty, and your mandatory range by a factor of five. A simple application of the formula for a circle reveals that the territory – the space – open to you increases by a factor of five squared for your mandatory range, and twenty squared for your effective range. Indeed, any increase in range, which a technological improvement in transportation creates, increases your “economic space” geometrically.

A bicycle further creates a tremendous increase in effective range. In reasonably good physical condition on reasonably level terrain you could travel twenty miles one way. That is a four fold increase in range compared to walking – which is a sixteen fold increase in available space. But here’s where it gets interesting. To enjoy those benefits, you need a relatively frictionless surface to ride. Try riding a bicycle over grass, or worse over sand. Somebody has to build some roads. If you trade your bicycle in for an automobile your effective range jumps to 100 miles and your mandatory range on an interstate highway at seventy fives per hour, driving 20 hours is 1,500 miles – half way across the country.

You should be able to see a beginning comparison in value with the comparison range and the space created by range. If we are talking effective range, we are talking a hundred fold increase in territory from bare feet to shoes, a twenty five fold increase from shoes to a bicycle and a sixteen fold increase from a bicycle to a car. From bare feet to an automobile, the territory available to you increases forty thousand times.

So what, you say. Range in the case of transportation is just the beginning of value. Let’s talk markets – for labor or for goods doesn’t matter. Let’s consider a store owner – say a news-stand, where a low profit margin requires high sales volume. The range of his customers determines his potential market. In fact, we can draw concentric circles on a map around his location to reflect the space available. The circles will have a half mile, five mile, twenty five mile and hundred mile radii, respectively. We can now factor in population density to determine the available potential customers. With a population density of hundred people per square mile – which nothing – our shop owner has seventy five potential customers walking in bare feet – laying aside whether people in bare feet can read. He has eight thousand people walking in shoes, he has 200,000 people on bicycles, and 3,000,000 people driving automobiles. Turn it around, and talk about employment opportunities for a person, and those figures are the population containing potential employers for a person using each respective mode of transportation.

With the opportunities for employment and commerce, one can quickly see that an automobile is a valuable piece of machinery. It is far more valuable to its owner than what he pays to own it, and what he pays in fuel, maintenance, insurance, and even highway taxes to run it. Not only is it valuable to its owner, it is valuable to every person who employs its owner, every person who trades with the owner, and every person who might like to. Now you know why people pay a hundred dollars for the better tennis shoes, a thousand dollars for the better bicycles, and $50,000 for the better automobiles. They’re damn well worth it.

What is the value of the man whose job is to properly install and torque head bolts on automobile engines? If there is no one to do it at all, the value of his service equals the entire value of every car that never got manufactured. The value of the person who puts on the wheels is exactly the same. The value of the person who designs the production process is exactly the same. It is the value to the end users, and to every other person who in turn benefits from the mobility of those end users. In fact, every participant in the “automobile industrial complex” – from assembly workers, to manufacturing engineers, to design engineers, to machine tool manufacturers, to road construction crews, to the executives and managers that organize each of those industries, and yes, to the investors in those industries equals the total end use value of every automobile produced. As I have just demonstrated, that value is huge.

Notice that the contribution of each contributor is not sufficient to produce automobiles. But the contribution of each contributor is necessary to their production. The value of automobiles is produced by the totality of effort expended in their production. Thus, the value of the input made by each contributor is an indivisible part of the total value of the aggregate effort to produce automobiles. If any one of these contributors is missing, there is no product, which means there is no creation of value. Every contributor is mutually dependent on every other contributor for the creation of value, which translates into the creation of pictures of dead presidents.

A Word about the Price of Commodities

The price of a product or service is not the same thing as its value. In fact, the price is inevitably much less than the value of the product or service. Why would I give you all of the benefits of ownership I get from buying your product. I don’t buy the product for your benefit, I buy it for my benefit – which means that I expect to realize a benefit that exceeds the cost of that product or service. One word for that is “profit”, and you should see that “profit” is a factor in virtually every commercial transaction. The profit from wearing tennis shoes may not be measured in dollars, but you can take it to the bank that the value of owning and wearing a pair of Nike’s exceeds what they cost their owner.

In fact, we can now start to understand what the process of negotiation is in the world of commerce. It is not the process of determining the value of a product. It is the process of determining the apportionment of the value between the producers of the product and the consumer. By extension it is also the process of apportioning the producers’ share of the value among the various contributors to production.

Remember that the value being apportioned is frequently huge. Remember also that each contribution is an indivisible part of that total value. Accordingly, the value of each contribution is equal in value to every other contribution – and any different apportionment will be made on the basis of such things as the law of supply and demand, available alternatives, and other factors. If investors or executives in a business organization claim an outsized portion of the value produced by that organization, it is not because the value of their contribution is greater. It is only because their bargaining power in the negotiation is greater. Supply and demand, and other economic principles have to do with bargaining power over apportionment of a total value that may be objectively determined.

With the concept that the value of anything is its end-use value, and value of every necessary contribution to its creation is an indivisible part of that total value, we can begin at last to form an objective theory of economic justice. This will be the topic of future discussions.

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