April 6, 2010

Price and Value
What is a “fair” price? The very question implies that there is some inherently “right” or “fair” price for any good. This notion seems to be almost instinctive, the way it keeps popping up through centuries of economic thinking. The commonest version is the labor theory of value; the value of any product equals simply the total of all the labor that went into producing it.

Incidentally, the labor theory of value is the biggest rock in the foundation of Marxism. This doesn’t make the notion wrong; it makes Marxism wrong. Under even casual examination the rock crumbles.

I have a little ceramic statuette, crafted with hours of loving effort by my sister. I value it because she made it. For my sister it had a negative value- she was glad to get rid of it. The labor theory of value would value it at something between $50 and $200, depending on the value given to my sister’s labor. But if I offered it for sale, at a garage sale or an estate auction, it wouldn’t bring in a dime. So what is the real value of my little treasure?

The answer is just this: value is in the mind of an individual, and therefore is personal and different for each person. And the value each person attaches to a product changes with time and circumstance. When I have a shelf full of canned salmon, another can of salmon has no value to me.

Another common example of the fallacy of the labor theory of value is the hole in the ground. If I spend hours digging a hole in the ground, and nobody wants it, what is it worth? And if I then spend as much more labor re-filling the hole, have I doubled it’s value or have I reduced it back to zero?

Price is not the same as value. The price I am willing to pay for a widget depends not only on how I value the widget, but depends just as much on how I value money. The day before payday, I’m watching every cent and I’ll think trice before buying anything at any price. The day after payday, my valuation of money has dropped dramatically and I have a little spending spree.


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