Libertarian Land Philosophy:
Man's Eternal Dilemma
Oscar B. Johannsen, Ph.D.
BOOK IV: The Marketplace
Chapter 1 - Value
"Monetary history teaches that there never has
been a permanent suspension of specie payments. The reason is that
paper is paper and gold is gold. Paper is no better, in the long
run, than the value of the promise made by the promisor. Such
promises have a notoriously poor record. Gold, on the other hand, is
free of these weaknesses of human beings. It carries fulfillment in
settlement in accordance with the weight and fineness of the amount
of gold employed. It does not falsify. Its value does not depend on
the promise of any man." [Walter E. Spahr -- Our Irredeemable
Currency System]
An individual is always making judgments. He evaluates people,
situations and actions. No one else can make his judgments for him any
more than anyone else can think for him. People or events may help,
but just as he must breathe for himself, or he dies, so he must make
his judgments himself .
As all men are unique, no one can predict how another will evaluate a
given situation. Occasionally, a good guess may be hazarded, but one
of the striking aspects of man is precisely his unpredictability.
It is natural for man to evaluate not only physical events but the
goods he produces. He considers whether he prefers one article to
another; whether he wishes apples or pears; a car or a carriage; an
ice cream soda or a glass of milk. These judgments are often called
value judgments. He values one thing more than he values another
thing. In saying his, we demonstrate the essential nature of value --
its subjectivity.
Value is order of preference.
It is a psychological concept which resides in the minds of men. You
judge the order in which you prefer things. You value an orange above
an apple. This means that in the order of the preferences which exist
in your mind, the orange has a higher place than the apple. More
exactly, value is order of priority of desires. The desire for the
orange is greater than the desire for the apple.
You probably cannot state conclusively why you prefer one thing to
another. Your preference may be due to any number of factors, some so
subtle that you may not even be aware of them. The determining
conditions may lie hidden within the deepest recesses of the insoluble
mystery comprising the human personality.
It is doubtful if your order of preference is a carefully thought out
list even though you may very meticulously decide which of several
items you prefer to others. You could not begin to list the order of
all the things you prefer for almost from the moment you did, it would
change in your mind. Even if you could, the very fact that the one at
the head of the list was satisfied might change the order of the rest.
Although you may convince yourself that your first choice is an
orange, the second an apple, with a pear the third, once you have
eaten the orange, you may now prefer the pear to the apple. You are
not a robot. It is one of men's cliches to say that a woman changes
her mind constantly, but that propensity is true of all of us. We are
men and our evaluations change constantly.
As men began to say that they valued this item more than another one,
value tended to be ascribed to goods. A pair of shoes was said to be
valued at, or worth $10. The value of a painting was said to be $1000.
This caused men to wonder why a pair of shoes was valued at $10 and a
painting, which was not nearly so useful was valued or worth 100 times
more. They did not realize that these valuations were the result of
subjective judgments.
Theories arose which assumed that value was actually a part of the
article itself. The term "intrinsic value" became common.
The suave salesman in an antique shop will claim that the "intrinsic
value" of a beautiful piece of Ming pottery was $5000, but out of
the goodness of his heart he will let you have it for a mere $500.
Many believe that "intrinsic value" is as much a part of an
article as its atoms. They have forgotten or do not know, that value
is merely a judgment of men.
This is not really strange. Men will say that a woman is beautiful.
What they mean is that in their subjective judgment her physical
endowments are such that they prefer them to those of other women.
Beauty is no more a part of a woman than value is a part of a good.
In making judgments, men seek objective means to help them evaluate.
They desire assistance to decide if it will rain tomorrow. In seeking
some objective factors, men noticed that rainy weather was usually
preceded by dark clouds, as well as pressure and atmospheric changes..
By associating such phenomena with varying weather patterns, they had
a means by which to predict the weather. It is not perfect. Not only
are there too many factors involved but the objective data is itself
subjectively determined. In addition, the decision as to which are the
more important factors is also subjective. Nonetheless, by continual
study, men almost squeeze subjectivity out of the data so that it
attains an objectivity which is almost as real to men as the world
about them. Despite this, that erroneous evaluations arc made is only
too apparent for the weatherman is constantly berated whenever the
fair weather he predicted turns out to be a howling rainstorm.
Similarly, observation has taught men that often certain factors have
a bearing on men's evaluations of goods. An obvious one is the labor
required to produce an article, so it is not surprising that theories
arose with labor as the causal element. It seemed logical to assume
that the more labor expended on producing an article, the more
valuable it must be. This is generally known as the labor theory of
value, and many variations of it have arisen. Such theories, while
apparently explaining why some articles are valued higher than others,
run counter to experience in many instances. A Franz Hals spends an
hour on a painting, but it is valued at perhaps a thousand times one
on which an amateur spends one hundred hours. Obviously, the value of
Hal's work of art was not determined by the amount of labor expended.
One variation of the labor theory of value is that value is
determined by the amount of labor which the ownership of an item will
save the possessor. If you estimate some article would save you an
hour's work, presumably you would be willing to buy it for the amount
you would receive for an hour's labor. But this is not necessarily
true. You might pay more or less or nothing, depending on how you felt
about it.
The facts of life prove that labor time expended or saved does not
necessarily affect people's judgment, although it may. If a housewife
desires an orange, she may give some consideration to the labor she
believes went into producing it, or which its possession will save
her. However, most women haven't the faintest idea how much labor is
very likely required or would be saved, and very likely, couldn't care
less.
Probably the most that can be said about value is that by some
psychological process, you arrive at a decision that you will give two
apples for one orange. But that does not mean you will have to make
the exchange at that ratio for when you come into the marketplace you
may find that someone is willing to give you an orange for an apple.
In such a case you gladly turn over the apple for the orange and
consider that you have obtained a bargain. In other words, the market
price was much less than the price you had independently decided you
would be willing to pay.
In civilized societies, price is the ratio at which goods are
exchanged for money.
This ratio is determined subjectively by each individual. The price
an individual is willing to pay is modified by the effect of other
individuals, all of whom are making independent subjective
evaluations. The interaction of all these exchange ratios, or prices,
through the higgling and haggling of the individuals concerned results
in a particular price at a particular time at a particular place.
The labor saved or expended may not be involved at all. Probably all
one can say about labor is that for continuous production, the price
of the article must be greater than the cost of producing it. This
means greater than the cost of labor expended, the land depleted and
the capital depreciated. But that is not to say that labor and other
costs determine price. It is the other way around. The price which
consumers are willing to pay determines the point beyond which labor
and other costs cannot go. If no one can produce at costs which are
lower than the price the consumers will pay, the article ceases to be
produced.
Businessmen usually say that costs determine price, although their
actions belie their words for they are constantly striving to cut
costs to meet the price. They assume costs determine price due to the
accounting practice of toting up their costs to which they add a
certain percentage for profit . By offering to sell their product at
that price, they are auctioning it in the marketplace. If consumers
are willing to pay it, they buy. If not, they do not, and in effect
the merchants buy their own product. If they wish to dispose of it,
they must then reduce the price, even though at a loss.
The consumer is not concerned wt. a merchant's costs. The consumer
has determined independently what price he will pay, although he may
have done this almost unconsciously, and have only a vague idea of
what he will pay. That evaluation usually does not take into
consideration the merchant's costs as the consumer is not concerned
with them. If the price is below the merchant's costs, then, if he.
wishes to continue to sell the article he must cut his costs so that
they are less than the price the consumer is willing to pay.
In a free market economy, the customer is the King. He sets the price
he wishes to pay, and the producers of wealth must abide by his
decision or go out of business. Parenthetically, it might be added
that it is the customer who really decides who will be employed and
who will be discharged, although most wage earners assume it is the
employer. If the customers do not buy an article, they vote against
it. In effect, they are telling the businessman not to employ people
to produce that article. On the contrary, he should discharge any who
are, or at least employ them in producing an article which the
customers want.
In the production of wealth, as more and more people are involved and
as the division of labor becomes more minute, each product tends to be
the specialty of some individual or relatively small group of
individuals. The worth which these men place on such articles tends to
be based on what such items can be sold for rather than the personal
desires of these men. In economic literature, this distinction is
emphasized by stating that exchange-value tends to be of more
importance than direct-use value. This does not mean that the
article's personal usefulness to the specialist is less. It means,
rather, that he would give very little for it.
To a farmer who produces 100,000 oranges, any one orange obviously
occupies so low a point in his scale of preferences that it can be
said to be virtually non-existent. This does not mean that he does not
desire to eat oranges. It merely means that he has so many available
that any one of them means nothing to him. For all practical purposes,
he looks at them as though he had no subjective desire for oranges at
all. His actions with respect to oranges are geared to what he can
exchange them for in the open marketplace. Similarly, other
individuals who make other products evaluate them on what they can be
exchanged for. If the market is broad enough, the tendency is for most
articles to be considered by businessmen in terms of exchangeability
and hardly by what desire they can satisfy. It does not mean that the
article is not still valued in terms of its ability to satisfy the
desire of each individual who wishes it. It merely means that with the
supply so great, and with so many individuals involved in the
production process, and with the article in question being exchanged
many times before the ultimate consumer purchases it, that it tends to
be considered in terms of exchangeability rather than in terms of
individual preferences. But while this is true enough, it is still
dependent on the scale of preferences of millions upon millions of
consumers. If people did not like oranges, they would not be produced.
All theories of value previously had foundered on such vexing
questions as why fabulous sums were spent for famous paintings and
other works of art, as well as for land. The artists may have been
long dead, so the price placed on their work was certainly not based
on the labor required to produce them. Land is not created by any
human labor, yet it has value in men's eyes. Fabulous sums are paid
for virgin land on which no one has trod. Any theory of value had to
take into account all goods, as well as land.
No labor theory of value could take these diverse items into account.
We must thank the Austrian economists for the subjective theory of
value which has helped men to acquire a better understanding of this
perplexing subject.
When people inquire as to what the value of some article is, usually
they mean what is its selling price. But a good does not have a
selling price. All we can say is that an apple sold for five cents at
ten o'clock in the morning of a certain day in a certain location. At
the same place a few minutes later, it may sell for more or less. At
the same time in a different location another apple which for all
practical purposes is the same, may have sold for 8 cents. Then, what
is a Mackintosh apple's selling price? We cannot say that it has any.
All we can state is what such an apple sold for at a certain time and
at a certain place.
This is obvious in the sale of securities. The prices of stocks on
the New York Stock Exchange vary from minute to minute. So true is
this that the Exchange puts the prices on a ticker which shows the
variation of the prices during the day. The price changes may be
considerable, minor or none at all. If one says a stock's closing
price is $100, this means that it sold for $100 at the New York Stock
Exchange on a certain day at the end of the trading period.
It should be obvious by now to the reader that the value people place
on goods may be quite different from the prices they pay. Obviously, a
purchaser of securities values them at a higher figure than they are
being sold at or he would not purchase them. He prefers the securities
to the money he has. The seller. on the other hand, values the amount
of money involved more than the securities, which is why he sells
them. He puts money at a higher place in his order of preferences than
those particular securities.
Valuations are said to be determined by ordinal rather than cardinal
numbers, that is, we state our preferences as first, second or third
rather than one, two or three. While we may be willing to pay ten
cents for an apple and twenty cents for an orange, that does not mean
that the desire for an orange is twice as great as that for an apple.
nor does it mean that we will obtain twice as much satisfaction. On
the contrary, in the marketplace prices may be the reverse of what an
individual may be willing to spend.
The most that can be said about valuations is that we prefer one
desire to another. Possibly for a fleeting instant we can set them up
in some order or scale, but we cannot say that we prefer Debussey's
hauntingly beautiful "Clair de Lune" two and a half times as
much as we prefer Gershwin's intriguing "Rhapsody in Blue".
We cannot add, subtract, multiply or divide valuations. You may
prefer a soda to a slice of bread. Yet if you drink ten sodas, that
does not mean you derive ten times as much satisfaction. Most likely,
you may be quite ill. You cannot apply mathematics to valuations. You
are not dealing with inanimate matter, You are dealing with thinking
individuals, often irrational, who have ends and purposes in mind and
whose psychology and mental processes are simply not reducible to
numbers.
Though accountants use the principles of arithmetic and mathematics
to tote up the assets of a business, this does not mean that they
actually have made any precise determination of the valuation of the
assets. A balance sheet is merely a crude guess as to what the assets
of a company could be exchanged for on a particular day of the year.
Whether such would work out that way is another story. The
probabilities are that the actual selling price might be quite
different.
Recapitulation
Value is order of preference. More exactly, value is order of
priority of desires. It is a subjective concept which exists in the
minds of men. It does not exist in goods. Due to the tremendous
production of goods and the minuteness of the division of labor,
businessmen tend to value the article they produce by its exchange
value rather than by its ability to satisfy their own personal desires
for it.
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