Utility and Market Value: Some Insights

Dan Sullivan

[Reprinted from a Land-Theory online discussion, 27 August 2001]

Have you read Henry George's distinction between personal utility and market value? Most of the arguments for the subjective value seem to be actually talking about personal utility.

For example, Max Hirsch, a pro-Georgist Austrian (an Australian Austrian, to confound sloppy readers), uses the case of a person in the wilderness whose bountiful crop left him with with five large sacks of grain. The first sack will feed him through the winter and keep him from starvation. The second sack enables him to plant his next year's crop. The third he will feed to his animals so he can have meat. The fourth he will feed to the birds to make the environment more pleasant, and the fifth is of no particular use to him. Hirsch then posits travelers coming unexpectedly past his frontier home, offering payment for grain.

Hirsch's point is that the pioneer would part with the fifth sack at almost no price at all, but having done so, he would want at least a token price for the fourth sack, a substantial price for the third, a very high price for the second, and, were he down to his first sack, would fight to the death to keep it, the alternative being starvation.

Here then, is a perfect description of personal utility, and a very contrived scenario to make market value conform to personal utility. The contrivances are that:

1. The person is isolated in a wilderness, as far as possible from what we normally think of as a market;

2. The settler only produced a crop for his personal utility, whereas most products placed on the market were produced with the *intention* of placing them on the market;

3. Five separate travelers without the foresight to provision for themselves come looking for grain in an area where this pioneer did not anticipate that *anyone* would come looking for grain; and 4. With the coming of each grain-purchasing settler, it never occurred to this pioneer that there might be additional grain purchasing settlers.

5. The implicit assumption that this is an ongoing situation, such that this settler did not learn of travelers' demand for grain from last year's experiences, nor will learn from this year's experiences of a likely market for next year.

What we have, then, is an extremely idiosyncratic example of a supply based on complete ignorance of or apathy toward the market it portends to be serving, and the notion that such an example should serve as an illustration of why market value cannot be ascertained.

However, one only need assign reasonable human intelligence to this settler, and voila, a labor theory of value emerges. That is, the settler will set about to discover what travelers would normally be willing to pay -- a reasonably easy task as they are coming buy making offers to him.

Then, if the value of what they are willing to pay him (in money or in barter) exceeds the negative value of the labor necessary to raise a larger crop of grain, then he will raise that larger crop. If it does not at least match the value of the labor necessary, he will not bother.

Once we take the contrivances of ignorance and serendipity out of the picture, such that there is an actual supply of grain to be purchased and an actual supply of travelers to do the purchasing, we also see that people setting out on this expedition will compare the labor involved in carting cheap grain through the wilderness from the town markets with the cost of buying expensive grain en route.

As we get closer and closer to a real market, we see less and less influence of personal utility and more and more influence of the actual cost of production, and that cost is primarily a labor cost. Even the cost of a natural resource (to someone who does not have title to that resource) is weighed against labor.

Consider, for example, that a Mercedes Benz is not a good value for me, because it would take me 2500 hours of my labor to acquire a Mercedes Benz. However, it might take a successful doctor, lawyer or executive only 250 hours. Is the Benz worth 10 times as much to him as to me? In market value, yes, but his personal cost is only 1/10 what my personal cost would be, because his time is worth 10 times as much as mine.

And so we see all sorts of interactions between labor saved and demand value, and labor expended and supply value, once we get into a market situation. The computer on which I am writing cost me about a third of what my first computer cost, even though its personal utility is well over an order of magnitude higher, because production efficiencies have reduced the amount of labor necessary to make computers.

So what is the value of my computer? If you are asking about personal utility (and assuming that I cannot replace it), then it is worth several thousands of dollars, which is several hundred hours of my effort. In fact, however, it is worth about 700 bucks, because I can buy a better one for that price (plus the effort of going upstairs to the computer store).

Where Marx went wrong, then, is not in assuming that labor in the long run determines value in the long run, but in forgetting that the constant effort to increase profit by increasing efficiency is a free- market phenomenon. Making a Volga might require 1,000 hours of Russian auto-workers' labor, and might therefore be priced by the state to reflect that cost. In a free market, however, the Volga makers would have to figure out how to get the labor time down to 500 hours in order to compete with Volvo, BMW, Fiat, etc.

In any case, the selling price is constantly modified by the amount of labor required to replace the product, and the amount of product sold is determined by how much will sell at that price.