Prices and values

A common observation, usually made with a sneer, is that economists know the price of everything and the value of nothing. Thus is anyone who brings economic thinking to bear damned as a heartless philistine and devoid of appreciation of the higher things in life. In fact the statement is literally nonsense: it is only by knowing the price of things that we can establish their value – or rather what value other people put on them (as opposed to ourselves).

The value that each of us places on objects or actions or services is profoundly subjective and so varies dramatically from one individual to another. For one person a pickled shark might be enormously valuable while for another it might have no value at all. Moreover there is no single unit or standard by which we can measure the degree to which any one of us values something, no valuon as we might say. This means that the only way we can work out by how much one person values something and in particular by how much they value it relative to other things is to see what else they will give up in order to get it. If someone gives up two tickets to a Madonna concert in exchange for a musical instrument that tells us they value the second item twice as highly as the first.

Money and exchanges made using money make this kind of signal of value much easier to read and also enable us to arrive at a rough aggregate or average of the relative values people place on particular things. If someone pays a thousand pounds for something, that means that at the time they spend it they value it more than the other things they could have got using the same amount of money. This means that market prices tell us how much people in the aggregate value some things as compared with others. So the price of something in a market is in a very real sense a signal of the value that it has, for people at large.

Why though do people have such a visceral reaction against this? There are many possible reasons but two in particular spring to mind. One is that it is frequently discomfiting to discover that the value we place on something is not apparently that widely shared. When people say things such as “X is valuable beyond price” what they often really mean is “I personally value X very highly but I fear that my valuation is not widely shared”. Even more significant is the constant desire to believe that you can have your cake and eat it. In the real world we are constantly having to make trade offs between things that we value and prices are the way that we discover where for most people the appropriate trade off is. Thus if we have to trade off preserving agricultural land versus building houses, the price of land in a free market would tell us how much people valued the two uses relative to each other in a specific place. Even more important, it would tell someone who wanted for example to buy land to stop it being developed what they would have to pay to do so, i.e. what else they would have to give up in order to do so.

This means that it is free exchange and choice that discovers the value of something at a given time. Many however are not prepared to accept this. They would rather use force to impose their relative valuation on others. That is the reality of pious claims to care about values rather than prices.

What a good post. It’s astonishing how prevalent this sort of epistemological solipsism is on the Left, with people like the NEF calling for centrally-planned price controls. Even though they don’t believe in individual judgement, they’re quite happy to privilege certain individual judgements, specifically their own.

I really enjoyed this post! The belief that prices should be determined ‘objectively’ by value is very problematical. Just to confuse things there’s Hayek’s use – merit and value – which he applies to wages. Much work which is meritorious has little value. As you describe here, prices are the best way of discovering value. But it must be added that meritorious goods or activities can receive non-money rewards such as prestige. The problem arises when government tries to attach an arbitrary monetary value in an attempt to reward merit. This should be left to private charity to voluntarily reward based on each individual’s assessment of merit.

The price of something may give an idea of what value other people place on it; but cost price is not the same as value to me. When I buy books I rack up ‘consumer surplus’ all over the place, which means I value the books I buy at more than their cost price. (I sometimes wonder if I value buying books more than I value reading them!)It works for producers too. Suppliers of goods normally prefer getting the selling price to keeping the goods they are selling.This means that different people attribute different subjective values to the ’same’ goods. Price is NOT usually the same as value for anybody.If I choose to buy, value exceeds price; if not, asking price exceeds value to me.

“If someone gives up two tickets to a Madonna concert in exchange for a musical instrument that tells us they value the second item twice as highly as the first.”Correction: If someone gives up two tickets to a Madonna concert in exchange for a musical instrument that tells us they value the second item at least twice as highly as the first. As long as they do not expect the price of musical instruments to fall at a rate higher than their rate of time preference, he will not abstain from trading today.

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