5 On Value
The topic of value is also very much neglected in economics. It is taken for granted that value is something that people wish to gain, but little thought is given to the nature of this very important concept. We must have a firmer grasp of it.
Utility is a related concept, but the two should be separated. Utility is the capability of a thing to deliver value, which is different to value itself. Hence an object such as a coat has utility because it can provide warmth, but it does not create value until that service is rendered to the owner of the coat. Utility can also be measured in the fitness of an object to serve its purpose. A coat has greater utility than the wool from which a coat may be made.
It's been said that what nature provides to men is seldom fit for service in its natural state, but requires effort to fashion into a usable form. It is the labor required that creates utility, and which enables the object to deliver value. And again, value may be delivered without substance, if the actions a person performs suffice to assuage pain or deliver pleasure.
Value is entirely subjective - it is perceived by a person whose need or desired is to be fulfilled. A man who does not mind the cold values a coat less than one who is sensitive to a draft. We cannot then suggest that anything has a fixed and universal value to all who might consume it (though the utility, regardless of whether it is wanted, remains the same). The problem of suggesting value is that we cannot feel any other person's wants or satisfactions.
(EN: Worth noting that this has been rather a meander and I'm not sure if I am missing the point, or if the author simply hasn't gotten around to making one.)
Exchange creates value by transferring ownership of an item (and access to the value it has the potential to provide) from a person who has less need of it to another whose need is greater. It is in this way that exchange creates a net positive effect by providing greater value to both parties than if they had kept their original goods.
He speaks for a time about the manner in which men are "handicapped" by their lack of skills or resources. A person without land to farm is unable to farm - he must find something he can do (that a farmer cannot) in order to produce a good that can be exchanged for the produce he requires. A person who is no good at farming is best advised to do likewise.
There has been a great deal of pointless argument in attempting to fix the value of things, as there can be no timeless and universal value of any item. Food is of great value to a starving man, of little value to one who has been fed - so one cannot declare that a loaf of bread is worth a certain amount of money to all people at all times. We may observe the prices men customarily pay for certain goods, and it will tend to hover around a given average, but this does not mean that its value is fixed. "Ice is a good thing in summer and coal is a better thing in winter."
There's a bit of fussiness about the creation of value. The textbook model assumes that goods have already been produced and are capable of delivering value - the farmer brings his crop to market to see what others will give for it. However, it is common among producers to decide what to produce based on their expectation of the value it will fetch in future. This is most evident in employment situations, where an employer hires a laborer to furnish labor in the expectation that it will create value.
Just because something has utility does not mean it has value. It is produced or procured with the expectation that it will have value, but it will have to be put to good use in order to do so. His belief in value may be his own, or he may be convinced by another party. And he may be mistaken or misled. To underscore the point: value is not created by the effort expended in creating a product or delivering a service, but rendered in its use.
The needs of man are inevitable - they are not created by others, nor are others responsible for satisfying his wants. Nature has made men in such a way that they should die if they did not drink from time to time, and it is not the responsibility of others to provide a man with something to drink. If he chooses to live two miles away from the nearest source of water, it is not the responsibility of others to carry the water to his home. He must undertake the labor to fetch and consume the water, or offer something of value in payment to another party who does this task for him.
He turns to the notion of fixed pricing, which is based on assumptions. Taking the example of water, a man may offer a penny to a child to fetch him a bucket once, and if he needs water the next day he may offer the child the same price to fetch it again. And if he does so often enough it creates the expectation that the service of fetching a bucket of water is worth a penny. But this is an arbitrary custom - if the child finds the well dry, and needs to walk two miles further to fetch water, he may decide he wants two pennies for the task. Or if another child offers to do the task for a half-penny, the man may decide to use the cheaper service and the price of fetching the water has fallen. Water still has the same utility, but the price of procuring it has changed.
The principle that value is created by labor is not entirely acceptable. The things of greatest value (water, or even air) take little effort to procure. And a great deal of effort can be put into an object that delivers very little value (a painting or sculpture). Value consists of the direness of a need, which is a separate matter to the labor required to fashion the object that provides it.
(EN: This is from the consumer's perspective. The supplier often bases his price on his costs of production - and when a product costs more to produce than buyers will have to possess it, then the product is commercially unfeasible. Hence he cannot demand or force buyers to meet his price, but should consider himself foolish to have produced it.)
This is often ignored in arguments of what is a "fair" wage for laborers to receive for their time. If their time is spend doing activities that create no value, then there is no basis for the expectation that their labor has earned a specific wage. In other instances, a person can be compensated quite generously for undertaking very little effort - if the product or service they render is of great interest to buyers. And what creates interest to buyers is highly subjective. Again, one man may treasure things for which another has very little use.
There's a bit of mock dialogue between a man who has found a gemstone and one who wishes to buy it. The buyer wishes to argue that he has no right to charge very much for it because it took him no effort to obtain it. The seller tells him to meet his price or go find his own gem, and it is here that the buyer recognizes it might take years of searching to find another - hence the value to him ought to be considered in light of the amount of labor it would take him to do so, not that which another person has undertaken.
This takes us again to the benefit of exchange: the need of the buyer is of little interest to the seller, and the cost of the seller are of little interest to the buyer. They have different and independent motivations for feeling a good is worth a given price - and if they do not agree, there is no basis for an exchange.
He goes into another protracted example, based on bread - the person who needs food must bear the responsibility for creating it for himself, or create something to trade for it. The direness of his need does not give him the right to demand that others are enslaved to farm, mill, and bake on his behalf. He then tediously considers the various components that are necessary for bread (an oven built by a mason, wood cut by a forester, salt that is mined, etc.) as a means to pointing out how many individuals in society a person proposes to enslave to his desires by insisting his need for bread places an obligation on others to provide it.
He touches briefly on the notion of scarcity: the seller seeks the highest price for his wares, which means that scarce resources are apportioned to those who need them the most as evidenced by their willingness to pay the most to have them.
Scarcity may also be created by nature - if there is only one coal mine in a region, then there will be many buyers competing to have its product. The owner of that mine may reap very rich rewards for his product - but it is the competition among buyers that inflates the price. Bastiat therefore rejects the notion that it is the seller who is acting improperly. Quite the contrary, he is driven by self-interest to ration a scarce resource to those who need it most.
Security is another significant want. While man needs only so much bread as will sustain his life today, he will also wish to acquire and have on stock something to eat tomorrow. He will wish to protect the field in which he grows the crop that will provide him with food for the next season. This need for security yields a demand for relatively simple things (a cupboard to store his bread) and rather complex ones (police and soldiers to protect his farm).
In a purely capitalistic economy, the farmer would hire others to guard his possessions against threats, foreign and domestic. In fact, it can be seen that every person has a need for this protection, and as such government often undertakes to provide it, extracting payment in the form of taxation to compensate it for the cost of hiring police and soldiers to protect all the citizens of their realm.
(EN: This is a bit idealistic, as government was originally the seizure of assets by force, and the guards and soldiers were to protect the interests of their master. The notion of a government that serves the people is a very modern development, and there is still a great deal of debate over whether anything has really changed.)
It is often very problematic to define what things are truly in the interests of all citizens - and which are in the interest of some, who wish others to pay to have them provided. Much of the bickering in parliament is over exactly that problem. Were government to keep out of private affairs, the cost of a benefit would be paid by those who need it sufficiently to pay the cost of having it.
His next example turns specifically to the arts: a group of men, mostly wealthy, would be pleased to hear a virtuoso sing a given piece of opera, but do not wish to pay the cost of the performance, and so seek to convince the mayor to pay for their pleasure under the guise of providing a civic benefit. As such many of the working classes, who have no love of opera, are burdened with taxes to pay for the pleasure of those who could afford, but do not wish to pay, the cost of their own amusement.
He then mentions the example of the church, which asks donations of its parishioners. When this is given willingly, it represents the morality of the people to support religion for the benefit of the community. But where people do not see a given religion as moral, they offer nothing to support it - nor should they be compelled to do so. In this sense capitalism does not abhor charity, but compulsion.
There's another diversion about exchanges in which no value has been provided. Per the earlier consideration, people buy things with the expectation that they will obtain value from them - and they do not always do so. But care must be taken to suggest that it is the fault of another party - there must be some clear instance of deception or misrepresentation. A person who acts on their own false beliefs is penalized by his own folly.
Next, he turns to the question of the value of money, as there is the widespread misconception that money has value. His perspective is the value of money is the value of ease of exchange itself. If it were possible to produce everything for one's own consumption, there would be no need of money. And if it were convenient to engage in direct barter of good for good, there would be no need of money. Money has value only as a token that facilitates exchange.
It is even more plainly evident when we consider that most societies gravitate toward precious metals as their currency. Gold, silver, and the like have no functional benefit as they are not consumed. Any implement made of precious metal could be fashioned from a base metal. The precious metals do have some ornamental value, but this seems negligible. Their real value is as tokens of exchange - they can procure things that render a benefit by means of exchange.
It is the vagueness of their exact value - the fact that precious metal can be exchanged for anything that is needed - that creates such interest in possessing it, and great mythology about its value. But if you imagine a primitive economy, in which survival needs are very difficult to make, a nugget of gold is merely a shiny rock and is of little value in exchange.
Having gone rather far afield, Bastiat gets back to the topic of the chapter, which is "value" in case it has been forgotten, and means to be a bit more systematic in discussing the factors that create value.
Materiality of Value
Man is a physical creature, and his greatest needs are in service to his material existence. One may speak in lofty terms of intellectual and religious pursuits, but no society has ever existed that had libraries and churches and not a single farm. We must eat, drink, breathe, sleep, and protect our bodies from the elements that are destructive to them, hence our first and foremost needs are for materials that support our material existence.
Where we can obtain what is needed with minimal effort, we can do so without entering into exchange. Except in extreme instances, there is no need to pay someone to give us air to breathe. But in most instances, we must fetch water and produce food, or compensate others for performing those tasks (or some part of them). And these basic physical needs must be met before we aspire to intangible loftier goals.
The materiality of value should not be taken to indicate that all the things that provide value are material. The service of a laborer who digs a well or plows a field is not a material good, but these services contribute to obtaining a material good that in turn will deliver an intangible value. So the suggestion that these services have no value, or are "unproductive" is misleading.
He strays a bit into politics - particularly the notion of what is private property and what belongs to the community is a point of great contention. There is the notion that nature belongs to no-one, hence anyone can take anything from nature for their own use. But therein lies the distinction: anyone can take directly from nature - but once a man has taken something from nature, it is no longer the providence of nature but of the man who has undertaken the effort to gather, transport, and fashion it. Those who maintain that all things are gifts of nature itself have little understanding of or respect for the efforts of those who make the raw gifts of nature suitable for consumption.
There is a bit of silliness about God being owed payment for the gifts of nature. Pagan religions often honor this by sacrificial rituals, though it's doubtful that God has much use for what he is offered after it has been immolated. More often, the claim that "God is owed" is presented by those who wish to collect on his behalf, and consume for their own pleasure that which they take from others in his name.
(EN: This skirts the argument of the ownership of land - as certain plots of land are reserved for the use of certain individuals by various systems of government. But the argument is often distasteful because the conventional answer is that land is taken or defended by force. And as abominable as that is, it is a functional necessity to apportion land for use among owners by some means.)
Durability
Durability is concerned with the amount of time that utility is stored in an object. A service performed is not durable because its value ceases to exist when the action ceases. For material goods, the duration of serviceability will vary according to their nature - a coat may provide service for several years, but water ceases to have utility upon consumption.
Again, the obsession with material objects is misguided and produces a number of serious errors in economic thinking as well as in planning. It is not necessary and quite inefficient to seek to own a carriage to gain the benefit of transportation, particularly if one does not travel often - and wiser in this case to pay for the service of being transported in a carriage owned by someone else. The value to the consumer (being in a given place at a given time) is no different.
The same can be said of a certain slavish obsession with durability. Things that last for decades have value to those who need them for decades. An object that breaks after its first use is just as good to a person who needs it only once, and a great deal less costly on a per-use basis than one that is built to be durable.
He strays a bit, knowing he draws the risk of consternation, into the topic of wealth. In a similar way there seems in some schools of economics a devotion to the idea of accumulating wealth without limitations -as if it were an end in itself. Wealth is only to be value because it conveys purchasing power - and once a man has all the money he will ever need to supply him with the things he may wish to have for the duration of his lifetime, additional wealth is of no benefit to him.
And the same can be extended to the possession of any material good. The difference between saving and hoarding is that something that is saved will be used and something that has been hoarded never will. Capitalism is rightly criticized for its obsession with the accumulation of needless goods - though there is quite some legitimate argument over how much might be considered sufficient.
Labor
Labor is understood to be the human force that is applied to create value. It is too often assumed to be limited to manual labor (missing the value of intellectual labor) that produces physical goods (missing the labor to provide services that render value).
It is also debatable whether labor that does not contribute value is to be included in labor, though this becomes problematic. The miner spends a great deal of effort in excavating dirt to get to the ore that contains a precious metal - is this effort not labor? The carpenter builds a cabinet that is accidentally consumed in a fire - has he not applied labor? Or the weaver who produces cloth that, due to a market glut, is sold for the cost of the thread - has he not labored? Whether value will be derived from human effort is often unknown before the effort is completed.
There is also a common mistake of assessing the value of labor by time and exertion, as some physical activities produce greater value than those actions that require greater time or exertion. The stroke of a banker's pen or an artist's brush can create greater value than a week of hauling stones. An afternoon spent playing a vigorous game of tennis meanwhile produces no value for anyone but those who have the pleasure of playing or watching the game.
And again, the buyer cares nothing for the amount of labor that was required to produce something he values, as he values it in relation to his needs. Meanwhile the supplier, for whom labor has been the cost of goods, is highly attentive to the profit he makes by his labor (or by labor purchased from others) and it influences him in negotiations.
Utility
Utility, again, is the potential of something to provide value to its consumer. It is therefore consumption that defines the value of all things - even those who manufacture or trade things must consider the utility to a consumer, as this perception will determine the price that will be paid for them.
He again enumerates the roles that are required to bring a pound of wheat to the market, and indicates that the revenue the buyer gives for having possession of it are apportioned among those who contributed to its provision to the market - whether directly or indirectly involved. There are some who wish to meddle in the way in which the profit is shared out, to suggest that the landlord is owed a certain percentage, the plowman another, the plow-maker another, and so on.
But the apportioning is a negotiation among those parties and it is simply no-one else's business to interfere. One cannot argue that too much or too little is given to any party because they agreed to accept whatever they were paid for doing their part. And if the price offered for their contribution was not "fair" they would not have accepted it, and applied their labor or material to a more profitable enterprise. It is their own responsibility to see to their own interests in these commitments.
There's a bit of niggling over various flaws in arguments that have been made in support of apportioning the reward for providing utility. But these are entirely moot once one recognizes that no one party arbitrarily determines what amount should be paid to each contributor and that each has the opportunity to negotiate for himself or withdraw from the deal.
More commentary follows refuting those who claim that nature provides all utility. Again, nature provides very little that renders value in its natural state, and it takes quite some nature to gather and fashion nature's gifts to make them suitable for human use.
But by the same token, if we consider "utility" to be the potential to deliver value, then everything has utility to some degree. Bread has utility to relieve hunger, but it must be eaten to do so. Wheat has utility to become bread, but it must be ground to flour, mixed with yeast, and baked. Wood has utility to fuel an oven than bakes bread, but it must be gathered, cut, and set alight. So when we pay the price of an item, we are paying others for performing services to fashion something into a state that is nearer to the one in which value will be provided.
He makes a case for intellectual labor, which is involved in identifying the potential utility of things and discovering a way to put them to use. Countless things are useful to us without our knowledge, as new uses are being discovered constantly. The manual labor of producing products from materials cannot commence until this intellectual work is done. In this sense it is just that the inventor of a tool is compensated more than the manufacturer of the tool, and both are compensated more than a laborer who uses the tool. The inventor has caused the production of utility of all laborers who use his invention.
Scarcity
There is a single paragraph on the notion of scarcity. Things that are scarce are valuable - but scarcity does not create this value. Instead, scarcity causes those who wish to have the value engage in a competition to determine which of them shall have it. Very often, scarcity constitutes a very high percentage of the price of goods, far in excess of the value of the benefit they provide. Consider the price paid at auction for the last bottle of a rare vintage, as compared to the price paid for a bottle of wine in the common market - it is not attributable to any physical characteristic of the product, but of the desire of many to have it.
Judgment
The price given for an object in exchange is determined by the judgment of those involved in the transaction. A foolish man will pay far more than a discerning one, because he is unable to accurately assess the value of the item in question.
Determining the value of a thing is vague and subjective. We must assess what degree it will produce satisfaction, and whether something else might address it better. It cannot be done with the ease of measuring the height of two trees or the weight of two stones, as satisfaction cannot be subjected to feet or pounds, nor is there any ruler or scale on which it can be weighed. And to make matters more complex, we are assessing the satisfaction we expect to receive from consumption, which is only speculative until it is experienced.
Wants are also considered in context. A man wants many things, and must decide how to apportion his effort (or his budget) among them. He must consider which of several things he wants more than the others, as purchasing or producing one thing consumes money or time that could have been spent on others. And every person, even the intellectually unsophisticated, must make many such decisions on a daily basis - and in general they are seen to do so successfully, as their survival depends on making the right choices.
And yet, we see differences in the accuracy of the judgment of men. Some spend freely and have little, others deliberate purchases and make the most of their limited resources. Any price of a good in the market represents an individual's judgment of its value (or the aggregation of multiple individuals' separate judgments).
Loose Bits
(EN: Having made his principal arguments, Bastiat seems to come unraveled at the end of the chapter, offering smatterings of random thoughts. The notes will seem a bit disheveled, but so was the source.)
Having considered some of the elements that determine the degree to which an item is valued, and particularly in that each act of valuation is performed by an individual, how can we stubbornly persist in or demand to define a fixed value should be attached to anything? It is likely a waste of time for economists to pursue this.
For practical concerns, particularly production planning, it is necessary to consider the potential value of a thing to its buyer because this determines how much they will pay to have it, which in turn determines whether it is worthwhile to produce it at a given cost. But these calculations will vary by the good, the time, and the location.
Labor is valued for its scarcity. The simplest kind of work (unskilled labor) is always in great supply. So while it is also highly taxing and unpleasant, it will never command a high wage. It is also a mistake to assume that masters pay for the training of a worker - in a location where highly trained workers of a given kind are available in significant amounts, their wages will not "compensate" them for the cost of their training.
Likewise, any good or service is valued for its serviceability and scarcity. The purchasers do not care to consider the amount of work that went into producing an item, only the value that it renders to them and the amount that they must offer to obtain it.
The cost of a laborer is paid by the customer. The employer is merely a middleman who estimates how much customers will pay for the product of labor and absorbs the risk that they will pay less.
More on materialism: every product is merely a vehicle that conveys the labor of one man to the service of another. We pay others to fabricate things that we could have made for ourselves, had we the materials, skills, and time. And an inventory of finished goods stores value over time in the same manner that money does.
Technical progress decreases the effort that must be expended for value. There is a temporary increase in the amount of profit that can be made by a supplier who decreases his costs by leveraging knowledge - but when that knowledge becomes accessible to all, the price of the good will fall in the market and he will again be fairly compensated for his goods.
What troubles people most about economics is the constant suspicion that they are being treated unfairly. They estimate the value of their work, and feel that others ought to give them more for it. You may measure value by any method you wish - but there is no cure for suspicion, avarice, and jealousy.