The Value Theory of Value


When I say that money is just made up and we don’t need it, many people react with disbelief. Money, they have been told, is how we measure the tradeoffs between otherwise equivalent choices — by picking the cheapest. How can we decide how to properly divide our efforts to solve problems if we can’t determine the relative cost of different approaches?

I’m going to let you in on a little-known secret. We don’t know how to do that. We’ve never known how to do that.

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A theory of value should tell us what things cost. That means setting prices, both the price of products and the price of labor.

For centuries philosophers, charlatans, and philosopher-charlatans (aka economists) have argued many theories about how everything should be priced in some kind of ideal model market. None of them have been at all successful. Even the simplest question of why lumber has one price and kitchen utensils have a different price remains elusive. Perhaps one board is worth one spoon, or perhaps thirteen boards are worth three spoons. There is no theory that can even come close to predicting those ratios.

Everyone agrees that labor is part of the equation. Adding labor to raw materials allows the resulting product to be sold for a greater price. Indeed Marx employed the Labor Theory of Value to show that for capitalists to make a profit they either have to underpay workers or overcharge consumers. (He’s not wrong!) But that doesn’t get us anywhere with the boards / spoons problem.

People expect this to be a science. It’s not.

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In fact prices are set mostly by tradition. Stuff we buy have prices that we expect because we’ve encountered them before. There are standards and norms set historically and by cultural consensus. We know what things cost because we have become accustomed to seeing their price tags. But there is no theory behind it.

It’s made up.

Capitalism imposes constraints. Products make a profit, therefore the cost of the product must be higher than the cost of the parts and the labor. Also the total profit from the product must be higher than the fixed costs of the tooling and development. But none of this really tells us anything.

I suppose if we knew the ins and outs of every business and the cost of their processes then we could make an educated guess about their minimum viable price. But we don’t know any of that. In fact that kind of information is a closely-guarded secret at even publicly-traded companies. They all make a profit, yes.

But we can’t know how much of their price is profit.

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Prices are literally made up all the time. Every company has a meeting where they decide what to charge for their product. R&D puts their finger in the wind and proffers a guess at the development cost. Marketing asks bizarre questions about things like value-add or target demo and they map out price points. Whatever the process, eventually someone has to make a decision. The name of the game is to guess a number high enough to generate profits, but low enough to appear fair to potential customers.

This might technically be the Monetary Theory of Value, but we could easily call it the “whatever much we can make for it” theory of value. Indeed Martin Shkreli — hedge fund manager, ex-con, all-around low-life, and probably actual vampire — took this approach to pricing to its logical extreme when he raised the price of lifesaving drugs by more than 50x in a single step.

That move inflamed moral outrage really only because it was an obvious cash grab. Many other companies are doing the same thing but slowly — boiled frog style — so we don’t notice. At least some of the recent bout of inflation is companies pulling a Shkreli and inflating prices for profits, but in smaller, less noticeable increments.

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If we look on the labor side of prices we can see the same thing even more clearly. Salaries are set entirely by tradition. We each have rules of thumb about how much we should pay people based on their class: unskilled worker, entry-level job, temp worker, college graduate, 2 years experience, etc. And where do those rules of thumb come from? Our own personal experience. By convention we don’t share our salary with our co-workers, so how could we build up our knowledge of salaries any other way? There are surveys and reports we could read, but again these just capture what’s already happening.

We know salaries have been eroding for over 40 years. If we absorb that in our own rules of thumb we’re just boiling the frog ourselves.

There should be theoretical lower bounds on the cost of labor. At minimum a rational theory of value would provide each worker enough income so that they could not only refresh themselves enough to be able to maintain a consistent level of production on a day to day basis, but also that they would have enough surplus so that they could bear and raise children to be workers in the future.

But that’s not happening, is it? Way too many working people don’t have the basics to survive. Instead we get price inflation for me, wage stagnation for thee.

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The idea that prices or salaries represent real value is completely wrong. That’s not what human beings mean by value.

I offer instead the Value Theory of Value : Things are valuable because humans value them.

  • people value the natural world and their place in it
  • people value music and literature and art and drama
  • people value time with their family
  • people value being known and appreciated
  • people value their health

And so much more. Most of the things people really value can’t be bought or sold. So why do we have an economic system that only assigns value to things that can make a profit? What is an economic system for except to harness our collective will into satisfying human needs? If you can’t put a price on people’s most important values, and thus factor it into how we manage ourselves, then what good is money? Organizing our society around generating profit by setting entirely arbitrary prices is just stupid.

We know what we really want and money can’t express it. We need to move past money and design a new economy based on metrics that reflect human values.