Hello fellow voaters. I am here to casually sort out some very common economic fallacies that continue to plague common thought. This will, I hope, let you better articulate your defense of liberty and maybe start some productive discussion.
For the first of these sessions I will be tackling the Labor Theory of Value.
So what is this theory? Well to understand that we need to go back to the 19th century when conventional economic thought was in its infancy. The first economists had recently come up with the theory of supply and demand which of course states that price is altered by the general supply and demand of a product. More supply/less demand equals a lower price, less supply/more demand equals a higher price holding all other variables equal. Satisfied with their theory of supply and demand they began to test it and one question nagged at them. Why are goods that in invaluable to existence such as food (specifically bread) so cheap? Everyone demands it, demand is practically infinite since all humans must continuous eat to survive but the price of grain was low, lower than even useless, but desired goods such as diamonds.
Many theories were suggested but one was latched on to by a couple of obscure men named Karl Marx and Frederic Engels. This was the labor theory of value and it says that the price of a good is directly affected by the value of the labor put into that product's creation. They had some good examples too that make sense on first look. The aforementioned diamonds for example. It takes hundreds of hours of mining which is grueling and expensive labor to unearth diamonds from the ground. Therefore diamonds are expensive. Another example are the classical paintings of the day that were extremely valuable. It takes hours of practice to refine an artists ability and then many hours more to paint a painting, therefore skilled paintings are valuable.
So on the face of it we have explained why some things are expensive that shouldn't be according to pure supply and demand theory.
Unfortunately for Marx this theory was proven false just a few decades later during his lifetime with the true reason for price. This theory is known as the subjective theory of value and to illustrate this point here is a silly picture of a bee.
Silly Bee
So the picture states that if a bee earned minimum wage that a jar of honey would cost $182,000. This is a by definition statement of the labor theory of value. The artist took the amount of hours that a bee spends creating a jar of honey, multiplied it by the minimum wage, and came to the cost of a jar of honey. Now ask yourself a question. Would you pay $182,000 for a jar of honey? No? Would anyone pay that much for honey? No? So what would happen if this was the actual cost of honey? The answer, of course, is that no honey would be made.
You see the labor theory of value puts the cart before the horse. It states that price comes from the process of creation when the correct subjective theory of value states that price comes from the final consumer and then trickles back up the stages of production influencing the prices of the various stages including labor. Now lets look at the previous examples.
Diamonds. People want diamonds, people are willing to pay a lot for diamonds. Therefore entrepreneurs are willing to risk and invest a lot of money into mining operations.
Art. Why is it that the value of art tends to go up when the artist dies? Has he invested any more time or effort into that painting? Obviously not, being dead and all, but people are more willing to pay for the artists work which pushes the price higher.
Or to quote Boehm-Bawerk:
"A second and still more important consideration is that even where the law of costs is valid, those costs are not the final, but only an intermediate cause of the value of goods. In the last analysis, they do not give value to their products, but receive it from them. That is clear as crystal in the case of production goods for which there is only one productive use. Surely no one will wish to deny that it would be erroneous to assert that Tokay wine is valuable because Tokay vineyards possess value; everyone will concede that the truth is the other way around, and those vineyards have a high value because their product is highly valued. It is just as hopeless to deny that the value of a quicksilver mine depends on that of the quicksilver, the value of a wheatfield on that of wheat, the value of a brickkiln on that of brick, and not vice versa. Only because of the manysidedness of most cost goods is it possible for the situation to present the opposite appearance. As the moon reflects the light of the sun upon the earth, so do the manysided cost goods reflect the value which they receive from their marginal product on their other products."
Any thoughts?
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[–] Lucre ago (edited ago)
I'd be careful with the word "utility." It already has a rigorous economic definition. Lots of people get confused when talking about economics because the field's use of "utility" can easily be conflated with that more common "task-usefulness" meaning.