Now that we have examined the biblical and practical truth that labor is a component of all wealth, we can expand that concept somewhat to discuss how products and services are valued within the marketplace.
How is a price determined by the market? More importantly, how does TRUE money “store” the value of one’s labors so that such value can be used in the future for making purchases? We will discuss the first question within this chapter so that we can then discuss the second question within the next.
A technical note for economists and financial professionals: Throughout this chapter of Organic Economics™ I will very briefly—and with simplified explanations—reconcile a few seemingly conflicting theories of value: The Subjective Theory of Value (as championed by Austrian economists and others) and the various Intrinsic Theories of Value , most especially variants of the Labor Theories of Value (as championed first by some of the Classical School economists, such as Smith and Ricardo, but which was subsequently badly perverted by Carl Marx and others).
In short, I will demonstrate herein “organically” that all prices within the marketplace are subjective, but that such considerations include objective elements within the thinking of both buyer and seller. This will produce a far more practical (and biblical) representation of value estimation, which I believe also happens to best reflect the reality of daily market transactions.
Nevertheless, this short chapter on this topic is not meant to express a fully developed thesis able to withstand critical examination, as this website is not the appropriate location for such an effort. In time, I do expect to fully develop such a thesis and intend to publish it on EconomicTheology.com when it is complete. –R.V.
Without controversy, the idea of “value” is a subjective determination. The World English Dictionary definition of “subjective” found on Dictionary.com defines this word as:
1. Belonging to, proceeding from, or relating to the mind of the thinking subject and not the nature of the object being considered
2. Of, relating to, or emanating from a person’s emotions, prejudices, etc: subjective views…
4. Existing only as perceived and not as a thing in itself
When one refers to something as being “subjective,” he or she is saying that the internal considerations that someone has about a person or thing forms the basis of their opinions, rather than the objective characteristics of the object/person itself. So using a piece of artwork as an appropriate example, “Beauty is in the eye of the beholder” as the classic English idiom states.
So in the marketplace, if several people are looking at the same product or service, each individual will generally have a different opinion regarding its value. For example, John looks at a certain barrel of apples and considers that barrel worth three ounces of his own silver. Miriam looks at that same barrel and considers it worth about one ounce of her silver. The market vendor then tells them both his price is two ounces of silver. Miriam walks away (considering the price too high) and John begins to weigh out two ounces of silver to the vendor (considering it a great bargain).
It is a fact that “value is in the eye of the beholder” (to alter that common English idiom), which is a concept that is also very consistent with the Christian tradition of free market economics (a point we will see even clearer as we progress further in Organic Economics™).
However, in order to understand subjective valuation, and to lay some more foundation for our later discussions, we need to examine what the root issues might be that caused our hypothetical “John” to have a different concept of value from “Miriam” within that illustration; and what caused the vendor to have a different valuation from them both.
One aspect is how each person considers the object in question useful to their own specific goals. John may have been craving apples for several days, and upon seeing the barrel in the market square, his appetite was aroused and his willingness to pay was high. Miriam, on the other hand, may still have a stock of uneaten apples at home. In her mind, her silver could best be used to acquire something else of more urgent need.
We could also conceptualize someone coming along who was allergic to apples. Upon seeing the barrel, they were not interested in the goods at ANY price and would quickly move on to other things in the market square.
Thus, we see another “organic” principle at work here:
The Goal-Component of Subjective Valuation: One major component in determining “value” is the subjective estimation by a person of a particular good or service’s usefulness towards meeting their own needs, goals, and desires. For buyers, this affects their willingness to part with their money. For sellers, this affects their willingness to part with their goods or services.
Again, this factor applies to both the seller and the buyer, as even the seller has certain goals and objectives regarding the product in question. Unless the price rises high enough for the seller to value that quantity of money more than the good or service he possesses, he will keep what he has until a more “willing” buyer comes along.
However, the example of Miriam within our illustration above brings another related factor into view here. She already had apples at home, and thus, the “value” she placed upon the barrel of new apples was much lower. If she, like John, had been without any apples, she would have likely “valued” the barrel somewhat higher.
Economists often discuss this factor within what they call the “Marginal Theory of Value.” Essentially, what they recognize is that—all other considerations being equal—a person will tend to value the first “unit” of a certain good much higher than a second one. They will likewise value this second one higher than a third unit, and so on.
Using a car as a modern example: If a family was without a vehicle, they would likely “value” an automobile very highly for the usefulness that a new family car would provide them. In many countries, and especially within the United States, a car is considered a critical transportation need by many. However, once that first car is obtained, the expense of a second car might seem far less justifiable to many people.
But let us assume that both the husband and wife work outside the home, and that a second car seems to be really ideal to simplify their morning commute. So they save money and/or negotiate financing for another car, and after some shopping around, they have their second vehicle in the driveway. Nevertheless, this second car does not have nearly the feel of critical “necessity” that the first car had for the family.
And what about a third car? If there are only two adults, this added expense would likely seem very unnecessary to many families. However, if their teenage son or daughter was running “mom” around the planet taking them on their errands, the third vehicle would start to look more and more practical. Regardless, this third vehicle would not have nearly the “value” within the minds of the parents as the first two cars did (though the teenager would certainly have a different perspective in the matter).
So this concept brings us another Organic Economic truth that we have identified:
Marginal Value: Each subsequent “unit” of a good or service—all other considerations being equal—has a marginally smaller “value” within a person’s subjective value considerations.
And this has a related principle also worth noting:
Diminishing Utility: Each subsequent “unit” obtained of the same good—all other considerations being equal—is used to achieve a goal or objective that is less important than those objectives for which those preceding it are used.
Did you notice how critical the use was for the first car within our illustration? But did you notice how the second car fulfilled a less important objective? And, of course, the third car was—at least in the mind of the parents—intended to fulfill an even less important goal (which is one reason why the third car in a family tends to often be a used car). 😉
So we could easily assume that this “diminishing utility” principle also had an affect on Miriam’s valuation of the barrel of apples further above. Again, all value is subjective, and specific to the circumstances and considerations of the individual.
The Labor Component
Without departing from a subjective view of value, let us now tie this discussion into the Organic Economic™ principles that we examined within the previous chapters, and especially within The Labor Component of Wealth:
Consider how one’s own labors influence their estimation of value. Have you ever heard (or said), “I worked hard for that money” or “I paid for that with my own sweat”? Such statements tell us plainly that one estimation of VALUE can also be directed toward the medium of exchange that we are using to PAY for the good or service in question, as well as toward the good or service itself. Consider this illustration:
Samuel is a lumberman. He heads into the forest and cuts down a very large tree. With much sweat and effort, he is able to transport that tree to Joseph, the carpenter. Joseph negotiates with Samuel and finally pays six ounces of silver for some of that wood. Samuel then goes off and sells the remainder elsewhere.
Joseph then begins to labor in his shop to produce a table with four chairs out of that lumber. When merchant Eli stops by to view Joseph’s latest creations, he asks about the table and chairs. Negotiations ensue, and the two agree on a price of nine ounces of silver. After paying his men about an ounce of silver to transport it safely to his market square booth, he has ten ounces invested.
Since the carpenter did not put a finish on the wood beforehand, Eli now directs one of his employees rub it down with almond oil so as to protect the wood and give it a more appealing luster for buyers. His investment in the oil is half an ounce, and he has another half an ounce of labor invested in the wages of his employee. Altogether, Eli has nine ounces in the product, plus half an ounce in almond oil, and a total of one and a half ounces of silver invested in labor (transport and finishing the furniture), or a total cost of eleven ounces invested.
Note: There is a labor component in every stage of the production of the furniture, all the way up to it sitting in the merchant’s shop awaiting a willing and able buyer.
Now the market opens for business the next day, and here is the new table and chairs awaiting a willing buyer. By chance, Samuel the lumberman happens to be the first to stop and look at the table and chairs (not knowing where they came from, of course). He asks about the furniture, and Eli quotes him an initial “high” price of twenty-five ounces of silver (as a seller would tend to start negotiations from a higher price). Samuel scoffs at that price and says, “For that? That set is not worth more than ten ounces of silver!” (as a buyer tends to want to start from as low a price as possible). The two haggle back and forth, and we will state for illustration purposes that the final price negotiated is sixteen ounces of silver.
What factors were likely contributing to Eli’s (the seller’s) negotiation price range? If we exclude other unusual conditions for this example (e.g. a shortage of tables and chairs for sale, or alternately, a desperate need by the seller to liquidate his shop’s goods), we can ascertain:
- His direct costs, plus…
- His subjective goals for obtaining a profit in the sale, plus…
- His subjective expectations of price the market would likely bear for those goods, within his desired time frame (i.e. based upon his past experiences).
BUT what factors were likely involved in determining Samuel’s (the buyer’s) negotiation range? Excluding unusual conditions, we can determine:
- How much total money he has on-hand to use for purchases;
- What other things he could do with that money (alternate choices, e.g. other purchases, savings, etc.);
- What are his specific goals/motivations for obtaining that furniture (e.g. pleasure, function, pride, etc);
- And the conscious knowledge of how hard he had to work to get that money in the first place, and what it would take to replace it again.
This last point is the one I have found so often omitted from consideration by economists deliberating on how people determine value in the marketplace. Yet, it is such an “organic” basic instinct within humans that it occurs within the mind of many people almost unconsciously. The “blood, sweat, and tears” that preceded the buyer obtaining the money he or she now has to spend, has a tremendous amount of influence on the BUYER’s subjective valuation of his or her own money. Thus, this has a necessary affect upon the buyer’s side of any marketplace transaction, in varying degrees, based upon the amount of labor that was required to obtain that money.
On the other hand, a seller may also have significant “blood, sweat, and tears” to consider regarding their investment within the goods/services which they are selling. In the example we used above, Joseph the carpenter had quite a bit of “sweat equity” invested in turning that raw lumber into furniture. No doubt that affected his own subjective valuation of those finished goods, and thus, the firmness in which he negotiated his side, as the seller to Eli the merchant. The amount of such sale-side, labor-centered considerations will vary widely in the marketplace (e.g. Eli did not have much of his own labor in the final consumer-ready furniture, so his subjective valuations would have been minimal when he negotiated the sale price to the end-consumer later).
So now let us state this “organic” truth more officially as:
The Labor-Component of Subjective Valuation: Another major component of a person’s SUBJECTIVE valuation of their own goods and services as a seller—or regarding the money with which they are making their purchase as a buyer—is the labor investment (or “sweat equity”) that they have in the good/service/money in question.
This affects both buyers and sellers in the same, but inverse, manner: The higher the labor investment therein, the less willing they typically are to part with the good/service/money in question. For sellers, this tends to encourage them to seek a HIGHER price in the marketplace. For buyers, this tends toward them seeking a LOWER price for the same goods/services.
Of course, the above “organic” axiom is dependent on what we might call “normal” market conditions. Extraordinary circumstances (e.g. product shortages, natural or man-made catastrophes, family crises, etc.) would have a tendency to override just about any normal subjective valuation processes in the minds of market participants. However, we are looking to understand Organic Economic™ principles that are applicable under the broadest set of circumstances, so we need not take the time to consider such abnormal conditions within our discussion beyond this brief note.
A Living Marketplace
So we can see in what we have covered within this article that the marketplaces of the world are “alive” with the actions of sellers and buyers as they each seek to satisfy their own needs and desires. There is a constant “tension” between the motivating factors driving the buyers on one hand, and those motivating the sellers on the other hand. This tension actually causes something called a “price discovery” as market participants each try to achieve their objectives. That remarkable occurrence works this way:
This “tension” affects each role within the market (i.e. buyer or seller) in opposition to the other, and thus, the “price” they are willing to quote. The seller’s price is called the “ask” price, while the buyer offers a “bid” price. This phenomenon produces an obvious difference in the quoted prices of many markets—particularly in today’s equity and commodity markets. That difference between the two is called the “spread,” and the size of the spread can be an indicator of the markets’ efficiency and health.
Despite this tension, however, a free market is a “living” organism (i.e. made alive by the people who participate therein) that forms an extremely efficient system for distributing goods and services when it is functioning properly. There are generally “willing” buyers at a certain price, who are able to find “willing” sellers at that same price. When those mutually beneficial exchanges take place, all market participants benefit, and society as a whole benefits as well—as we learned already within earlier chapters very clearly.
- All “valuations” being made in the marketplace by both buyers and sellers are subjective in nature.
- Each person’s unique circumstances affect how they view and “value” goods and services, whether they are a buyer or a seller.
- The perceived usefulness of any good/service towards obtaining a person’s objectives influences their “valuations” of those goods/services.
- Each subsequent “unit” of a good or service is typically “valued” less by a person than the units obtained before them.
- Each subsequent “unit” of a good or service is typically utilized to achieve less important objectives than the units obtained before them.
- The subjective assessment of labor (i.e. “sweat equity”) invested within goods/services/money affects the individual’s valuations of those same things. The higher the “labor” they perceive that they have invested, the less likely a seller is willing to part with the good/service except at a higher price; and the less likely a buyer is willing to part with their money, except at a lower price.
- The valuations of both buyers and sellers within the marketplace creates an ongoing “tension” between the two marketplace roles, and this “affect” causes price discovery to help determine the “market price” of goods/services.
- The aggregate of all of these factors reveals that the Organic™ marketplace is a “living organism” of sorts, because it is made up of human beings who make choices.
Again, the Organic Economic™ principles that we are covering in this series highlights those “organic” elements that comprise a truly prosperous and functioning market (microeconomics)—and in the aggregate, a truly prosperous economy (macroeconomics). Within this light, those “artificial” elements that are corrupting the function of today’s many markets and global economies should already be coming ever more clear to my readers. So as we continue this study, these truths should also reveal the ideal financial strategies for these troubled times that we live in today.
Now with this additional foundation now firmly established for our Organic Economics™ discussion, we can proceed to explore some amazing truths about Prices, Profits, and Market Forces within our next chapter. This teaching will open up to your mind the key components of truly Organic Economies™, and how they actually regulate themselves automatically. In fact, this next chapter will build upon what we have covered so far, as it further prepares us to move into some strategic topics soon thereafter.
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