Economic Harmonies: Chapter 5 Review – Value and Utility

How And Why They Differ, And The Dangers In Conflating Them.

By Scott Albright

When we think of how the word value is used, both as a noun and as a verb, it is very important to not conflate it (as a noun) with utility, to know the differences between the two, and always remember that value, as a verb, in describing economic principles through voluntary exchange does indeed imply an evaluation and a comparison of services in barter/direct exchange, or their equivalent of such with money in indirect exchange.

What has been thought to be the principle determining factors of value has gone through an evolution throughout the centuries but what remains today in various schools of thought does have fragmented pieces of older ideologies, especially from those classical economists who embraced value as being objective and determined by labor inputs in production, not by the level of output.

In chapter five of the Harmonies, I personally think Bastiat parsed, compared and contrasted the concepts of value and utility very cogently with solid logical consistently outside of his assumptions of labor spared being more influential than labor expended in his famous water/diamond paradox. More on this later but first, the early definitions that he gave to both value and utility lay sound groundwork for the whole chapter’s exposition.

“And yet I must say: From the viewpoint of political economy society is exchange. The primary element of exchange is the notion of value, and consequently the connotations that we give to this word, whether true or erroneous, lead us to truth or error in all our social thinking. …

…But, to succeed in my effort, I must explain two things, namely:

1) Utility-that is, the service a thing renders tends to cost less and less, to become more generally available, as it gradually passes outside the domain of individual ownership.

2) Value, on the contrary, which alone can be claimed as a possession, which alone, in law and in fact, constitutes property, tends to decrease in proportion to the amount of utility it represents.

Consequently, if I base my demonstration both on private ownership but exclusively on private ownership of value, and on public ownership, but exclusively on public ownership of utility, I should be able, provided my reasoning is valid, to satisfy and reconcile all schools, since I recognize that all have had a glimmering of the truth, but only of a part of the truth seen from different points of view.” [1]

This excerpt highlights the main points of the chapter:

-the primary element of exchange is the notion of value.

-the differences between value and utility, and why they are important.

-where some of the past economists went wrong in their understanding of value, and where they were right.

-why and how some of the classical economists errors gave dangerous fuel to the fire of the communists and socialists.

Bastiat’s Water/Diamond Paradox sheds some profound light on political economy, exchange, value and utility (and their differences), but the intrinsic assumptions in it that Bastiat espouses, specifically that labor spared the consumer is always more important than labor expended by the producer, while at the individual level is largely accurate and observable, arguably led him astray, as Dean Russell pointed out in the introduction to the Harmonies.

The extent to which labor is desirable or undesirable, in and of itself regardless of it’s productivity, varies, as does the psychic disutility of forgone leisure. The desired level of labor expended and leisure enjoyed does have an influence that is cultural, not just solely dependent on the economic freedoms that come with private property rights, rule of law and free markets.

People don’t care solely about monetary benefits or labor spared through exchange, as the Amish would be one example. They desire to have a sort of seceded community, while employing more primitive forms of labor, so as to keep all hands busy and no hands idle with enough work for everyone to go around. Many labor union policies are designed to fight the effects of machinery and enhancements in innovation and advanced methods of production. Protectionist and Nationalist economic policies aimed at keeping certain lines of production in one’s domestic country are designed to promote domestic expenditure of labor even if it is more cost effective and yields better choices for consumers, producers and investors to offshore investments in certain lines of industry.

The Water/Diamond paradox is great just for brain exercise, following chains of logic and deductive reasoning, regardless of whether you agree with Bastiat or not. Bastiat expounds here on his principle of labor spared the consumer having more weight than what labor was expended by the producer. It’s what I call the Savings Theory of Value (STV).

“I take a stroll along the seashore. A stroke of good luck puts a superb diamond into my hand. I have come into possession of a considerable amount of value. Why? Am I going to contribute something great to humanity? Have I toiled long and arduously? Neither the one nor the other. Why, then, does the diamond have such value? Because the person to whom I give it believes that I am rendering him a great service, all the greater because many rich people would like to have it, and I alone can render it. Their judgment is open to question, granted. It is based on vanity and love of display, granted again. But the judgment exists in the mind of a man ready to act in accordance with it, and that is enough.

We could say that this judgment is far from being based on a reasonable evaluation of the diamond’s utility; indeed, it is quite the contrary. But making great sacrifices for the useless is the very nature and purpose of ostentation.

Value, far from having any necessary relation to the labor performed by the person rendering the service, is more likely to be proportionate, we may say, to the amount of labor spared the person receiving the service; and this is the law of values. It is a general law and universally accepted in practice, although, as far as I know, not taken into account by the theorists. We shall describe later the admirable mechanism that tends to keep value and labor in balance when the latter is free; but it is nonetheless true that value is determined less by the effort expended by the person serving than by the effort spared the person served.” [2]

The comparing and contrasting of value and utility by Bastiat was very cogent because it clears up the legitimacy of property rights being in services exchanged, not in the utility, or generally speaking, satisfaction derived from goods and services due to their ability to serve consumers needs, and satisfy their wants. He also clarifies that valuations of reciprocal services are implied in the concept of value. An example of this would be how a homeowner attempting to sale his or her house believes it to be of a certain value but potential buyers either confirm their judgment or render it too high (or possibly too low, if many are willing to pay more in order to secure it, in the event that available homes for sale is possibly limited or the opportunity is not believed to be present again going forward). The provider of a good or service can legitimately say to the customer, “The value is mine, the utility is yours.” The clear descriptions in Bastiat’s explanation exposes the errors of the classicals who ascribed value to materials/natural resources, apart from and independent of the services applied to them.

“This transmission of effort, this exchange of services, forms the subject matter of political economy; and since, on the other hand, political economy can be summed up in the word value, which is the thing it seeks to explain in all its detail, it follows that our notion of value will be an imperfect one, an erroneous one, if, neglecting the mean, we base it on the extremes, which are phenomena of our sensations-wants and satisfactions, which are intimate, nontransferable, not subject to measurement from one individual to another-instead of founding it on our activity, our effort, our exchange of reciprocal services, since these are capable of comparison, appraisal, evaluation, and can indeed be evaluated for the very reason that they are exchanged.

In the same chapter we arrived at these conclusions:

“Utility (the ability of certain acts or things to serve us), is composite, one part of it being due to the action of Nature, the other part to the action of man. The more Nature has done to effect a given result, the less there is for human labor to do. Nature’s contribution is essentially gratuitous; man’s contribution, whether intellectual or physical, exchanged or not exchanged, collective or individual, is essentially onerous, as is implied by the very word “effort.”

And since what is gratuitous cannot have value, the notion of value implying acquisition through effort, it follows that value too will be misunderstood if we extend its meaning to include, in whole or in part, those things that are received as gifts from Nature, instead of restricting its meaning to the human contribution only.

Thus, from two points of view, from two different approaches, we reach the conclusion that value must have reference to the efforts made by men in order to secure the satisfaction of their wants. …

…Thus, the definition of the word “value,” to be accurate, must have reference not only to human efforts, but also to efforts that are exchanged or exchangeable. Exchange does more than take note of values or measure them; it creates them. I do not mean that it creates the acts or the things that are exchanged, but it imparts the idea of value to them.

So, when two men exchange their present effort, or the fruits of their past effort, they are serving each other; they are rendering each other mutual service.

I therefore say: Value is the relationship existing between two services that have been exchanged.” [3]

I must admit that after reading this chapter the second time around, it gives you a much clearer understanding of political economy, value, utility, legitimacy of services, and how free and voluntary exchange is necessary to keep the just balance of services rendered and services received aligned properly. Bastiat’s corroboration and critiques of the classical economists in their conceptions of how value is determined gives you a more complete and dynamic understanding of what factors can influence it.

Many of us have heard about the labor theory of value (LTV), which states that all value comes from labor, and therefore that prices should be determined by this. While many ascribe Marx to coining this, it was Marx who was more influenced by the likes of Ricardo and Smith for their at least semi embrace of it. The dangers here are clearly exposed by Bastiat and it is worth noting what these five classical economists had to say about value in general.

Adam Smith

Adam Smith and the Durability of Value

“There is one kind of labor,” he says, “that increases the value of the object on which it is expended. There is another kind that does not have this effect.”

“The labor that goes into manufactured goods,” Smith adds, “is fixed and takes concrete form in some salable article of merchandise, which lasts at least for some time after the work is completed. The work of servants, on the contrary [and the author lists soldiers, magistrates, musicians, teachers, etc., under this heading] is not fixed in any salable merchandise. The services disappear as rapidly as they are performed and leave no trace of value behind them.”

We see that it is implied here that value refers to the modification of things rather than to men’s satisfactions.” [4]

This idea that Smith had regarding materiality and durability is what is clear in the protectionist and nationalists sentiments behind the love for domestically produced products. Those who decry and bemoan outsourcing of production, trading with other nations and us becoming more of a service oriented economy believe that that is somehow or another inherently worse than being a manufacturing powerhouse like we were post Great Depression and WWII.

They are obviously dismissing the degree of services and utilities that are consumed by their own people. It’s like in their mind, if it is not produced domestically, it must be a bad thing. While this is short-sighted, it’s clear to see the ideological similarities of Smith and protectionists. I know many will point to Smith bailing himself out with logical inconsistencies later revealed in his magnum opus, The Wealth of Nations, but just from these excerpts, what would we say of the services rendered by babysitters, taxi cab drivers, and health care workers, just to name a few, if we all thought like Smith in this regard. It doesn’t take much to see how this flawed logic leads one astray in studying political economy.

Smith was also wrong in assuming that manufacturing labor costs were fixed. As methods of enhanced production and capital investments accumulate in the economy, the amount of labor required to bring any level of output of a product to market tends to decrease, so that labor becomes more free and mobile to pursue other lines and talents.

David Ricardo by Thomas Phillips, oil on canvas, circa 1821

Adam Smith, David Ricardo and Labor

“Adam Smith and his disciples have ascribed value to labor under the condition of materiality. This is contradictory to their other theory that the forces of Nature have some share in the production of value. …

…There are, then, strictly speaking, two flaws in Smith’s definition. The first is that it does not take exchange into account, without which value can neither be created nor conceived of; the second, that it uses a word, “labor,” which is too narrow in its meaning, unless that meaning is extended beyond its normal limits to include not only the degree of intensity and the length of time expended, but also the skill and sagacity of the worker, and even the good or bad fortune he happens to encounter. …

… Here is where the English economists’ definition fails most seriously. To say that value resides in labor is to suggest that the two are in a reciprocal relation, that there is a direct proportion between them. In this respect, the definition is contrary to the facts, and a definition contrary to the facts is a faulty one. …

… My definition eliminates the difficulty. … value resides in service rather than in labor, since it exists in direct proportion to the former and not to the latter. …

… I go further. I maintain that value is appraised at least as much in consideration of the labor it can spare the user as of the labor it has cost the producer. …

… I agree with Ricardo that labor is the basis of value, provided first that we take the word “labor” in its most general sense, and, second, that we do not give it a ratio to value out of keeping with all the facts; in other words, provided we substitute the word “service” for the word “labor.” ” [5]

Here, it is reiterated that Smith disregards the essence of exchange and almost sees value as independent of said evaluations of reciprocal services. What the consumer gets out of exchanging his/her services in order to obtain the good/service desired, is ultimately, in a free market with free prices, what determines the value of said good. The imputation of value goes from the consumer backwards throughout the production process towards the producer, not vice versa. You can also apply this to labor services, and see how David Ricardo was wrong if he is assuming labor in the abstract is the source of value, regardless of it’s results or productivity, making it more or less desirable.

It seems that Smith and Ricardo were flirting with the concepts of the labor theory of value here, when they say that these labor costs in manufacturing are fixed (Smith) or that labor is the basis of value (Ricardo), providing one is not careful to be detailed in their explanations of whether they mean labor in and of itself or the degree and desirability of the services rendered from labor, the results, so to speak, of the labor.

As I said earlier regarding the Amish employing primitive production methods to keep more hands employed, these methods can work for feeding a small community, but to extend your consumer base, generate more revenue and earn profits in the process, you must employ much more efficient methods of production. Your consumers are competing for a vast availability of goods to choose from at competitive prices so, that being said, farmers need not have in mind how to employ the most hands, but rather, how to feed the most mouths or feed the ones they currently feed better, at lower prices.

This is the essence of value vs. utility, as Say elaborates upon but does go astray unfortunately. This makes it easier to describe why entrepreneurs seek to maximize their returns on their input factors of labor, land, capital, raw materials, etc. It’s the output that counts, not the input. This makes it easier to understand the concept of reciprocal services.

Jean-Baptiste Say

Jean Baptiste-Say and Utility

For those who’ve heard the axiom that utility is the basis of value, they’ve probably known that because of the French economist Jean-Baptiste Say, or J.B. Say.

“Say’s axiom was this: The basis of value is utility.

If it were a question here of utility as related to human services, I should have no argument with him. At the very most I could say that the axiom is so self-evident as to be superfluous. It is quite clear that no one consents to pay for a service unless, rightly or wrongly, he considers it useful. The word service is so completely included in the idea of utility that it is simply the translation, and even the literal carrying over, of the Latin word uti, to serve.

But, unfortunately, this is not the way Say meant it. He found the principle of value not only in human services rendered through the medium of things, but also in the useful qualities that Nature imparts to things. By so doing, he again placed upon his neck the yoke of materiality, and, we must add, he did nothing to tear away the harmful veil that the English economists had thrown over the question of private property. …

… This being the case, since Nature creates utility, it also creates value-a most harmful confusion of ideas that the enemies of private property have forged into a terrible weapon.” [6]

How Say embraced the correct view of value residing in services that are exchanged in the market but then erroneously embraced value in materiality is beyond my pay grade but since Say did believe that there is value in BOTH human services rendered and in natural resources, such as in land, minerals, air, water, etc., then the communists do have some legitimate beef when they claim that property is theft, providing that they mean ownership of resources apart from any services applied to them. Bastiat goes on to show how theoretically, when embracing materiality of value, you necessarily give rise to this notion.

“You tell me to pay you, in other words, to render you a service, says Proudhon, for receiving utility produced by natural resources, without assistance from man, who has already been paid separately.

But I insist on asking: Who will profit from my payment, that is, my services?

Will it be the producer of the utility, that is, the land? That is absurd, and I can bide my time quite easily until the land sends the bailiff after me.

Will it be a man? On what grounds? If it is for having rendered me a service, well and good. But in that case you share my point of view. Human service is the thing that has value, not Nature’s; that is the conclusion to which I wished to lead you.

However, that is contrary to your own hypothesis. You say that the human services are paid fourteen francs, and that the two francs that complete the payment for the wheat correspond to the value created by Nature. In that case, I repeat my question: By what right can any man lay claim to them? And is it not unfortunately only too clear that, if you apply specifically the name of landowner to the man who claims the two francs, you are justifying that too-famous maxim: Property is theft?” [7]

Very profound indeed to say the least! This is where the classicals who espoused the theory of value being inherent in material went astray and gave too much fuel for the communists fire. Also, might this give rise to price controls enforced by the state on various commodities or mineral rights being under attack?? I do not believe that most people realize the inherent danger in these logical inconsistencies and what they can give intellectual assent to.

Nassau Senior

Senior and Scarcity

Nassau Senior, the first professor of political economy at Oxford, believed that:

“of all the circumstances that influence value, scarcity is the most decisive. …

…Other things being equal, a service has greater value according to the difficulty we should experience in performing it for ourselves, and consequently, according to the more exacting terms we encounter when we ask someone else to do it for us.” [8]

I would contend that scarcity is a prime factor in the matter, but not necessarily the most important. We can see with deductive reasoning that because, for example, in order to become a neurosurgeon, it takes 15 plus years of schooling beyond high school, including very difficult classes such as microbiology and organic chemistry, to name just a few, very strict competition for med school entry, a high score on the M-CAT, clinical rotations, residency, and being shadowed by a surgeon before you are set free, and probably $250,000 of student loan debt, most people both don’t have the intellectual capacity to become one. Because of this, it only stands to reason why these natural checks on entry into the field will ultimately result in highly paid professionals, because they are much more scarce in number than the amount of people who can work at a fast food restaurant.

You can also apply this to the scarcity of obtaining water post natural disasters, such as Hurricanes Harvey and Irma, just in this past month. All of the outcry and memes against price gouging on water will never change the fact of the matter that water is scarce in these situations, transportation of it has to come from areas further outside its normal distribution centers, and the time elapsed to get to market for these suffering people is only longer due to submerged routes of travel, necessitating more aerial deliveries, delays, and so on. Say what you will about enabling the poor to have lower prices on water with price controls, but empty shelves speak much louder than your feelings on the matter.

As scarce as any good or service can be, it still must be subjectively valued high enough to fetch a given price in the market. That’s where our final economists view on what determines value comes in.

Heinrich Friedrich von Storch

Storch and Subjective Judgment

When we say that value is subjective, we mean that the valuations of goods and services that are voluntarily exchanged in the free market are determined by comparing what one gives up as compared to what he or she gets out of an exchange. This means that we can’t have interpersonal comparisons of utility, as no two people will value all goods and services equally, our value scales are all ranked differently.

Heinrich Friedrich von Storch, was an economist who believed that subjective judgments are what determined value.

“Our judgment enables us to discern the relation that exists between our wants and the utility of things. The verdict that our judgment pronounces of the utility of things constitutes their value.” …

…”In order to create value, three circumstances must coincide:

(1) Man experiences, or conceives, a want. (2) Something exists that is capable of satisfying the want, (3) His judgment pronounces a favorable verdict on the utility of the thing. Hence, the value of things is their relative utility.” [9]

Bastiat then goes on to describe that this alone cannot account for the relation between services since, during the daylight, we enjoy what sunlight provides as gratuitous utility, since we don’t have to pay for the service but at night, since lighting a candle is required (in the days of 1840s in France before modern technology) to see, then seeing during the day is more free but at night more costly, because we must pay candle makers the services that went into producing the candles. Therefore, the relation between the two services is more determining of their value in exchange than is the relationship between their intrinsic utility.

“Many outside circumstances influence value without becoming value themselves. The word “service” takes all these circumstances into account in their proper measure.” [10]

My previous example of how water is more scarce during and after a hurricane is another corroboration of why all of these factors are determined in the word service, regardless of the intrinsic utility of a good/service.

I want to give a few more examples of the differences in value and utility, and how the just balance of services rendered against services received is distorted with various statist policies and monopolistic privileges.

Two years ago, I got my alternator replaced in my old 2006 Ford Escape. What the mechanic told me was that the 2005 and older models only required two hours of labor but the 2006 and newer models required six hours of labor. When you consider the design of automobiles, and their evolution, it only stands to reason that different parts will be placed in different locations for various models, and this will mean that certain replacements can cost more (and others less) with newer models as compared to older models. However, when we consider the concept of reciprocal services, because of this new design, I had to give up more of my own labor hours to get a replaced alternator. The observable utility here is an automobile that runs well due to a new alternator, the value, on the other hand, is higher, not because of a better trained mechanic or a higher quality part, but because of the extra labor that went into replacing the alternator.

We should not be quick to assume however, that the mechanic won and I lost this one. There is a higher opportunity cost for the mechanic as well, not just on my end. For he had to give up four extra hours just to replace an alternator that used to cost him two hours of his time and skill. That is four hours he could have been serving another customer who needed a new transmission, a few customers who needed oil changes and were delayed by the design of my vehicle! Because the alternator is placed much deeper behind the guts of the engine, transmission, and a host of other parts needing removed to get to it, there is a higher value in the service rendered, but as far as the service received or the observable utility, a replaced alternator is still what I get out of it.

Another example of distortions in the relationship between value and utility, or service rendered and service received, would be in the cluster classes necessary to complete a four year bachelor’s degree. I received my B.A. in Economics in 2005. In order to obtain this degree, 60 credit hours (roughly 15 classes) had to be in clusters and electives that were not related to my degree in any way, shape or form. Most of these classes were history, biology, communications, philosophy, and some electives.

Now, do these classes require a professor, who has been trained in a given discipline for so many years before they can teach, and for so many hours a week, semester, year, etc. that they could be teaching another class in place of…yes, without a doubt, and there are valuations that go into that, I don’t dispute that. However, to say that I get utility, or satisfaction in general, out of these classes, or that it renders me a service that is necessary to know, for my field of study, professional development, etc., is a dubious claim. They are dubious precisely because they are not at all necessary in learning economics, and are in my humble opinion, revenue boosters and job security for the faculties and bureaucracies in higher learning. But, when the state is so heavily entrenched in setting standards for accreditation in higher learning, subsidizing student loans, and determining what textbooks can and can’t be used for teaching, it only stands to reason that they want to extract as much revenue as they can in the process. It is far from a meritocracy.

These gross inefficiencies and distortions in the imbalances between service rendered and service received are precisely what give rise to more innovative learning methods like online universities and an innovative company, whose aim is to condense all of the learning for their applicants into a nine month program so that they are on the job market ASAP with little or often no debt. That’s my kind of model! These leaders of tomorrow’s workforce understand the difference between value and utility very well and because their own resources are on the line with no life line bailout from the state, they stand to lose more. It only benefits them if their customers are benefited well. Incentives matter, it’s that simple.

The next chapter review will highlight some more of these principles of value and utility, but more specifically in regards to the relationship between consumer and producer.

[1]Bastiat, Frederic. Economic Harmonies, pp. 100-101, The Foundation for Economic Education, 1996

[2] Ibid, pp.110-111

[3] Ibid, pp. 102-103

[4] Ibid, pp.129-130

[5] Ibid, pp. 132-133, 144

[6] Ibid, pp.134-135

[7] Ibid, pp. 137-138

[8] Ibid, p. 141-142

[9] Ibid, pp.142-143

[10] Ibid, pp. 143-144

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