Tag Archives: economics

Objective and Subjective Value

The two main forms of Value theory that are in existence right now is the Labour Theory of Value (LTV) and the Marginalist Theory of Value (MTV). Usually the proponents of one, do not recognise the validity of the other in defining the value of an object. I wish to show that these two are not mutually exclusive but that rather, we have a dualistic system of value where both play a role.

First of all, I consider that each item has an Objective utility which is the intrinsic use-value it has for the vast majority of humans. For example, a potato has an amount of kcal and it can always nourish. A car has the capability to move with a number of km per hour etc. These define a utility that remains constant no matter the subjective view on them by any human.

The only way to get this objective utility1 is to create it and the only thing that creates items is human labour. Labour can be counted in hours and thus we can find out how many hour of labour2 are necessary to create a specific objective utility in the form of a product. We can call this the objective value of the product.

It is this kind of value that the LTV attempts to define.

Now each item also has a Subjective utility which is the use-value any specific human individual assigns to it. This utility is almost never the same for any two individuals and further fluctuates for the same individual based on marginal utility. So I value a single potato when I have nothing to eat much more than a single potato when I have another 1000 of them in the warehouse. And I value a car when I have to drive 10 km every day to work, much more than a neighbour who works in the same building he lives in.

This subjective utility can only be abstracted based on the average demand for any type of objective utility. There is no other way to quantify it as each human simply thinks in a matter of priorities. For the starving, the potato is more “valuable” than a car. We can call this averaged demand the subjective value of the product.

But how do these two merge? The objective value lets us know how much work a product requires. This work needs to be repaid with an equal amount of work (in the form of another product) if one is to part with it. Thus it defines the minimum exchange value of a product. The subjective value lets us know on average how much people value a product. As a person values another product more than what they produce themselves (due to marginal utility), the subjective value tends to be higher than the objective value. Thus it defines the maximum exchange value of a product.

If there is a demand for the product then we can assume that the subjective value is higher than the objective. The higher the demand, the higher the subjective value. We can consider this difference between the number of labour hours a product requires to make and the number of labour hours we can get in exchange for it, as an objective measure of the subjective value.

In case the subjective value is below the objective value, then it means that this product will not be made as nobody will wish to make even the necessary minimum exchange for it at the objective value.

So what does this all mean? I’m not certain yet. For me, it is an obvious fact that the LTV is true but that also the MTV is also true. Neoclassical economics have used the Subjective Theories of Value as an unbeatable boogeyman to prove that Marxist theories were inherently flawed. But the Labour Theory of Value is still a very real important aspect of the value of a product as it is the only thing that can be used as a basis for the price. Certainly, Subjective Theories of Value play an important part but it is a much lesser role which only helps to show why exchanges happen and why prices fluxuate. It can in no case be considered the only way to define value.

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  1. When it does not already exist in nature []
  2. Socially necessary labour hours to be exact but I don’t want to get into such details now []

Quote of the day: All Economists must die

Quoth Satoshi Kanazawa

Microeconomic theory, or any other theory of human behavior which assumes that human behavior is rational and based on carefully calculated cost-benefit analysis, cannot explain van Beest and Williams’ remarkable findings that humans are happy to lose money and sad to make money.

And if you’re wondering about the title of this QotD, read the full article 😉

This goes very nicely with my recent post on human nature and how, not only is it not suitable for Capitalism, but on the contrary, the truest expression of it can only be found in Communism.

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What Capitalism needs

Earth provides enough to satisfy every man's n...
Image by just.Luc via Flickr

In previous times I have had sporadic thoughts on how would it ever be possible to reach a utopic society through a system such as Capitalism. I just couldn’t fathom how such a thing could occur.

My classic thought example was that we develop machinery that is capable or creating enough food to feed the whole populace of the earth 5 times over. This would be obviously be a good thing for everyone as nobody would ever have to starve again but I couldn’t just see how our current society would work with it.

The recent Quote of the Day gave me the insight, or rather the mental push I needed. Capitalism just cannot work with such concepts. While things like infinite goods (food & shelter included) would seem as something positive for any humans, for the concept of Capitalism they are anathema. When you have infinite food, automatically the value of it must approach zero. When you have enough place to shelter everyone on earth, by necessity, the cost of residence must approach zero.

Thus, there is absolutely no way for a capitalist to ever want to invest in a technology which would produce any kind of infinite good unless they can act as the monopoly or they can insert artificial scarcity. And indeed, we already see these kind of limitations used where much more good would be done without them.

A good example is genetically engineered food-producing plants which are much more resistant to disease and produce a higher wield. The companies that created these seeds have also made them produce sterile plants, the seeds of which will just not grow. Thus farmers are forced to buy seeds from the company every year, instead of using part of their crop to sow the next year.

Artificial Scarcity.

My biggest revelation however was not that. It was that Capitalism needs two very specific things in order to be able to exist. These two things incidentally, are the ones that prevent the world from ever approaching Utopia. Misery and Greed.

Why Capitalism requires misery

Can there ever be a Capitalistic society in which work is not required in order to be fed and sheltered? I can’t see how it can. If this happened, it means that the cost of food & shelter would have become zero. But if the cost of food is zero, then there is no profit to be had, thus nobody would care for producing food and shelter, which means there will be a shortage and thus the price will rise above zero due to supply and demand. Thus it’s impossible. (unless we can make the aforementioned machinery somehow)

It does not stop only there but this is the basic idea. Capitalism requires people to be in some degree of misery so that it will be able to sell them something to alleviate it. A healthy human does not need medicine. A fed human does not need food. A warm human does not need shelter etc.

Misery is the driving force that makes humans take the worst, but necessary jobs. Without misery you would not have people willing to be abused at McDonalds or a Nike sweatshop. It is the acid which turns humans into the necessary grease for the economic gears.

Without people being in some state of misery, all those industries which exist to prevent or stop it must cease to exist. Without it, nobody would be willing to put humiliate or punish himself for the thankless benefit of others. And finally, without misery, the only other thing left to keep Capitalism going is greed.

Why Capitalism requires greed

Although greed is very closely tied to misery (one who does not have the object of his greed becomes miserable) it plays such a big role in a Capitalistic society that I believe it deserves special analysis.

Greed is arguably the basic driving force of capitalism. When misery has been vanquished for an individual, it is greed that takes the baton and drives them to continue playing the capitalist game.

A content human is the true enemy of Capitalism.

Having a society where work is not required for basic food and shelter would mean that there would be a significant amount of humans stopping working in order to do the activities they really enjoy. Perhaps these activities would simply be a waste of time, or perhaps they would be some of those activities that are not considered valuable enough to sustain someone (notably the arts). These people would thus not be productive member of society as defined by “what people will pay for”.

Capitalism requires people to be greedy and greed demands capitalism. It is a vicious circle that a society cannot break away from without a significant shift in beliefs and desires which will lead humanity to ditching both of them together.

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Quote of the Day: Capitalism

Quoth the Barefoot Bum

The problem our capitalist economy faces is not how to feed everyone, but how to make a profit feeding everyone.

Aptly said and so true. We would have no problem feeding everyone on the planet but the capitalists can’t make a profit that way and this goes for most goods.

Just look at the situation with Intellectual Property where the right holders are trying to reign in infinite goods just because they can’t figure out a business plan to make money out of them.

Pessimistic but realistic

The Barefoot Bum has once again posted a really insightful article on socioeconomics. I especially agree on the very basic moral values that most people agree on.

[…] but no one should oppose in principle the idea that no one deserves to starve in his old age. No one should oppose in principle the idea that every child should receive sufficient education to participate fully in a democratic society. No one should oppose in principle the idea that everyone should expect a safe workplace as a matter of course. No one should oppose in principle that everyone should expect that the products they buy, the air they breathe and the water they drink have been made safe to the best of our ability.

He then takes it a step further and explains how laissez-faire has not only shown that it is incapable of achieving these goals but it is actually dragging society to the other direction.

What I hadn’t realised however is how much damage the perverted teachings of the Objectivism cult leader have done, not only to the US society but to the world at large. It is telling when you see the US empire slowly1 disintegrating the more they try to follow “laissez-faire” which basically means that the rich are using it as a way to make the poor vote for them to take their money.

I wasn’t aware that the US had a socialistic reform (Roosevelt) but now that I do, the US rise to the forefront as a the first world nation makes much more sense. That US’ position as a developed nation erodes along with these reforms should not surprise anyone but the deluded Right-Libertarians and Objectivists. That Western Europe, where Ayn Rand never got very popular has ended up much more tolerant, secular and generally has a better way of life that the US, also comes as no surprise.

Anyway, go and read the above post. I mostly posted this because I didn’t want to leave him yet another “well-said” comment.

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  1. Slowly for our lifetime that is. In historical standards, it is disintegrating amazingly rapidly, almost as fast as the Macedonian empire []

Quote of the day: Economics

Quoth the Barefoot Bum

I am no more impressed by the assertion that “The vast majority of economists agree that capitalism is the most sound system there is for producing wealth and responding to demand,” than I’m impressed by the equally true assertion that the vast majority of theolgians agree that religious belief is the most sound system of creating and maintaining social, moral and ethical socialization.

I couldn’t have said it better myself. This is exactly the same way I feel every time someone brings in the “vast majority of economists that support capitalism” or whatever.