Monday, December 28, 2015

HOW SUBJECTIVE VALUE BECOMES OBJECTIVE VALUE

by James Craig Green

Alternative title "Adventures of the Demand Wizard?"

The value that every person places on a particular transaction or decision not to transact is completely subjective, as the great Austrian Economist Ludwig von Mises said. Also, it is very fleeting. Before explaining this however, I'd like to introduce you to two of my kindred spirits.

My friends Paul Prentice and Penn Pfiffner, both Senior Fellows at the Independence Institute, teach classes to students for which this blog was named. These classes are called Free People, Free Markets, emphasizing the importance of markets in producing useful goods and services, which led to an email list of alumni of those classes. This blog was created to encourage discussion of issues among course alumni and others, but so far, it has been a place for me to expound on my free market views.

One of the most interesting features in Paul's and Penn's classes is their presentation of the Demand Wizard.

Paul and Penn dress up like a wizard, complete with hat and magic wand, and bestow generous benefits on each member of the class. Four items are available, like chips, soft drinks, cookies or bottled water, which comprise a sample economy.


Step 1 - The Wizard Allocates

The wizard, in his infinite wisdom, hands out one item to each person. This begins a process in which the overall value of the items is increased without adding or subtracting any of them from the economy.

Each member of the class is asked to value the four items available on a scale of 1 through 4. For example, you assign a value of 1 to the item you would least like to have, 2 to the next least valuable item, 3 for the next  get a bag of cookies, but you would prefer to have any of the other items than the cookies, then you assign it a value of 1. If

Step 2 - The Market Allocates

If you are hungry for sweets, you would value the cookies or soft drink over the chips. However, if you were thirsty, you might make another choice, maybe bottled water. So, von Mises' subjective value not only varies from person to person, but from minute to minute within thee person. This may be profound, but is only half the story.

From the subjective, individual, whimsical choices by many people in contact with each other, you begin to have a market - a voluntary collective in which each person trades by his own whims, but the collective action of many such choices produces an OBJECTIVE value. That is the "market price" of any given commodity at any given time. The stock market is an example. So is a store that sells anything. When demand falls off, the store owner lowers the price, even below his cost if necessary to get rid of inventory that is not moving. When demand picks up, he may rise the prices again. These prices are the objective value of some thing or things in a market. They may remain constant for long periods of time, or they may vary each day, depending on the supplies and demands that produce changing prices.

This connection between subjective, even whimsical, fleeting value for a person creates an objective value, which is the integration of many transactions.

Value, in its various forms, is the essence of markets and the freedom they produce, along with the protection they can provide if people take seriously their responsibility to make decisions. Government "freebies," as well as restrictions, reduce the need to make decisions; producing sloth, dependency, lack of initiative and defense of the status quo.

This is just as true for "justice" or "law" as it is for the price of widgets.