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.

THE LAW excerpts

Title, introductory notes and excerpts selected by James Craig Green

Excerpts from THE LAW by Frederic Bastiat (1801-1850):

1998 version by Foundation for Economic Education (FEE)

PDF file available as a free download from FEE (www.fee.org)
http://fee.org/library/detail/the-law-3 

Forward by Walter Williams
Introduction by Richard Ebeling

Introductory Bastiat quotes selected by James Craig Green (craig@waterwind.com):

Life, liberty and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty and property existed beforehand that caused men to make laws in the first place…

 

The Law is the organization of the natural right of lawful defense. It is the substitution of a common force for individual forces. And this common force is to do only what the individual forces have a natural and lawful right to do: to protect persons, liberties and properties; to maintain the right of each, and to cause justice to reign over us all.

 

If a nation were founded on this basis, it seems to me that order would prevail among the people, in thought as well as in deed. It seems to me that such a nation would have the most simple, easy to accept, economical, limited, non-oppressive, just, and enduring government imaginable – whatever its political form might be…

 

It can be further stated that, thanks to the non-intervention of the state in private affairs, our wants and their satisfactions would develop themselves in a logical manner. We would not see poor families seeking literary instruction before they have bread. We would not see cities populated at the expense of rural districts, nor rural districts at the expense of cities. We would not see the great displacements of capital, labor and population that are caused by legislative decisions.

 

The sources of our existence are made uncertain and precarious by these state-created displacements. And, furthermore, these acts burden the government with increased responsibilities…

 

But, unfortunately, law by no means confines itself to its proper functions. And when it has exceeded its proper functions, it has not done so merely in some inconsequential and debatable matters. The law has gone further than this; it has acted in direct opposition to its own purpose. The law has been used to destroy its own objective: It has been applied to annihilating the justice that it was supposed to maintain; to limiting and destroying rights which its real purpose was to respect. The law has placed the collective force at the disposal of the unscrupulous who wish, without risk, to exploit the person, liberty and property of others. It has converted plunder into a right, in order to protect plunder. And it has converted lawful defense into a crime, in order to punish lawful defense…

 

Property and Plunder

Man can live and satisfy his wants only by ceaseless labor; by the ceaseless application of his faculties to natural resources. This process is the origin of property.

 

But it is also true that a man may live and satisfy his wants by seizing and consuming the products of the labor of others. This process is the origin of plunder.

Now since man is naturally inclined to avoid pain – and since labor is pain itself – it follows that men will resort to plunder whenever plunder is easier than work. History shows this quite clearly. And under these conditions, neither religion nor morality can stop it.

 

When, then, does plunder stop? It stops when it becomes more painful and more dangerous than labor. It is evident, then, that the proper purpose of the law is to use the power of its collective force to stop this fatal tendency to plunder instead of work… All the measures of the law should protect property and punish plunder.

 

But, generally, the law is made by one man or one class of men. And since law cannot operate without the sanction and support of a dominating force, this force must be entrusted to those who make the laws.

This fact, combined with the fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort, explains the almost universal perversion of the law. Thus it is easy to understand how law, instead of checking injustice, becomes the invincible weapon of injustice. It is easy to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people, their personal independence by slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, and in proportion to the power he holds.

Men naturally rebel against the injustice of which they are victims. Thus, when plunder is organized by law for the profit of those who make the law, all the plundered classes try somehow to enter – by peaceful or revolutionary means – into the making of laws. According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: Either they may wish to stop lawful plunder, or they may wish to share in it.

Woe to the nation when this latter purpose prevails among the mass victims of lawful plunder when they, in turn, seize the power to make laws!

Until that happens, the few practice lawful plunder upon the many, a common practice where the right to participate in the making of law is limited to a few persons. But then, participating in the making of law becomes universal. And then, men seek to balance their conflicting interests by universal plunder. Instead of rooting out the injustices found in society, they make these injustices general. As soon as the plundered classes gain political power, they establish a system of reprisals against other classes. They do not abolish legal plunder. (This objective would demand more enlightenment than they possess.) Instead, they emulate their evil predecessors by participating in this legal plunder, even though it is against their own interests.

 

It is as if it were necessary, before a reign of justice appears, for everyone to suffer a cruel retribution – some for their evilness, and some for their lack of understanding.