Putting the Pieces Together

0:00Value. What it is and how it works. Value is an extremely important concept in all human behavior. Human beings are, in a sense, value-oriented. We are really profit-oriented. We all of us act in an effort to gain something or to prevent the loss of something that we value. Now, value is a very, very sophisticated idea, and I've got to deal with it here at some length in order that we do understand it and understand the very significant part it plays in our lives.

0:47When we talk in terms of a marketplace and how things work in a market, there's a tendency for people to suppose that goods and services operate almost on their own volition. In fact, I have read some relatively supposedly scientific treatises to that effect, that there are natural and the laws that govern the flow of goods and services in the market. In point of fact, what we have is this. Goods and services move in the market only because of one thing. That one thing is human decision. Goods and services don't make up their own minds and they don't move by themselves.

1:34People move them. And people move them in terms of how they value them. And characteristically, what we have in scarce supply, we value highly. And what we have in abundance, we value less highly. So value is the little trigger mechanism that causes us to act. When we see something that we want, we value it more and more until we get it. And then after we've got it, sometimes we tend to devalue it until we get rid of it. So this is what causes goods and services to move. Now in the early days when people first approached this idea of value and tried to deal with it, they were aware that there were a number of factors in the market and they were bringing the best judgment they had to bear on the subject.

2:31They realize, for instance, that there is such a thing as cost, and there is such a thing as price, and obviously there is such a thing as value. Now the man who did the basic work here is a man named Adam Smith, and in 1776 he published a book entitled The Wealth of Nations, and in this book he attempted to deal with this This Phenomena, or These Phenomena. And he recognized that there is such a thing as cost, and that there is such a thing as price, and what he wanted to figure out is what the real value of something is, because the cost might or might not indicate its value, or the price might or might not. Well, he took a look at it, and he did the best he could at the time.

3:23He figured that cost is whatever it costs to make a product. Then to his credit, let me say, he did see that the entrepreneur, that is the man who was managing the whole proposition, who was bringing the pieces together to make the thing work, that this man had the cost to pay, but that he would have no incentive to pay them or to do any of these and so on. And that which he was to get for his efforts, Smith called a profit. So as he saw it, the cost of production was in one area, then there was another cost which was the profit to the entrepreneur, and therefore the price of the item would be the cost of production plus the profit to the entrepreneur.

4:21And after Smith had thought about that for a while, he said, well, that's value. Value would be the equivalent of the cost of production plus a profit to the entrepreneur and the two together is value. Well, that idea was accepted for a while by some people, but other economists, who we usually think of as classicists, came along after him and they weren't quite as happy with it as he was. Because they pointed out, and this is a valid criticism, that if you have costs of production, you have the entrepreneur sitting on top of them trying to keep them down. But when you come to profit, why should an entrepreneur try to keep that down? It might be to his advantage to put that up. Therefore, the real value couldn't be left to the entrepreneur, because he might be able to produce a good for a dollar and that's all it costs him. But then he could turn around and assuming that there's a scarcity of these goods and it's a desirable good, what's to prevent somebody from selling that

5:34same thing for $10? $9 profit, $1 cost. And then that would mean that the value of the of the Item is $10 according to Smith, but that means that the entrepreneur is getting such a large lion's share that it just didn't seem equitable to these people. So they said the profit can't have anything to do with this. Value has to be somehow equated not with price, but with the cost. And profit is an excess value. It's something over and above the costs. Now, I'd like to point out that in the market today, we have people who still think in terms of profits being equal, excuse me, not profit but price, the price being equal to value, and we have other people still running around who think that cost is equal to value. In fact, I was in a store not too long ago in In the bargain basement, that's where I do my shopping, I was down in the basement, and I was pricing some goods and talking to the clerk, and a lady came along and she interrupted,

6:51actually a little rudely, and she said to the clerk, she said, this material here, she pointed to a particular type of garment that was on an adjoining counter, she said, I see

8:02The more they pay, the more it's worth. Is that true? No. Not necessarily. Was to her. That was her value judgment of the matter. She felt that if she paid more, it was worth more. And this happens all the time. I have known of other cases where an item of merchandise will be put on sale at a relatively low price and nobody buys it. And then some smart promoter will get hold of it and say, well, the problem is that people who see that particular item priced in that bracket just don't think that item can be priced in that bracket and be worth anything. We've priced it too low. Price it back up here. And then you put the price up in the lines formed to buy it.

8:52Because that's the way people sometimes formulate a value judgment. Now other people think that cost determines the value. And, of course, this was begun by the classical economists who contended that this was the case. In fact, we have two major economists following Smith. Their names are David Ricardo and Jeremy Bentham. Jeremy Bentham a little prior to Ricardo. And they took a good hard look at this question of of Value. And they thought it very definitely related to cost. And therefore, the profit, you see, should be minimized. It should not be permitted to get too high because the real value is in the cost of production. And a little bit of profit is all right, but anything over that is out. And then, of course, you finally get the idea that any profit is actually and Excess Value and is in a sense cheating of the public somehow, and therefore profits should be abolished and everything should operate simply on the basis of cost.

10:05Now Karl Marx came along, very much influenced by David Ricardo, and he made a career out of that idea and worked that into his Das Kapital, because it seemed to him, and here Here is the particular Marxian way of looking at it, that if you have a dollar of profit, you have cheated somebody, but guess who you've cheated? You haven't cheated the buyer, you've cheated the workman. In fact, Marx stated this, it's a very interesting phrase, and it keys you in on the entire Marxist In this economic theory, a dollar of profit is an unpaid wage. That's Karl Marx. Quote and unquote. A dollar of profit is an unpaid wage.

10:56Example. Let's suppose that I wanted to build a desk. I don't want to build one myself, but I would like to have one, and there isn't one around that I can buy. So I find a young man who has the necessary tools and is skilled as a carpenter or a cabinet maker and I say to him, young fellow, I would like a desk and I'd like to hire you to build one and deliver it to me. And he says, fine, I'll be glad to do it. And we discuss the specifications and the price. And he agrees, let me suppose, to build me the desk that I want precisely to my specifications for, let us suppose, $50. And he does so. And he delivers the desk and I pay him $50. Fine. Now what have we established by this process?

11:46What we have established is the price of the desk. Because at the time he agreed to produce it I did not ask him how much of the $50 was going to his labor or how much he would have I don't know whether I paid a profit to him or just labor costs or what. I didn't ask, and he didn't tell me. I know that if I pay him $50, I get the desk, I paid him $50, I've got the desk. The desk is mine, very well. Now let us suppose that I take a look at it and I say, you know, this desk is a whale of an interesting desk. I don't think there's another one like it. and I bet I could get more for it than I paid for it. So, let's say I put up a sign or run an ad or something to let people know that I have this very special desk and I advertise it for, let me say, $85. And one day you decide that you need a desk. And so you come calling

12:47and I show you the desk and you say, $85. And I say, yes, that's what I'm selling it for. When you say, well, that seems like quite a lot, would you take a little less for cash? And I say, well, yes, I probably would, providing I didn't have to deliver it. Will you take it yourself? And they say, yes, we could do that. Would you take 75? And I say, yes, yes, I'll take 75, providing you take it and I don't have to deliver it. So they give me $75 and I turn the desk over to them. Now what's happened? According to Marx, I have cheated somebody. But the interesting thing is I didn't cheat you, who bought the desk. I cheated the young fellow that I got to make the desk in the first place. Because although we agreed that the price of the desk to me was to be $50, Marx would have contended that the only reason I entered into that relationship

13:46with this man was that because I was smarter than he was and had figured out how to exploit him, I was engaged in exploiting him and making a profit on his labor, because I was smart enough to know that the desk was worth more than $50 even before I saw it, and therefore I was taking advantage of him. Now that's the Marxist labor theory of value. Do you You note that the whole value is presumed to relate to the cost of production, and the cost of production is presumed to relate to the cost of labor, because that's what it is you pay for. In all production, you tend to pay most for labor. If you want some wood and you're in a primitive situation, you don't go up to a tree and offer it a five dollar bill. You hire a woodsman to go up to the tree and cut it down. You pay the woodsman, and it was Marx's contention that the only rightful cost is the cost of labor and therefore if you pay the cost of labor, that's all you have to pay because the value of an item is exactly the cost of the labor of production.

14:57Anything more than that is an excess value and, in consequence, if I could collect more than I paid the laborers for producing something, then I'm simply cheating the laborers. They are entitled to 100% of whatever I can get on the basis of what they produce. Now that's the Marxist theory. I do not agree with it. I think it is a very bad theory. In fact, I don't think it would hold up at all. Well, and I might point out that even Marx didn't think so, because in the third volume of Das Kapital he contradicts this, although he sets it forth in the first volume. So he isn't quite sure himself, and he runs a little bit around in the circle. But a lot of people are still running around in that same circle, and they are still contending that a dollar of profit is an unpaid wage.

15:43Now what really is value? Well, I'd like to show you that actually we're way afield There is such a thing as cost. Cost is objective. It is a fact. Whatever you have to pay to produce something, including the cost of the entrepreneur, which is a cost of doing business. Whatever the entrepreneur gets, it's simply the cost of management. I might point out that even Marx saw this later on. Although he didn't think much of managers, he conceded that there was a managerial function and it had to be performed but managers didn't do really too much and therefore they shouldn't get very much. Their wage should be small but they were entitled to a wage. In any case, the entrepreneur, the man that puts it together and I'm not speaking here of the manager, I'm speaking of the entrepreneur. The fellow that puts together gets what we call a profit but the profit is merely a cost of doing business.

16:41That's really what it is. It isn't something left over after all the other bills are paid. is one of the bills that has to be paid. It's paid to the guy that made it all possible. So that is an essential. But whatever the cost is, it is. It's real. You can figure it out. You may have to sharpen your pencil, but it's there. It is a part of the real world. It is objective. It belongs to that philosophic order of things that we call objective reality. The same can be said for price. Price, too, is objective and real. You can find out Now, what's value? Value is in another category entirely. And although this may surprise you, may I assure you that value has no value in the No necessary connection with either cost or price. Value is subjective. It belongs to an entirely different philosophic order. It is a state of mind. It's the way you look at something. You are not concerned with what it costs to make it. You are concerned with

18:08what you are going to have to pay for it. But you don't judge it as having any kind of a Fixed Value. It has a value to you compared to other things that you also value, and so you never value anything absolutely. You value relatively in terms of other things that you also value. For instance, take the desk again. You would like to buy the desk and you are are willing to pay $75 for the desk. Why will you pay $75? Because, in your judgment, that price is satisfactory, whereas $85 isn't. What's the desk really worth? You don't know.

18:56And you really don't care. It's worth $75 to you, at that time, in terms of the value Now, let me show you an interesting thing, and here's where many people are confused. You might say, well, fine, in this instance where the party comes in and buys the desk from me, I paid $50 for it. I have not only established when I paid $50, I established the price to me of the desk, but also I established the value. This might be said. And then this This other party comes in and buys it from me for $75 and at that time we've established the price that I sell it for and the party buying it, we would say, well, hasn't that established the value?

19:43And actually we didn't establish the value either time. We don't know what the desk is worth. And the interesting thing is we'll never really find out. Because it works this way, the only reason I was willing to spend $50 for the desk is Because to me, the desk was worth more than $50. You see, I've got the $50. I already have that. But I'm ready to get rid of it if I could get the desk. So in my order of value preference, I prefer the desk to the $50. And that means that to me, the desk is worth more than $50. How about the fellow that made it for me? Well, to him it isn't. When he agreed to accept $50, he was saying to himself, I would rather have the $50 than my time and skills and energy that have got to go into making this desk. So as far as he was concerned, the money that he got from me was worth more than what he sold me. As far as I was concerned,

20:54What I bought from him was worth more than what I paid. Who was right? We both were. Because nobody coerced anybody. I wanted the desk more than $50. He wanted the $50 more than the desk. We both were looking for one thing, a plus factor. That's why we act. We act in search of plus-factors. Wherever we find a plus-factor existing, we will tend to act. Just as in this second case, now someone comes in to buy the desk for me. We aggle over it a bit. I have a price that's $85. I won't pay that. But finally, an agreed-upon price is arrived at. $75. What does this mean? Does it mean that the desk is now valued at No. That's the price. What's the value of the desk? We'll never find out. All that we know is that in the mind of the buyer, the desk is worth more than $75 because the party is ready to get rid of $75 in order to get the desk. The party would rather have the

22:09desk than the $75. It's worth more than $75. It isn't worth more than $85, but it is worth I'm ready to take $75 rather than keep the desk. So what does that mean? It means that I value the $75 more than the desk. Which one of us is right? We both are. Because each one of us is getting our highest value in terms of a voluntary action that molests no No one at all. Whether I make $25 on the transaction or whether I lose $25 on the transaction doesn't alter the nature of the transaction, assuming it is voluntary. When I act to exchange, I will act to improve my situation. I will have a plus factor there for me, or I won't act.

23:06And the same applies to you. If you act to exchange something, there has got to be a plus factor in it for you, or you won't act. In a free market, each exchange brings profit to all parties to the exchange, or the exchange doesn't occur. Now that is how value functions. Value is subjective. It is a state of mind. Here I I thought the desk was worth more than $50 to me, and then I thought it was worth less than $75. I would rather have $75, but I would rather have the desk than $50. So my position was somewhere between $50 and $75. But now this new party comes in and the new party would rather have the desk than $75. And what the new party will do with the desk? I don't know.

23:59I don't know, and it doesn't concern me. This is how we operate. Whatever it is that we do, I'm explaining this in familiar store terms where we go into stores and we buy things, but this sort of thing happens all the time anyway. It doesn't have to be translated into terms of money. It simply is translated into terms of decision-making. When I make Make a decision, for instance, to go to work. It isn't necessarily that I'm going to enjoy going to work. I might much more enjoy going to the beach and lying there and sunning myself. Why do I go to work? It is because in terms of the costs involved and the profits involved, and having weighed these, I would decide that I would rather go to work than go to the beach Even though I don't really want to go to work, I'd rather not take the losses that are entailed in going to the beach.

25:00So it all adds up to a plus factor, or I don't go. And that is the way we act. Every human being is in search of maximizing his values, and that's precisely how we do it. So, value is in a state of flux. It isn't nailed down. There is no such thing as a statement that this particular item of property is worth so many dollars. The answer is, compared to what? Like the gentleman you know who was asked, how's your wife? And his answer was, compared to whom? You know, it's relative. You've got to figure out, it's always a comparison.

25:46You compare things. Money has no fixed value. It only has value when you spend it. And it only has value in comparison with other things that you also value. So that's the way you operate. You operate seeking to maximize your sense of plus factors, whatever they may be. And in this respect, every one of us will be different. We will all value different things in different ways. Now here was the idea of Marx then, that value is objective and related to cost. Here is the value of Smith, that value is objective and related to price. But in point of fact, value is subjective and although cost and price might influence our subjective judgment, it has no real merit. For instance, if you go to the grocery store to buy a can of soup, I'll wager that you have never gone up to the grocery clerk, or if you have, it would be a rarity, and said to the store manager or the clerk, before I buy this can of soup,

26:53I want to know what the wages were of the fellow that put the soup in the can. You're not buying his labor. You're buying the soup. And you're buying the soup in terms of scarce money that you could also buy something else with, but you now value the soup fairly highly, So you're willing to part with so much money for the soup, but not more than so much, and so you make a comparative value. Values are subjective, relative, and invariably in motion. You might picture it this way. Think of having in your mind a vertical scale beginning with A, A, B, C, D, E, running down vertically in a vertical line. You will always deal off Always you will take the highest value in terms of what you yourself want if you are given free choice. And the interesting thing is, once you have selected A, it will no longer be your highest value. It will move someplace else and something else will come to the top.

28:02It might be V, it might be F, G or W, because once you have acquired A, which is a value you wanted, everything is revalued. And so then the world looks different to you and you now are going to want something else. Man is a creature of wants and he acts to fulfill them in terms of his highest value at the time. Thanks very much.