Economic Value is NOT Price
from: Bruce Edmond
One of the areas that classical economics has been very weak is in the modelling and understanding of the value of goods and services.
Mostly it is assumed that price is a good proxy for value – this makes things a lot easier. However this formulation is clearly inadequate if given a moment’s thought – if the price was the value nobody would be bothered to sell anything since the value they gained (whether directly or indirectly via the IOU of money) would be the same as what they lost. The reality is this: the value to the buyer is greater than the price, so that they actually bother to buy the item or service, whilst for the seller the opposite is true (so they want to sell). Some of this is due to diminishing returns – the increase in value from none to one apple is greater than from 1000 to 1001 apples (even if the apple has the same price). However diminishing returns are only part of the story of value.
The other move is to represent value as a 1D measurable utility. This is definitely an advance on price, since this can be different for different people etc., however this is either meaningless (there is no mapping from the details of the situation/state/ownership and utility) or unrealistically limited (e.g. a utility function is assumed with certain properties). For example, it is not clear that value can be reduced to a 1D measure – the amount of love we receive, the amount we contribute to society and the money we have may not be commensurable. That is, there may be no meaningful ‘exchange’ rate between these. Yes one may make comparisons when one has to make a decision, but this may be so sharply context-dependent that this comparison is not usefully formalisable or measurable.