Thursday, June 24, 2010

What is valuable?

What is valuable? There seems to be some confusion here. This is because what is valuable to an individual need not be valuable to a society. For instance, money is wealth to an individual, but to a society, it is…. well, nothing. To an individual, it is demand over the production of an economy. For a society, its only use is as a means of allocating… real wealth.

How does it do this? Well, it does it in a most peculiar way: Money values most what is least valuable to an economy. And this is necessarily so.

Consider, for instance, which is more valuable, a dollar’s worth of gasoline, or a dollar’s worth of greeting cards. Well, as far as money, or the market, goes, they are the same value. But from the economy’s point of view, the dollar’s worth of gasoline is more valuable, because you can do more with it. For instance, you can have a modern economy without greeting cards, but you cannot have one with out gasoline. We’ll call this a real valuation, as opposed to the monetary one. The monetary valuation undervalues the real value of the gasoline, and overvalues the real value of the greeting cards.

Consider the resources that go into a car: the energy, the materials, the labor. In money terms, these things together add up to less than the price of the car. That is why we build the car. Because the maker of the car sells the car for more than the price of the resources .that go into the car. But in real terms the combined value of the energy, the materials, the labor, is greater than the car.

In particular, energy is, in monetary terms, undervalued. Its less now, but it used to be that 10 times the amount of energy came out of a gallon of oil than went into producing it. It is this real profit, this 10 to 1 ratio, that allows us, drives us, to use (burn) the oil. Suppose instead, there were no real profit: That the ratio was 1 to 1, that as much energy went in to producing the oil as was gotten out of it. Then, from an economic point of view there would be no point in producing the oil in the first place. (In particular, if we used the energy from the oil to produce the oil, nothing would be produced. Except waste.) Nothing is gained. (Of course, with subsidy, an uneconomic process may still go forward. Witness ethanol production from corn)

Allowing for profit, and neglecting things like taxes, that means that the monetary value of the oil was about 1/10 its real value. Suppose instead that it sold at its real value. Suppose your gallon of deisel sold at $30, or 10 times its current valuation. Then there would be no point for you to buy it, because you couldn’t make money off it. (at least using it for energy.) Its real cost to you, monetarily valued at $30, would be equal to the benefit you expected from it. (We’re not allowing for the induced inflation. With the price of oil going up, the real price, the price of everything will go up. More on that in a later post.)

Similarly, commodities are undervalued. Undervalued energy went into making and extracting them. But it is this monetary undervaluing that makes them more valuable in reality. Because they are undervalued, they can go into making things. For instance, you wouldn’t use gold to wire a house. Monetarily, it’s too valuable. You would use copper. Copper is more valuable here than gold, because if you used gold, you couldn’t sell the house for a profit. In fact, the less valuable it is, the more useful it is. If the price of copper were to double, you might still use it to wire the house, but you might not use it for the plumbing.. If the real price of copper were to halve, you would not only use it for the wiring and the plumbing, you might use it for the roof as well. So the lower its monetary valuation, the greater its real valuation.

Suppose now that copper was as rare as gold. Those who owned copper would be much richer, but society would be much poorer. They wouldn’t be able to use copper to wire houses. Indeed, the uses of copper would be few. It would have little real value. Just like gold. It would be too precious to be useful.*

Now if some things are undervalued, other things must be overvalued. That is the monetary value is more than the real value. Or, these things are worth less to society than they are to the individual. So what is overvalued? That is what is overpriced?

If we look at production, at each step, resources are destroyed. Energy and labor are destroyed at all steps. Now the irony is, that the more resources are destroyed in making something, the more (monetarily) valuable it becomes. (This is in a well functioning economy. Under subsidy, resources can go into making something that is less monetarily valuable. For instance, the subsidy of corn production makes possible the production of hamburgers at less than would be their monetary cost.) But as those resources are destroyed, the real cost of the thing goes up. So its real value goes down. The more resources are destroyed making a thing, the less valuable it is. To society. Suppose 10 times the resources as now go into making an automobile are used. Automobiles would cost 10 times as much. There would be many fewer of them. They would be less useful to society. Conversely, if automobiles cost one tenth the resources to make, there might not be more of them, but the resources freed up which would otherwise go to their production could be destroyed to other use. In that sense, they would still have a greater value to society.

But, at each step in the destruction of resources, that is, the destruction of real value, “value is added.” Monetarily. The thing becomes monetarily more valuable, and can be sold at a profit. So in general, resources, which are undervalued, are converted to finished goods, which are overvalued, and it is this twist in valuation which drives economic process. (We can even go a little further, and say that those goods which are most overvalued will be preferentially produced. They will have the highest profit margins in the conversion process. Goods under subsidy will be preferentially produced, for instance.)

Now the economy does need finished goods. Indeed, that is the whole point of an economy: To create goods and services to the benefit of the individual. But economically speaking, most finished goods are useless to an economy. A dishwasher, for instance is economically useless. (It may benefit the individual. It does free up leisure. Depending on how much one valued that, one can calculate the benefits one would get from buying a dishwasher.) The end result of economic process, the conversion of resources, in particular the destruction of energy, is a finished good or service. (Actually, since energy can neither be created of destroyed, we really mean the conversion of energy from useful forms to useless forms. So for instance, one could say the dishwasher was worse than economically useless, since the power it consumes when operating increases the conversion of energy to useless forms.)

So where does money fit into this? Well, in real terms it is worthless, so we can say it is most overvalued. If government printed up a room full of money, society would be no better off. More on this later. Energy, which drives the modern economy, is most undervalued. Some labor is also undervalued. (Some is overvalued.) Some has to be exploited, for the manufacturer to make his profit. This is not a bad thing. But because labor is also the ultimate market, (all economic processes are ultimately for the benefit of individuals,) it does create a problem. So does overvalued labor. For a later post.

So what is valuable? To a society, the resources, and the means to convert those resources to goods and services desired by individuals. To an individual, these desired goods and services. It is the difference between these two valuations that drives an economy.
*There is an ironic phrase which refers to extraction of minerals: ‘The riches of the earth.’ However, it is the poverty of the earth, the scarcity of what is extracted, which makes it monetarily valuable, and reduces the real value to society. But, it is this relative scarcity that makes extracting the minerals profitable to the individual in the first place.

No comments:

Post a Comment