Before I move on to describe market exchanges in a bit more depth I would like to summarize the previous comments on value—in part because I encountered a bit of delay since my last post.
Understanding value provides a foundation for understanding all other economic concepts. In order to distribute resources effectively and efficiently the system must have a source of value and a way to measure value. Without a consistent source and measure of value the effective, efficient, allocation of resources would prove virtually impossible.
The Source of Value
Individuals provide the only uniformly consistent source of values. We might use gravity as an analogy for values. Although every discrete body in the universe exerts a different force of gravity, this attracting force always exists between bodies of mass throughout the universe. In a similar fashion, although each individual assigns value differently, value always emanates from individuals. As we will discuss later, only the actions of individuals reveal relative values.
No objective value exists apart from the subjective values of individuals. No intrinsic value exists as a part, or characteristic, of any economic good.
The Measurement of Value
Since the individual always assigns value to economic goods, the individual also determines the measure of that value. The method of valuation remains consistent amongst all individuals. They simply assign an ordinal ranking to all economic goods. Of course that ranking generally only applies to the goods with which they engage in exchange.
No definitive measure of value exists apart from the preferences of individuals.
Value Revealed by Exchange
I have included the first part of the discussion of exchange in my discussion of value because it is through exchange that economic actors reveal relative values. Before an exchange occurs economic actors and observers have no real clue as to the relative values of various economic goods. After an exchange occurs, however, we can say with certainty that each party to the exchange values what they got more than what they gave.
We have no way of assigning a unit to the degree with which they value one thing over another, but we do have objective evidence of the relative preferences. That evidence appears in the form of a price, which we will discuss in depth later.
Individuals and Value
Because value lies at the core of economic activity and individuals provide the source and measurement of value, individuals play a central role in all economic activity. It could be said that economics represents the study of exchanges that fulfill the values of individuals.
I will begin to discuss exchanges in a bit more detail in later posts.
Next, I will begin a discussion of the Conflicting Value Theories.