On the Failure of Money to represent Value

What a person values is what they consider to be good in the world, or their life. What an economy values is what it treats as being good in the world. The two are clearly related, and we might hope that a well-optimised economy would work to maximise the production, conservation and distribution of things that people value.

Unfortunately, economies almost always work with numbers, and translating personal values into numerical quantities is not a trivial matter. Our current economic system treats money as a proxy for value - when monetary transactions take place, the price that someone pays for something is treated as being the value they assign to it.

The best things in life

Equating value with price has the great advantage of being relatively simple, and relating economic value to something that clearly has something to do with personal ideas of value, but there are some big problems monetary exchange as the determiner of value. One is that a great many of the things that make people happy and well do not come from monetary exchange, and optimising for monetary value risks undermining those things. In particular, a transaction between two parties has no guarantee of accounting for its effects on anyone else. Various attempts have been made to put a price on the otherwise unquantifiable, by asking people how much they would pay for things like trees and rivers and communities, if they had to. By its nature, though, a market economy does little to account for these things.

Conversely, the creative industries are heavily invested in putting a price on things which modern technology allows us to distribute freely. This often means attempting to restrict access only to those who can pay for a copy. Alternatives include mediation by libraries, subscription services and broadcasters, all of which have mechanisms in place to pay for distribution rights while sharing things more-or-less freely. All of these have to compete with an internet which allows people to gain limitless access to things of value to them, without any system in place for the originators of those things to be paid. Since the copies are valuable, and their reproduction is virtually cost-free, there is a perspective on piracy which sees it as free wealth. The same argument applies to access to the results of research and innovation. However, generating any of these things may still require substantial investment. It seems likely that an optimal system might allow unrestricted access to these things while fairly compensating their creators and allocating sufficient resources for them to go on creating the same sorts of things. The problem of putting together such a system may or may not be intractable, but it is certainly not straightforward, and in its absence, whole industries based on restricted-access business models are floundering.

Inequality and Weighting

Another major problem with market evaluation is that it assigns vastly much more weight to the values of some people compared with others. The importance of somebody's purchasing decisions is roughly in proportion to their disposable income, meaning that the preferences of some people are several orders of magnitude more important than those of others in determining how the economy acts. This is true even within national economies, but the differences are far greater again on an international scale. It could be argued that the rich have earned the right to that kind of influence, but only by assuming that people earn whatever money they get.

Homo Economicus and the Illusion of Rationality

A more subtle objection to market-based assignation of value is that in any given transaction, the price somebody pays for something is only loosely coupled with how much they value it. For one thing, the price paid only sets a lower limit on how much they value what they are buying at that time - presumably the thing is worth at least as much to them as what they paid, but sometimes people feel they have got a bargain. Other times, they may pay well over the odds for something because they feel like they need it immediately. In general, the price a person is willing to pay or accept for something is related to things like how soon they are going to get it and whether they have it already - a doughnut right now is worth far more than a doughnut tomorrow, and I'm not going to sell this mug I just bought for only a little bit more than I paid, even though I would be making a profit. As a rule people are not very rational, economically speaking, and they are not just randomly irrational but systematically so - meaning that no economic model can safely assume that people are even approximately rational on average.

Even more importantly, purchasing decisions are made with reference to the buyer's perception of the market, not simply their individual feelings - maybe you feel like lawyers or sofas are terribly overpriced, but if you need one, you don't have much choice about paying the going rate. On the other hand, you might think smartphones are incredibly cheap considering how powerful they are, and the amount of labour and material resources that go into making them - but you are unlikely to pay much more than the market rate just on principle. Having said that, the notion of fair trade exists because people are sometimes willing to pay more than the market rate, if they think the markets are unjust and fail to reflect the true value and cost of a commodity. Prices are obviously related to supply and demand, but there is also a great deal of inertia and convention in pricing, and a good deal less logic than some economists might like to think.

Theories of Value

Taken together, all of these considerations make it clear that market evaluations are unlikely to be well correlated with what people consider to be good in the world. The relation between how much society values something and what the market says it is worth is convoluted and highly contingent. Unfortunately, formulating an alternative theory of value has proven to be enormously difficult. In the nineteenth century it was normal for economists to talk about two or three different ideas of value side by side - 'exchange value' (or price), 'labour value' (it would probably be more helpful to call this 'labour cost') and 'use value' (how much something is actually worth in practice), for example. The trouble was that assessing the value of the labour that went into something is terribly complex - Marx spent pages upon pages tying himself into knots trying to produce a coherent theory of this, and the end result was still not altogether convincing. 'Use value' is even more fraught - as far as I am aware, nobody has the slightest idea how to produce a unified numerical measure of it. Alternative theories of value had become quite unfashionable in economics by the late twentieth century.

So if market evaluations epicly fail to reflect those of humans, and no other numerical measure of value is forthcoming, where does that leave us? I see two obvious options. One is to keep on treating markets as the ultimate arbiters of value, maybe trying to patch up their shortcomings here and there by assigning official monetary values to things that nobody is actually selling. The other is to ensure that more decisions are made by taking into account values that cannot be expressed in dollars. For one thing, we could encourage governments to look beyond strictly economic statistics - perhaps exploring the idea of prioritising Gross National Happiness over Gross Domestic Product, for example. We may need governments to rely a bit less on statistics of any sort, and to make more use of other faculties when weighing up decisions. We could also look at ways of encouraging organisations with goals other than the maximisation of profit. For some reason in the last few decades a perspective on businesses which officially prioritises returns for shareholders above all else has taken hold, and even been enshrined into law. This was almost certainly a mistake - there seems to be pretty solid evidence that it is not even good capitalism to pursue profits to the exclusion of what your business's other stakeholders want.

What can we Do?

There is considerable scope for encouraging businesses to value things other than profit, even without sacrificing their basic businesslike nature, although this may require some redefinition of official goals. There are also many kinds of economic and political structures where the main aim has never been the generation of profit - charities and other non-profit organisations, governments and their offshoots, and perhaps most interestingly, cooperatives of various sorts. Neoliberal capitalism is an ideology that holds that all of these sorts of power structures are inherently inferior to for-profit businesses, and hence many of the functions that governments have previously taken care of really ought to be sold into private hands as soon as possible. I have never seen anything that looked like a convincing argument for this position, but the main force opposing capitalism for most of the twentieth century was socialism, and after the Soviet Union's attempts at socialism definitively failed, the right wing has been able to present their neoliberal vision as somehow inevitable - even though this specific flavour of capitalism is no more than a few decades old. It should be acknowledged that government bureaucracies have often proven inefficient, but perhaps there are other ways to reduce this inefficiency besides replacing them with for-profit businesses accountable to nobody but their shareholders.

I do not have a grand unified alternative vision of political economy to push, just a few basic points to make. Price is not the same as value, and profit is not the same as goodness; a political economy that disregards the differences between these things is badly broken; and the suggestion that there is no viable alternative is disingenuous. Leaving aside, for now, the possibility of overthrowing capitalism and starting from scratch, it is not difficult to imagine ways to make organisations of all sorts more accountable to the people affected by their decisions, more likely to make decisions to the benefit of more people. Fundamentally what I am arguing for here is democracy, but democracy of a sort that we have yet to build into our political economy, outside of the cooperative movement and a few other isolated cases. The use of LETS and other alternative schemes for recognising value may also help us to achieve more equitable and efficient economies. I am convinced that we can do much better than we have so far, and that yielding to neoliberal capitalism represents a hugely premature admission of defeat. The way I see it, we can stand up for what we really value, or we can close our eyes, cross our fingers and hope that what the market values happens to be close enough.

References and other Food for Thought

  1. The methods to estimate the monetary value of the environment
  2. Contingent Valuation Method
  3. Pirate Cinema by Cory Doctorow
  4. Open Access: 'we no longer need expensive publishing networks'
  5. A Giant Statistical Round-Up of the Income Inequality Crisis in 16 Charts (USA)
  6. Income inequalities in the UK
  7. World Income Inequality
  8. Income inequality is killing capitalism
  9. Pathologies of Rational Choice Theory
  10. Bounded Rationality, Impatience and Intertemporal Choice
  11. Economyths: How the Science of Complex Systems is Transforming Economic Thought
  12. Theories of Value
  13. Gross National Happiness
  14. The Dumbest Idea in the World: Maximizing Shareholder Value
  15. Why don't bad ideas ever die?
  16. Time for a "Shift Change": Cooperatives and Resilience
  17. Fundamentals of Alternative Currencies and Value Measurement
  18. The Participatory Economics Project