The 1871 Catastrophe

A brief critique against the modern conception of value in economics via the perspective of exchange.

The ‘culprits’: William Stanley Jevons, Carl Menger and Léon Walras.

As I was perusing through comments jotted down by Ayn Rand via Ayn Rand’s Marginalia (edited by Robert Mayhew), I found one profoundly significant remark.

It referred to a segment by Ludwig von Mises, which started with the proposition: “Now, we must realize that valuing means to prefer a to b[1].”

Here was Rand’s comment:

No, it doesn’t! “Choice” means this. “Value” and “choice” are not the same concepts. (Typical equivocation.)

(“Valuing” means measurement by means of a standard.)

“Value” cannot exist where there is no choice. But it is not the fact of choice that determines value, it is the standard of value. Example: the “value” of a girl to a lover is not that he prefers her to other girls; he had to have a standard which made him prefer her; he could have chosen none if none filled his standard.

Now, I don’t know if she would have agreed with me, but I believe that this brief remark undercuts the entire conception of value in the field of economics post-1871.

Let us first understand what she’s saying.

What she means is that the lover’s love for a girl is not based on preferring her to others; he loves her—which is why he prefers her. And why does he love her? Because he has a standard for what he loves.

Even a child that prefers chocolate over vanilla ice cream does so on the basis of some standard (e.g., he remembers that chocolate is sweeter). But regardless of whether one prefers randomly or consciously, valuing isn’t possible without a standard of value.

“Value” presupposes a standard with which to measure value. This is because not every means will suffice to meet the ends. The end establishes a standard or gauge with which to judge the proper means.

For example, romantic relationships are based on mutual admiration. The more virtuous a girl in the eyes of her lover, the more admiration (and love) he will feel for her. The “more” part—an (ordinal) measurement—is possible due to a standard of value (based on virtue, in this case[2]).

Every “more” or “less” presupposes a standard, namely, an anchor, without which “more” or “less” can’t be measured. The standard does not have to be a specific unit; it can consist of some abstract principle, such as “honesty,” or “profit,” or “life of a rational being.”

I cannot stress enough how important this point is. Try to imagine what it would mean to value on “preference.” It would mean that by the act of choosing a girl over others—that makes her a value. Not her interests, her virtues, her looks, her demeanor—the preference defines the value.

You might think I am reading too much into this; but Mises explicitly denied valuing by means of a standard.

Just as there is no standard and no measurement of sexual love, of friendship and sympathy, and of aesthetic enjoyment, so there is no measurement of the value of commodities[3].

This is not a mere philosophical problem. The reason that Mises emphasized this point relates to the problem of exchange. Until 1871, economists generally held that money is a measure of value. If money is a measure of value, it must be a common measure of value; namely, each trader measures goods with a shared standard of value.

The function of money, in this view, is to “equalize” between fluctuating values in the market[4]. Traders use money to appraise the worth of goods, willing to offer equal value for equal value in return (albeit wanting to pay less, or sell for more, than their valuation). Thus exchange represents an equivalence of values.

Mises, however, attacked this view:

The spurious idea that values are measurable and are really measured in the conduct of economic transactions was so deeply rooted that even eminent economists fell victim to the fallacy implied. [They] took it for granted that there must be something like measurement of value and that economics must be able to indicate and to explain the method by which such measurement is effected. Most of the lesser economists simply maintained that money serves “as a measure of values[5].”

The so-called “marginal revolution” of 1871 got rid of this “fallacy” by substituting “exchange of equivalents” for “exchange of differents.” The idea was that exchange transpires due to a double “higher-for-lower” valuation in reverse orders; i.e., a buyer purchases an iPhone for $800 not because he thinks it is worth $800, but because he values the iPhone more than he values $800 (and vice versa for Apple). The buyer needn’t have a standard for preferring an iPhone over $800, and neither has one—as far as economics is concerned.

If a man exchanges two pounds of butter for a shirt, all that we can assert with regard to this transaction is that he—at the instant of the transaction and under the conditions which this instant offers to him—prefers one shirt to two pounds of butter[6].

But as we have seen with the example of the lover, one can’t “prefer,” i.e., value more, without a standard with which to measure how much more. One can’t know if he prefers one, five, or a thousand shirts without a standard. It would render his “preferred” quantities completely arbitrary.

The “exchange of differents” suggests that traders decide their preferences like a blind person guesses which of two objects is bigger. Values, in this view, are divorced from the facts of reality; they are solely an internal phenomenon. It is not the relationship between subject (trader) and object (good) that assigns the object value, but the arbitrary choice inside the subject’s consciousness.

There are grades in the intensity of the desire to attain a definite goal… But psychic quantities can only be felt. They are entirely personal, and there is no semantic means to express their intensity and to convey information about them to other people[7].

So while the consumer may well gain satisfaction from a good (which is real), how much he values it depends entirely on his “psyche.”

The flip side of this, ironically, is that value—derived inexplicably from the mind—is expressed between object and object, not subject and object. Namely, it is not that I value a hamburger because it satisfies my hunger (and is tasty); I value the hamburger because I chose it over pizza.

Now, perhaps you are someone who believes that “exchange of differents” does not have to contradict valuing by means of a standard, regardless of what economists like Mises may have thought.

But, as aforementioned, the fundamental premise of the theory rests on rejecting a standard. This is crucial for the theory to “work,” because it claims (implicitly) that lacking a standard facilitates exchange. It states that traders prefer object over object, not that they value objects in relation to their needs.

Modern value theory is based on the fact that it is not the abstract importance of different kinds of need that determines the scales of values, but the intensity of specific desires[8].

If objective needs determined the scales of values, economists would have to venture into these needs—which they never have. They settled the matter by asserting that value is a completely psychological phenomenon, observed only through real-time market choices.

To summarize, this problem is binary: either exchange reflects equivalent values (based on a standard between traders and goods) or it reflects dissimilar “values” (based on random selections between different goods).

Since traders do have different valuations, “to express their intensity and to convey information about them to other people” requires a common standard of value. This is why traders must find a common measure with which to engage an act of exchange.

But what is the standard of value in exchange? How do we measure economic values? Wouldn’t “equal values” contradict the need for exchange? I will address these questions in my forthcoming essay, “What Is Economics.” If you’re not a subscriber yet, be sure to subscribe now so you don’t miss it.

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[1] Ludwig von Mises, Human Action, Part III, (The Scholar’s Edition), p. 205.

[2] The lover’s idea of what is virtuous may be held implicitly.

[3] Ibid, ibid.

[4] And not merely function as a “convenient tool” for exchange.

[5] Ibid, ibid.

[6] Ibid, ibid.

[7] Ibid, p. 205-6.

[8] Mises, The Theory of Money and Credit, p. 46.