Update (March 24, 2026): I have reorganized my definitions of “economic value,” “exchange value” and “use value.” Some issues in the theory below needed further development and correction. They will be explored in a new title. I am preserving this one for the historical record. —Mr. Examiner
In the 19th century, John Stuart Mill wrote that economics is concerned with man “solely as a being who desires to possess wealth[1].”
Although this was conventional wisdom throughout most of the century, a revolt against this view was all but won by the end of it. Economics turned its back on production and wealth and became primarily a study of consumption and exchange.
William Stanley Jevons maintained that economics “must necessarily examine the wants and desires of man[2].” Contrary to Mill, it is
surely obvious that Economics does rest upon the laws of human enjoyment; and that, if those laws are developed by no other science, they must be developed by economists. We labour to produce with the sole object of consuming[3].
Frédéric Bastiat, preceding Jevons, said that “Wants, Efforts, Satisfaction—this is the circle of [economics].” And more: “Exchange is Political Economy… because it is there we see the first appearance of Value[4].”
Under the same rationale Richard Whately proposed substituting the then-name of “Political Economy” to “Catallactics, or the Science of Exchanges[5].”
American economist Arthur L. Perry asserted:
Political Economy is the science of Exchanges, or, what is exactly equivalent, the Science of Value… Wherever Value goes this science goes: wherever Value stops this science stops. Political Economy is the science of Value and nothing else[6].
On this much we agree: value is where economic issues revolve around. Goods, after all, are exchanged for different values in the market. How then do traders settle on agreeable values? What is value in a market context?
Mill was well aware of this fundamental question, and warned about the consequences of getting it wrong.
Almost every speculation respecting the economical interests of a society thus constituted, implies some theory of Value: the smallest error on that subject infects with corresponding error all our other conclusions; and anything vague or misty in our conception of it creates confusion and uncertainty in everything else[7].
If economics is to be rescued as a science delimited to wealth and production, a correct theory of value is required. Identifying value incorrectly distorts its parameters (re: the Classical School). Defining value too broadly blurs its parameters (re: the situation today). For economics to be a specialized science, its conception of value must be properly identified and differentiated from other values. What is it about economic value that requires a separate study?
The Classicals addressed this via the labor theory of value, trying to quantify labor as the determinant of economic values. But as Whately noted: “It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price[8].” The Classical theory failed to find an independent source of value. Consequently, it relied on exchange in the market to demarcate its sphere of study.
The new economists, hoisting the flag of the subjective theory of value, fell into the same circular, exchange-dependent trap.
Proto-Marginalist H. D. Macleod wrote: “The Value of any Economic Quantity is any other Economic Quantity for which it can be exchanged[9].” The same idea, in cloudier prose, was expressed by Ludwig von Mises: “What touches a man’s heart only and does not induce other people to make sacrifices for its attainment remains outside the pale of economic calculation[10].”
Non-circular attempts tied economic value to quantity: scarce items are economic, abundant ones are not. Yet some scarce things, such as friendship or sentimental items, are non-economic, forcing a return to market exchange as the arbiter of economic and non-economic—relying on the effect (that which is exchanged) rather than the cause (why it was offered and accepted in exchange).
The new economists’ indifference to this circularity was rooted in their subjectivity.
“To satisfy our wants to the utmost with the least effort… in other words, to maximise pleasure, is the problem of Economics[11],” maintained Jevons. Léon Walras wrote that value derives from “rareté” (or scarcity), which he defined as “the intensity of the last want satisfied[12].” Mises wrote that economics is concerned with “money prices” but that it “must deal also with actions which are in a loose manner of speech called ‘noneconomic[13].’”
Thus, economics was both restricted to acts of exchange (“money prices”) and broadened to include most aspects of human life.
This ambiguity stemmed from lacking an objective standard of value. Medicine, by contrast, treats health as its standard. Medical care that assists the proper functioning of the body is judged positively, while impairment of the body is judged negatively. This is why medicine is well-defined and precisely delimited; its scientific demarcation has no room for debate.
And while the Classicals attempted to develop a standard in economics, whereas their successors consciously renounced the search altogether, the irony was the both schools ended up accepting the same standard by default; one that remains the most destructive premise in economics: that value is grounded in a comparative standard.
Exchange-value “is a relative term. The value of a thing means the quantity of some other thing, or of things in general, which it exchanges for[14],” wrote Mill, of the former group.
Exchange-value “expresses nothing but a ratio, and the term should not be used in any other sense[15],” said Jevons, of the latter group.
Notwithstanding the debate over the source of value (“labor” versus “utility”), both schools agreed that value in the market is an expression of exchange ratios, i.e., comparable quantities. The result was catastrophic: the value of goods was erased in relation to the valuer.
I will show later on how this developed, but notice for now that economists treat prices as exchange ratios explained by prior exchange ratios that never reach an independent source of value. Thus exchange ratios, instead of recording value, become the embodiment of value.
For this reason, Jevons concurred that exchange maximizes utility[16] “more than any other means[17].” The premise that exchange is the primary cause of “utility”—with its origin clouded in subjective mystery—meant that exchange ratios could be treated as the starting point of value. This is where the preposterous idea of “perfect competition” came from, namely, that exchange ratios should be known in advance to all market participants to facilitate future exchange ratios.
A market, then, is theoretically perfect only when all traders have perfect knowledge of the conditions of supply and demand, and the consequent ratio of exchange[18]. (Italics mine)
Mises held essentially the same view, which draws a distinction between “subjective use value” and “objective exchange value.” The latter, he wrote, “enters as the unit of economic calculation,” whereas the former is a “purely individual phenomenon” incomparable with the subjective values of others[19]. Rational valuation “enters” after exchange ratios are established; everything beforehand is an inexplicable “coincidence” of a subjective meeting of wants.
Still, how do we transition from “subjective use value” to the “objectivity” of exchange ratios? According to Jevons:
Regarding utility, as constantly varying in degree, and as variable even for each different portion of commodity, it is not difficult to see that we exchange those parts of our stock which have a low degree of utility to us, for articles which, being of low utility to others, are much desired by us. This exchange is continued up to the point at which the next portion given would be equally useful to us with that received, so that there is no gain of utility: there would be a loss in carrying the exchange further[20].
Although this theory of exchange invites several critiques, there is one that undercuts it: traders do not exchange goods that they value; they trade goods that are surplus to their requirements.
Sellers do not rank their inventories in diminishing orders. This “reverse diminishing orders” formulation of marginal utility theory may seem plausible for two consumers exchanging their personal goods, but it does not reflect the real economy driven by sellers whose inventories are surplus to their needs.
Apple for example does not value its stocks of iPhones in diminishing orders. Steve Jobs had no use for a million iPhones, which rendered him the precise personal value of zero. This is also true for the kids around the block selling lemonade. They may value a small portion of their lemonade stock, but the rest has no value to them.
This problem posed a challenge to the Neoclassical School, who developed a separate theory for the supply side, focused on “marginal costs.” The theory starts (!) with a given price (recall that exchange ratios are the starting point). It next assumes that the cost of each unit produced rises incrementally. This compels the seller to stop producing when the marginal cost of one more unit exceeds or equals the (given) price; i.e., producing beyond this point would be unprofitable.
Marginal costs then become the restricting factor of production, but principally in terms of quantity. Why do costs cost what they cost? How do “market forces” determine prices? These are assumed, not explained (even under “monopolistic competition”). Demand and supply determine price, which is derived from demand and supply, which regresses infinitely with the producer little more than an input-to-output machine. Yet contrary to this mechanistic approach, empirical studies have repeatedly found industries where costs fall with greater outputs, and that sellers set prices on the basis of average costs—regardless of output levels.
The Austrian School, although not rejecting marginal costs entirely, offered an alternate “solution,” which reduces prices ultimately to the subjective preferences of consumers. The seller, or entrepreneur, it argued, “speculates” about consumers’ future preferences, and consequently, about how much they would be willing to pay[21]. However, “speculation” breaks the “symmetric mirror” of exchange. The seller projects the preferences of the buyers—his inventory is not valued in reverse order to his customers. The reversed symmetry of mutual evaluation is lost. The supply side is still missing an independent source of value. Let us now identify it, and tie it to both producers and consumers.
Economic Value
Goods, although they are produced for anonymous persons in the market, can be used for different concrete purposes, each within the individual’s particular context. A vehicle can be used to commute to work, to travel long distances, to make short trips around the city. Grain can be used for eating, harvesting, or feeding livestock. A horse can be used for racing, traveling or ploughing. The list goes on. The question is: which use do we consider when purchasing goods? Marginal utility theory was a way for economists to explain why food, indispensable for life, generally costs less than luxury goods, which are not indispensable for life. They argued that when purchasing goods we value them on the basis of their marginal use, i.e., the use that is least important or desirable. This is because when goods exist in large quantities we regard their more important uses as more or less “secured,” with only the marginal uses “at stake.” With goods such as diamonds, gold or rare artworks, we cannot employ their marginal uses because they do not exist in sufficient quantities for marginal uses. To the extent that we possess luxury goods, we use them for our most important, urgent wants.
And yet, this approach is false. Ayn Rand’s theory of concept-formation solves the problem of many uses. When evaluating goods we do not need to choose one particular use; we can abstract all uses under one unifying principle. What follows is an exposition of this principle.
The first thing to note is that use in a particular context does not contradict a general use. Just like two men can be different in height, skin color, intelligence and character—but they are still two men—so uses of similar goods can be applied in different contexts while still generally used the same.
For example, a shower may be used as part of a daily hygienic routine, after a sweaty workout, or to get energized—but its general use is to wash oneself with water pouring out of a showerhead. A hammer may be used to strike any number of nails into any number of different materials, as well as shape metals or break objects—but its general use is to strike objects. A book may be boring or captivating, entertaining or challenging; read on the train, in bed at night, or in a public park—its general use, however, is to read printed words on turnable pages.
It is true that when using goods in personal contexts, we do not pay too much attention to their general use. For example, one is likely recall a lovely dinner with a romantic partner in that particular context, not as a “tasty meal that allayed my hunger.” Or when one thinks about his favorite novel, it is likely to evoke a certain feeling of elation, with its characters springing to mind, not thought of as a “literary reading experience.”
But there is one context in which the general use of goods does spring to mind: the market.
Think about possessing goods versus purchasing goods. In the first instance, there is no cost for our using them[22]. Since we already own them, we do not need to trade them value for value. In the second instance, we do; which necessitates their careful appraisal. For instance, buying fruit at the grocery store is accompanied by precise weighing. Both buyers and sellers want to know exactly how much they are paying or being paid for. On the other hand, when one treats guests at his home with his freshly bought fruit, he will not weigh each guest’s plate—a rather absurd idea. Serving the fruit may well be reciprocated by the guests’ company, but the fruit is not carefully scrutinized.
Our market-related behavior demonstrates that there is something distinct about our dealing with goods in a market context versus how we handle them in our personal lives. Goods in the market transcend the personal; they are created for unknown customers who lead different lives, in different contexts, with different needs[23]. From the seller’s perspective, the sole purpose of his goods is to be exchange for gain. His are unused goods, surplus to his needs, intended for use only by those who will purchase them. Moreover, he does not know how his merchandise will be particularly used after selling it. The only thing that he knows is that his goods have general uses or purposes—with this knowledge derived from the production process of goods.
Goods undergo three metaphysical stages: from raw matter—to intermediary state—to final state. We may classify these as: resources, intermediary goods and final goods. All goods begin as raw matter. Their material composition is made of elements that at some point were found raw in nature. In their natural state, materials are largely useless for humans. Raw objects that can be used for human ends directly, without requiring further labor (i.e., transformation or combination with additional elements) are quite rare. Water, edible plants, rocks (for hunting or defending), caves, and perhaps a few others sum up all that can be used directly from nature[24].
The rest of matter cannot be used directly to yield specific results for specific human needs. Even wild animals, putting aside the difficulty of catching them, are not directly usable. We need to cut their fur and skin to get to the meat, and without yet discovering fire, we are obliged to eat it promptly after the killing. My five- and four-year-olds always prefer boneless chicken to chicken with bones, and not just for aesthetic reasons. The latter is more difficult to use: it requires work to separate the meat (the useful part) from the bones (the non-useful part) until one can finally eat it and yield the alleviation of hunger and satisfaction of taste.
Intermediary goods are goods that can be used indirectly. They are non-useful for direct human ends but useful for potential ends. To become directly usable they require further transformation or rearrangement with other elements. A hen, for example, is not directly used in its living state. To be eaten, it must be killed, cleaned and cooked. To use its feathers for insulation, fertilization, or decorative items, they need to be plucked or processed. To use its eggs for food or reproduction, they need first to be laid, then cooked or hatched (or grown in incubators).
The same is true for an oak tree, practically useless in its natural state[25]. To use its wood for human ends it first needs to be cut into logs, which are then transported to a sawmill that turns them into lumber. The lumber, after processing, is dried to reduce moisture. Next, the lumber requires finishing and grading, the latter of which determines its intended application (e.g., structural framing or furniture). Still an intermediary good, the lumber is sold and further rearranged or integrated into any great number of final goods.
These final goods, for the most part, require no additional work. They can directly serve human ends, whether as consumption goods or producer/capital goods. They may require maintenance, or repair, but this only enhances the fact that they are final products that are wanted for the direct uses in their present state. Final goods can be repurposed via the production process (nothing metaphysically is holding back their further transformation) but generally, it is not economically sensible as long as they maintain the high performance of their direct uses.
Thus, the closer goods are to their natural state, the more indirect uses they have. The closer goods reach their final state, the fewer indirect uses they have.
The logs cut down from a tree can be used potentially for a fireplace, furniture, construction, flooring, outdoor structures like decks, fences and gazebos, crafts and art, boats, landscaping, and even packaging, paper and pulp. Graded pieces of lumber have diminished potentialities as their grading determines their respective purposes. Once the lumber is assembled into a piece of furniture, it reaches its final stage of just one use—the one imbued with its general purpose.
During this entire production process, particular human ends are never considered. Goods are conceptualized exclusively from a general use perspective.
The seller of graded lumber does not know or care to know what later uses will be made of his intermediary good; all he knows is that it has many indirect uses (within the range of that which is possible with wood). The seller of copper in the form of bars, rods or sheets does not know or care to know if it will be used in electric wires, jewelry, musical instruments, electric motors, clocks, etc.; all he knows is that it is an industry metal with many potential uses.
The sellers of final goods, unlike the sellers of intermediary goods, do know how their products will be directly used—but only in a general context. They do not know the particular ends for which their goods will be put to use.
“Use” for a particular human end (e.g., “I will use this chair to sit comfortably in front of the TV in my sunroom”) is different from “use” for a good’s general end (e.g., “This chair is made for sitting”). A particular use pertains to human ends; a general use pertains to the good’s end.
What is unique about final goods is that they are embodied with functional ends. These are not “intrinsic” ends, divorced from human context; they are ends imbued by their creator for the benefit of human beings. A good’s end exists by the fact that the good functions in a particular way for a common (human) purpose.
Goods, undoubtedly, are wanted for personal ends within particular, personal contexts, but this does not erase their general uses. The general uses of goods are abstracted from their particular uses, including in the case of multi-purpose goods. For instance, buyers and sellers are equally aware that the purpose of an automobile is to transport passengers and cargo on land—no matter which route, passengers, or cargo; or that the purpose of a computer is to process information by following instructions—no matter which information or instructions, as long as they are operable. All purposes can be abstracted under one general purpose.
Both sellers and buyers know that final goods will be used within particular contexts and for particular ends, but they omit these in their market evaluations. To put it differently, both producer and consumer know that a good will be used for some particular end but can be used for any particular end within the constraints of the good’s general usefulness.
At the end of the day, we buy goods, not the particular benefits we derive from them. The benefits are the underlying reason for our wanting the goods, and one does not forget or drop this context, but we omit our personal context—i.e., particular ends and uses—when appraising the value of goods. The particulars are a part of the evaluation process, but are abstracted or isolated from the conclusion of value.
Economic value is the useful capacity of a surplus to achieve its general or imbued purpose, with one’s particular context in relation to it omitted[26].
Economic value stands for an unlimited number of particular uses within its general purpose. A simple illustration of this is that a kitchen knife can cut cucumbers, eggplants, apples, chicken, butter—and a great many other foods—but we do not consider these particular uses when purchasing a kitchen knife. Rather, we abstract from these uses and single out the knife’s general purpose of cutting (for more professional uses, we will narrow the range of general purposes, e.g., a butcher knife).
A good’s imbued or common purpose establishes its standard of value—which is: its useful capacity to meet its imbued or common purpose. Usefulness is the standard, i.e., the gauge, with which we economically evaluate goods on the market.
The greatest error in economics is that the concept of “usefulness” has never been fully examined. The inseparable link between “use” and what something is “used for” has generated persistent deflection: economists took the latter for granted while leaving the former unexplored.
Google defines “use” as: “take, hold, or deploy (something) as a means of accomplishing a purpose or achieving a result.”
The term “use” presupposes a purpose for which the good is employed, as we do not use things for the mere sake of using them. But it is often overlooked that “use” or “useful” refer to the means in relation to ends—not to ends separated from means. To use, in the literal sense, is to control or to regulate. It means that applying action to a good yields certain results. For a good to be use-ful, it must have the capacity to be controlled or regulated (by its user); namely, if put to use—specific results will ensue.
Usefulness is the regulated capacity of material objects to achieve specific results. This capacity involves three core functional components: usage, performance and durability.
1. “Usage” is the good’s category of action, i.e., its method of function. It answers the question: “how is it used?”
For example, a ball is used by kicking it; a table is used by placing small objects on it; a bed is used by laying our bodies on it; clothes are used by wearing them; a computer is used via a mouse (hand), keyboard (fingers) and screen (eyes); a bridge is used by walking or driving across it; a house is used by physically entering it and via the utilities and comforts installed in it.
How a good is used—i.e., its particular operability or method of regulation—is no small matter for its value.
Recall the revolutionary impact of the iPhone. It was not so much its apps that excited consumers, although they were important, but the touchscreen. This novel use made the operation of phones simpler, friendlier and faster. Wireless earbuds command higher prices than regular earphones because they remove the nuisance of wires. Laptops generally cost more than desktops (of comparable performance), due to the former’s portability and compact components. Historically, typewriters were more expensive than pencils and notebooks, or labor of manual writing. Early automobiles cost several times more than a carriage and a horse or two. Vacuum cleaners are more expensive than brooms and mops. How we use goods—and there are countless ingenuous ways—is essential to value.
2. “Performance” is the good’s category of effective action, i.e., its quality of function. It answers the question: “how well does it achieve its purpose?” or “how well does it execute its method of function?” Performance is the function that determines the good’s results.
For instance, a smartphone with a powerful chip, high-resolution camera, long lifespan battery, etc. will perform faster and offer an overall greater user experience than a smartphone with lesser hardware. A renovated, spacious house with modern high-end utilities will offer the kind of comforts and options that a decrepit old house cannot.
In cases of innovation, usage and performance typically align under a similar purpose. For example, a broom is used and performs differently from a vacuum cleaner. The latter cleans with more efficiently and with greater speed, and can be used in places where a broom cannot. Thus, even if a broom can outlast a costlier vacuum cleaner, the overall usage and performance quality of the latter renders it a higher value.
3. “Durability” is the good’s category of duration of action, i.e., the time span of its functionality. It answers the question: “how long can this good be used?”
Typically, the longer a good can maintain its original performance, the greater its usefulness. For example, a closet made of cheap wood will see its back panel bow or detach over time, its shelves sag under the weight of clothes, its hinges loosen as screw holes enlarge and its structure damaged with moving. An identical structured closet but of high-quality wood, such as solid oak or walnut, will resist all of these problems. Hardwoods have dense fibers and high tensile strength, making them sturdy and stable. They can be refinished and repaired if damaged. The natural grains of hardwoods endow them with aesthetically pleasing colors, unlike cheap woods. The high-graded wood closet conducts its function for longer, which is why it is valued higher than the low-graded wood closet[27].
Generally, performance and durability align, i.e., the higher the quality the more durable the good; but it is not always so. There are cases where a good’s high-level performance comes at the expense of its durability, such as high-end chips that run extremely fast but generate more heat, which results in shorter lifespans. It also happens that durability can be preferred over performance. Producers for instance may prefer durable equipment that lasts longer than sophisticated equipment that requires frequent maintenance.
But note that preference has little influence on value. A more advanced machine generally costs more than a more durable machine (of lower performance), because for this type of good, performance is the essential function of its purpose. In the case of vehicles, durability is itself a performance trait, which is why large, more durable vehicles are valued higher and command higher prices than compact vehicles with fuel-efficient, less durable engines, even if urban consumers prefer the latter. Increased loading and towing capacity, more endurance in demanding environments and higher reliability and safety are all durable features that are part of the vehicle’s performance, “mixed” together as the essential function for its general purpose.
While the three functions blend and affect the quality of each other, the question which is more important depends on the good’s purpose. Metaphysically, the functions are inseparable; which leads us to the underlying cause of usefulness: the good’s material composition.
A good’s material properties in their unique integration and form determine its definite degree of usefulness[28]. Almost every component of a good is essential for its proper functioning and overall utility. The total quality of the combined parts defines the good’s general utility. To put it differently, the good’s material makeup is the metaphysical cause of its usefulness, and usefulness is the epistemological identification that links the material composition to the good’s purpose.
Note that the material composition of goods is not valued for its own sake; rather, it is recognized as the causal determinant of a good’s usefulness. Raw materials scattered randomly have no use; a transformed object that integrates these materials in a deliberate design for human purposes does. This is the essence of production and what gives value to material objects.
Economic value is not some arbitrary construct or subjective feeling. It is an objective relationship established between a good’s devised materials and its imbued purpose(s) for human needs.
And while the good’s purpose must be identified for its proper evaluation, the direction of economic evaluation is from means to ends—not vice versa. A good’s usefulness determines the results it can achieve.
Modern economics ignores and even reverses this fact. It asserts that value is “imputed” from ends (or desires) to means. This is because it does not recognize usefulness as a concept pertaining to goods. It refers only to what goods are used for, in particular contexts, not to how well they function for their devised purposes[29]. This creates a dichotomy between fact and value: value derives principally from ends, with the factual functionality of goods neither denied nor incorporated into value. Ends in this view are divorced from goods. They may be satisfied by goods—but exist separately. Austrian economist Friedrich von Weiser said as much: “The means without which an end cannot be reached must be valued as highly as the end itself[30].”
What he meant is that if an end depended on a single good, its value would be equal to this end because there would be no other good to accomplish it. But this means that the degree of value corresponds to quantity, not quality; the means as a qualitative causal factor is shoved aside.
A simple thought experiment demonstrates the falsity of this view. If a person were stranded on an island and all he had for shoes was a torn up pair, they would provide a low comfort level of walking (though still better than walking barefoot). If, however, this person had brand new Hoka shoes instead, they would provide him with a superior walking experience.
The idea that value is imputed from ends to means reverses causality and overlooks the actual usefulness of means. Modern theory never quite denies the factual quality of means—which is presupposed when discussing goods—but the implicit contradiction leads to constant equivocations between objectivity and subjectivity. In reality, the more useful a particular good is in accomplishing its imbued or common purpose, the higher its economic value.
Say I am interested in purchasing Atlas Shrugged. Any volume of the book satisfies the end of reading it, and is valued for this purpose, but not every concrete volume is identical. Books come in different shapes and sizes—hardcovers, softcovers, mass paperbacks; the fonts can be larger or smaller—more readable or less so; there are different qualities of paper; and so on. The most useful volume (of the best material qualities) for the purpose of reading Atlas Shrugged will provide the highest economic value[31].
Or suppose you adore Dvořák’s “American Quartet.” This admiration alone will not compel you to pay more for a concert, regardless of the performers, venue, or seating. If it is the New York Philharmonic performing at David Geffen Hall, chances are you will value it economically higher than a ticket for the local high school orchestra performing it in a small town in Maine[32]. The particular end (experiencing a Dvořák quartet) does not dictate economic value. It is the means to general ends that one scrutinizes in his economic evaluation.
The general principle of usefulness allows us to abstract all uses under one unifying principle. Let us now apply it to the so-called water-diamond paradox.
The main purpose of diamonds is to enhance beauty as an adornment. Diamonds shine brilliantly and are almost indestructible, with a single gemstone lasting for practically a lifetime. Its general utility is extremely useful for its general purpose. Water’s general utility, on the other hand, is trivially useful. Despite its many uses (drinking, cleaning, irrigating, etc.), water vanishes immediately upon consumption. One glass of water, for the purpose of relieving thirst, is hardly sufficient for a day, let alone a lifetime. Measuring usefulness (across time) against the good’s general purpose resolves this paradox with ease, without a fictitious “marginal use.”
Generally, perishable goods are less valuable than durable goods[33]. The former are destroyed in consumption, and most foods, even when cooled, lose their freshness and eventually spoil. It is not a mystery to consumers that if they eat today, they also need to eat tomorrow. No matter how luscious a specific meal, it can only be useful in that particular occasion. Life is not a range-of-the-moment phenomenon. Food, a biological need, is useful in intermittent quantities over a lifetime.
As shown, economic evaluations involve a special cognitive focus on the material quality, i.e., the degree of usefulness, of goods. This is the rational evaluation process that traders engage in in the market.
Rational evaluation requires mental effort; since knowledge is not automatic, our evaluations can be wrong, i.e., judging a good to be more or less useful than it actually is. The more knowledge is required in appraising a good’s worth, the more complex the evaluation process is.
This difficulty spawns services in the market that provide such knowledge, from reviews of electronic devices to home inspectors. This complexity is more common in the assessment of services (which create or repair/maintain goods, rather than selling them directly). Assessing the capacity of services to provide or repair goods by their track record is crucial for objective judgments, as is seen for example in job interviews. Assessing financial assets involves even more complexity, as the entire business operation requires scrutiny[34].
Before concluding this section, I want to draw your attention to one more matter. The transition from a subsistence lifestyle to a market economy of surplus goods did not occur overnight. It involved several stages, of which the most important was the introduction of money in Ancient Greece. For the purposes of this essay, I will only remark that food surpluses were the first economic catalyst, allowing humans to engage in activities other than nourishment, with money being the last piece of the economic puzzle, introducing an entirely new way of living—namely, a dedication to wealth creation.
Value and Price
At this point, the reader may still have two lingering questions: (1) does quantity not have any effect on economic value? And (2) if value is not affected by quantity, does this mean that value is fixed—contrary to what is frequently seen with prices in the market?
First note that prices in the market are generally uniform (i.e., a good’s units are priced the same). Sometimes sellers offer discounts for the second or more items, but discounts come in all sorts of forms or in particular periods of the year; this is hardly sufficient for a quantity-related principle. If anything, the burden of proof is on those asserting incremental “utilities,” which are not evident in prices (this is typically explained by “equilibrium”—another vague concept). Prices indeed move over time (up or down), sometimes faster and at other times slower, but uniform prices fluctuating uniformly is no evidence of “utility functions.”
Second, the value of goods is fixed—at a given time.
A good’s usefulness refers to a definite degree of utility, which depreciates or decays over time. Iron rusts, food spoils, flowers wilt and roofs deteriorate. A new automobile has a definite level of usefulness, but five years on the road will depreciate its value; namely, it will be less reliable, hence its price drop.
Third, utility is a teleological measurement (a graded relationship of means to ends), not a cardinal measurement (a quantitative relationship); yet prices are cardinal.
Money is the bridge between the two. Prices, being cardinal, do not represent usefulness alone. One of money’s key roles is to measure value within a given context of resources. If only one loaf of bread exists and two consumers compete for it, they will bid up the price—not because they deem its value higher, but because they are trying to acquire the bread at the expense of the other. This is not an economic evaluation per se, but a derivative economic phenomenon that arises in conditions of scarcity.
Consider also that while the owner does not need his surpluses, they do cost him. He must pay wages, rent, storage costs and many other expenses. If his goods do not sell, he absorbs operational losses even if his goods remain untarnished. The seller thus may be prompted to lower prices, even at the expense of expected profits.
Lastly, there is no such thing as a specific “right” price. Prices are cardinal and utility is not. We measure a good’s usefulness from a means-to-ends perspective and, according to our conclusion, offer or request a specific price within a certain cardinal range. If the range is rational, then the price is right (good). If not—the price is wrong (bad).
A price formation theory goes beyond the scope of this essay. My intention is only to demonstrate the difference between value and price. Economic values are fixed—at a given time—while prices tend toward uniformity but can fluctuate due to circumstances other than utility.
The quality of goods, i.e., their definite degree of usefulness, is what determines their economic value and nothing else. Just like the value of a partner is not affected by other potential partners, so does the value of goods not change due to external quantities. Value arises between subject and object—not from subject and many objects, which for the most part do not even enter the considerations of the individual[35].
There is one sub-category of goods, however, whose productive limitation has an effect on value. This is the class of irreproducible goods.
Since most material things can be reproduced, they are replaceable. We may get upset if they break or get lost, and we may certainly get attached to them. But their reproducibility means that they can be conceptually generalized, with our personal contexts abstracted.
An irreproducible good, on the other hand, cannot be generalized as it cannot be replaced (or, at least, cannot be easily replaced). To draw from the partner example again, while a lover’s girl is not valued as a “single person” per se, her irreplaceability is a factor in the lover’s evaluation of her. He does not love her because she is irreplaceable—as other girls are irreplaceable too—but her irreplaceability means she cannot be generalized. She is unique and that is the only context through which he can value her.
The same thing is true for exchangeable goods that are not reproducible (e.g., original artworks, artifacts and collectibles). They are too particular to have general uses. They are evaluated as unique items whose uniqueness is an essential part of their value. An ancient coin collected by a numismatist does not have the general use its original owner had.
This makes irreproducible goods essentially non-economic. They can be evaluated only through particular contexts. Since they do sell on the market, however, their irreproducibility means that their price is not determined by sellers but by buyers competing over scarce quantities. This is a buyers-only market—a “market-rationing” phenomenon—where irreproducible goods are allocated to the highest bidders.
From an economic standpoint, this is a subjective phenomenon driven and resolved by buyers’ desires and their limited sums of money. The final price has little to do with economics. All that the economist can do is identify the underlying cause of a scarce, buyers-only market—whether it is driven by objective factors such as non-reproducible goods or artificial factors such as government intrusions that quash supply.
Material Value
Economics is the realm in which humans selectively focus on the material aspect of values. The conceptual revolution that was brought about by surplus goods enabled man to go beyond the context of immediate consumption[36]. By producing surpluses one could now defer consumption—and through precise measuring of his surpluses he could also know by how long.
Consider the kitchen knife example once more. As a personal item, it makes no sense to think of it in quantitative abstract terms. One simply uses the knife for his personal needs, and if he happens to need a new one, he can visit the local store. A seller, however, who sells kitchen knives for a living, has every incentive to track the number of knives that he sells, his monthly revenue, and subsequent savings. Quantifying kitchen knives—as material values separated from any personal-contextual value—becomes a formula for his long-range survival.
Even water, an indispensable element for life, is pointless to be thought of in quantitative terms without its superfluous production.
Before modern plumbing, most human beings on earth—at least in rural areas—did not calculate how much water they used, nor did they think in such terms. They simply fetched their water from nearby wells, springs, rivers, communal fountains and the like. Trips to the nearest water sources were labor-intensive and time-consuming. A woman could make six to ten trips a day to fetch water for the household (this activity was typically reserved for females). Asking such a woman to calculate how much water she needs on a daily or monthly basis would be utterly pointless. Water was simply “there,” out in nature. When she needed it, she went out to fetch it. She had no tools for accurate measuring or the need for them. While jars were locally standardized, exact quantities could not be known without modern gauging devices. Women went by experience. They estimated how much water they needed by habit, such as: “This jar lasts us half a day for cooking and drinking.” Measuring water could not go beyond this level of approximation.
Scrupulous attention to quantity is a central feature of markets. First, surplus goods must be accounted for from the producer’s perspective to have full knowledge of his stocks. Second, they must be measured so both the seller and buyer know exactly how much quantity of value they are receiving in trade. Third, more often than not, the quantitative attributes of goods help define their quality, namely, their degree of usefulness.
The careful appraisal of the material aspect of goods did not exist in pre-markets. The gradual progress from primitive economies to market-economies has changed the way its participants thought about their productive activities: not just from approximate uses to meticulous measurements—but from production subjugated to communal service and self-subsistence to production as a wealth creating pursuit in a social context.
Pursuing wealth is not some caricature of men chasing riches or pleasures. It is a distinct human endeavor focused on arranging the environment in ways that transcend man’s personal and communal context. Society, for this man, is not an obstacle for his material goals but the vehicle with which he achieves them. An architect could not build skyscrapers if he built for his private purposes alone. Building for others allows him to erect tangible testaments of his ambitious visions into the sky.
Wealth creation is a pleasurable end in itself. Consuming one’s productive rewards is pleasurable too, but it cannot give the producer what rearranging matter gives him: the purpose of transforming the world around him through the competence of his mind—the true source of wealth.
The meaning of “wealth,” though, has long eluded economists. What is it about wealth exactly, that individuals pursue? Working, saving money, spending money, creating goods, selling goods, launching businesses and expending large portions of our lives seeking to attain this thing that we call “wealth” are unquestionably a part of it. But what is it that the seekers of wealth are ultimately after? Identifying the actual referents of wealth via a proper definition is necessary to tie the loose ends of this essay’s title question. We must know what it is that individuals pursue in the economy to cement the boundaries of our science.
The Meaning of Wealth
The first attempts to define wealth were either too wide or too narrow. Aristotle said: “By ‘wealth’ we mean all the things whose value is measured by money[37].” The problem with this definition is that it includes slaves, bail, traffic fines, dowries, donations, labor, land, firms, copyrights, bonds, assets, etc. Are all these things equal manifestations of wealth?
During the years of the so-called mercantilist system in Europe, only money was considered wealth; namely, gold and silver metal. Even if we discard this view, a question remains about money’s place in wealth. Can we say that money earned is wealth created?
The Physiocrats of the 18th century in France held a more nuanced view. They distinguished between production and consumption, maintaining that only produced goods are wealth, not goods consumed for personal uses. But they also held that only the produit net (annual surplus after costs were paid) extracted from the earth, e.g., through agriculture and mining, was true wealth because this alone was the material that could multiply. Humans cannot create something out of nothing, they stressed, therefore wealth represented only new materials extracted for human use.
Adam Smith was not so rigid. He viewed all things created via labor to be wealth. “Real wealth,” he wrote, is “the annual produce of the land and labour of the society[38].” For him, a distinction between production and consumption was unnecessary. All useful things were wealth. Although he recognized that, for instance, consuming bread extinguishes it, he maintained that bread in consumer hands constituted wealth just the same.
The Marginalists expanded the definition to include material and immaterial things, as well as services. Alfred Marshall wrote: “All wealth consists of desirable things; that is, things which satisfy human wants directly or indirectly[39].” But the Marginalists placed caveats in the definition. They conditioned wealth on the relationship between desires and scarcity. As Carl Menger said, wealth is “the entire sum of goods at an economizing individual’s command, the quantities of which are smaller than the requirements for them[40].” Walras was no different: “The ensemble of all things, material or immaterial, on which a price can be set because they are scarce, that is to say, are both useful and limited in quantity, constitutes social wealth[41].”
Consequently, and peculiarly, this meant that the scarcer the goods, the wealthier those who possess them; the more opulent the goods, the less wealthy those in possession of them. In situations of scarcity, wealth increases; in situations of abundance, wealth decreases. Wealth is not so much created but is the resulting relation between wants and quantities.
As counterintuitive as it is, this argument was not entirely misguided. It tried to answer the seeming paradox that the greater the quantity of goods, the more their prices tends to fall; the fewer the goods, prices can skyrocket.
But wealth as a scarce-dependent concept means that innovation reduces wealth. Irrigation, the printing press, fossil fuels, automation, AI—all of these lead to superabundance, effectively destroying wealth.
The counter argument is that new technologies introduce new desires, which grow infinitely with progress. But this suggests that humans are like Sisyphus. That no matter how hard they work, they will never truly be satisfied. Besides, the notion of “infinite wants” does not solve the inherent contradiction. Instead of working hard, producers can simply stop producing. If they accept that privation, not creation, is the source of wealth, then starving the population will make them richer than feeding it (or the similarly absurd notion that the “purchasing power” of employees’ income will be higher if they demand lower wages).
To avoid this absurdity, recall that goods in the market are their owners’ surpluses. These are useful items whose usefulness has not been materialized. They are potentially useful, not actually used. And without buyers, as aforementioned, this situation can incur diminished profits or losses for the seller.
This is the constant risk that producers face. They have no assurances that they will gain profits. Sellers must offer goods that are actually useful, are recognized for their usefulness and are actually purchased.
What producers seek is the achievement of selling surpluses through trade.
Wealth links production and trade; it is the recognition of the fact that to be successful in the market, one must trade value for value and that value must be created. One cannot consume more than he produces.
Wealth, in essence, is the producer’s achievement in a market context. It is a concept that presupposes productive action that was actualized or “validated” in trade. It is a social recognition of the value created by the producer, i.e., of his capacity to arrange material elements into useful objects. A “stamp of approval” of one’s demonstrated creativity.
Wealth is the market validation of useful surpluses produced and exchanged.
Wealth is not “stuff,” it is not riches, it is not an entity. Wealth is a concept that denotes a relational accomplishment; one that arises from productive results and their validated recognition via purchases in the market. Every exchange validates the producer’s success. It changes the non-useful status of surplus goods to goods put to use, proving the producer’s competence. The creation of wealth means that the producer’s idea of a useful item was recognized in the marketplace and actualized in trade[42].
The elusiveness of wealth is its fleeting nature. A purchase of a surplus actualizes wealth but also dissipates it. One cannot possess wealth. What remains after a settlement of exchange is the producer’s achievement, recorded in money as a token of his accomplishment.
A “win” in sports for example is not something that the winner possesses. It is the outcome of his effort in relation to those who lost. A trophy or a medal, akin to money, is a testament to the winner’s achievement—but it is not the win itself. The win is the end-result of a prior process. It is a relational fact that the winner can carry with him in the form of pride.
It is important to note that appreciating assets are not wealth. If the price of an asset (or a good or a service) goes up, this does not mean that wealth was augmented. Rising prices are not creations of useful things. Neither stocks, bonds, land ownership and other financial assets are useful things. They are claims on present or future things, whose exchange/validation in the market pays dividends to the asset owners. Moreover, wealth constitutes produced goods, not used goods. Wealth is about material achievement, which does not apply to an exchange of a used good. There is a significant market for used goods, but exchanging items that one did not create does not constitute wealth.
This same principle applies in the case of money creation, yet it requires an explanation to avoid confusion. When real money is produced and exchanged (not today’s counterfeit credit), wealth is created just like any other good in the market. The miner extracts raw gold or silver from the earth. He then refines it into precious metal, i.e., an intermediary good. In this state, the metal is surplus to the miner’s needs. The miner sells his surplus to the minter, who receives a fee (a small portion of the gold or silver) for his minting services. The minter pays the miner back with certified coins, i.e., money[43].
Thus, the miner generated wealth by exchanging his (surplus) refined metals, and the minter generated wealth by exchanging his (surplus) services. Both the miner and the minter created wealth by their productive work and exchange, receiving money for the value they created. Money—the tangible reward that the producer earns through trade—is always the evidence of wealth creation, not wealth itself. Money that circulates is not surplus produced since it already existed. From a wealth-perspective, it is a symbol of the producer’s achievement[44].
Here we have a clear distinction between wealth, money and profit. Wealth is a market achievement for creating useful goods, money is the reward for the achievement, and profit is the measure of the achievement.
Note that wealth can be created at a loss. A producer who exchanges his goods on the market at a loss still creates wealth, but not enough to sustain his operation. Wealth is the actualization of usefulness in a market, not necessarily the successful thriving and growing in a market. This stems from the market’s competitive nature. A producer may produce and exchange useful things, an achievement by its own right, but not enough of an achievement in a market that demands a certain level of efficiency[45].
As wealth marks achievement, it also highlights that failure is a real risk. As aforementioned, producers cannot know how and to which concrete ends their goods will be used. Their economic power resides in their knowledge that their goods are indeed useful. A successful entrepreneur does not succeed by luck, nor does he succeed by “guessing” consumer preferences. He is successful because he came up with solutions for problems that consumers most likely did not even know or imagine could be resolved.
Even an entry-level employee knows that he has some skills that can be utilized. That which he does not know is mitigated through training and by learning from his more experienced colleagues. As he gains more experience and refines his skills, he can be certain of his improved useful services (but not beyond that).
Certainty does not mean omniscience. It only means that the producer is certain that his goods or services are useful. This still does not guarantee market success, but it explains how exchange is ultimately possible. The process of improving the quality of one’s goods or services or finding ways to produce at lower costs can be remarkably inefficient, as is normal for new businesses and entrepreneurs treading novel paths. But as producers hone their craft, and know better how and what to produce—using the market as their foil—their efficiency rises in terms of purposeful production—not in allocative terms. True efficiency is about creating wealth, not redistributing that which already exists.
To address the market paradox of falling prices against rising quantities and vice versa—I will say that this issue is resolved via the nature of surpluses, i.e., the problem of abundance.
If a seller cannot find buyers, he may lower prices—even at a loss—to weather the storm and realize whatever value he can from his existing stock. Conversely, when a producer expands output in response to growing demand, producing at scale often reduces the cost per unit if he has the capacity for it or the capital to invest to attain this capacity.
In any event, falling prices do not imply a reduction of wealth. Unless they occur in recessions, they generally indicate increased levels of productivity that augment wealth.
The economic pursuit to produce and exchange surpluses is the rational purpose of market participants. The enormous effort expended in producing goods and selling them to willing buyers is no less than a heroic endeavor that should be commended—not frowned upon and degraded. The meticulous attention to material matters and the “cold impersonality” that characterizes economies should be celebrated as a rational achievement that makes all of our lives better.
The pursuit of wealth is the delimited scope of economics. Wealth is surpluses produced and exchanged, validated in the market. The existence of surpluses makes possible a derivative conception of value, which is formed by isolating the general usefulness of goods derived from their material composition. This closes the full circle of economics, with usefulness serving as the standard with which we measure material values.
Economics thus is the science that studies the pursuit of wealth. Its boundaries are set by man’s goal to rearrange his environment into material objects that are useful to human beings. This is the conceptual orientation of the avaricious wealth-creator. It is his love for what the material world can be that shapes his economic thought and action.
[1] The Collected Works of John Stuart Mill: Volume IV (PDF format), p. 285.
[2] The Theory of Political Economy (5th ed.), p. 39.
[3] Ibid, ibid.
[4] Harmonies of Political Economy, translated by P. J. Stirling, 1860, p. 65.
[5] H. D. Macleod, Economics for Beginners, p. 15.
[6] Ibid, pp. 15-16.
[7] Mill, Principles of Political Economy (Ashley ed.), p. 436.
[8] Introductory Lectures on Political Economy (2nd ed.), Lecture IX, p. 253.
[9] Macleod, p. 31.
[10] Human Action: A Treatise on Economics (The Scholar’s Ed.), p. 216.
[11] Jevons, p. 37.
[12] Elements of Pure Economics (Ed. Définitive; Tran. William Jaffe), p. 43.
[13] Mises, p. 235.
[14] Mill, p. 478.
[15] Jevons, The Theory of Political Economy, p. 78.
[16] Marginalists treat “utility” as a psychological phenomenon.
[17] Jevons, p. 75.
[18] Jevons, p. 87.
[19] Mises. Economic Calculation in the Socialist Commonwealth, p. 10.
[20] Jevons, Money and the Mechanism of Exchange, p. 10.
[21] The Austrians treat entrepreneurs as soothsayers. Economic success, they contend, depends on the guesswork of future preferences—unknown even to prospective clients in the present (!). Imagine the difficulty of this impossible task, as Mises claimed: “[Valuation] is entirely psychical and personal. It is not open to any projection into the external world. It can be sensed only by the individual. It cannot be communicated or imparted to any fellow man.” Mises, Human Action. P. 97.
[22] That is, other than time or the good’s decay/destruction.
[23] To the extent that sellers do let personal relationships to direct their business, they are bested by competitors who do not.
[24] I rule out rain, shade, air, wind, etc., as usable objects. These may benefit human ends directly, but we do not use them in the literal sense. For more on this issue, see my essay, “What Are Goods?”.
[25] Unless planted for landscaping purposes.
[26] The exchange-value and use-value division that economists have hitherto struggled with, while understandable, was unnecessary. Exchange-value is use-value. The use-value of goods is the good’s general usefulness that meets its general end. Use-value does not refer to personal uses, which are evidently many and cannot be pinpointed to one such “use-value.” The good’s exchange-value in the market is its use-value; the two are one and the same. A good’s use-value is its exchange-value, which is its economic value.
[27] Note that durability does not equal a good’s shelf life. Goods such as dried grains, toilet paper, honey, etc. can be stored for relatively long periods but vanish when consumed. How long a good can be used is not the same as how long it can maintain its storage capacity.
[28] E.g., a ball that lost its round form will not serve well its purpose for playing soccer; a ball with a round form that cannot bounce will not serve well its purpose for playing basketball.
[29] The Classical School treated utility as pertaining to generalized human ends (e.g., “water is useful for human survival”) while the Neoclassical School treated utility as pertaining to concrete human ends (e.g., “the 10th unit of water is used to bathe my dog”). Both schools of thought erased usefulness as a concept relating to goods.
[30] Natural Value, p. 22.
[31] Prices are affected by additional factors outside of usefulness, such as competition between buyers.
[32] The value (not price) of concert tickets is generally based on the material experience of concert-goers, determined by factors such as venue, experience/prestige of the performers, seat location (the closer to stage the higher the value), duration of performance, etc. We do not economically value a concert based on how much we love the specific music being performed.
[33] Although from a durational perspective, durable goods are more cost-efficient.
[34] A business or asset whose operation is not ultimately backed by real useful goods or services is a scheme.
[35] Modern economics treats objects that the individual is not even aware of as factors of his evaluation (a blatant contradiction). It even says that goods that do not exist—i.e., a void that causes “scarcity”—determine the value of goods.
[36] Money was also a necessary condition.
[37] Nicomachean Ethics, Book IV (Tran. W. D. Ross), p. 53.
[38] The Wealth of Nations (Everyman’s Library), p. 3.
[39] Alfred Marshall, Principles of Economics, p. 36.
[40] Carl Menger, Principles of Economics, p. 109.
[41] Elements of Pure Economics (2nd Ed.), p. VIII.
[42] Being wealthy means having the capacity to produce and exchange useful surpluses.
[43] My treatment of coined metal as money requires a theory which I intend to present in the future.
[44] Only if the miner extracted, refined and minted the metal himself, would this first entry of money into the economy constitute wealth creation—with both sides of the trade validating each other.
[45] Some businesses may choose to sell at a loss as part of a long-term strategy to profit in the future.
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