How do we tell what something is worth?
September 30th, 2009 | Published in Economics idea | 2 Comments
Suppose we want to pay producers based on the value of what they produce. I think there is a fundamental problem. Nobody really knows what things are worth.
People aren’t rational. We aren’t good at putting numbers to things. We aren’t even that good at arithmetic often. I think it is unrealistic to expect people to be able to do anything more than guess at an order of magnitude value for the things they buy.
I believe that our intuition about fair prices is based mostly on recent history. If apples cost a dollar yesterday, it’s okay for them to cost a dollar today. A dollar feels fair because we are used to paying it. I believe we convince ourselves that an apple is worth a dollar when we really don’t have a clue. We are just making crude comparisons to yesterday’s prices.
Given stable prices over a long enough time period, I think we could convince ourselves that apples are “worth” anywhere from 20 cents each to $2 each.
While it might be nice to pay people based on the value of what they produce, I would want to see at least moderately objective way for establishing value first.
October 1st, 2009 at 4:35 pm (#)
Stephen,
I’m trying to clarify this in my mind. I see two underlying questions.
1. Do we want to pay people based on value or based on cost?
2. How do we approximate value or cost and what mechanism can we use to set prices?
Are you saying that we DO want to pay people based on value, but that it’s hard? Or are you saying that we should forget about value and pay based on cost?
I agree that it’s hard to establish value and that there are weaknesses in using a market system to approximate “value”. However, basing prices on costs would be a worse approximation of value, I think.
Eric
October 1st, 2009 at 7:26 pm (#)
Eric.
I think the fundamental problem is that we don’t know the value of either inputs or outputs.