Service, cost, and price
There is a further complication here, however, and to discuss it, we have to introduce the concept of service.
A service is an action of value or necessity to another person, performed in exchange for a value or necessity.
Compensation is the value exchanged for the service.
A slave serves his master, but is not really performing a service in my sense of the term, because he is not compensated for his actions. He is fed, of course, and clothed and housed; but these are necessities which he has a right to as human, and he is spending his time (which, as self-determining, involves pursuing goals) doing nothing to achieve his own goals, but only his master's. That is, the slave's service is exacted under a threat of greater dehumanization if he does not perform the service; and so the necessities he receives are not compensation for his actions at all. It is just that the owner is trying to preserve his asset, not that he is making a "transaction" with the slave. You will note that slavery is the service-counterpart to swaps involving necessities.
A person who does something out of love for another is also not performing a service, precisely because the lover expects no compensation for what he is doing--and therefore, there is no transaction. This is the same as giving a gift to another person, and is not really connected with the field of economics, which involves transactions. In a transaction, both parties have control, and the transaction is freely chosen on both sides; but in gifts or acts of love, it is only the giver or lover who has control--even though the beloved is the beneficiary--because the only thing the beloved can do is accept or reject it. This is precisely the reason "you can't look a gift horse in the mouth"; with a gift, no haggling is possible; you submit to the will of the lover or you don't.
Quite a few definitions are coming up before we can discuss transactions involving services. Here are a couple:
Work is activity pursuant to a goal one has chosen.
Play is activity undertaken for its own sake.
Labor is activity which transforms some material object into something of value or of greater value to people.
Production is the transformation of a material object into something of value or of greater value to people.
Every service is work, because the exchange supposes that the worker is exchanging what he is doing for something that will enable him to attain some goal of his more efficiently than (or at least as efficiently as) if he hadn't performed the service; so he is headed toward a goal by performing the service (in spite of the fact that the action in itself actually heads the recipient of the service toward his goal). But not all work is service, because you are working when you are pursuing your goals, whether you are serving someone else or not. Thus, a person who is studying philosophy to become a philosopher is working, but it not serving anyone. A philosopher who reads philosophy because he likes it is playing, not working.
And, of course, labor is not necessarily either work or a service. You may whittle wood into little statuettes, not because you want to sell them or because someone paid you to do it, nor because you want the statuette, but just to pass the time. In that case, you are laboring and playing. Or you may labor for yourself if you build your own house, for instance; and in that case you are both laboring and working, but not performing a service. And of course you can work without laboring, as when you teach philosophy to students (performing a service), or when you study philosophy to get a degree in it.
The difference between labor and production is that of cause and causality, as we saw in Chapter 5 of Section 2 of the first part 1.2.5. Labor is the act which does the transforming; production is the action on the material object: the transforming itself, or the creation of value in the object.
One of the mistakes in the foundation of Marxist economics (and for that matter, in the "classical" economics of people like David Ricardo) was the "labor theory of value," which for practical purposes mistook labor for service. But we will discuss this a little later, because we still need some more definitions:
The seller-value of a product or service is the value of the act or object from the point of view of the one who performs the act or gives up the object.
The buyer-value of a product or service is the value of the act or object from the point of view of the one who receives it.
The cost of something is what is given up to get it.
The price of something is what is exchanged for it.
Since services aren't quite the same thing as objects which you swap with others, then we are going to need the distinction between buyer-value and seller-value made explicit.
There are several things to note here. First of all, what I defined as simply the "cost" is what economists talk about as the "opportunity cost" of something, as opposed to the "monetary cost" of it. That is, if you go to the doctor and he keeps you waiting for two hours and charges you twenty-five dollars for the visit, what you actually gave up in exchange for his service was (a) what you would have bought with the twenty-five dollars, (b) the wear and tear on your car and the gasoline in getting to the office and back, and (c) whatever you would have been doing to pursue your goals during the two hours and a half (ten minutes plus waiting time plus drive time) you spent in receiving this service. That was what it really cost you; and the twenty-five dollars wasn't a cost, strictly speaking, at all. So "monetary cost" is a sham as a cost, because it is only a cost if it is a loss; and you didn't lose two pieces of paper with pictures on them, you lost what they represented to you: you lost what else you could have spent them for. Hence, only "opportunity cost" is really cost. The twenty-five dollars is the price, not the cost.
Secondly, the cost may be less than you would be willing to give up; in which case, you have gained from the transaction. If the cost is right at the limit of what you would be willing to give up to get the value in question, then the exchange is an even one, and you wouldn't have entered into the transaction. Economists say that when it is "for practical purposes at" the limit and you engage in the transaction, then it is "marginally below" it, because you see some infinitesimal advantage to tip the scales in favor of actually entering it rather than maintaining the status quo. Of course, if the cost is greater than the value you gain in the transaction, it would be a net loss, and you wouldn't enter into it.
It is in this sense that libertarians consider all transactions as "free," because if the cost is too great on either side, there simply is no transaction. But this ignores the fact that in dealing with necessities or in cases of robbery, the "cost" is the cost of greater dehumanization if you don't enter the transaction. When that is the case, the transaction is not freely entered into, because the person is morally obliged to make it to avoid greater damage. As I said, when one of the objects exchanged is a necessity, the cost of getting it (the giving up of a value for something you have a right to have as human) is always too great; it is just that the cost of not having it is greater.
Now then, the way the buyer determines the value of the product or service is by what he is willing to give up to get it: i.e., how much inconvenience, how much of valuable objects (or potential valuable objects, if you're giving up money) and so on. The upper limit of what the buyer would be willing to give up is the buyer-value of the product or service he is buying.
So the relation of cost to buyer-value is that the cost (what is actually given up) is less than the buyer-value (what the buyer would give up if he were pressured enough). My wife and I bought a car some time ago. We had decided that we wanted to pay five thousand dollars or less, but we wouldn't go beyond six thousand. (You can see that this was quite a while ago.) We found a car advertised for five thousand seven hundred, for which the salesman made his request for five thousand four hundred, and I said that we didn't want to go beyond five thousand--which he accepted. I probably could have got him to go lower if I had persisted, but it was a thousand dollars less than I valued it at; and so I was content. There were some additions to this cost (such as taxes and title and the time we spent looking and haggling), but these were still quite a bit below the value we set on the car.
The way the seller determines the value of what he is offering (his product or service) is by determining what he is giving up in not having this object or in what he would be doing with the time he is spending performing the service. Hence, the seller-value is equal to the cost. The seller's situation is slightly different from the buyer's. He might, to get rid of the product, sell it at below what it cost him, because (a) he realizes that he can't get anyone to give him what is equal to what he gave up to provide it (i.e. no one's buyer-value is that high), and (b) it is only going to cost him more if he doesn't sell it now (in storage or in the fact that buyers are going to evaluate it as less as time goes on). But this doesn't mean that he values it below cost; for him, the sale is a loss, and he is just trying to minimize the loss. So you can sell something below its value, because it is often the case that much of the cost is already incurred before the transaction. But you can't buy anything above its value (its buyer-value) because if it's above the value, you just won't make the transaction.
Now of course, in transactions involving nothing but values, there is nothing wrong with the seller's trying to find out what the buyer-value actually is, and trying to sell the object in exchange for something far above the seller's value, so that he gains as much as possible from the transaction. By the same token, there is nothing wrong with the buyer's trying to find the seller-value of the object (or rather, the "floor" below which he simply will not go, whether this is his value or is in fact a loss) and in offering outrageously little for the object, trying to buy it as far below his buyer-value as he can.
The reason there is nothing wrong with this is that the seller can assume that the buyer won't buy if the price he asks involves a cost that is above the buyer-value, and so any price agreed on will be fair from the buyer's point of view; and the buyer can assume that the seller won't sell unless either the price offered is above the seller-value or is the highest he thinks he can get from anyone else; and so the transaction is fair from the seller's point of view.
But is it really fair if the seller is taking a loss? Yes, actually, because the seller is in the business of offering to people things that he predicts that they will find valuable. When he takes a loss, no one had previously contracted with him to make his product or perform his service; he is just offering the product or service in hopes that someone will want to use it to pursue his goals. Hence, if buyers don't find the product or service valuable enough to cover his costs, then (absent dehumanization, now), it's not their fault that he made this mistake; and they are actually helping him minimize the adverse consequences of the mistake. So the transaction is not unfair.
Of course, this quoting prices and counter-quoting and so on is called haggling, which is actually the normal and natural way of doing business. The reason it is normal and natural is that, as I said, there is no real value for anything. Haggling does not try to establish what the "true" value is; and in fact, the result of most haggling is that each party thinks that he has taken advantage of the other.
And he has, actually. The seller has taken advantage of the buyer, generally speaking, because the price agreed on is above the seller-value; and the buyer has taken advantage of the seller because the price is below the buyer-value. So again, both are gainers, because it would be very rare that the buyer-value and the seller-value of whatever is exchanged would be exactly the same; and unless the buyer-value is above that of the seller-value, no exchange will in general take place (except for the case of the loss we talked about).
Then what is the price?
The price is the compromise between the buyer-value and the seller-value.
That is, it is something somewhere in the middle that the two parties agree on, given that each is approaching the transaction with a different notion of the value in what is for sale.
And this, of course, is the reason why the Third Great Myth is a myth and is not true. The price is not something that comes from the product that is for sale, but is what comes from the process of haggling. It does not reflect a value in the object at all, but rather is the result of the "clash," if you will, of two values. This needs stressing as a formal conclusion.
Conclusion 13: The price of a product or service, as the compromise between the buyer-value and the seller-value, does not reflect any value of the object at all.
I have been talking about this in terms of haggling, because, as I said, this is the normal way of establishing price, and brings out what is actually going on--and is the way prices are arrived at still in many, many places in the world. In the markets and bazaars of India and Cairo and other places, everyone knows that things don't have a "real" price, and that the salesmen who are clever hagglers get higher prices than the people next to them selling the same product.
Things become complicated, however, when manufacturing is introduced, because the manufacturer simply cannot haggle over prices for several million pairs of jogging shoes every year; so something else must be done to get things sold. What happens is that the manufacturer guesses at a price that will be the upper limit he thinks he can get and still sell all that he has manufactured (because he has another several million coming off the belts next year, and you've got to clear the warehouses or pay for storage); and then he attaches this to it and you either buy at this price or you don't buy.
This creation of a "take it or leave it" price for the buyer actually confuses the issue of what is really going on in establishing prices; but it is where most economic theories start in trying to figure out what price represents. They assume that each product is offered to everyone, and so they look at what "everyone" offers for "any" product of this type (i.e. the average price they think it should sell for); and this leads to the notion of the "market" and "supply and demand" as determining prices.
Some more definitions:
The market for any product or service is the set of all buyers who want to buy that product or service and the set of all sellers who offer it.
The demand for the product or service is the number instances of it that buyers will buy at a given price.
The supply of the product or service is the number of instances of it that are offered at a given price.
Supply or demand is elastic if it changes when the price changes.
Supply or demand is inelastic if it remains the same when the price changes.
Let us first look at the way Marx analyzed this. For him, the market price reflected the "exchange value" of the product,(1) which came about because of the cost of production, given competition. The idea is that all firms try to sell at the highest price they can. But once there is competition, competing firms would try to sell at a lower price so they could sell more, and so the price would drop to the point where lowering the price would be taking an actual loss, and those who sold at this lower price would, of course, go bankrupt and disappear. Obviously, this floor is the cost of production.
The cost of production--for Marx--reflects the amount of labor it took to make the product, plus the amount of labor it took to make the components and the machines and so on (what is now called the "capital"); and so the "exchange value," or what determines the "real" cost boils down to the amount of "abstract human labor" that went into it; and the price amounts to putting a dollar value on the labor-time embodied in it. The actual raw materials, as we will see, in their natural state have no "exchange value." They acquire it by the labor that it takes to get them ready for further production.(2)
His "dialectic" basically goes this way: The manufacturer looks to his cost of production (labor, overhead, materials, etc.) and sets his price as high above this as he thinks he can get and still sell all he produces. If he manages to sell everything at this price, he pays his costs and pockets the rest as profit. Other manufacturers, seeing him making high profits, then get into the industry, charging the same prices and making the same profits, but increasing the supply at that price--until the demand is used up. There are now leftover items for sale. Someone cuts the price and sells all he can make, with this lower profit margin--and now gobbles up a huge chunk of the market (having taken advantage of the greater demand at the lower price). So now the other manufacturers have to cut their profits too or they will go out of business.
There is, however, a time-lag here. Even at this point (where some have to cut their prices and profits) there are still new entrants into the industry because some latecomers started producing before or as soon as the profits began to fall--or even somewhat after they began to fall. So the supply is increasing at this lower profit margin, which forces lower and lower profit margins if everything is to be sold; and eventually, the price drops to the cost of production, with no profit at all.
But then, of course, there's no advantage, and no sense, in producing the product.
Therefore, shortly before this point, the smart manufacturers have taken their money out of the industry and moved it somewhere else that makes high profits; and the rest follow suit, but not soon enough that they don't take a loss from selling things below the cost of production--because after all, they have money invested in plant and equipment, and you can't just let that go. But either they go bankrupt or they get out of the industry licking their wounds.
While they're doing this, of course, the supply is decreasing, until it reaches a point where the demand is greater than the supply--which now means that the few poor fools who couldn't get out while the getting was good can now begin to charge higher prices and make a profit again. And given the time lag, the supply still decreases for a while, making profits rise higher and higher until it becomes an attractive industry to invest in once more, and the cycle begins da capo.
The turning-point of this, Marx reasoned, was the cost of production; so the price as determined by supply and demand will always hover around the cost of production, moving above and below it; so it is the cost of production, for Marx, which is the real "equilibrium price" (using "equilibrium" in the sense in which we used it in describing "biological equilibrium" in Chapter 2 of Section 1 of the third part 3.1.2--a point around which things fluctuate), even though the product probably never sells for exactly that price, or if it does so, it does so only briefly on the way up over it or down below it.
But now into this comes the "abstract human labor" and "exploitation of the worker." You see, the manufacturer has three groups of costs: labor, materials, and plant-and-equipment (what we now call "capital"). He has to buy the materials and the building and heat and so on from suppliers. But in a capitalist economy, he can't haggle with these suppliers and has to take the market price for what they sell, which of course hovers around their cost of production. Hence, the only thing the manufacturer has any real control of if he wants to cut costs is the wages he offers the laborers and the number of laborers he hires. So as far as he's concerned, he has a fixed lump of cost (the "capital") he can't do anything about, and so if he wants to make a profit, he has to cut labor costs. And what this amounts to is that he has to see to it that what he pays each laborer is less than what the laborer's work allows him to sell the finished product for. Hence, his profit comes from "exploiting" the laborer: paying him less than what he gets out of him.
That is, the "exchange value" of the product is the amount of human labor embodied in it. If the capitalist pays the laborer what is equal to the value of his labor, then the exchange value of his product (which in the long run shows up as the selling price) is the labor embodied in his materials and plant-and-equipment plus the labor of the workers, and there is nothing left over for the capitalist. So the capitalist has to figure out a way to pay the workers less than the value of their labor, because he can't save on the materials and overhead, since the market determines their cost.
But of course, his suppliers are in the same situation; they're in business to make a profit, and so they also have their fixed costs, and the profit has to come from exploiting their workers; and so on back down the line, until you get to the ones who supply the raw materials. As these raw materials exist in their natural condition, they're of no value to anyone, because (a) they're not in a state to be used, and (b) they're underground or in the field, not at the factory. Hence, the labor of getting them into a condition to be used is the sole value they have, economically speaking.
Hence, the value of the raw materials is the value of the labor in making them fit to be worked on; and since all the values up above this are the cost of the raw materials (in their labor-transformed state) plus what someone has done to them to get them into a state to be further transformed (or to serve as buildings or machines), then the whole cost of production of any product is actually nothing but labor; the "rawness" of the raw materials has no value at all.
But since the cost of production is the "true" price of something (the price toward which all price changes tend), and the true price of something expresses its "true exchange value," then we have the labor theory of value.
Now how is it that capitalists can get away, even in the long run, with giving wages that are below the value of the labor that the workers put into the product? Ah, here is the dirty little secret of capitalism, according to Marx. There is also a market for workers. That is, there is a supply of workers that the capitalist can "buy"--or perhaps I should say "rent," because he only buys their future labor and only for a designated time. The worker "owns himself," and just rents out his labor power to the capitalist. That is, he rents out his body, which is capable of doing the job later on today and tomorrow and so on, and he agrees to work for a certain length of time, using his "labor power" in actual labor, putting value into the product.
Now since the manufacturer buys labor-power in the market, then there's a market price for it, which is independent of the desires either of the manufacturer or a given laborer. Why? Because manufacturers in general want to pay as little as possible, and laborers in general wants to get as much as possible for their future labor-time. If there's a short supply of labor, the labor side wins, until the price of labor is so high that the manufacturer's cost rises above the market-price for his product, and he goes out of business--throwing his laborers out of work. This increases the supply of labor, and so the workers have to lower their price in order to get jobs, because they're in competition with each other for the small number of jobs available.
So the price of labor drops until the workers simply can't survive at the price they get for their labor, and they die (or get sick or weak and can't work). And this decreases the supply of workers, and so the price has to rise so that the manufacturers can staff their companies with the small remaining supply of workers.
Note that the "equilibrium price" here is the cost of survival of the worker. That is, it is enough so that he can continue to live and be healthy enough to be able to show up for work. If he holds out for a higher price, then with high unemployment, he gets no work and dies off. Thus, even in the labor market, the "exchange value" of the worker as a worker (the value of his "labor power") is his "cost of production" as a human being capable of working--what it takes to keep him alive. That is, the exchange value of a worker is the amount of abstract human labor that goes into giving him minimal food, clothing, and shelter--just enough so that he can keep working.
Now this "cost of production of the worker" himself, so to speak, which is reflected in the price of labor, the amount of money that the laborer is worth in the market place, is considerably less than the amount of labor that he actually puts into the product that he is making. The capitalist doesn't really want him, he only wants his labor. But he has to rent his labor-power at the market-price (because he has to hire him before he actually does anything); and he finds that he can sell his product for more than the cost of the materials and the cost of the labor power he rented, because the actual labor the worker produces has a greater value than the labor power he represents as a cost to the capitalist.
And the tragedy is that if a given capitalist wants to pay his workers what their actual work is worth (meaning he would just break even and not make a profit), he will find that other capitalists will undersell him, by paying workers less, but still above their "cost of production" as laborers, and so he will go out of business. And so he must pay workers less than their work is worth, and must make a profit by siphoning off some of the value of their labor, while he does no work himself. And since for Marx, what labor (the transformation of the material world into something useful) is is the essence of what makes humans human,(3) the capitalist is using for his own purposes some of the very humanity of the worker, without (by working) being human himself.
Sounds logical, doesn't it? And that's why Marxists still exist. What it says is that the capitalist system, which is driven by profit, is inherently evil and inhuman, and necessarily exploits the workers. The workers don't own their own humanity (they've sold their labor power, which is their essence as human: they've sold their bodies); and the capitalist doesn't have any humanity of his own, since he does no work. And so the workers' humanity is "alienated" into the capitalist's hands, and his is alienated by having others perform the human acts he should be performing. Nobody's really human.
And this gets worse and worse as time goes on, and competition forces capitalists to cut costs more and more. The only costs they can cut are labor costs, and so they invent more and more efficient machines that do more and more of the work (because after all you don't have to pay a machine any more than the electricity to run it), and more and more workers lose their jobs and compete with one another for the few jobs that are left, and work longer and longer hours at starvation wages, and eventually die. And meanwhile the capitalists are producing more and more widgets, and the dying laborers can't afford to buy them, and so the capitalists also shrivel up and die. The system is not only evil, it is bound to collapse in the long run. And, of course, in getting to the long run, misery increases exponentially.
But Marx thought that there was no law that said that everything had to be bought and sold in the market. Why not just produce, paying what the value of the product was, letting the workers make the profit based on the difference between what it cost them to keep alive and the value they put into the product--just as was done in the old days with a single cobbler making shoes? Couldn't manufacturing be structured so as to avoid this exploitation?
See, if you could do away with capitalism altogether, and make every company a non-profit company, with all of the selling-price being distributed to the workers, then why couldn't you manufacture everything that everybody needs and wants, and just distribute the value (the price) according to the actual labor that went into it? And as machines become more sophisticated and take up more and more of the "labor," then the work week becomes shorter and shorter, and products become more and more abundant. And since less and less human labor goes into producing them, their value and so their price decreases to a mere pittance.
So in the limit you make only twenty-five cents because you worked an hour last week. So what? What hardship is that if you can go and buy a BMW for a nickel?
Eventually, things will become completely automated, and nobody will have to work, and we'll just go pick up whatever we want for free--and we'll "work" at whatever pleases us--or in other words, we'll spend our time playing. So if we could get rid of capitalism, eventually we could get rid of all its evils too. If we gave Communism a real chance, that is.
--The only trouble is that it doesn't work that way in practice.
You see, the whole logic of this collapses if you assume that there isn't any real value to something, let alone one reflected by the price. In that case, the worker's work doesn't have a value, but only its value from the worker's point of view and that from the capitalist's point of view; and the wages are the compromise between these two values. In this case, the worker is being paid more than the seller-value of his (future) work or he wouldn't take the job. But he is being paid less than the buyer-value of his work, or he wouldn't get hired.
I hasten to say it's not that rosy. On the supposition that work is a necessity, exploitation is possible; but let us defer this for the moment. The point I am making here is that, if you deny that the price reflects an actual value, you there's no reason to assume that the system automatically exploits the worker. If you don't deny it, then you have to say that the true value of the worker is how much work it cost to produce him; that is how much he's worth as a worker, and it has nothing to do with the value of his work; so that if you pay him the value of his work, you're paying him more than he's worth as a worker.
But even on Marx's own terms, the logic is faulty. The worker produces the product only in cooperation with the other workers and under the supervision and direction of management; and the efficiency of a team effort results in something that isn't the same as the sum of its parts; so there is something about the "teamness" of the team that does some of the work over and above what each of the workers does; and the fact that there is a team is due to the capitalist--and why shouldn't he take his pay for this share of his in the "value" of the product? The "surplus value" on this showing is due, not to the discrepancy between the value of the worker and the value of his product, but between the value of his work as isolated and the value of his work as integrated with the others.
The whole point of capitalism as a system, Marx recognized, was the division of labor, which made production more efficient. But then that means that not all the value of the product (supposing it to have a "real" value) is the sum of the individual labors put into it. There is this intangible addition due to the fact that the workers are acting cooperatively.
But then that means that the labor theory of value is false; and once that is falsified, the whole house of cards falls down.
Nevertheless, the historical view of the market value (the value that was supposed to be expressed by the price) was the labor theory of value, and capitalist economists saw what a devastating critique Marx did of capitalism based on it. So they scrapped the idea of trying to derive the value from the supply side of the equation (the cost of production), and took the notion that Marx called the "use value" or the "value in use" (which he showed reduced itself dialectically to the cost of production to the extent that it was relevant in exchanges) and developed out of it the "utility" theory of value, looking at things from the demand side.
In subsequent, non-Communist economics, then, the price reflected, not the cost of production, but the demand. Instead of assuming that there was a demand "out there," and looking at how supply adjusted itself to it as to an independent variable, economists noted how the introduction of a new product created a demand that wasn't there before (because nobody had thought of having anything like that) and how changing the asking price changed the demand, and so on. It was the same dialectic, but from the other point of view. But now, since the real value lay in how much people wanted a given thing (how "useful" the average person found it), then there could be no question of paying the worker less than the value of his work. The value of his work now reduced itself to how much the entrepreneur ("Capitalist" had acquired a bad name) wanted his work; and he, being the supplier, had to create a demand for his potential work if he wanted to sell it.
This notion of value, of course, let economists adjust everything to the fluctuations of the marketplace, because the value on this notion is just what they now called the "equilibrium price," or the price at which the demand is fully satisfied. If more people decide they want something and can't get it at this price, then they would be willing to pay more for it, which means that the value went up, and the price now adjusts itself upward to meet this new value; and if the supply outstrips the demand, then fewer people are willing to pay the higher price, and since the value went down, so does the price.
With the "utility" theory of value, there's no assumption of an actual embodiment of some quality in the product; it's simply the sum of the perceived utilities (what I called "buyer-values") at any given moment, and so can fluctuate.
Well, what's wrong with that? Doesn't it describe the way things are? No, because, though it does describe what you might call the aggregate buyer-value, it doesn't have anything to do with the aggregate seller-value. The assumption is that the cosmetic manufacturer who makes his product for ten cents and sells it for ten dollars is selling it for its value, because in fact if he sold it for, say, fifteen cents no woman would buy it because if it's that cheap it can't give her beauty.
And, you might think, it is really the seller's idea of its value, too; because the fact is that the cosmetics are really worthless to the seller (what can he use makeup for?), and so any use they have for him is the use the potential buyers will find in them. Hence, the value he sees in the product (the seller-value) is the value the buyers see in it--which means that the price reflects his guess as to the product's value; and if he sells all he makes, his guess is correct.
I mentioned that Marx did a similar analysis of what I have been calling the buyer-value and seller-value, and he just as logically showed the opposite conclusion: how the buyer-value reduced itself to the seller-value; so this analysis should create a certain amount of suspicion.
First of all, if the seller sells below the cost of production, does that mean that he regards the object as really not as valuable as it cost him to make it? Suppose a shoe manufacturer here has a cost of production which allows him to sell shoes for forty dollars a pair. Foreign competition comes in and their shoes sell for twenty dollars, far below his cost because of cheap labor. Does he really think the value of his shoes (even if it's their potential usefulness to consumers) has declined just because his competition has cheaper labor? But nobody buys his shoes any more, and so it must have.
Secondly, it's perfectly obvious that in a monopoly situation, the producer can dictate prices simply by curtailing and expanding supply (since that's what monopoly is: control over the supply by one supplier). If he lowers the supply, the price goes up, because competition among buyers will force those who want the product to pay higher prices. But does this really mean that the value of the product increased just because the producer decided to produce less? It's the same product as before, just as useful as it ever was. How is value related to usefulness if the same usefulness means different values? Value was supposed to be created by demand; but in this case, it is established by supply.
Thirdly--and this is important--if you take this notion of value, legitimizing the "equilibrium price" in the market as what the value of the product or service at the moment "really is," then in cases where the product is a necessity and demand is inelastic, you have something whose value is really infinite. Brain surgeons know that they can charge sixty thousand dollars for an operation and get it; therefore, their time wielding the scalpel is "really worth" twenty thousand dollars an hour? When they charge a hundred thou for the operation, then they find that they can't get patients--not because patients wouldn't pay if they could, but simply because they can't raise the money, no matter how far they try to go into debt. So their time isn't really "worth" thirty-three thousand dollars an hour, but only twenty thousand, based on the accident that no one has enough resources to pay them, not on the fact that if they did, they would.
But does that mean that the operation is perceived as more useful by the patient than keeping his bank account, his house, and his car? Utter balderdash! The patient has to pay, and the operation is no more "useful" to him than staying alive is "useful" to him when he hands over his wallet to the robber.
But if the value of something is based on what the demand is, this means that it is based on the perceived usefulness to the buyer of the product or service; but then either you accept the distinction between values and necessities and say that the value of the necessary item is nil (because it's something that the buyer has a right to take for granted), or you don't, in which case, the value of the necessary item is infinite, and the price doesn't reflect the value, because the equilibrium price is the price above which people have to forego the item because they simply don't have the money, not because they wouldn't buy it if they had it.
Fourthly, if the price is based on demand and therefore on the average buyer's perception of usefulness, then it follows that wages are determined solely by how useful the employer finds the employees. If these are starvation wages, the employees' services aren't really worth more than bare survival; and the fact that he's a human being who is self-determining and forced into a condition where all he can do is work and go home and eat and fall exhausted into bed to get up and work tomorrow is completely irrelevant--because this is the seller-value of his work, and his work is worth only what buyers (employers) think it is. And of course, things like "equal pay for equal work" and "jobs of comparable worth" are out of the question. A job is worth only what the boss thinks it is, or only what people actually get paid for it.
It's interesting, isn't it? The entrepreneurs collectively (or individually, in monopolies)--that is, the suppliers--have control over the prices or the value of what they sell, even though value is based on utility of the buyer, because as the supply increases or decreases, the demand decreases or increases, and more important, the price (the value) increases or decreases. On the other hand, it isn't the workers--the suppliers--who have control over the value of their work, but the entrepreneurs collectively, because the workers have no control over supply, but entrepreneurs have control over demand (by deciding to do things like introduce machines).
This is one of the reasons why people think that capitalist economics is essentially an inhumane system, with everything skewed to the whims of the capitalist.
But, fifthly, if government fixes prices, then government fixes the value of the product or service, because the price reflects the value, doesn't it? No, these people say, only the market price reflects the value. The problem with price fixing, they claim, is that these artificial prices don't reflect the value of the item, which leads to black markets and various other ills. But when a monopolist fixes prices, this reflects the value? Yes, because the market stabilizes at the price he fixes, since he makes just the number of items that will sell at that price.
Finally, if you consider that the value of the item is its utility, then why is it that people in general will pay a lot for one or two pairs, but won't keep buying and buying shoes? The other assumption in both capitalist and Marxist economics is the Second Great Myth: that everyone is infinitely greedy.
The way the economists get out of this is with what they call the "law of diminishing marginal utility." The idea is that your first pair of shoes uses up most of the "utility" of shoes for you, even if your wants are infinite; and so you wouldn't pay as much for the second one, because you've got other things to do with your scarce resources, and the leftover "utility of shoes" is rather smaller than the original one--and so on for the third and fourth pair.
In real life, however, a person buys a pair of shoes for a specific purpose: to go with certain clothes, or to use in certain definite activities. The only reason he would buy a second pair identical to the first would be something like wanting two pairs from the beginning, so that he wouldn't be abusing the one pair by wearing it every day. In that case, he would be perfectly willing to pay the same price for both. But all of a sudden, a third pair becomes totally valueless to him--unless it's a pair of a different type of shoes, such as jogging shoes. In this case, he might be willing to pay twice as much as for the first two pairs. If he also wants to play golf, then he'll pay for golfing shoes, and there's no "diminution of the utility" for him at all, because each pair has a definite purpose, which exhausts all of its value for him.
But even on its own terms, "diminishing marginal utility" makes no sense. When a person buys a pair of shoes, his available resources diminish. If he has a hundred dollars and buys a forty dollar pair of shoes, he has sixty dollars left. Now in order for "diminishing marginal utility" to work, his next pair of shoes would have to be bought for less than twenty-four dollars (four tenths of his available resources). If he pays thirty for it, then obviously this means that the marginal utility has increased. But even if he pays twenty, it's hard to see how this reflects a diminishing marginal utility, because the sixty dollars he now has can fulfill many fewer of his desires than the hundred originally could. Paying the twenty for the pair of shoes now only leaves him forty dollars for all the rest of what he wants; so in spite of the fact that it's a lesser percentage of what he has to spend, what he has to spend is now so small that this percentage leaves him very little room to maneuver. If the price of everything diminished in proportion to the percentage of the money you have available, everything might be fine; but things remain just as expensive as they were. That is, when the man bought the shoes with four tenths of his disposable resources, he could distribute the six tenths among, let us say, twenty other items of various prices. When he buys the second pair of shoes, leaving him only forty dollars, he now finds that he can afford only five of the things he could previously afford. Thus, spending less than four tenths of his resources the second time cuts off three fourths of what he can actually have with the remainder. Presuming he knows this, then in relation to what he would actually like to have, the second pair of shoes had to have been extremely valuable to him, since in fact he had to give up a lot more of what he wanted to get it (its cost to him was greater) than the first pair was, in spite of the fact that the money he spent was (a) half of what he paid for the first pair, and (b) a lesser percentage of his disposable resources than the first pair.(4)
But this "diminishing marginal utility," generalized, is supposed to account for various market phenomena such as diminishing demand over time as the market gets saturated. This shows what happens if you try to mathematicize economics; you get into an unreal world which directly contradicts the real one, but which sounds very exact and accurate.
So if you say that the value something has is really how much the aggregate of buyers want it, then you're in as much of a mess as if you say that the value is really the abstract human labor-time embodied in it.
But then there's no way out of this, is there? Communist economics, basing its notion of value on seller-value, amounts to having the government fix prices and wages looking, presumably, to the cost of production. This leads inevitably to padded costs, inefficient production, high prices--and exploitation of the workers once again, who aren't in a position to pad their "cost of production." Capitalist economics, basing its notion of value on buyer-value amounts to letting the market determine value, which means that buying necessities pushes the buyers into abject poverty and the suppliers into outrageous wealth on their backs--legitimizes robbery, in other words--and at the same time, it forces those for whom selling is a necessity (like workers, who have to work or starve) into selling for a price that is inhumanly low, and so legitimizes exploitation.
The way out is to say that the price does not reflect a value at all; price is a compromise between two values which are irreducible to each other: the buyer-value and the seller-value. To "reduce" one to "really" being the other is falsifying the real situation. Neither of these, it cannot be stressed too much, is the "real" value, nor does the price reflect the "real" value. This way, prices can fluctuate from day to day without the silliness of saying that things have bounced up and down in their value (have become more or less useful) from day to day. Further, you can say that the value of a worker's work is not just what the boss thinks he's worth; it is just as much what he knows he's worth, because he knows what he's giving up in order to work for the boss, whatever the boss thinks about how much the work fits into his pursuit of his goals. Each of these is a legitimate assessment of the value of the work, and neither is reducible to the other one.
And I personally think that until economists recognize these two distinctions: that between values and necessities and that between buyer-value and seller-value, their theories will be like the Ptolmaic view of the heavens. You can adjust that view, by tinkering with it, to account for the perceived motions of the heavenly bodies based on determinants and epicycles; but the adjustments are always ad hoc. Similarly, you can take either Marxist or capitalist economics and adjust it to fit what's happening to prices and so on, but you do so only at the expense of sanity. Actually, it's mob psychology which determines market prices, not economic laws, as anyone who has looked at the stock market can testify.
Well, I think I've made out enough of a case that I can take my view of buyer-value and seller-value and price as the compromise as not obviously overridden by other economic theories. So let us see what is implied in my view.
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Notes
1. Marx did recognize a "use value" to the owner, but for various reasons, in exchanges, it got buried in this notion of the "exchange value."
2. The reason that it is "abstract human labor" (i.e. "average" or "generic" human labor) is that it doesn't matter how hard a given person actually has to work at some definite job; it's the average amount of work that it takes to do that job. And so the labor "embodied" in the work, giving it its value, is not the actual labor that went into making it, but this generic "amount of human labor." That is, if Henry's lack of skill is such that it takes him six hours to make a pair of shoes, and Frank can do it in two hours, it doesn't follow that Henry can sell it for three times as much as Frank's shoes. It's not worth three times as much in the market, but only--according to Marx--what the average pair of shoes of this type cost in terms of "human labor as such."
3. The idea here is that humans evolved by being the creatures that didn't adapt themselves to their environment, but adapted the environment to themselves; and language and all the things we think of as "human acts" were consequent upon this.
4. I read this--actually a better--critique of "diminishing marginal utility" quite a number of years ago in a book I took out of the library, whose title was something like Values, on value theory in general, but whose author I don't remember, and which I haven't been able to track down since, because the library no longer exists. Whoever he is, I am grateful for all he taught me in that book, and if I have stolen some others of his ideas because I don't remember that they were his first, I hope he forgives me for not acknowledging where I got them. This is the best I can do.