“Price is what you pay. Value is what you get.” -Warren Buffett
What matters to us and what price? Until the 1860’s, economists such as Adam Smith and Karl Marx struggled to develop a compelling theory to explain how humans qualify value and quantify price. Smith thought that the value of a good was a gestalt of the various costs required in its manufacture. Marx sort-of believed that a good’s value was determined by the amount of the labor required put the good together. The Austrian economist, Carl Menger, was the first to articulate in a brilliant and compelling fashion, how humans value goods and derive their price at the market.
Menger uses the example of Robinson Crusoe shipwrecked on his island. Let’s assume Crusoe has 100 cups of water at his disposal each day. Crusoe determines that he requires 10 cups of water in order to feel healthy and hydrated. He also needs 50 cups of water to irrigate his crops. He uses 25 cups for washing his clothes and dishes, and he uses the remaining 25 cups to water flowers in his garden. He has no further need for any more water.
What is the value of one additional cup of water: the 101st cup? Zero. It has no value because Crusoe has no use for it. The 101st cup, Menger terms “non-economic.” Looking at this metaphor from the other extreme, if Crusoe’s spring dries up and he is left with only one cup of water, the value of this one cup is priceless. It means the difference between life and death.
Menger posits that all human interactions in the marketplace are composed of sliding valuations, valuations bordered at their extremes by the non-economic and the priceless goods. Menger, therefore, strikes directly at the subjectivity implicit in the vast majority of these pricing decisions: the subjectivity of desire.
Absent the terrible coercion of poverty, we predicate our decisions of whether to buy or sell purely within the framework of our own sense of justice. In the vast majority of our purchases and sales, we only ask, “What is the value of this good to me, and is the price a fair representation of its value?”
Money provides a handy calculus for this determination. By referencing all goods with respect to their price in dollars, we manage to shackle our subjective musings under a link of objectivism. Our ration of water, to extend the Crusoe metaphor, is our weekly paycheck; and after accounting for the basic needs of our survival, we can begin to attend to our wants.
It is for this reason that inflation fills us with dread. The rising cost of bread breeds anxiety because it sows doubt in our minds about our ability to pay for our needs. But more subtle, sinister, and insidious is the inchoate notion deep in the back of our minds that the markings on our yardstick are in flux; that money, the arbiter of all goods, is no longer predictable, discernible, or just.