Jan 072001

What makes merchandise valuable is usefulness and scarcity. Air is useful, but has no value, as anyone can get it easily. Trash is, even if it is very unique and hard to obtain, valueless, as it is useless. What then do both have in common?

1. Value is low entropy

Usefulness is relevance to realization of a desired purpose. Our purpose is to maintain and develop our systems. In order to reduce the entropy of open systems, we must increase more entropy in the environment. The low entropy resources useful for it are the value for the systems.

Scarcity is the difficulty to acquire commodities in short supply and great demand. The scarcer a commodity is, the more indeterminate the acquisition of it gets and the higher the entropy grows. Acquiring it or producing it is negation of the indeterminacy, namely negentropy.

2. Two theories of value

There are two theories to interpret the scarcity value, the labor theory and the marginal utility theory.

2.1. The theory of marginal utility

The marginal utility is the extra utility per additional unit of consumption. When you are thirsty, a glass of water is valuable. Another glass of water is not so valuable. The third is still less valuable. When you do not want to drink any more, the marginal utility is reduced to zero.

This is the law of diminishing marginal utilities. It is because the scarcity of the commodity decreases that the marginal utility diminishes according as the supply goes on increasing.

2.2. The labor theory

How about the labor theory of value? It is evident that labor creates value when it comes to the commodities as service. In case of the commodities as goods, what we actually pay for is not things but the labor of producing and transporting the things.

Before considering why labor can create value, let’s examine what is the difference between labor and play. A man that plays golf for pleasure might play as well as professionals. Why can the latter get paid for playing golf, while the former must pay for it?

When you play golf for pleasure, you do not have to win the game and you can quit playing whenever you lose interest in golf. Professionals cannot play so arbitrarily without any kind of punishment. Play is richer in possibilities than labor. That is to say, the entropy of labor is lower than that of play. As labor is negentropy, it can produce value.

3. From energy to entropy

Are all value is produced by labor? Does the socially necessary labor hour, as the labor theory sometimes insists, determine the value of commodities? Those who win the first prize in a lottery did not necessarily work harder than those who draw a blank. A lottery may be an extreme case, but a chance often produces value.

A Bristol woman won a £1 million on a Merry Millions Christmas themed Scratchcard from The National Lottery. Is this value a result of her work? “Maria Murray Lottery Scratchcard Millionaire” by Matthew Anderson is licensed under CC-BY-SA.

The hourly wage rate of some jobs is higher than that of others. The labor theory of value explains this difference by means of the opportunity cost of education and finally its value by means of labor hour. But the same hour long education under the same conditions does not always produce equally talented workers. Whether someone is talented on a certain job by birth or not is, like whether s/he can win the first prize in a lottery, accidental.

The labor theory of value cannot explain the case of lottery, but the entropy theory of value can. Suppose there are N applicants for a lottery, while the prizewinner is only one. Winning the prize decreases the entropy by logN. The bigger this N is, the more valuable winning the prize is.

The Marxist Economics that insisted the labor theory of value was economics of energy and lacked economics of entropy. Although economics of energy worked well in the era of industrial societies, it could not adapt to the era of information societies. That’s why socialist countries collapsed when the information revolution broke out.

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  2 Responses to “What is Value?”

  1. A very interesting article, but I’m not sure I agree with your last point. It seems to me that the information revolution had little or nothing to do with the fall of the Soviet Union and Warsaw Pact countries. Could you elaborate on why you think it played such a pivotal role?

  2. The information societies are knowledge-intensive, while the industrial societies were capital-intensive. Since 1929, not only the Soviet Union but also capitalist countries had enlarged the role of Government as welfare states or fascist countries. Around 1973 the era of the big Government ended. The heavy industry reached the limit of the environment and natural resources. We must abandon the development dictatorship and adopt the market-based democracy to adapt to the knowledge-intensive revolution. If a Reagan or a Thatcher had downsized the centralized bureaucracy of socialist countries in 1970s or 1980s, the Soviet Union and Warsaw Pact countries could have survived the information revolution. I will discuss this theme in detail someday.

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