Capitalist Valuation

In capitalism, goods and services are freely traded in a market, sometimes for other goods and services, but usually for a medium of exchange known as money.  I state the obvious not as a lead in to a critique of the truth or falsehood of that statement.  Rather, I want to focus on an implication of it that often gets overlooked, or even denied. 

Once all economic transactions are reduced to exchanges involving money, money becomes not only the medium of exchange, but also the expression of the value that the buyer places on the good or service purchased.  So far, pretty much everyone would agree.  However, the unspoken implication of this is that money also becomes the expression of the value that the buyer places on the seller.  I intend to argue that, writ large, this is also a measure of the value that society as a whole places upon the individuals within it.

The amount of money that a person has dictates much of the way that they lives his life.  It affects the quantity and quality of the food they eats.  It controls what they might have for living space.  It limits possible entertainment options.  It even plays a large role in determining what friends, companions and mate they will have.  There are other components to determining how happy a person is, but money is the dominant factor in establishing the environment in which that search takes place.

Economics talks a lot about the concepts of ‘price’ and ‘cost,’ and how they differ.  There is a third idea that goes along with them: value.  Value is the measure of what something is worth to an individual.  In standard economic theory, the value that someone places upon something is the maximum price they are willing to pay to obtain it.  If they can get it for a lower price, the difference is considered to be surplus value, and is the economic benefit that is added to society by the exchange.  Note that this is not zero-sum.  The entire point of a capitalist system is that the market allows surplus value to accrue to both sides of a transaction.

Overall, this system works pretty well.  Thanks to human nature, it produces better outcomes than anything else we’ve tried.  What it is not is perfect.  There are a number of places where it breaks down.  Many of these are externalities, where a market left to its own devices fails to capture all of the costs of a product in its price.  Others are places, such as education, where societies have decided that allowing a market to produce the most efficient outcomes leads to morally unacceptable results.  The United States is currently engaged in a debate as to whether or not, and to what extent, health care is one of these items.

The labor market is another part of a capitalist economic system that is fraught with conceptual peril.  There is a lot of confused argument about this, with most participants making arguments that they do not explicitly ground in the assumptions underneath.  Behind most of them is the fact that the market places a value upon those that labor within it defined by the amount that an employer is willing to pay them.

By far the largest asset that most people in the labor market own is time.  Their time is what they sell, and it is the source from which they can derive surplus value.  Save for a few that possess large amounts of what are more traditionally thought of as assets and many of those near retirement, time is the most valuable thing on the left-hand side of their personal balance sheet.  Most people do not own equity in a house, or stocks or retirement accounts that can come close to the present value of the time that they have available to sell over the rest of their working lives.

Given the way that money dominates our lives, how much of it we can obtain is a very real statement about how much society values us.  Since the time we sell in the labor market is our largest asset, it goes a long way to establishing our personal net worth, less liabilities.  Dani and Eytan Kollin have a science fiction novel, The Unincorporated Man, that makes this explicit.  It posits a society in which stock is issued in every person at birth, and they are a corporation.  They must sell this stock to obtain all of the things they need, such as an education and medical care.  With that stock comes a share of their income over their lives, and the price they can obtain expresses the market’s view of that lifetime income.  The value that society places upon each person is explicitly stated by their market cap.

I confess that I have not, yet, actually read the book.  It’s buried in the huge stack of things I own but have not yet read, so I can’t say where they go with the idea, though the blurbs on the back make it sound depressingly glibertarian.  However, the concept is intriguing enough that I will get around to it at some point.  Hopefully.

The novel really only makes explicit something that is already true.  There are other sources of personal worth than money.  Friendships are not, usually, built around money, though it can play an important role in their formation.  Volunteer work obviously lives in a space that is not quite economic, but not really not economic, either.  None of these other sources, however, get traded in anything like a market, nor are they really ‘sold’ to society as a whole.  Our labor is typically the only way in which the system as a whole can express an opinion as to what we are worth.  Psychologically, most people understand this, even if they cannot put it into words.

When people get into political debates about economic policy, they are usually arguing over the meaning of the observation that our worth in the labor market plays such a large role in setting the value that society places on each of us.  Given the declining marginal utility of a dollar as income increases, it is fairly obviously what motivates those arguing for lower taxes on the rich.  They aren’t arguing that they need, or really even that they necessarily want, that additional dollar.  What they are really arguing is that they are worth that extra dollar, and that only by receiving it is their value properly measured.

The same thing is true at the other end of the economic spectrum.  The specific amount of money at stake in labor disputes has more importance to those making less of it, but the affirmation that they are worth more than management desires to pay them plays a huge role.  Money is not only a medium of exchange, but also feeds our internal scoreboard of appreciation.

Much of the reason that the political debates are so intense is because of the counterarguments.  In response to assertions of what you are worth, those on the other side argue that you are less valuable than you think you are.  Saying that the rich use unfair methods to capture a larger share of national income, or that those on welfare are to blame for their condition are attacks not only upon your opponents’ economic interest, but also their sense of self-worth.  No wonder everyone gets so bitter about it.

This is why extended unemployment is so demoralizing.  Beyond the economic hardships it can create, it’s a statement that society as a whole believes that you are, literally, worth nothing.  No individual may hold that belief, but collectively, that is what they are saying.  There is a growing class of people in America that are being told that the world would be just as good a place if they disappeared.  That this isn’t true does not reduce the power of the message.

Were society a meritocracy, all of this might be less toxic.  In that case, there would still be arguments about what people really deserve, but there would be less of a sense of unfairness attached to it all.  There is the fact that we do not have anything approaching a consensus on how ‘merit’ should be defined and measured.  To what extent should a person’s inherent abilities, as opposed things that they achieve relative to those abilities, be considered in determining their merit?  Absent agreement on that and many other things, a meritocracy is incapable of obtaining legitimacy.

The bigger problem, though, is that there is no definition of ‘merit’ that is coherent, noncircular and can explain the distribution of wealth in society.  We can all come up with examples of individuals who are incredibly wealthy despite no obvious merit whatsoever, and those who are paragons of virtue and yet remain poverty stricken.  All that we are left with is the tautological idea that the people with the most money deserve it, and we can tell that they deserve it because they have so much of it.

There is a powerful political philosophy that has fetishized the economic idea of a market clearing price.  They have taken the observation that there is a price for any good or service at which supply equals demand and endowed it with moral content.  What was a true claim that economic efficiency is maximized if products are traded at the market clearing price becomes an argument that they should trade at that price, and that any deviation from that principle contains a wrongness that is not only inefficient, but also ethically flawed.

For most things in the market, the distinction obscured is largely irrelevant.  I may think that it’s kind of crazy for the idea that a car should trade at a market clearing price to take on a moral dimension, but it doesn’t have much practical consequence if people insist on being so wrong, since I agree with their conclusion that we’re best off if it does trade at that price.  In this context, as opposed to dealing with externalities, the argument about what something should cost is meaningless, but if those arguing derive enjoyment from doing so, have at it.

Once again, though, the labor market is different.  Here, we are not trying to establish the value of a several ton chunk of metal and plastic, but rather a human being.  The critics of consumer materialism may often be annoying, but they are at least partially correct when they say that capitalism reduces individuals to dollars and cents.  The market clearing price for their labor is a terrible way to go about setting someone’s value to society.

One flaw in the labor market that underlies this is that one of the many ways that markets can break down is if one party to a transaction absolutely must make a trade.  If someone does not have the option of simply not selling the product in question, the potential exists for a distortion in the price at which it trades.  For most of its participants, this describes the labor market. 

People do not have the option of just holding on to their time if they do not like the price at which they can sell it.  If they try, they find that they can’t eat and can’t pay the mortgage.  They are forced participants in the market.  Particularly in times of mass unemployment, workers may sincerely believe that their time is more valuable than what they can sell it for, but they have to sell it anyway.  While most goods can end up in a situation in which this is true in the short term, the market has ways of forcing a correction.  It cannot force there to be fewer people, and it cannot reduce the need for those people to sell their labor, save by producing mass starvation that is considered to be morally unacceptable and practically problematic.

Instead, we get situations in which one party to labor transactions manages to extract all of the surplus value, and often more.  In theory, capitalism should prevent this situation from persisting.  In practice, it can do so for quite a while.  Improper monetary policy can help explain this, but it remains true that negotiations between an individual worker and an employer have the inherent potential to be conducted on a level playing field.

If we allow the market to define what people are worth in monetary terms, we are making objective something that should really remain subjective.  This doesn’t change the fact that capitalism is the best economic system we have ever derived, but it does mean that it comes with a heavy spiritual cost that should not be ignored in policy debates.  Just because the logic of the economic system demands that labor be sold at the market clearing price does not mean that we are a captive of letting that be the final word on the value a person contains. 

“Big money goes around the world.

Big money give and take.

Big money done a power of good

Bg money make mistakes.

Big money shows a heavy hand.

Big money takes control.

Big money got a mean streak.

Big money get no soul.”

- Neal Peart, the final verse to “The Big Money.”