Economic Value Defined

What determines Economic value?

The Definition of Economic value is the subjective utility one derives from a thing or idea. Many people think the amount of labor and hard work you put into something will determine value.  Because you put effort into something than you have created something of economic value.  Something that others will hail as great.

Economic value is subjectively determined by whatever you think it is worth. This is an actual economic concept. The early classical economists tried to tie value with labor or cost. Something is worth, whatever you want to pay for it.

Marxist economists believed that is the amount of labor that goes into creating something determines its value.  This is the labor theory of value.  With the collapse of Communism we can all see this understanding of value is, unfortunately, is wrong. If you tried to ascribe value objectively, the system falls apart.

Price is the ultimate measure of economic value and this is determined by supply and demand based on millions upon millions of people making a subjective personal preference of what something is worth.

When someone else determines the value for you, then life is boring and inefficient. The Soviet Union had of tractors but no toilet paper.

However, take it to the next level, think how really boring it was to live under communism, and how fun the world is now with web 2.0, Sony play stations, miniature golf courses, Adam Sandler movies  and countless things people might think of as worthless, if value might be determined objectively rather than subjectively.

Economic value is something that is determined subjectively.  This is basic economics. It is where the aggregate supply and aggregate demand curve intersect.

In other words, many people believe value is determined by the factor of production or their own personal evaluation of what is quality or what is junk, not from the customers point of view.

People think that if they work hard at creating something it should be of value.  In fact, at some level I believe this. But we can not be the judge of value, rather the economic idea of marginal utility, and the cruel idea of aggregate demand is what determines economic value.

How economic value is determined

Economic value is determined by supply and demand. That means the value is subjective. What might be valuable to one person is not to another. This is illustrated in the Diamond water paradox.  Diamonds are of great economic value but not as important as water for survival, which is cheap.

Another example is if some person takes ten years to make something that only he and his mother thinks is good than people will find it of little value.

However, if someone writes, lets say a blog which has to to say 1/4 million page views a month (like one of my other blogs) than this is an indication of value.

YouTube as an illustration of subjective value

What about YouTube? I have a nice channel about economics, yet someone who make funny cat videos gets more subs than I do. Why? This is what people like.

Value is determined by the aggregate demand for such a thing that is created. Many elites intellectuals create some weird theory, true nonsense and people do not like, something avant guard and artistic but in reality, what they create is ridiculous. They snub you  the world and say ‘you fools’ can you not see its value, I am great, what you create is spam, my mother and I think I create something great.  Ha ha.  Again economic value is subjectively determined by the aggregate.

On the other hand, many plain humble people create things that are useful to many people, and they are rewarded economically, like my neighbor when I was a kid, long before my time, he created the pop-up toaster.

Economic value is connected to likes and dislikes in plain English. 

The take away from this post is, think about this when you want to make money through an entrepreneurial effort. Give the people what they want.