A short post on value transference

A lot of readers still don’t get value transference. So I think this is something I need to write more about. Some of my blog readers suffer from rigid thinking. They tend to be of a libertarian economic bent and wrongly believe that any voluntary commercial transaction is a fair transaction in which the party receiving the money has created exactly as much value as the amount of money received. On the other hand, the same blog readers may agree that paying $30,000/year college tuition per year to study Women’s Studies is a big scam. But wait! If the money was voluntarily paid from student to college, surely the college created $30,000 of value, didn’t it?

What about the story of the stucco guy whose income dropped from $500,000 to $70,000 after competitors entered his market? How is it that the guy was creating $500,000 of value per year (VPY) before there was competition, but only $70,000 VPY afterwards? My answer, of course, is that he was creating $70,000 VPY the whole time, but because barriers to entry prevented competition, he was also transferring hundreds of thousands of dollar of VPY from others to himself.

The stucco guy is an example of someone simultaneously creating and transferring value. I think there are two major categories of value transference occupations. There are people like the stucco guy and bankers who both simultaneously create value and transfer value, but who transfer far more value than they create. And then there are more pure value transferers, like women’s studies professors, who earn a decent middle class salary despite contributing nothing useful to society. I guess we can call these two classes the commercial value transference class, and the SWPL value transference class.

* * *

DaveinHackensack writes:

Supply and demand offers a simpler and more coherent explanation: when he was the only stucco guy in town, his scarcity made his service worth $500k.

Where did I ever write that value transference and supply and demand are mutually incompatible economic concepts? Just the opposite, it’s the basic economic law of supply and demand that explains the value transference. Because of barriers to entry, the supply of stucco services is much less than it would be in a free market with perfect competition, and this is what causes the value transference to take place. I believe that value transference also has a demand component in that people’s demands are irrational, but that’s a topic for a future post.

DaveinHackensack also writes:

As sloppy and imperfect as the market's assignment of value is, Marxists have never offered a better one; in fact, what they've offered has been worse.

Where did I ever write that I favored the imposition of communism? Or even of socialism? My proposal for reform, which should be called Sigmaism and not Marxism, is that the purpose of government is to create rules whereby people who create value are rewarded and people who transfer value are not rewarded. Under Sigmaism, people’s self-interest in obtaining rewards would cause them to create more value than they would under the current system. In contrast, Communism assumed that people would create value out of altruism rather than any self-interest.

Comments

[cvd]

Perhaps your readers don't understand value transference, but it's clear that you don't understand libertarian economics.

No libertarian economic theory suggests that if someone pays $30,000 for an education it necessarily implies that the educator creates $30,000 of economic value.

The fact that the transaction took place implies two things and only two things: 1) the supplier (the school) likes $30,000 (and all higher sums) more than not providing the service; and 2) the buyer likes the service more than the buyer likes all monetary sums below $30,000.

I'm not sure where you got "creating exactly as much value as the of money received," but it wasn't from libertarian economic theory.

[cvd]

While we're on the subject of your poor economic understanding, your stucco example is also wrong.

You cannot conclude that $70,000 in economic value has been created. What if more competitors join the market and his wage is driven down further? Would the new wage be the "real" answer?

The economic value that your are trying to arrive at is never observable. Further, if it was observable, so what? It wouldn't tell us anything that we need to know.

Your statement that someone who is making more than the imaginary monetary quantity you are trying to find is "transferring value from others to himself" is also absurd.

This value you are after is a product of individuals preferences. It is neither constant, fixed, nor measurable.

At no point can you state that anyone is the loser in a transaction. All you can state is that the transaction revealed the preferences of the transactors.

[bbartlog]

Austrian economists would likewise scoff at your attempt to even define 'value' as some measurable property. Of course their Wittgensteinian purism when it comes to these matters sets them rather at odds with practical people, but I think you need to offer a different criticism.
Anyway, apropos of your ideas regarding value transference and creation, here are The Basic Laws of Human Stupidity: http://www.cantrip.org/stupidity.html

[Aspic sentence]

If you believe that all artificial barriers to entry in the market should be removed - meaning ones imposed by government (such as licensing or even patents), that's pretty radical, even by libertarian standards. If you think the patent system is a justified form of a value transference mechanism, then why isn't the existence of Women Studies (or the modern art market) valid as well?

[DaveinHackensack]

"What about the story of the stucco guy whose income dropped from $500,000 to $70,000 after competitors entered his market? How is it that the guy was creating $500,000 of value per year (VPY) before there was competition, but only $70,000 VPY afterwards? My answer, of course, is that he was creating $70,000 VPY the whole time, but because barriers to entry prevented competition, he was also transferring hundreds of thousands of dollar of VPY from others to himself."

Supply and demand offers a simpler and more coherent explanation: when he was the only stucco guy in town, his scarcity made his service worth $500k. You offer no ex ante method of differentiating value creation from value transference. What if twice as many stucco guys moved to that guy's town, and he was earning $35k? You'd probably say that $35k was his "VPY" all along.

This sort of Marxist thinking just leads to a slippery slope of subjective value judgments (e.g., bourgeois professions bad; manual labor good). As sloppy and imperfect as the market's assignment of value is, Marxists have never offered a better one; in fact, what they've offered has been worse. How many of the better-compensated (in terms of perks and power, if not always in terms of wealth) folks in communist countries were secret policemen, ideological enforcers, etc.? How much value did they create?

[bored]

Communism isn't a charity. It's about workers (people who work for somebody else) taking matters into their own hands. The communist premise regarding "work" is that healthy humans ENJOY productive labor. What we dont' enjoy is the lash of compulsion; laboring hard in order to make a non-productive class of people money. Only in the imagination of anti-communists would the "working class" become "lotus eaters" if they weren't constantly threatned with destitution and starvation.

[sabril]

"This sort of Marxist thinking just leads to a slippery slope of subjective value judgments "

I agree. Although it seems obvious that feminist studies professors are worthless, painful experience shows that it's usually a bad idea to have some central authority making judgments about what does and doesn't have value.

Ironically, a big part of the reason feminist studies professors exist is that the government subsidizes them through student loans and preferential tax and antitrust treatment for universities. Without such government goodies, universities would have a lot less money to throw away on useless nonsense like feminist studies.

So one could say that in fact the government has implicitly determined that feminist studies does add value.

[691]

When you describe it like this, HS, value transference stops making me angry. All it amounts to is capitalizing on your bargaining position.

Deals and bargains are about finding mutually acceptable arrangements, something that benefits both parties. But there is a range of deals that are acceptable to both sides, not just one, and one aim of negotiating is to maneuver within that range to a deal that is relatively more beneficial to you.

Here's how the Stucco Man example works. There is a minimum price, call it $30K, at which he is willing to do the work, and a maximum price, call it $600K, at which the millionaires are willing to contract him for their houses. Anywhere between that is acceptable to both parties - Stucco Man will do the work and rich guy still wants his house - and pushing the price up or down is a zero sum game: what one gains the other loses. There is a theoretical $570K to be divided between the two sides. With low supply or high demand, Stucco Man can claim more of the middle ground. When more competition arrives, he loses most of the middle ground.

Now, the way to get really rich, and not just middle to upper middle class comfortably off, is to put yourself in a situation where you continually, perpetually have an extremely good bargaining position and can extract most of the mutual pot in these zero sum games within the larger nonzero sum games. Working in a perfectly competitive industry is not fun as there are minimal profits to spend on private jets.

[sabril]

"My proposal for reform, which should be called Sigmaism and not Marxism, is that the purpose of government is to create rules whereby people who create value are rewarded and people who transfer value are not rewarded"

Dude, that's pretty much the essence of Marxism. Marx felt that the capitalists needed to be expropriated because they weren't adding value. That they were just sitting back and getting fat of the labor of the workers. That the workers are the real value creators.

[Basil Ransom]

Your value transference idea is interesting and plausible, but no more.

What sort of laws would a Sigmaist society have?

How would banking be different under your ideal circumstances?

As far as reducing or eliminating barriers to entry like certification, this is wise but not novel.

[DaveinHackensack]

"My proposal for reform, which should be called Sigmaism and not Marxism, is that the purpose of government is to create rules whereby people who create value are rewarded and people who transfer value are not rewarded."

In order to do that, you'd need an ex-ante way of determining what was value creation and what was value transference, and that would require the same sort of subjective, invidious distinctions made by the communists. In practice, of course, various constituencies would lobby to increase the government-assigned value of their labor, and the result would be a hash. You'd almost certainly like it a lot less than the current system. Women's studies professors might end up making more than heart surgeons under a system where the government decided how much value every worker created.

"In contrast, Communism assumed that people would create value out of altruism rather than any self-interest."

Communism, in practice, relied on other means to motivate workers (fear of persecution; the promise of fame, social status, and perks for success). But the communists also made the same mistake you do, in underestimating the value created by the owners.

I may have mentioned this example here in a past comment, but there was a steel factory in some ex-Soviet 'stan, where no worker had been paid in a long time, and everyone in the area was poor and hungry. The country pretty much begged an Indian steel magnate to buy the factory, and he bought it, for a pittance. Not long after, the factory was profitable, the workers were paid, the people in the area were much better off. Same factory, same workers. Clearly, the new owner, the steel magnate (Lakshmi Mittal) created a lot of value, but he's the sort of guy the communists would have considered a value transferer, not a creator.

[Michael Anissimov]

Can you define the difference in a non-arbitrary way? The dude really was producing $500,000 of value if others couldn't bring the service. Maybe Womens Studies majors really do receive $30,000 of yearly value if there is a large community that will actually pay them.

I find your economic, intellectual, and political ideas interesting, but sometimes you sort of blur them together.

Also, would you ever consider going public with your real name? It's a shame that intellectuals like you and Mencius feel you'd lose so much by going public that you don't seize the benefits of being a unified persona, instead of a segmented persona. I spit radical ideas of every sort and go with my True Name.

[dearieme]

Siggy, aren't you just banging on about what economists call "rents"?

[sabril]

"Women's studies professors might end up making more than heart surgeons under a system where the government decided how much value every worker created"

I totally agree, and I would add that if it weren't for heavy government subsidy of universities (student loans, grants, anti-trust exemptions, tax exemptions, etc.) there would probably be a lot fewer womens' studies professors.

[Ronald3]

Half,
Do yourself a favor and never reveal your true identity. I enjoy your writing very much, but if your real name comes out you will never get a corporate job

[Steve Miller]

So value transference = really high producer surplus?

Seriously, that's how I explain the stucco guy. He had a temporary monopoly, and was able to transfer surplus from consumers to himself, which is the basic monopoly model. Absent significant barriers to entry, competitors will enter and bid prices down. Producer surplus falls, and consumer surplus increases. That explanation is roughly 100 years old. What's the great discovery?

[Alex]

I still don't understand your theory because you haven't explained it very well. How do you calculate how much value is being created? Is it just based on the happiness that someone gets from the good or the service? Is it what the person would pay for the good or the service if they understood what they were really getting?

It seems like the line between value transference and value creation is entirely arbitrary. How do you know that the women's study major isn't getting $30,000 of value from her studies. Most people assign an intrinsic value to gaining knowledge. Perhaps these women think that learning about the condition and history of women is essential to being an educated person. Why should your assessment of what makes a person educated come before theirs?

To summarize, you need to be able to quantify and objectify "value" if you want your theory of value creation/transference to make any sense.

[Bob Dobalina]

I think Steve Miller has it on the nose, HS.

You're a complete autodidact when it comes to economics, I'd bet, as every now and then you write something that betrays a stunning ignorance of stuff a second-semester undergrad almost certainly would have encountered.

[capitalkid]

In a truly free market your notion of someone profiting off of "value transference" would be a transient event. As soon as other profit seeking entities see the profit potential and subsequently engage in the same activities, the magnitude of that profit would decrease.

Your "stucco guy" is a perfect example of this. A truly free market would already self-regulate and there would be no need for the government to impose regulations aimed at punishing value transference while rewarding value creation.

I can guarantee that any such regulations would only have some unintended consequence that would then leave the market a little less "free". Then you'd get another regulation trying to fix the shortcomings of the first, leading to more unintended consequences, and then you would ...

[HS: The whole point of value transference is that what you describe DOESN'T always happen.]

[AshAndMistyInLove]

I respect his right to privacy...

[seeitnow]

It seems that by your definition of value transference all salesman (like myself) would fall into that category - after all, we add no value to the products we sell. But I like to think of my job as one that drives capitalism. Without sales people, much of the goods and services would find a difficult path to new owners. Although this adds no value to the product, it encourages innovation and risk taking by corporations and entrepreneurs. This leads to the product producers ( working people creating the products we sell ) to work harder to be able to buy the products produced and sold by others.

[wreaver]

@Aspic sentence said,
"If you believe that all artificial barriers to entry in the market should be removed - meaning ones imposed by government (such as licensing or even patents), that's pretty radical, even by libertarian standards."

No it isn't. Libertarians want patents and (mandatory) licensing removed.

[wreaver]

@HalfSigma said,
"My answer, of course, is that he was creating $70,000 VPY the whole time, but because barriers to entry prevented competition, he was also transferring hundreds of thousands of dollar of VPY from others to himself."

It sounds like you are suggesting that there is some objective way of determining how much "value" an amount of work has. That doesn't seem cogent.

The "value" of an amount of work (or even an item) is (potentially) different for each and every person. The "value" TO THAT PERSON is whatever that person is willing to pay for it. (And the "value" TO ANOTHER PERSON is whatever that other person is willing to pay for it. And if a person is not willing to pay anything for it, because they don't way it, then it is worthless TO THAT PERSON.)

[rosscros]

This sounds sort of like the good intentions of libertarianism and the good intentions of populism had a lovechild.

[TGGP]

Thirding Steve Miller. Consumer surplus isn't some new wrinkle on economics, I was taught it back in high school.