Use, Cost and Exchange Value

To explore the epistemic problems of the exchange a little more - that is, to explore why things don't get to places they need to go - I want to lay out a basic theory of use value, cost value and exchange value. The main claim is that we often have a sense of what things need to be produced and where they need to go, but that that sense is frustrated or interrupted by choosing the method of exchange to get them there.

Use-value and cost-value

Use-value is the value that someone gets out of using a good or a service. An apple is valuable because it satisfies hunger, and music is valuable because it satisfies the desire of entertainment, and so on. Is it possible to quantify, measure or order the different use values of different goods? In some cases the answer might be easy (we might prefer apples over rocks in our everyday lives) but in other cases it might be more difficult (would we prefer food over medicine if we need them both, or is the idea of preferencing a little nonsensical?). Here I want to consider the use-value of a good as some sort of value that society in general applies to it - so, for example, the use-value of an apple might, according to the aggregate opinion of society, or according to a "reasonable person" in society, be that it can be eaten. We might say that this is the "intersubjective" use-value of the apple - the one that, if people spoke to each other about the use-value, they might tend towards some consensus on.

Cost-value is the cost of making something or providing a service, such as all the materials and labour that go into it. Like use-value, there isn't necessarily a clear way to order or quantify goods by their cost-value, though there are certainly cases where, for example, we might note that two similar products have different labour and material requirements. Once again, the aggregate, reasonable or intersubjective societal evaluation is the one I am going to consider.

It might sound a bit useless to raise two such concepts of value if the exact value of them is hard to pin down, but it does allow us to consider the following two situations for a good. The first situation is where the use-value is greater than the cost-value. In this scenario, society in general thinks, essentially, that the good is worth making. For example, various foods are worth growing because they feed people; the labour and resource costs are worth paying because the utility of the food is worth it. The second situation is the opposite, where the cost-value exceeds the use-value. In this situation, society in general thinks that the good is not worth making. The benefit of the good is sufficiently low, or the cost too high, that resources and effort should not be directed towards it.

So things are worth making if the cost is low, or if the utility of the good is high enough, and this concept is pretty intuitive and sensible, even if we can't go out and evaluate specific values exactly.

Exchange-value

The exchange-value of something is the value that can be received in return for it in an exchange. So, a coffee might be worth $5, or an afternoon's labour worth a six pack of beer. This value isn't the use that someone can get out of a good, nor the effort or materials that were required in making it. Instead, this is a value specifically regarding how much of a finite exchange capacity it is worth sacrificing to get the good, especially when comparing it to other goods. Exchange-value is a construct of a system of exchange, by which I mean that it can only be considered once a system of exchange has been imagined.

Although the exchange-value of something can be quantified - we can place an exact price of dollars on it, for example, within a specific exchange - it is still something that is subjective. When two people engage in an exchange, they each need to consider how much they value the things that they are thinking of trading. And while different individual exchanges might have different prices, there is likely a general trend for a good. For example, ordinary cow's milk is likely to trade for closer to a $1 a litre than $100 a litre, even if different brands trade at different prices and the same brand changes price from time to time.

Value orderings

Just as the use-value could be higher or lower than the cost-value of a specific good, the exchange-value can also be higher or lower than the use- or cost-values. With these three values, there are six different orderings. Four of them are fairly interesting, and I've put them in the table below. The other two - in each case where cost-value is the highest - are less interesting, because they are very clear cases where society does not think it is worth making the good, regardless of whether there is a system of exchange or not.

The four interesting ones are outlined here:

I want to work through these orderings one by one, and think about how the exchange can interrupt the intuition of whether a good is worth making, and how it should be allocated.

Use > exchange > cost

Ignoring the exchange-value for a moment, for this good, the use-value is higher than the cost-value. This indicates that this is something that society in general thinks it is worth to make. The exchange-value is higher than the cost-value, which means that someone who makes the good can sell it to the market, and the use-value is higher than the exchange-value, which means that there are users of the good who will want to buy it from the market. That is, both the producer and the market think they benefit out of an exchange, and both the user and the market think they benefit out of the exchange, and so the exchanges will happen.

This is the ideal scenario for a market. A good that has this ordering of value will travel through the market from production to consumption. Someone who grows apples will sell them for money to a shopkeeper, and the shopkeeper will sell them to a hungry person. In this ordering, the market works well.

Note that "the market" doesn't have to be a particular actor who functions as an intermediary (like a shopkeeper). It could, instead, simply be the structure of the exchange. So if the apple-farmer wants to sell apples directly to consumers, the fact that an exchange occurs between them means that there is exchange-value at play. For example, society in general might think that it is a good thing to grow apples and feed them to hungry people, but the farmer will only part with the apples if both they and the consumer agree upon the exchange value of the apples. The next scenario shows what it looks like if this doesn't work out.

Use > cost > exchange

Again, ignoring exchange-value, for this good the use-value is higher than the cost-value, which indicates that society in general thinks it would be worth making this good.

However, the exchange-value is now lower than the cost-value. This means that the market is unlikely to want to purchase the product from the producers. Again, the "market" doesn't have to be an actual intermediary. Instead, it simply means that the producer does not find it worth exchanging the product, regardless of how useful it might be.

Consider a case where a company could produce medicine for a particular illness, where sufferers need a daily or weekly dose. The medicine, in this hypothetical, costs a lot to make - it requires a lot of labour and a lot of materials. The company wants to recoup that cost when they sell the product, or otherwise the company will collapse. So they have to set a price for the medicine - let's say they set it at $1000 for enough medicine for a week.

The problem occurs if the consumers of that medicine don't have $1000 a week to spend. In that situation, the company has no one who is going to buy the product: the people who can spend $1000 a week don't need the medicine, and the people who need the medicine don't have $1000 a week to spend on it. With no one to sell the medicine to, the company decides not to make the medicine.

The result is that the medicine is not made, even though society generally believes that the usefulness of the medicine (helping the sick) is worth the cost of the medicine (labour and other resources). Even though people generally agree that it would be good if the medicine were made and that sufferers would benefit from it, the market provides no way for the medicine to get to the consumers. And this is the same whether the company goes through an intermediary (a shopfront of sorts) or sells it directly to consumers - the exchange-value issue prevents the transfer of medicine to the ill.

This is a form of under-signalling, where the people with the need for medicine cannot sufficiently signal the market in order to receive the medicine.

Exchange > use > cost

This is another scenario where the use-value of the good is higher than the cost-value of the good, so, in general, this is a good that society thinks it is worth making. In addition, the exchange-value is higher than the cost-value, so the market is happy to have the product. However, in this scenario the exchange-value is also higher than the use-value, which means that the market is less likely to pass the product on the end-user.

The most obvious goods of this sort are investment assets, where the market thinks that the exchange-value of the good is going to go up over time, and they only want to complete the exchange when it has hit its maximum. In the meantime, the market is happy to hold the good. For example, investors might buy houses as appreciating assets rather than to live in, or a diamond seller might hold product in reserve to create artificial scarcity, or people might buy toys and comics and preserve them in their packaging rather than play with them or read them.

Goods of this sort are used as financial instruments; their function is to act as exchange capacity. The house bought by the investor is not considered for its use-value but for its exchange-value - it is, to some extent, irrelevant that it is a house and not some other thing of equal exchange-value, like a bond or other financial instrument.

But this situation is likely temporary. At some point the use-value was likely higher than the exchange-value, like an ideal market good, but then some speculation about the potential future price pushed the exchange-value up beyond the use-value, transforming it from an ideal market good into a financial instrument of sorts. This is a type of signal inversion, because the two values have swapped. Rather than the house being valued primarily as a thing to live in, it becomes a thing to store value for an exchange, and people who want to live in it are potentially pushed out of the market.

Quite likely there will also be a signal reversion, where the exchange-value once again dips below the use-value to become an ideal market good. If the exchange-value remains high indefinitely, then the good will never end up being sold to the users, and if the good can never be sold to the users then the future exchange-value ceases to exist as it will never be exchanged. Some forms of this transition are called market "corrections". Note that if parties took on a lot of debt to purchase the asset at an increasing exchange-value, when the exchange-value dips the debt will remain; this is what happened in 2007 and 2008 during the Global Financial Crisis.

Exchange > cost > use

Here we come across a good where the use-vale is lower than the cost-value; that is, society in general thinks that this good is either of too little use given the cost, or too high a cost given the use, and not worth making. Most of the time, these goods won't be made.

But there is one clear exception, and that is money. Any market economy will need money of some sort, whether it is a currency you can hold in your hand or a way of organising things on a ledger. The money itself doesn't have an inherent use-value, but it does have an exchange-value, and so it is worth making. Not that many things have an exchange-value and no other use-value except for money and various financial instruments, so it is only by the collective agreement on the exchange function of these goods in a system of exchange that they gain any value whatsoever.

Overview

The logic of value relationships when teh only values are use-value and cost-value are rather straightforward, but they become more complicated when exchange-value is brought into the mix, as it must be if there is a system of exchange. While there are ideal market goods, there are also other configurations where a nominally worthy good (where the use-value is higher than the cost-value) is rendered not worth making, or not worth transferring to end users, and other occasions where a nominally unworthy good is considered worth it. The exchange disrupts and distorts the otherwise straightforward evaluation of worth.