Monday, June 19, 2006

ECONOMICS: The concept of value to a lone human

I'm going to have a series of posts that will describe concepts in Economics. I've recently been listening to the Rukeyser series of audiotapes of the Great Economic Thinkers, and many of the concepts are difficult to understand, or, in contrast, some of the arguments between schools of economics are difficult to distinguish between.

The conceptualization of economic cases.

Before I begin the discussion, economics is rife with cases and models. One fault that many economists have with each others models is that the model (1) makes assumptions and (2) holds everything else equal and (3) oversimplifies.

Of course, the problem with these are that the assumptions may presuppose an answer, nothing is static, and simplifications may eliminate alternative explanations.

Thus, in each of my models, I will attempt to discuss the major assumptions, how static/dynamic each model is, and the simplifications employed.

The concept of value

Imagine a lone human, eking out a living by their own effort. There are no other humans involved in this model.

The human produces a quantity of food. What is the value of the food?

1) The value of the food is equivalent to the items used up in order to procure the food.

2) The value of the food is equivalent to the amount of effort involved in procuring the food. This can include (1) above if you argue that effort is used up.

3) The value of the food is equivalent to what was given up in order to obtain the food. This can include (1) and (2) above, if you argue that effort was given up and that items were used up, and that these could have been put to a different use. It can also include what is know as the opportunity cost, that is, the thing given up so that the current item can be obtained. {NOTE: This is a broad simplification of opportunity cost.}

Utility theory describes a notion of value that has each thing have a certain amount of utility, and thus, our lone human describes a certain amount of utility in producing the food that is equal or greater than the utility of not obtaining the food.

Some self-awareness will enlighten us to the use of utility theory.

Our lone human is not hungry. Therefore there is little need to obtain food. That is, there is little utility in obtaining the food. There is greater utility in using the time and effort that would be expended in obtaining the food in doing something else. Time passes. Our lone human becomes hungry. That is, the utility of obtaining food has increased over time.

In the illustration, the utility of obtaining food begins less than the utility of doing something to obtain the food. Over time, as our lone human becomes hungrier, the utility of getting something to eat increases until it has greater utility to eat, than to do nothing to obtain food. Generally, at this point our lone human will act.

To complicate this, let's assume that our lone human understands time and that, over time our lone human becomes hungrier. The lone human may not wait to act until the utility cross-over point is reached. Knowing that they will become hungry, the lone human may perceive utility in acting to obtain an item before the utility of consuming the item is equal or greater to the utility of the act of obtaining the item. Thus, you might argue that the perceived utility can be more or less than the actual utility, and a human might act upon the perceived utility rather than the actual utility. For example, our lone human might obtain the food early, in effect saving food, for later use. Or, the human might put off obtaining the food if the human perceives utility in self-denial. Both of these qualities are present in consumers.

At any particular time during these discussions, I may use any or all of these working definitions of value. I submit that the utility theory is most likely the best, but, it is also the clumsiest. I will most likely default to using utility as a synonym for value, and I will attempt to discuss other points of view as appropriate.

NEXT:Our lone human gains a friend.

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