If you regularly involve yourself in advocating for economic liberalism, you have probably, at one point or another, explained to some interventionist naïf that markets tend to allocate resources to their highest valued uses. You spoke it as a central truth of social science, as the economic truth. And anyone who simply took the time to read even a Mankiw textbook would have their world illuminated by this truth.
If laissez-faire had a super-hero incarnation, “highest valued use” would be his catchphrase. It is perfectly succinct. It is an incantation to exorcise socialist demons. It is the soundbite-size revelation of markets’ desirability. It is also absurd.
We are living through a Cambrian explosion of free-market economics. The phylum of Austrian Economist is no longer confined to tomes coated with three decades of dust. Mises, Hayek, and Rothbard name-drops are now found in the most far-flung arenas of debate.
At any given time, there is a self-styled Austrian furrowing his brow and rambling off a stream-of-consciousness explanation of profit and loss because he found out a peripheral acquaintance is now feeling the Bern. “Capitalism actually maximizes social welfare,” he is typing. “Free markets and prices allocate goods to their highest valued uses.” And as he hits his Enter key, a corpse jactitates six feet below a tombstone chiseled “Carl Menger.”
One of the earliest contributions of the Austrian school to the field of economics was the subjective theory of value. This is the idea that resources, goods, and services only have value because economic actors value them. Menger, the Austrian school’s great progenitor, laid waste to the prevailing labor theory of value—that goods have an objective value determined by the amount of labor needed to produce them—in 1871 with the publication of Principles of Economics, where he writes:
Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs.1
Neither goods nor labor are independently valuable; they only become valuable through their ability to satisfy human wants. The value of mill labor is imputed by the value of a loaf of bread, which is ultimately imputed by the desires of a hungry man. Keep in mind that it is from the desires of particular, individual men (not an abstract or aggregate Man) from which goods and labor get their value.
Now, we can infer an implicit ranking of value an individual assigns to each good based on his actions: A man who spends two dollars on a Pepsi rather than a Coke has demonstrated that, in this moment, he values this Pepsi higher than two dollars and also higher than the Coke. We are unable, however, to assign units to the amount of value he receives from the Pepsi, the Coke, and the two dollars. We cannot, for example, determine that he would receive 5 units of value from the Pepsi, 4 from the Coke, and 3 from the two dollars, only that Pepsi was valued above the alternatives.
One implication of our inability to measure this psychological concept of value with uniform numerical units is the impossibility of conducting interpersonal comparisons of value. As Bob Murphy explains,
[E]ven if we thought it made sense to attribute units of utility to individuals, there is no reason to suppose we could compare them across individuals. For example, even if we thought a rich man had units of utility–akin to the units of his body temperature–and that the units declined with more money, and likewise for a poor person, nonetheless we have no way of placing the two types of units on the same scale.
Some free-marketeers (including self-styled Austrians) erroneously believe that all individuals value money equally and, as a result, money can be used as an objective, universal metric of value. Let us consider a logical conclusion of this: Assume I find myself in a bidding war with a starving, penniless vagrant over a Cheesy Gordita Crunch. Even if my esophagus is brimmed with food, I am going to win the auction at one cent. But do I value this unit of faux-Mexican food more than this poor fellow? We cannot confidently answer ‘yes’. We cannot confidently consider the question anything other than ridiculous.
This sort of thinking is ridiculous not necessarily because it is wrong, but because it is meaningless. Roy Cordato rightly notes, “It is inconsistent with [radical subjectivism] to say that A values resource X more highly than B does because he is willing to pay more for it. In reality, all that can be said is that resources will flow to those who are willing to pay the most money.” Assuming that willingness to spend money can objectively represent one person’s valuations relative to another’s requires us to believe that desires scale with purchasing power, i.e. wealthy people actually value eating more than poorer people do, and people with no money to spend do not value eating and prefer starvation.
If we cannot have comparisons of value between individuals, we cannot calculate the total value across society; we cannot determine if changes could be made to create more value; we cannot say that one economic system creates more value than another. To speak of a good’s highest valued use in society is thus nonsensical. Austrians, who pride themselves on their commitment to methodological individualism, should readily admit that “society”—an amorphous abstraction—does not value anything. Only individuals assign value, they assign value uniquely, and their valuations are not translatable onto their neighbors. “If that’s true for two people, it’s no less true for 285 million people. There is no social value scale to consult. The idea that there is such a scale lies at the heart of collectivism,” writes Sheldon Richman.
Despite the severity and extensiveness of this transgression, there is a displeasing lack of literature even mentioning the sin of appealing to a highest valued use. The aforecited articles by Cordato and Richman are the only treatments I have seen of this common inconsistency in the defense of free markets, and each is over a decade old with an empty comment section. The inconvenient reality of there being no highest valued use is that it becomes very difficult to state what it is about markets that makes them desirable. We find ourselves in a similar situation to that which Rothbard should have found himself in his reconstruction of welfare economics, as pointed out by Bryan Caplan:
Rothbard could only claim the welfare effects of government intervention upon “social utility” are indeterminate; i.e., since the victim loses and the intervener gains, it is impossible to say anything about social utility without making a verboten interpersonal welfare comparison. This is an important point, because it shows that Rothbard’s welfare economics provides a much weaker defense of the free market than usually assumed. In particular, Rothbard’s own theory strips him of the ability to call any act of government “inefficient.” By denying the ability to endorse state action in the name of efficiency, Rothbard also implicitly denies the ability to reject state action in the name of efficiency. This is no logical flaw in Rothbard’s theory … but its political implications are rather different than commonly assumed: Rothbard’s welfare criterion justifies agnosticism about—not denial of—the benefits of statism.2
It seems we should be similarly agnostic regarding the benefits of the market once we are rid of the highest-valued-use illusion and barred from invoking it as a defense. At the very least, we should be a little more humble in our theory.
Cordato suggests as alternative defenses that (1) markets make more complete use of dispersed and inarticulate knowledge, and (2) markets incentivize people to make more sparing use of scarce resources. These seem insufficient, though, as they are unclear about the actual effect upon people’s standards of living, the improvement of which is considered by many to be the telos of economics. (Ultimately, Cordato falls back upon a first-principles argument, that “free enterprise is desirable because it is just.” This is unacceptable as it is not germane to the science of economics.)
If we cannot say that markets are more efficient than socialism, that they maximize social utility better than interventionism, what is it that makes markets desirable? What can we say, regarding humanity’s material conditions, is generally, theoretically true of markets? Sadly, I am unable to formulate a good answer. I hope that someone who finds this essay can or perhaps already has found the solution to our problem in advocating for the free market.
- Menger, Carl. Principles of Economics. Auburn: Ludwig von Mises Institute, 2007. 116.
- http://econfaculty.gmu.edu/bcaplan/whyaust.htm, §2.4.