Adam Smith states, ‘The word value has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys.’ In other words, there is ‘value in use’ and ‘value in exchange’.
This is a very important distinction and one that is often forgotten. Smith reminds us, ‘the things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use’.
DEFINING IDEA…
Value is the most invincible and impalpable of ghosts, and comes and goes unthought of whilst the visible and dense matter remains as it was.
~ W. STANLEY JEVONS, ECONOMIST AND PHILOSOPHER
He gives the examples of water and diamonds to illustrate his point that nothing is more useful than water, yet nothing much can be exchanged for it. Diamonds, on the other hand, have no value in use, but have huge value in exchange. However, this observation isn’t strictly true anymore as diamonds have properties that make them exceptionally useful: they are the hardest natural substance and as such are found in cutting equipment, where durability is essential.
What is perhaps most interesting, though, is the changeable nature of value. If you had dragged yourself out of the desert after five days, what would you value more: diamonds or water? Water is by far the cheapest commodity and yet it is one of the few things we can’t live without. Most of us can easily live without diamonds! The irony about Smith’s examples is that ‘need’ against ‘want’ is highlighted, and the subsequent potential for exploitation.
When James Bond starts tackling the subject in fiction, perhaps we should all be a little nervous about fact! In the 2008 Bond movie, Quantum of Solace, the villain attempts to corner the world’s water supplies to sell to the highest bidder. This might seem like fiction now, but perhaps it’s already begun with the partial privatisation of water.
It will be interesting to see if the water supply, an industry already worth billions in the bottled variety, will go the same way as energy and hold many households to ransom. Putting what we ‘want’ in the hands of the free market makes economic sense, while putting what we ‘need’ in those same hands could prove very dangerous indeed. Surely some commodities, such as food and water, must have the supply protected for all - regardless of financial resources?
As economies expand and contract, it’s easier to see the changing nature of value more clearly as our needs take priority over wants. Faced with water or diamonds, even Coca-Cola®, we may end up preferring water. Financial restriction and desperation has a way of levelling our desires and forcing us back toward simplicity.
HERE’S AN IDEA FOR YOU…
What do you value above all else? Make a list of the ten things in your life for which you are most grateful. You may be surprised to discover that few, if any, relate to money. When the economy turns south and the press is filled with predictions of impending doom and gloom, this may be worth remembering.