Sunday, November 24, 2013

The End of the Road: A Reflection on Value

There was a song I have heard a long-long time ago which had started or ended, I am not quite sure with the following words: “the king of the road”. Sitting on my desk pondering whether or not I should begin work on my next book, about the state of the Federal Budget and the unsustainable levels of debts in the US and most EU member countries, I found myself recalling this particular tune. The mind works in mysterious ways, as so many believe.

Why this tune, and at this point in time. I am sure psychologists can answer this question. For me, a trigger prompted me to recall it. I have just published a paper on the “Rate of Return to Aging: A capital Stock Approach” (International Advances in Economic Research, November 2013, vol.19, pp.355-366), where I came up with the finding that the rate of return to aging if not negative is close to zero. Another and perhaps a more subtle reminder about the implications of aging is the relationship between old age and work, especially the value of work. On reflection I knew why I associated the song with age.

I am fond of watching a program on PBS called “Window to the Wild”. There the host of the program, perhaps in his 60’s or early 70’s takes his viewers into the “wild”. A day or two ago, I saw an episode where the host of the program took his viewers into a place in Massachusetts quite deserted called “Dog Town”. What prompted me to think, I believe about the song and the title of this blog is a most interesting statement carved on one of the town boulders that stated: “When Work Stops Value Diminishes”. Whoever thought of it did well to carve it in stone.

Not every one, I am sure will realize or envisage how this small, yet a most powerful sentence pricks the mind. For an economist, value is a very important concept in the economist’s repertoire. Value has two characteristics: Value in “use”, and value in “exchange”. An inquiry into the history of economic thought leads you to the question of what determines value.

Value defines a good or service. A good such as bread or water have a value to the user but may not have a value in exchange. For example, water in a river can be obtained free of charge, and if the water is available to all, it will have no exchange value. On the other hand, if water is not available to all, and it is useful to users, then it will have a value in exchange. Whoever possesses the water can exchange it for other commodities or for money.

Determining a good's value in exchange has been at the foundation of economics from Adam Smith’s the Wealth of Nations (1776) to Leon Walras Elements of Pure Economics (1873) and Alfred Marshall (1890) to name a few. Through the history of economic thought one of the issues that have occupied the classical and neo- classical economists has been the determination of value in exchange. Although the analysis differed, one thing they have settled on was that “LABOR” determines the value in exchange (For a review of the history of economic thought on this issue see Attiat F. Ott with Sheila Vegarie: What Economists Do: A Journey Through the History of Economic Thought i Universe LLC, 2013, ch.4).
If “Labor” as our forefathers put it is the source of value in exchange, then the statement carved in stone in the Dog Town is quite remarkable.

As a professor of Economics who spent all my academic life teaching and writing about economic issues and principles, my value to my profession was determined by my labor. When dispensing labor services stops—comes to an end with retirement, value unquestionably diminishes. A person who has retired from the work force, his/her labor clearly has value in use but little in exchange in a monetary economy.

Everyone knows that, if a good has an exchange value, and if such a good has a limited life span, (an exhaustible resource) from instantaneous to a relatively longer duration, at some point in time it will cease to command a value in exchange. Labor is such a good, its services fall under the label of exhaustible resource. By labor, it is meant not only physical existence, but also the embodiment of said labor in value in exchange. When labor diminishes, or erodes through the passage of time, so does its value.

The law of Economics, since Adam Smith still holds. Labor is the source of value in exchange, and when work stops, as it happens sooner or later, “VALUE DIMINISHES” and that is the end of the road.