Saturday :: Dec 3, 2011

Calculating Value From Adam Smith

by Mary

One fascinating point in The Big Thirst was a quote from Adam Smith who observed that humans are confused about value.

The word VALUE, it is to be observed, 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. The one may be called "value in use"; the other "value in exchange." 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. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.

This is a profound observation that is just as true today as it was when Adam Smith wrote it.

We see this in many environmental values. During the timber wars of the west, it was clear that the market knew how to price timber but a living healthy forest had zero value in the market. This is why there has been a push to find a way to price externalities in our natural systems. For instance, how much would oil really cost if the cleanup for the pollution and ill-health caused by the search for and use of oil was priced into the cost we pay for it? And how much of our defense budget is really part of the cost of oil in the United States? These are some of the things that we need to price better and value appropriately to make the future for our descendents livable.

Mary :: 1:01 PM :: Comments (2) :: Digg It!