GOLD economics posits the choice theory of value, in contrast to the labor theory of value, which is Marxist, and the subjective theory of value, which is Austrian. I am well aware that many, perhaps most, libertarians are Austrians or are fond of Austrian economics, so I am sure they will be angry for my taking on Austrian theory, and will try to discredit and attack me. I come from the Objectivist-influenced school of libertarianism, which is sharply contrary to the Rothbardian Austrian school, but I believe in one unified big tent libertarianism, and so I want to try to persuade the Austrians that there is some merit in what I have to say. Let me see if I can answer some of their objections, in anticipation. Two obvious objections that I anticipate are, first, that the choice theory of value will collapse into the labor theory of value, and second, that there are factual scenarios which disprove my theory.
The labor theory of value says that money should be equal to the amount of work done to make the sold goods, in other words, money should equal labor expended. The Austrian theory of value says that value is subjective, in other words, money should equal the subjective feelings of the consumer. The choice theory of value is, perhaps, in between the other two, or, perhaps, is in a different area altogether. The choice theory of value holds that profit is equal to the amount of value that the producer created and added to the raw materials on top of what was there already. Value refers here not only to physical items added to the raw materials, but of work done to improve the raw materials and turn them into a finished product, such work including both physical labor, intellectual work, and making decisions. Assuming that a person has free will, which the choice theory does assume, a person is responsible for their work and choices, hence created the value, hence is entitled to own the profits as their just reward. The choice theory of value, like the Austrian theory, also holds that value begins with the subjective tastes, feelings, and preferences of the consumer, but the point of sale converts this into an objective measurement, where the consumer made a choice to spend $X to buy something, and at this point the subjectivity is converted into an objective value, the mathematical value of $X of the price of the item, which is fundamentally an objective existing thing in reality, which can be measured and compared and quantitatively analyzed, and is not merely a subjective entity in the consumer’s mind.
The choice theory of value is so named because it is the choice to buy or sell at a given price which defines the objective value of the product as being objectively worth that price, so that only the freely made choices of consumers in the marketplace can objectively evaluate values. This implies that government bureaucrats could not know objective values in the absence of free market choices by buyers and sellers, so socialists cannot accurately assign productive resources in proportion to the value of the goods they need to produce. The choice theory of value is distinctly libertarian and anti-socialist. The only way to know what people would choose is to give them the freedom to choose and then see what it is that they actually choose. It is not something an economic planner can guess or predict, despite the fact that it is objective and not subjective, hence economic central planning is futile.
According to the labor theory of value, the value of something is defined by the amount of blood, sweat, and tears that went into producing goods and services, hence, obviously, the working class deserves to own everything. The Austrian will say that, if I say that the person who made the value deserves the money, then this collapses into the Marxist position, because doing the work would earn the profit. To which I reply, for an ethical defense of capitalism, we must be able to say that the people who own money deserve to own it, and earned it, otherwise capitalism has no ethical justification for the ownership of private property, and it would simply be random chance that the rich have money, a random chance that would seem unfair and could be fixed in the interests of fairness. Such a moral justification is utterly missing from the Austrian position, when one turns the magnifying glass of critical scrutiny upon the details of Austrian dogma.
The choice theory of value is not the labor theory of value, because the relevant measurement for my theory is the money price that is paid, not the amount of blood, sweat and tears expended to make the product. If a rich person makes a product that people pay a million dollars for, then he made that money, he earned it, and he deserves it and is ethically justified in owning it. My favorite example is the star Major League baseball player, who brings joy to millions of fans and deserves a $20 million/year salary because he brings joy to 20 million people and thereby creates the value to make that money, even though his job is fun and easy compared to the daily grind of a school janitor who makes $10/hour to clean up unpleasant filth. In the market there is a high supply of potential employees relative to a janitor’s work, and the janitor’s work is low-risk work that does not entail high stakes if he fails in his job, so the value he creates is actually worth $10/hour in the context of supply and demand and the importance of the job. A corporate CEO, of course, is like the baseball star, but more so: the CEO of a company that mass-produced products bought by millions of people creates millions of units of value, and he bears the risk of what happens if he fails at his job, which is bankruptcy and disaster for his company, so the value he creates is obviously enough to earn a million dollar a year salary. In a free market society, the people who make lots of money deserve to be rich, and the poorer people who don’t make as much value deserve less money, as a conclusion of deductive logic. Profit is not labor, it is value created, which does not perfectly correspond to labor, but the objective measure of value does correspond to money price paid, indeed, it is identical to it.
The Austrian position is anathema to any Objectivist-influenced libertarian, first because we don’t believe that subjective things really exist, second because we understand that capitalist economics needs a moral justification for people to believe in its justice or rightness, or it will die. Under the Austrian postulates, that money need not be earned, and that economics exists to prioritize scarce resources, the people with large amounts of unearned money would have their needs and wants held as a higher priority than people who did lots of hard work and created lots of value but have less money, which screams unfairness to any normal human being, although within the narrow, cloistered Austrian community the Austrians probably don’t come into contact with average people very often. In the Austrian model there could be people with lots of money who don’t ethically deserve to own their money, yet the entire economy would be organized to satisfy their every whim, and this is not fair. My theory solves the problem created by the Austrians: it rejects Marxism while proving that the people who created value have an ethical right to their profits, which includes the profits made by businesses in a capitalist economy.
The choice theory of value is not the labor theory of value, but doing hard work and making smart decisions generally does create value, so you will get what you deserve under GOLD, whereas the Austrian theory is, in the end, value free, and therefore not as good for capitalist politics. The choice theory of value can never collapse into the labor theory of value, because prices don’t perfectly correspond to labor, and A is not non-A, price is not labor, so they are two different theories. One won’t collapse into another with any greater probability than that Austrian theory will collapse into Marxism, or that Quantum Mechanics will collapse into Flat Earth Theory. If Austrian theory continues to insist that a person does not need to earn money to own money, then they are sabotaging the ethical justification for capitalism, and this may very well lead to Marxism, which, in a sense, means their theory will collapse into Marxism long before mine does.
There are three factual scenarios which will be asserted against me, so let me anticipate them. First, that a man buys a bottle of wine for $200 from someone who walks past him on the street, and in the very next moment he turns around and sells it to someone else who passes by for $400, but he did absolutely nothing to the bottle of wine, hence created no additional value, yet has a $200 profit. Second, that a man makes a grilled cheese sandwich and puts rare, precious caviar into it, but then sells it on a street corner for $5, so its objective worth was not the price that was objectively paid for it. Third, a worker deserves the money they are paid as salary, yet my theory of profit, that it is the value added on top of raw materials and valued objectively by the free market at the price paid for the product minus the cost of the raw materials to make the product, does not account for salary.
In the bottle of wine case, the value that is created is the value of the wine being in the hands of someone who values it for $400 instead of the person who valued it less at only $200. This is value, as the economic theory of arbitrage, well known to Wall Street traders, would understand. The man did the work to create this arbitrage, and the market valued it at $200 of profit. But what if this man did not work to arbitrage it, and found the buyer and the seller by accident? Then no value was created, it would merely good luck, yet a profit was made.
Well, to this I would reply: everything that exists has some degree, big or small, of luck and chance intertwined with it. From the position of the electrons in the atoms that form your cells, to the position of planet Earth relative to the Sun that makes life on Earth possible, to the fact that your ancestors 50,000 years ago lived to reach sexual maturity and procreated, to the prices and details of the things you can buy and sell, to the people you deal with every day, everything is influenced by luck and chance. Thus, when someone creates value, there is always some degree of luck and chance that created it, yet the creator still deserves to own his property as a result of creating it. In other words, luck is everywhere, hence it should not be considered as a controlling element in any specific case as separate from something that hovers around us everywhere and falls out of the analysis. Thus, the presence of luck and chance should not be an argument against a person having done work to deserve something or earn something, since there is some luck in all work that is done. In the bottle of wine case, perhaps 99% of the profit is luck of being there at the right place and time to find that seller and then that buyer, but 1% is making the decision merely to talk to them, buy it, sell it, and hold the bottle of wine without dropping it and spilling it, and we have already evaluated that luck is a non-factor, so this person did create a value that the market priced as being worth $200, therefore he earned $200. Of course, in the vast majority of cases, the numbers will be reversed: 80 to 90% of the profit will usually be value created intentionally, and about 10 to 20% of most value is attributable to good luck and chance favoring the productive creator, although in short-term fluctuations luck and chance can play a much greater role, as it does in the bottle of wine scenario, and good luck and bad luck tend to even out to reveal the effect of productive capacity only over a long enough period of time for probability to emerge from randomness.
The thought experiment posits that the man does absolutely nothing to get a $200 profit, but we have seen that this postulate collapses into an impossibility, because the man must have done something to make a sale at all, even if it was just being in the right place at the right time for one split second. The market has valued this minimal amount of work at a $200 profit, so objectively the tiny value he created is actually worth $200 in the evaluation of the market. If the man truly had literally done nothing, and someone handed him $400 and did not get a bottle of wine in return, then this would have been a gift, not a profit. Gifts are not the same as profits in terms of economics, and one does not earn gifts or deserve to own gifts on the basis of the recipient (rather, a gift is rightfully placed because the gift-giver deserved to have the right to give it to a person of their choosing) so the gift scenario would also not be an obstacle to my theory of profit.
Now, for the man who sells caviar in a sandwich for $5, we say that he sold it for less than what it was objectively worth, yet the choice theory of value would say that it must be objectively worth $5, since that it was the marketplace priced it at. Yet why do we say that it was objectively worth more? Because caviar is more expensive than $5. And why do we say that? Because there are people buying and selling jars of caviar for $1000 and $2000 elsewhere. The only reason we say it is objectively more expensive is because there are other trades happening elsewhere in the market where the same product is sold, in money prices, for other amounts. The choice theory of value would say that those other purchases and sales of caviar that price caviar at $2000 are defining the objective value of caviar, and it is on the basis of those objective prices that we can say the man undersold the sandwich relative to its objective value. In the choice theory of value, the objective value of something is priced by the purchases and sales in the market, and the market functions by each individual aggregating to find the price where one unit of a product won’t be bought by buyers for more $X and won’t be sold by sellers for less than $X because of the supply and demand for it, the price of its competitors, and the price of its raw materials.
In this way, the purchasing decisions of individuals come together to form the wisdom of the market and create an objective evaluation of the value of an item. The individuals decide the price, but Adam Smith’s invisible hand guides all individuals into a choreography wherein the sum of all purchases and sales ultimately finds the market price, so one individual who defies the market does not create the price, although the $5 sale does lower the price of caviar ever so slightly below the $2000 it was priced at elsewhere. This Adam Smith invisible hand process is what evaluates an objective value for the product, let us say $2000/jar for caviar. One purchase or sale may define an objective price relative to that one buyer or seller, but the evaluation of the market is what defines an objective price overall. So, yes, in fact, the sandwich was objectively worth more than $5, but it is only true because of those other sales for $2000. If the other jars of caviar were only selling for $5/jar in the caviar stores, then the sandwich might actually be worth the $5 objectively.
We can take the caviar principle and broaden its application. If someone objects that my choice theory of value is incorrect because the amount of profit that is made by selling a specific product is not actually equal to the objective value that the producer created in taking the raw materials and producing the finished product, we can say: why not? Why do you think it is worth more, or less? Often, it will be because elsewhere in the market there are sales which price comparable value differently, but the person who makes this objection is pretending to be blind to that data. If there are not other trades to value the profit, we can answer: no, the market has evaluated the worth of that created value, and has valued it as being worth this amount of money. The market has spoken, so that it the objective worth, and your feelings that it is really worth more, or less, are mere subjective feelings. Specifically, if you make something, and you put a lot of work into it, and you think it is great, but the marketplace rejects it and it sells for a tiny value, or doesn't sell at all and you take a loss, then your subjective valuation is irrelevant, and the product was objectively worth its price in the free market.
The salary objection is simple to answer. I think of work done by an employee as a product made by the employee and sold to his or her employer, from an economist's point of view. Indeed, work is probably the most common product that is ever sold. The raw materials are the factors of production: the employee's food, water, shelter, healthcare, and education. The salary, minus the cost of those factors of production, is the profit the employee makes on selling his labor to his employer. Indeed, in my triangle of trade theory, an employee sells his labor to his employer and gets the things that he buys as the corresponding value that he receives in return for giving his labor, from other traders who bought the end products produced by the employer, either directly, or, as in the pool of value theory, via an indirect path through many intermediate buyers and sellers. In this sense, it is quite necessary for us to characterize labor as a product sold by the worker to the employer, and my theory of profit and price does account for it.
That exhausts the refutation of these arguments, but I look forward to seeing what other critical arguments will be aimed at me in the future, in the interests of a healthy, open-minded debate and discussion of GOLD vs. Austrianism.