Friday, 23 August 2013

Various teaching links: what is value?

Once again Tim Taylor has a great post here.

The word value is overused in business schools.  Companies create value, economies add value, GDP measures value added.  Fortunately, Economics is clear about it via the Water-Diamonds paradox.

The paradox is a nice one. Water is cheap, diamond expensive.  But water is vital to life, diamonds are frippery.  So which has more value?

In Economics, we are almost always talking about "value in exchange".   Water has very little value in exchange since its so cheap and so can be exchanged for little.  That's because value in exchange, or price, is determined by the relative balance of supply and demand.  The price that balance yields tells you the value that the consumers and supplier place on the marginal unit of water. With plenty of water about that marginal value is very low.

But what about water being essential to life?  Isn't the "value" very high?  No.  The price is very low because that tells you the value in exchange of the marginal unit of water.  At the same time water can have a very high "value" in the sense of  "value in use".  But that value is fuzzy since counting the value (what are the units?) is hard to do.

So when an Economist says "diamonds are more valuable than water" she/he means value in exchange. 

Perhaps a final compelling example: what is the value in use of this below?  And its value in exchange?