The basis of value

What makes something valuable? According to value as a noun is the worth, merit, or importance of something, or more specifically monetary or material worth. The same dictionary defines worth as the usefulness or importance of something, or its value, as in money. Despite the somewhat circular definitions, value derives from usefulness in many cases, and the importance in some other cases. I think people place value on something for very personal reasons. As an economist I like to distinguish between cost, price, and value. Cost is essentially an accounting of the value of the things that went into producing a good or service. I make wooden spinning tops, and I can easily figure out the cost of making a top: there’s what I paid for the wood and the thread and the ball bearing, there’s the cost of buying the machines and running them, there’s my time (labor), and then there’s packaging and shipping. I will set a price for the top, based perhaps on the cost of making it as set out previously, but also based on what I think people will be willing to pay for it, and perhaps what I think is a fair price given what else they could buy if not my top. But finally there is what value a person places on that particular top. Economics theory has always been vague on the origins of value, saying value is an expression of preferences: fundamental enjoyment or utility, satisfaction derived from owning, using, or perhaps consuming the item in question.
For items that are not directly consumed or used by those who possess them, there is the possibility of transferring ownership to another person who places some value on the item (presumably a higher value than the current owner for the transaction to go through.) Although not always the case (some automobiles and some antiques are among the exceptions) most tradeable items are not diminished, or “used”, by ownership. Financial assets are perhaps the most obvious examples. A financial asset reflects some claim on some real thing – usually, but there’s an entire class of financial assets called derivatives that derive their value based on an underlying claim to a real thing. For example a share in General Motors is a claim to a share in the value of the company, in general its assets but also its future profits.

Work in Progress