Half Sigma and “value transference”

Half Sigma has been posting a lot on value transference, see here, here, here and here.

I’m going to explain why his posts are confused. I would like to start out by saying that I like Half Sigma and his blog a lot. It hurts me to see him posting so much on this topic without having a better understanding of "libertarian economics." I hate to be critical of him, but his thinking on the issue is a bit muddled.

1. HS’s definition of value transference

Ok, let’s see what he means by "value transference." Here are some select quotes from his posts and my summary of his major points:

Some of my blog readers suffer from rigid thinking. They tend to be of a libertarian economic bent and wrongly believe that any voluntary commercial transaction is a fair transaction in which the party receiving the money has created exactly as much value as the amount of money received.

In another post:

. . . he’s bought into the right-wing-libertarian-economist idea that everyone makes exactly what they are worth because the free market is just so perfect.

Here’s a specific example:

What about the story of the stucco guy whose income dropped from $500,000 to $70,000 after competitors entered his market? How is it that the guy was creating $500,000 of value per year (VPY) before there was competition, but only $70,000 VPY afterwards? My answer, of course, is that he was creating $70,000 VPY the whole time, but because barriers to entry prevented competition, he was also transferring hundreds of thousands of dollar of VPY from others to himself.

In other posts, he equates "value transference" with fraud. He states that the amount of "value" in the world is fixed. He equates value with status and says that the quantity of status in the world is fixed: "If I take some action that increases my own status, this status increase can only happen because I simultaneously, by an imperceptible amount, lower everyone else’s status."

He goes on to try to distinguish between "perception value" and "value":

If a big corporation spends a billion dollars to increase the perception of value of its brand, the corporation has also, by a small amount, decreased the perception of value in all other brands.

He ends by circling back in a manner that makes his whole argument seem tautological:

. . . we reach the shocking conclusion that the mere act of value creation also results in value transference.

This is all over the place. I’m not even sure I can specifically tell you want value transference is based on these posts. Some of the statements I am tempted to agree with. For example, I agree that value creation leads to value transference (as defined in the tautological statement quoted above), but I don’t agree that it’s possible to distinguish between "perception value" and any kind of true value (is this like the One True God? – I’ll use "One True Value" to signify the "real value" that HS seems to be chasing after).

Anyway, I’ll try to distill his statements into a few points that we can analyze:

a) "libertarian economics" – which he wants to criticize – is founded on the belief that transactions "create" an exact, measurable amount of value.
b) the "One True Value" is only possible in a market that is in perfect competition.
c) people can perceive things to be worth more than their One True Value.
d) value transferred above and beyond the One True Value leads to an increase in status and the amount of status in the world is fixed.

I think these points should get us started. At the end, we can return to the example.

2. Libertarian economics and value

Libertarian economics is Austrian Economics. Let’s dig in to the Austrian theory of value.

In Austrian Economics, value is a subjective phenomenon. Go to page 61 of the pdf for to dive right into Rothbard’s explanation (it’s free).

In sum, Rothbard states that value is ordinal. Thus, each person has a rank-ordered list of things that they value. Let’s say the economy has three goods: Fish, Wheat and Sheep. My values might be 1) fish; 2) sheep and 3) wheat. Your values might be 1) sheep; 2) fish; 3) wheat. The ordering reflects our preferences, no some actual level of valuation in terms of some hypothetical unit of value. All this says is that I prefer fish to sheep and sheep to wheat and fish to wheat. We know nothing about how much I prefer fish to sheep.

If a transaction between you and me takes place, then we can make some conclusions. Assume that you give me a fish in exchange for a sheep. We now know that I value a fish more than a sheep and that you value a sheep more than a fish. We do not know that the value of sheep = the value of sheep. In fact, per Rothbard, we can say specifically that this is not the case. If their values were equal, why would we bother trading? We wouldn’t.

To conclude, we see that value is subjective. In order for a transaction to take place, each party must be transferring value to himself. I value a fish more and you value a sheep more. Both of us have increased our value. If we didn’t both believe we were increasing our value, we wouldn’t trade.

3. HS’s points

Let’s return to the points:

a) "libertarian economics" – which he wants to criticize – is founded on the belief that transactions "create" an exact, measurable amount of value.

Actually this criticism is the criticism made of other economic systems by libertarian economics. Libertarian economics specifically denies that transactions create exact amounts of value or measurable amounts of value. HS’s criticism is valid only for non-libertarian economics, like neoclassical economics. Rothbard has already done lots of good work expanding on the same criticism, it’s old and it’s free on the internet.

b) the "One True Value" is only possible in a market that is in perfect competition.

Following the libertarian theory of value, we see that there is no such thing as the "One True Value" (or perfect competition). Value is purely subjective. We can never claim that someone has engaged in value transference, unless we define "value transference" in a tautological manner. We’ve seen that, per libertarian economics, both parties to a transaction transfer value to themselves since unequal valuations are necessary for a transaction to take place. If valuations were not unequal, the parties wouldn’t have transacted.

c) people can perceive things to be worth more than their One True Value.

Again, there is no difference between "perception value" and the One True Value. Value is perception. It is only because of differences in value (i.e. in perceptions of value) that transactions take place. As we have shown, if our valuations are equal, we wouldn’t trade.

d) value transferred above and beyond the One True Value leads to an increase in status and the amount of status in the world is fixed.

We have shown that there can be no value transferred beyond some imaginary True Value. Both parties are "richer" after a transaction (that is, both believe themselves to have increased their value). Thus both would, per this one of HS’s definitions of status, have higher levels of status and therefore, the amount of status in the world cannot be fixed.

4. HS’s example

In HS’s stucco guy example, a stucco guy’s income falls from $500,000 to $70,000 after competitors entered his market. HS claims that at $500,000 the stucco guy was transferring value to himself and only adding $70,000 of value. Let’s clarify this example and see where HS goes wrong.

Assume that the economy consists of a stucco guy and three other guys that want a stucco job. We know that demand curves slope downward – that is as the price of stucco jobs increases, fewer people will demand stucco jobs. Let’s assume that if the stucco guy charges $600,000 for a job, no one takes it. If he charges $500,000 for a job, one guy takes it. If he charges $70,000 for a job, two guys take it. And finally, if he charges $20,000 for a job, three guys take it.

This is how a demand curve works and we see immediately that there is no "One True Value" of a stucco job. In all cases, money is only changed for a stucco job if the customers prefer the stucco job to the amount of cash that the stucco guy charges and if the stucco guy prefers the amount of cash to the act of doing the stucco job.

5. Conclusion

Hopefully this post has helped clarify what libertarian economics has to say about value. HS makes some points that begin down the road to Rothbard. For example criticizes the calculation of GDP. Rothbard demolishes the calculations of GDP and inflation. But, instead of following Rothbard, HS turns the other direction and seeks some One True Value.

HS argues for progressive taxation based on his theory of value:

By imposing higher taxes on the person who created lots of value, we take away the value transference component of the act of value creation and redistribute it to the people from whom the value was transferred.

(Let’s set aside the absurdity of suggesting that government is capable of transferring value back to the people "from whom it was transferred." I can’t imagine that HS actually believes that this is what government will do. Government is run by people. If government employees or politicians are sitting on "value" why would they give it away?)

As we’ve seen, both parties to a transaction have transferred value to themselves and we cannot measure who has transferred more in reference to some True Value. It’s therefore absurd to try to tax away perceived gains in value.

Libertarian theory of value leads to the conclusion that government intervention in the economy is necessarily harmful to increases in value (quoting Wikipedia on the subjective theory of value):

If it is true that the economic value of things cannot be ascertained without subjecting a particular good to individual value judgments in a market, then governments may have difficulty justifying, to economists, setting the prices of goods and services for society. This is also a technical problem for governments wishing to implement a planned economy. Those who espouse the subjective theory of value tend to advocate that individuals should be allowed to choose for themselves what price they are willing to pay for, or part with, any given good or service. They tend to maintain that forcible interference by the state in the process of individuals arriving at a mutual value judgment when making a trade is irrational, unworkable, and/or immoral.


2 Responses to Half Sigma and “value transference”

  1. […] Foseti – “Half Sigma and “Value Transference”” […]

  2. Genius says:

    Thank you so much for writing this. I thought about doing it, but I didn’t know where to begin.

    I might also add that bogus theories of value are what cause planned economies to be inefficient and the people subject to them to be poorer.

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