Understanding Value

As the best-selling economist Henry George pointed out over 100 years ago, there are two basic types of value:

• exchange value - what something is worth in a simple buyer-seller transaction - measured in money.
• utility value - what something is worth to its user as it used - measured in money.

In this way, the exchange value of a painting by Picasso, for example, equals the amount it can fetch at an auction. Its utility value might lie in its ability to create prestige by contributing artistic merit to the room in which the painting is hung.

The market establishes the exchange value of manufactured goods through supply and demand.

• Supply comes from the ability of a manufacturer to satisfy demand profitably.
• Demand lies in the will and the ability of buyers to pay, based on their want and need; typically based on their perception of utility value.

Semantics notwithstanding, this list indicates the fundamental source of value (advantage) in 12 examples:

• reduced stress
• reduced cost
• reduced risk
• convenience
• pleasure
• increased profit
• importance or prestige
• entertainment or enjoyment
• respect or validation
• security
• comfort
• sense of advantage.

Awareness of the nature of value makes it easier to evaluate price.

Other articles posted to this blog discuss value, fees, and prices in the spirit of what's best for both buyer and seller, with particular focus on questioning the billable hour as a gauge of value.

- Glenn R Harrington
Articulate Consultants
www.articulate.ca