USA Africa Dialogue Series - Why do things cost what they do? Want to know the story behind 'prices'?

View full post at: http://economystified.blogspot.com/2011/08/how-are-prices-determined.html

Where do prices come from? Why do things cost what they do?

It seems like a pithy, kind of silly question. But it's one that has
dogged economists for centuries. It's a much more complicated
question than you might expect.

If I tried to sell you a stack of wood and sticks as a kitchen table
"with some assembly required," I'd doubt you'd be too excited about
the deal. But if I knocked those chunks of wood together into a table
first, suddenly I'd have something of value.

Somewhere in the late 1700s, some philosophers looked at this scenario
and concluded that it must be people's labor that made things worth
more money. This idea is called the Labor Theory of Value, and is
economics' earliest attempt to explain prices.

If we follow the theory to its logical conclusion, it would tell us
that any two items made from the same starting material would have
prices directly related only to the amount of time spent working on
those materials.

Of course, there's a ton of problems with the concept. If the labor
required to produce an object was the only determinate of it's worth,
a table that was made in 2 hours would always sell for exactly double
what a table made in 1 hour would. A generic plush mouse made from
the same amount and types of materials as a Mickey Mouse doll would
fetch identical prices, given that both take exactly the same amount
of time to make. This is observably untrue.

More importantly, is there anything that can be produced using labor
alone? The table maker needs tools, training, materials and a work
space, as well as his time to create a valuable table out of scraps of
wood.

In the 1890s, the economist Alfred Marshall pointed out that unless
they are pulling carbon and nitrogen out of the air one atom at a
time, and attaching them to each other in tiny chains, even farm
laborers aren't the sole producer of their products' value. Nothing
is truly created though the force of labor only.

The Labor Theory of Value had a decent run, say from about the 1770s
to the later 1800s. But by 1900 it drops out of mainstream economics
entirely.

Today, economists acknowledge that labor is definitely a factor of the
end price of an item, as it is part of the cost of making it. But it
is clearly not the only determinate.

Prices are completely subjective in the long-run. At any given point
in history, an item is only "worth" what buyers are willing to pay for
it. The price of a good or service fluctuate dramatically over long
periods of time, a major stumbling block for any proponent of an
"permanent, intrinsic value" view of the world.

Continue reading at: http://economystified.blogspot.com/2011/08/how-are-prices-determined.html

--
You received this message because you are subscribed to the "USA-Africa Dialogue Series" moderated by Toyin Falola, University of Texas at Austin.
For current archives, visit http://groups.google.com/group/USAAfricaDialogue
For previous archives, visit http://www.utexas.edu/conferences/africa/ads/index.html
To post to this group, send an email to USAAfricaDialogue@googlegroups.com
To unsubscribe from this group, send an email to USAAfricaDialogue-
unsubscribe@googlegroups.com