Value is a key concept in economics, but one that’s not all that easy to clearly define. Our intuitions about value are the consequence of our evolutionary struggle to survive and prosper, and are built on a deep history of Adaptive Behavior that extends back to animals much simpler than ourselves. Though ants do not form any conscious intention, they still have to decide what to eat for breakfast. All animals regulate their behavior, eating to avoid starvation, and not eating so much that they burst, but also eating the best kind of food available. Though ants are not our ancestors, we have inherited similar unconscious regulatory mechanisms. Brain scans in humans have shown that pictures of money and of food activate similar brain regions.

This means that, as in many other areas of human behavior, our intuitions about value are only rough approximations (see Biases), and that the basis of these judgments is also not reliably available to our conscious mind (see Representational Opacity). When we explain the value of a thing, we are only offering a Story, see The Argumentative Theory. Generating stories about value is one of the most important functions of business and political leaders.

Our intuition about value is that it is stable and intrinsic in an object, but this cannot actually be true. The value of a thing is highly context dependent.

There are things that are so tied to their social context that, although they could be said to have a price, they cannot be bought in the same market with other kinds of goods. Anthropologist Marcel Mauss described gift economies where certain kinds of ritual objects, although worth a huge amount to the people possessing or exchanging them, can only be exchanged for the same class of objects or to equalize social obligations of a profound nature (e.g. settling a blood feud, cementing a political alliance). These objects can not be traded for a everyday food or clothes, and can not be purchased with the kind of money that can buy food or clothes.

Anthropologist David Graeber suggests that what this means is that the logic of the market does not apply in all social contexts. This may be one reason why a simple definition of economic value is so elusive.

We are told that one key role of an economic enterprise is to add value. For example a business might take labor and materials and combine them to make something that can be sold at a higher price. We are also told that this incremental change in value can be measured and taxed (by a value added tax) and that a wise investor can look at this fundamental kind of economic activity when deciding where to put her money (what is known as value investing). We are even told that nations can pursue economic development by moving up the chain of value, for example South Africa attempting to do the cutting and polishing diamonds, rather than just digging them out of the ground and selling them rough.

The pattern described above should hold for cases where value is created – in other words, when measured by price, cases where the sum of the whole is greater than the parts. The final product has more worth than the costs of the labor and materials that went into it.

But when we try to define how that happens in a broad, theoretical sense, we run into a difficult question - what qualifies as adding value? Can we define the process any better than saying ‘combining labor and materials to increase worth?’ Just because something is transformed does not make it more valuable, and we can’t be automatically assured that it will sell for more than went into it.

(It’s worth repeating that we’re taking value, price and worth to mean three separate things).

The actual value being added remains a vague concept full of puzzling problems. For example, Adam Smith noticed that finished diamonds have a much higher value than water, unless we’re dying of thirst in the desert. It’s a good point. How is it that a product worked by so many hands over so many hours can suddenly be worthless? And what does that tell us about the process of adding value in the first place?

There are two preeminent schools of thought about theory of value, the intrinsic (which argues that the product carries around with it the value that was built into it during production) and the subjective (which holds that the value is purely dependent on consumers’ opinions.

Intrinsic value has the advantage of being easier to measure. Karl Marx argued that to find the value of a product, one simply has to total up all the labor that went into making it (including extracting the raw materials for its parts, shipping to and from the factory, etc etc.) and its value reflects that labor.

We could say that this labor theory of value doesn’t always hold. Take the cases of nails and shoes in the Soviet Union. The labor that went into making them certainly fit Marx’s definition of work. But under that system it was easy to find a size three shoe or a nail as big as a railroad spike, while a men’s size ten and a small finishing brad were nearly impossible to come by. This unpleasant situation resulted from the Soviet system measuring the output of those factories by number of shoes or tons of nails, and not by their how many of their products could be put to use (the value delivered to the customer.)

This is not merely a criticism of central planning–the point is that under the labor theory of value, a size three shoe represents nearly as much value as a size ten. The inputs, material and labor, are only slightly less for the former than for the latter, although enough to motivate the decision makers at the factory. But even though the value should be nearly the same, the demand for the size three is just a fraction of that for the size ten.

Similarly, when the nail factory reports its output one ton of nails could be treated as being just as valuable as any other. The way the central managers evaluated (literally measured the value of) the factories’ productivity did not reflect the society’s needs.

Marxists adapted the labor theory of value by saying the labor must be “socially useful.” But it seems like that opens up loophole vague enough to drive an ideology through. By the time we’ve added socially useful to the labor theory of value, it no longer tells us anything.

There are similar problems with subjective theories of value. For one thing, it seems the notion of subjective value risks begging the question – becoming a circular argument where a term is defined by comparing it to itself. Value, the subjective theory could be stated as saying, is anything people get a benefit or enjoyment from. All right we say, what then gives people benefit or enjoyment? Anything they value.

Add this to the standard notions of human economic motivations and we find ourselves lost in a hall of mirrors. Homo economicus we are told, desires wealth. Why? Part of the reason is so he or she can consume more. Why consume more? Because the things consumed offer benefits or enjoyment. Why? Because they are valuable.

Yes, but why do consumers like to buy things? They are homo economicus. Who is homo economicus? A person who seeks wealth in part so he or she can consume more.

It’s only a slight exaggeration. Part of the problem with both kinds of value theories is that their definitions have to be broad enough to include the astonishing variety of things bought and sold every day. The number and variety of goods and services is so huge as to make narrowly defining their appeal seem almost unimaginable.

A few clever theorists have shifted their focus from the variety of products to the variety of consumers. For example, many men in Thorstein Veblen’s day carried walking sticks. He asked why – what value would the canes offer, since it was clear few of those who used them needed the sticks to lean on?

He decided that part of the sticks’ appeal was that they showed that the man could afford to keep something in his hands, that he demonstrated that he was not part of the working class by carrying something impractical. That idea fit in with Veblen’s notion of conspicuous leisure. But Veblen also said the walking stick was appealing because it contained the recollection of a symbol of office (like a king’s scepter) and was furthermore a “vestigial club.”

Here we find the germs of several useful ideas, including the notion of value being transferable beyond its usefulness. We can argue that some things take on the emotional content of one valuable role and carry that content into a new role, even if the new use has nothing to do with the old one. So for example cowboy boots are a kind of shoes, but they also say a number of complex things about the wearer, things that may have nothing to do with footwear.

Products clearly have deep and elaborate psychological meanings for consumers, meanings that standard economic theories only glance at. (See Veblen Goods and see Utilitarianism’s influence on economics.)

Michael Benedikt has written about what he calls the “psychoeconomy of tokens,” the notion that rather than simply finding one value in goods being purchased, consumers satisfy a complex set of desires. Benedikt argues that consumers meet a series of needs, starting with basic survival impulses and leading up to complex social and physiological desires. He constructs a pattern in these desires based on Maslow’s Hierarchy of Needs.

Benedikt’s ideas are difficult to test, if for no other reason than because they attempt to apply a sense or order to the murky, mixed and complex nature of human motivations. Physiological researchers have a difficult enough time determining motivations that may not even be articulated by those people feeling them. Imagine trying to tease out a pattern when those motivations are layered on top of each other.

One way we might get a handle on how close people like Veblen and Benedikt are to the mark would be to make some predictions about bespoke goods and virtual money.

Bespoken goods are things that have added value because they are in some way handmade or individualized. Crafts and art works are examples of bespoken goods. So we might say that as industrialization makes standard mass produced consumer goods cheaper (and therefore more widely available), bespoken good should become more popular. Veblen might say this is because people can use them to demonstrate their capacity for leisure, and Benedikt might say that they appeal to a higher psychological value, but the effect is the same.

One version of virtual money (but far from the only one, or the most important) is the kind of on-line gold people collect in multi-user internet environments like Second Life and World of Warfare. In these multi-user online worlds (calling them games seems too limiting a description, even when that’s how a lot of them started) participants accumulate money or other markers of success. These markers have no worth in the off-line world, but in many cases people are willing to pay dollars for them. The rise in price of virtual money suggests that the acquisition of on-line assets is satisfying some kind of need or desire. Since these goods have no physical reality, it suggests that the physical nature of goods can, in the future, be devalued (see as lacking in value). Once, it might have seemed strange to pay for something that does not actually exist in any material form. But we may be entering a time when doing so is entirely normal. Benedikt’s theory might suggest something about what need or desire that kind of value fulfills.

But if we step back to the level of value creation we can see a different kind of useful concept emerging here, one that very much takes place in the so-called real economy. We ask, if a consumer finding value in a product or service is engaged in a murky, subjective process, how then did the business go about adding value to a product? The business owner might have a limited ability to predict the complex psychological reactions of the consumer to the finished product. He or she might be able to guess, but only within bounds.

In fact we could say that the business does not add value so much as it proposes new value, which is then tested by the (collective subjective) marketplace. In fact we might say that all value is nominated or proposed before it is accepted and solidified.

This is a notion with more than a little explanatory power, especially when applied to financial markets.