What is value?

An Energy Theory of Value

Background

Lately I've been spending some thought energy on the whole notion of value and what it must mean in biophysical economics terms. As with other economic notions, especially ones that have failed to actually describe what is going on in a real world economy, it's a good idea to start with what standard economists think about the subject and then see if energy flow concepts can add anything of value, or at least update some primitive notions. This concern stems from my thinking about finding an energy-based backing for money (see: "What is money, really?", and "What counts as real wealth?"). At the First Annual Biophysical Economics Meeting, last year in Syracuse (where I am taking my sabbatical right now!) I presented a talk on this subject. I've posted the slides here.

One of several challenges to this idea involves resolving how money can represent value in transactions for goods and services, including labor. And that means having a good theory of value in terms of energy. In the above linked posts I've toyed with ideas. This post represents some more analysis and some of my current thinking on the subject.

So I'll start with a rough survey of historically important theories of value from several schools of economics and then analyze them in terms of what they might reveal about a more fundamental theory, a unified theory if you will, based on energy considerations. This is crucial to understanding the use of money in transactions in markets. It is especially crucial given the nature of products and services we have today which are extremely complex and the price may or may not reflect any kind of intrinsic worth (much more on that later).

Once again, for purposes of this blog, I will rely on Wikipedia for backup and explication rather than spend a lot of time typing about something that I think has been covered adequately in that source. I've been through many of the articles there that deal with value and the many theories thereof, and I feel comfortable with the encyclopedic summaries you will find there. [Side note: I've actually gotten some complaints via e-mail about my tendency to use Wikipedia extensively (BTW: I do contribute to the Wikipedia foundation, like subscribing to NPR!). Some people are suspicious of Wikipedia articles as far as worthiness of content is concerned. There have been numerous complaints from academics in the social sciences, esp. politics, that there is too much amateurism and special interests among editors making the value of these articles questionable. I try to choose articles with some care, previewing them before providing a link. And most often I am writing about a technical subject rather than a subject subject to opinions (I've always wanted to use the word subject in a sentence three times!) Also, Wikipedia has been getting very good at flagging disputes or style or lack of citations making it easier for readers to read with caution. The other complaint is that I expect people to go off to another site to read what I should have summarized. Well I try to put technical terms into context, but I honestly don't think a summarization will help. If you already know a term, then there is no problem. If you don't, then I think you owe it to yourself to become more educated (sorry if that sounds harsh). So just recognize that I will continue to use Wikipedia and not go out of my way to explain or justify.]

A good overview/review of various theories of value can be found here. There you can find additional links (some of which are below) to more in-depth coverage of the various theories. One of the things that I've been thinking about is what might be the commonalities between these various theories? Could one discover a link between such commonalities and an energy theory of value? I'm still working on this line of thought, but let's see where it might lead.

The word 'value' is a bit problematic in itself. Value is a human subjective attribution that might be informed by some objective basis, such as the amount of skilled labor required, but nevertheless is conceived by what someone thinks is worthwhile. A worker might think more value should be placed on his or her efforts; they are being paid less than they are worth. A producer/owner/seller might see a product or service as being more valued because of its unique features or esthetics. A buyer, on the other hand places value on a product or service with a whole variety of psychological factors playing into the mix. One of the reasons that markets and money exchanges work as well as they do is that they provide a process whereby buyers and sellers can establish an average value via the price and supply/demand mechanisms. If a buyer thinks the seller is charging too much he or she can simply refuse to buy, or better yet, look for a competitor that is selling for less. That mechanism worked really well in days when relative values were transparent (one farmer had a good idea how much effort another farmer put into raising corn vs. his own effort in raising wheat and the quality of each product could be ascertained by looking in the bushel basket). But these days, there is much less transparency in products and services. We say that not all parties have complete information and therefore the markets are less efficient in terms of distributing real intrinsic values across varieties. Two computers could look exactly alike and yet carry different prices. How is the average buyer going to know that the difference is in the care of manufacture, or the quality of parts, etc? They might suspect it; one reason brand names can charge higher prices is that brand recognition carries some implication of higher quality, but that need not be the case.

Traditional Economic Theories

The Labor Theory

Possibly the most influential thinking (Smith, Ricardo, Marx) on value has come to be known as the labor theory, i.e. how physical or mental labor, put into a product or service, affects its value to the producer or to others with whom the producer will trade (for equal valued goods or services).

The relationship between various forms of this theory and an energy theory of value should be apparent. Labor means work and work means energy flow. Thus attributing a value to the amount of work done is equivalent to the amount of energy expended. Unfortunately things get immediately complicated because different levels of skill among workers lead to different efficiencies in the work process (see below, Knowledge Theory) and thus different, sub-optimal uses of energy or wastage. However, in aggregate, and statistically it is possible to posit an average energy expenditure per worker per unit of work accomplished. This is, after all, the way we compute productivity. Too, we are all probably personally familiar with cases of inefficient or sloppy workers who have been let go since their work efforts actually hurt the profitability of the enterprise. Inefficient skill has a way of getting pushed out of the organization (unless, of course, the worker is the bosses' relative).

Another complication involves the fact that so much modern work is actually based on machines, instruments, and other forms of automation. Each of these uses external sources of energy to drive the work process and the only expenditure by a human laborer is in guiding (and fixing) the machine. Or the human may be involved in a complex information process using an instrument to measure some critical parameter (e.g. quality control). Clearly significantly more work is accomplished by the machine/human combination than just by the human alone. Historical accounts of labor theories do not always take the machine use of energy into the picture.

Figure 1. A human worker and a machine combine to produce a product through a work process. The worker receives energy in the form of food, but also energy subsidies at home to support herself and non-working, or income producing, members of her family. The machine is powered by external (to the human) energy, say electricity. The figure shows inputs of finished parts that go into the product, external energy, and raw materials. The machine, under control of the worker, who must expend some of her energy operating the machine (as well as basal metabolism), produces a value-added product, waste heat and material. The value added, represented by the white arrow with a thicker black outline, is a combination of worker knowledge (in the control) and effort and machine power.

In the figure above, the machine could just as easily be a computer and the product an output message which may or may not convey information to a receiver. That is what I conceive of my current efforts at the keyboard. In my case there is raw material input, but there is energy (electricity to run the computer and the Internet that will convey this) and finished parts (the Wikipedia articles I link to). My control is the result of my knowledge (such as it might be), my typing and writing skills, and my internal motivations. I know my computer is producing waste heat because I can feel it being pushed out (by a fan) from the side. Since I rarely, if ever, print these blogs out on paper, there is no waste material produced, but if I did, and threw the paper away after editing, then this would be the case.

What is the 'work' value of this blog? I substitute work here for labor since the latter is augmented, considerably, by the machine. It isn't what you, the reader, pay for it since I give it away for free. Is it's value alone determined by the amount of energy that goes into it? What about the knowledge and skill. I will treat these separately below, but can note here that I expended more energy in the past to acquire the knowledge and skills being exercised now. So to the extent that my knowledge is worth anything to you the reader, I have to count that energy as one of the inputs to the final product. To anticipate what I will suggest below slightly, that energy should be counted in the value added calculus of this product. Of course, one could never account for that energy since it is impossible to say how much I expended acquiring these capabilities. Also, the full expense, if it could be accounted, cannot be added to this one blog, since I have used this knowledge elsewhere and many times. Given that the energy costs for knowledge and skill acquisition are unaccountable in this way, we need some other method of placing value on them. Nevertheless, it is the case that energy expenditures in the past were involved so my main point that energy can provide the basis for a theory of value remains valid, if hard to solidify.

But what about the value of this blog to you the reader? Is it worth anything? I suppose that depends on you. If none of it makes sense, then it is basically noise and you needn't try to consume it. If you already know it (or something like it) then, again, you have no use for it (except possibly to reinforce your current understanding). But if you can follow the trains of thought and you end up thinking differently, acting differently, or just learning something you hadn't considered before, then it seems there has been some value to you as a consumer. Certainly that value is not encoded in a monetary price. How would one price such a thing? And, you actually used up energy in the process of consuming this. Your brain had to do some work to absorb the information and convert it into knowledge in your head. But the real value would be recognized sometime in the future if this knowledge were to help you make a decision that led to a benefit to you. Almost assuredly, that benefit would come in the form of a net energy gain to your life! My labors of the past (in learning) and now (in writing) may save you time and energy in the future.

This transaction is not the usual sort from the standpoint that you didn't pay me anything, or barter with anything of value to me in order to 'enjoy' the product of my labor. That is only because to me what I am doing is the result of surplus and I am not worse off for giving it away. You could, of course, offer me a kind of payment by offering commentary on my work. Even critical commentary is worthy since it could help me improve my thinking.

But in another sense, you actually have paid me. Everyone who earns an income pays taxes to their state. Some of those taxes go to pay my salary. If you are a student of mine, you have paid into that salary via tuition. I receive an income in order to allow me the luxury of thinking about these issues and learning more as part of my job. Hence, I am sustained by income (with which I will buy energy for me and my family) from academia and some of that income goes to support my efforts in producing this blog! Very circuitous, I know, but you see, I'm not such a benevolent giver after all. If it weren't for my work as an academic I couldn't afford to spend time working on these blogs (I might be reduced to writing political blogs instead!)

Marginal Theory

This is one of those subjects that might give you an idea of why neoclassical economists are so enamored with their theories (though note in this subject the use of the word 'law' to indicate that a principle is inviolate!) Nevertheless, the notion of marginal utility and the 'law' of diminishing returns, and other laws, consider the rate at which an input has less and less value to a rational agent as the input is increased. For example the marginal utility of the next hamburger you eat at a single meal diminishes rapidly as you get full. So adding one more hamburger into the meal has diminishing value to the eater (unless you are Wimpy from Popeye world).

The problem I see with applying this seemingly straightforward model to a general theory of value is that it appears not to work at all with money. Ever since we decoupled the monetary system from the real asset base (Nixon's severance of the gold standard in 1971 being the last major assault on a coupling, albeit a poor one) money has become a valued commodity in its own right. People count their wealth in dollars rather than hard assets. Even the latter are assigned market value in dollars as if it was the dollars that mattered rather than the assets.

The effect of this can be most plainly seen in the housing market. How many rooms do you really need? According to marginal theory, having one more room has lower marginal utility. A rational agent ought to disfavor an additional room in lieu of some other asset that has greater utility, a car say. But since houses have been assigned dollar values by markets (and bubbles) all of our not-so-rational agents have tended to want larger houses with more rooms just because they are thinking in terms of dollar valued wealth. Every dollar more that you receive should have equal purchasing power, so the marginal utility of the next dollar is exactly the same as the very first one. And if your net worth is going up by virtue of your assets carrying a higher dollar value, then having that extra room is about equivalent to having a bunch more extra dollars, all of equal utility. This might, in part, help explain the irrational belief on just about everybody's part that taking equity out of your home to buy that car made sense. Of course car salesmen and bankers liked that idea.

Denominating everything in dollars when those dollars have no grounding in reality is bad business. You look at your balance sheet where you have marked your asset worth to market values and suddenly realize how rich you are. And since every dollar has equal value, why not spend some of that wealth on something else nice?

The efficacy of marginal value depends entirely on the existence of rational agents, Homo economus. And we now know that no such agent exists. We don't even come close.

That doesn't mean that marginal utility might not have some marginal utility in terms of understanding some aspects of decision making when it comes to accepting a price. But we can't base our whole arguments about value on this one marginally useful concept.

Objective Theory

Also known as the intrinsic value of a good or service, attempts to identify a value based on the actual worth of that good or service. Unfortunately, too often, people focus on that worth being equated to something like the labor theory of value. That is they want to add up all of the energy and material costs that went into producing a product or service and count that as its intrinsic worth. This approach is fine for doing an accounting for the inputs to product, like a cost accounting method for finding out what you had better price a unit of product at in order to make a profit. If your price is at or below cost then you're screwed.

But cost is only part of the notion of value of a product or service. The other part is what can that product or service do for the buyer/owner? In other words, there is an intrinsic value to the buyer that goes beyond what the sum of the costs were. I have argued in several different places, that this is what we mean by a tool. If the object or service allows the owner to become more efficient, thereby freeing up resources to the buyer, then the value is not only the cost embodied in the tool, but the lifetime return on the investment in buy that tool. The higher the return on investment, the more a buyer ought to value the tool, and thereby be willing to pay for the tool. Most of us don't compute a rational ROI on our investments in goods and services. Unfortunately most of the time we can't even differentiate between the tool value and some incomprehensible psychic or esthetic value. We tend to buy design more than function these days.

But assuming for a moment that you could discern the tool value — how much gain in time and resources, especially energy you would get by using the product or service. Wouldn't you be willing to pay cost plus some premium related to your presumed future return on investment? Even if you couldn't exactly compute what that ROI might be, wouldn't you allow that you will get something worthwhile out of the future use of it, and thereby be willing to pay some additional amount so the seller can have a 'reasonable' profit?

Most of us value convenience. We see saving time as essentially saving energy, our own personal energy. The problem with any form of objective or intrinsic value theory is that too many tools today substitute external energy for our energy. And they don't just substitute equivalent amounts. They usually run on electricity or gasoline and use far more power than we could have ever applied so that we can do a lot more work in a shorter period of time. This is the real meaning of Fig. 1. If you were a craftsman, say a carpenter, and you either used a hand tool, or could buy and use a power tool that allowed you to do ten times the amount of work in a unit of time (work for which you will be paid) wouldn't you do so? Especially if the external energy input was so incredibly cheap.

So the two aspects of objective value, real costs and reasonable profit based on perceived return on buying investment are a quite reasonable basis for ascertaining value, at least as far as tools are concerned and as long as external energy is abundant.

The problem comes from the fact that not all goods and services are actually convenience producing tools. We buy a lot of stuff just because it has a WoW factor, or because it carries a status marker, or we just like novelty. A house is a tool that keeps us warm, allowing us to survive in non-tropical climates (same for clothes). But when you add on the psychological factors that enter our thoughts about what kind of house, and how big it should be, and its location (40% premium for that view to which you will very soon habituate!) very soon, its value as a tool is no longer a factor. It has become a symbol of wealth (as above) and the only real question you end up asking is: can I afford it? And when some clever financier shows you how you can finagle a mortgage by hook or by crook, even that isn't an issue.

It is pretty hard today to actually look at anything as a tool and decipher its intrinsic value from your knowledge of costs and ROI-based profit margin allowable. Tools don't look like tools anymore, at least not in the way they did long ago when the sources of external energy were few and limited. Today an iPod^TM is some kind of tool because it allows you to conveniently download your favorite music to listen to while you plow the field with your air conditioned tractor. If you are a farmer you can certainly view the tractor as a necessary tool that will increase your productivity. It is somewhat questionable about the iPod. But if you are a home owner with a big lot and you have a smaller, but equally outfitted tractor for cutting your lawn, it is not at all clear that this is increasing your productivity, especially since the lawn of that size is a discretionary (luxury) accoutrement to your life style.

The real difference between a farmer of old valuing a pair of capable, strong plow horses and a good plow and today's farmer valuing a GPS guidance system so he won't have to pay attention to plowing the rows is starkly different. The farmer of old had a much clearer sense of the intrinsic value of things. The farmer of today is more often concerned with saving his own time and having an easy life. This isn't a value judgment against the modern farmer. He is actually using the same thinking process that the olden day farmer used. He just doesn't have enough information to make a value decision objectively. Which leads to subjective value theory.

Subjective Theory

I've included the link to the Wikipedia article but must say I think the information given there is unnecessarily narrow. Subjective means 'in the mind of the observer'. Therefore something more than just perceived usefulness and scarcity are at work in forming subjective valuations. It is true that these factors are at work, but we need to understand the psychological basis for why either a seller or a buyer would consider something desirable and scarce and hence worth a given price.

Consider the issue of needs versus wants. In this modern day how do we actually differentiate these? Once, not that long ago, a microwave oven was a luxury item, a convenience for heating foods and liquids, even a novelty. Today, I would not be sitting here writing this blog at 7:00pm if it were not for my handy microwave cooking my meal for me.

Back home in Gig Harbor, I have to admit that the microwave is just a convenience. It saves me some time and allows for last minute meal preparation that would otherwise have required more time and effort on my part (even in fixing things like steamed veggies, which I am chomping on at this moment!) There it really is a want more than a need. My only excuse is that old habits, formed long before I started questioning even my own motivations and actions, die hard. The microwave, as so many conveniences around the house, represents more of a want than a need. Here is something of a necessity as it allows me to make every moment of my sabbatical by not having to race to my house and cook a meal proper. Clean up here at the office is quick and simple and with very little lost time I'm fed and back to typing. Of course the irony is if these writings are worthless, then my justification for categorizing the microwave as a need might evaporate.

How did wants begin to trump needs as a major motivation to buy stuff? What was it that blurred the distinction between something that is a necessity and something that is just discretionary consumption? A microwave would not even be a possibility if it weren't for easily obtained electric energy. I say easily obtained, because the term 'cheap' doesn't sufficiently convey the meaning of the issue. Electricity is easy to obtain because the coal or gas that forms the backbone of the electric power generation system is easy to get and contains so much energy per unit of weight or volume, respectively, that the power companies can nearly give it away and still make a profit.

iPods aren't really scarce, but the company can sell them at a relatively high price, compared with actual costs (not including externalities) because people attach far more psychological significance to owning one than is justified by any kind of need. Do we humans need to listen to music? We absolutely do. But do we need 20,000 tunes available at the push of a button to fulfill that need for rhythm. Absolutely not. It's just nice to have. And so we are willing to pay the sticker price to satisfy that want. What should we pay for it? Unanswerable from the subjective point of view.

From the point of view of economics and valuation of goods and services, encoded in dollar prices, the real value of something is whatever a market of buyers are willing to pay. There is no basis for prices beyond what the dynamics of the market produce. But something gnaws at us about this blasé attitude. Surely, we say, a thing or service has some 'real' value that we could attach a price to. And that is what I want to explore from the perspective of biophysical economics. Starting with the realizations that money is no longer tied to anything real such that it can be a useful measuring stick and that objects and services can no longer be assessed for their tool value (utility in the old sense) because they are so complex and opaque with respect to their production, then we must look for a way to regain some sense of real value and see if it will be useful in bringing clarity back to markets.

Biophysical Economic Theory

A biophysical theory of value has to take into account three fundamental aspects. The first is that costs have to be complete and real. That is, all costs that accrue to a product or service have to be captured and accounted for. They have to be measured in some physical quantity that is universal and invariant across all domains of work. Current practices use money which is not tied to any real physical basis. And not all true costs are accounted for in the bookkeeping system of commerce. The cost category referred to as 'externalities' is generally ignored (although the accounting world has become increasingly aware of the problems associated with not accruing these costs in some fashion; see The Triple Bottom Line).

My recommendation, based on the thoughts of many who proceeded me in this line of thinking, is to develop an accounting system based on energy units consumed in the production of work. Howard T. Odum, a systems ecologist, was one of many deep thinkers who saw that energy was the real currency of any complex, dynamic system such as a living thing or an ecosystem (see my series on Systems Science, last section of the index). He likened money to what he called emergy or embodied energy. This is the energy required to accomplish a unit of work of any kind. It has the same units as energy, joules, but to differentiate it as the historical memory of energy consumed, he called them mjoules. Money, he claimed, was just an informational token that was used to regulate the flow of energy toward desired work. And, indeed, we can see readily enough that money is used in this fashion to buy resources that someone else produced by their work.

But there are two more components to value that need explication. These are the price that a buyer is willing to pay, and the profit that a seller makes as a result.

I've already mentioned the psychological factors involved in a buyer's decision to pay a price based on a perceived desire (want or need) for the object or service. Coupled with at lack of knowledge on the buyers part of what goes into the object or service, the buyer is in a predicament with respect to deciding if the price is fair. And, in any case, what does a 'fair' price mean? Clearly a buyer expects to pay the seller a price which reflects the seller's costs plus some nominal profit which is income to the seller. But what constitutes a fair, nominal profit. If the object were the ONLY item a seller would sell all year, then it is obvious that he would have to make a profit sufficient to support him and his family for the whole year (on the other hand, that one sale means he could relax for the rest of the year!) Since such objects are not common most sellers rely on volume of sales of smaller objects to make a small profit on each item that will aggregate to make up his income.

The price a buyer is willing to pay must somehow relate to how the object or service is going to improve the buyer's life. This is the tool value of an object mentioned above in the section on Objective Value theory. Will the purchase allow the buyer to do more work of other kinds by saving energy and time (which has an energy equivalence)? From a societal standpoint, the question would better be put as, does an individual's purchase save that individual energy that he or she no longer needs to consume so that there will be a net savings to society. The tendency for people in the developed world is not to think in terms of not consuming the saved energy, but to find other ways to expend it. It's their energy after all.

A biophysical theory of value has to account for buyer and seller psychology, obfuscation of intrinsic value and generate a model of pricing that relates to fair profit as well as energy savings from tool value. That is what I hope to develop here. But there is another more subtle factor that I need to cover first. Most economic theories have difficulty with the role of knowledge in work. In fact one major criticism of an energy-based theory of value is that it can't take into account the value of a product based on the knowledge that went into producing that product. The standard assumption is that knowledge is somehow ephemeral relative to energy and therefore adds something ineffable, beyond mere energy cost inputs, to the value of a product. The best that economists have been able to come up with is a vague notion of human capital. In this view, it is up to market forces to decide the worth of knowledge and skills because they cannot be determined in any objective way.

There is an element of truth to the idea that a market may indeed be the best mechanism for ascertaining the value of knowledge, as long as we are willing to accept some distortions from time to time (the knowledge of how to make buggy whips was valuable once, and probably will be again). But to conclude that there is no relation between energy investment and knowledge, and therefore investment in human capital, is completely wrong. Here are some thoughts on the matter.

Knowledge Theory

Suppose a naÏve individual sets out to learn to do a certain kind of work so as to earn a living doing that work in the future. The individual necessarily must expend much time and effort in learning the skills and knowledge needed to do the work with efficiency. The latter is needed to minimize the amount of time spent on each unit of the work in order to produce the end result (either product or service).

Knowledge is acquired over time by the receiving of information, for example from a teacher, and incorporating that information into one's brain. It also involves practice on subsets of the work problem to convert the explicit learning to tacit knowledge, whether implicit skills or consciously retrievable facts, such as formulas or procedures. This is often effortful requiring energy flows to support the individual during learning. Also, the brain itself increases its energy requirements during active learning. When someone says that learning something difficult is hard they are simply reflecting the fact that actual work is accomplished in the process and should be accounted for in the final tally of energy applied to future endeavors.

Knowledge, once bought with energy expenditures from an individual, is the basis for doing efficient work in the future. Efficiency here may be interpreted as units of work accomplished per unit of time and per unit of effort expended by the worker. At any given technology level applied to the work process, there will be some upper range of efficiencies which will allow the individual to minimize his/her time and effort while producing a sufficient number of units of product or service. What we mean by sufficient, of course, is that the work product or service will obtain an income adequate to the individual's needs in life.

What is important here is to recognize the crucial role energy flow plays in the acquisition of knowledge with regard to the successful accomplishment of work for income purposes. This presupposes that the 'customers' for this work are willing to trade goods, services, or money to meet the income needs of the laborer for the volume and quality of product or service put out. The individual is assumed to decide to learn the kind of knowledge needed to do this sort of work because he or she perceived the desires of others for this work were such that a fair trade of labor for income would obtain.

Take this one step further. Suppose the individual in question learns additional skills in supervising others who have learned how to do the same work. This learning also has an energy investment cost on top of learning the knowledge needed for the direct work. Moreover, knowledge of accounting will be required for the individual to become a supervisor or owner of a business in which he or she hires workers (who have also invested in learning their trade) to perform the operational work. The owner of the business expends extra energy learning to be a supervisor/coordinator of the work and must also expend real time energy doing the work of a supervisor. Again the investment in learning is predicated on achieving some level of efficiency in managing multiple workers, sales and purchases, and payroll. Many such owners learn these skills on-the-job, but that doesn't mean they haven't expended energy investing in learning. One of the reasons the 'boss' makes a larger salary is the tacit recognition (by society) that people who achieve the capacity for effective supervision add more value to the entire work process and have, themselves, expended more energy getting to the point of being skilled in supervision. Unfortunately, in the modern world, it isn't always clear that the boss has in fact achieved a higher level of skill and earned their higher wages. Indeed, as recent events have made clear, people have long ago learned how to game the system and appear, at least for a while, to have the knowledge and skills needed to guide the success of enterprises. Right Jeff Skilling? Right Rick Wagoner? Along with the scam of qualifications these faux coordinators/strategists have helped themselves to hefty rewards in anything but a free market of talent.

Finally, consider the energy expended in the education enterprise that is needed to make the knowledge acquisition process (by the future workers) as efficient as possible. A whole institutional framework is constructed in order to educate as many minds as possible in the shortest amount of time as possible for the least expenditure of energy as possible. The school system is the result. Teachers must efficiently guide students to learn what they need to know and since this is an energy investment scheme — no thought to humanization as also contributing to future value — only what they need to know. Schools are a tool. It is unfortunate that the mass perception of education is strictly oriented toward the tool value of schools and humans. Only a very few thinkers and educators have realized that there is a distinction to be made between short-run energy efficiency and long-term energy savings. The former is what maximizes profit. The later puts emphasis on our humanity. A more broadly and deeply educated individual ends up better understanding the need to save and relax, to be content with necessities and eschew luxuries. But, oh well, you can't have everything.

Energy Theory

So at last we come to an energy theory of value. In a sense, by pointing out the deficits or problems in the standard economics theories I have already pointed to the energy theory. Put simply it says that a good or service is valuable to the extent that it brings real comfort to a human being and his or her family. The key is in the phrase 'real comfort'. I am more comfortable sleeping on a mattress, in a bed, in a house that keeps me warm in winter and protects me from the glaring sun in summer, than I would be sleeping on a pile of grass in a cave. But the former took considerably more energy to produce than the latter. On the other hand, would I be any more comfortable sleeping on a gigantic mattress on a gigantic bed in a gigantic house that took orders of magnitude more energy to produce? Some people would believe that they would be happier. But no one can claim they would be more comfortable.

All of our tools, which includes everything in our energy cocoon are there to increase the comfort in our lives by reducing the amount of manual/physical labor that we need to do to achieve safety and community. They provide convenience and allow us to do many things more rapidly. It is this trade-off between our personal energy and time and the use of external energy flows that constitutes the basis of value. As biological beings with psychological needs (c.f. Maslow's Hierarchy of Needs) we are compelled to find external sources of energy and use our intelligence to construct tools to achieve these ends. Some of our needs are oriented toward achieving mental health in a complex social context. We need music. We need art. We need to both sense these things and produce them to one degree or another ourselves. The less time we spend making a living, the more time we have available to devote effort to having our higher psychological needs met.

But two conditions have thrown a monkey wrench (a tool) into the social fabric (another, biological, tool). The first is that somewhere along the line we started confusing tool value (needs) with pleasure value (hedonic value). Comfort is pleasurable, but hedonism goes beyond mere comfort to assert that pleasure is the end pursuit in its own right. Modern neuropsychology is bearing out the notion that humans can become fixated on pleasure value and seek those things that provide that even when it goes way beyond providing comfort. The standard explanation is that we evolved in a time of scarcity, in which we needed to seek, for example, fatty, sweet, and salty foods just for survival. Sex is certainly a good example of this pleasure as a marker for comfort and survival. But in modern times, when we are no longer confronted (at least in the developed world) with scarcities of these kinds, we have no way to turn off the drive to seek pleasure. We've even managed to transfer some of our pleasure from the original form, say sex, for a substitute, say a big fancy car or designer clothes. We are no longer motivated just by needs, but by manufactured wants that masquerade as needs. As a result we are willing to attach more value to frivolous energy expenditures than is warranted by the facts.

The other major condition that has created a real problem for us is that the pleasure-based drive behind sex has paid off in spades. We reproduce prodigiously. Moreover, because we have cleverly found ways to meet our basic needs, especially safety, we are no longer subject to ordinary ecological controls on our numbers and have thus managed to overshoot the natural carrying capacity of our planet for our species. We did this by expanding our external energy flows by many orders of magnitude with fossil fuels, thereby creating tools that protect us and help each individual live longer lives.

The problems that are becoming apparent, based on these two conditions, come down to too many people expending too much external energy (from a carbon-based fuel that is depleting rapidly) for too many things that are really about pleasure more so than comfort. And that has led us to what is in reality a negative value being treated as a positive one. We are literally paying for things that make us feel good but that are, collectively and over not too long a time span, going to kill us.

We need to reestablish the biophysical basis of value. We need to comprehend the limits of comfort we can reasonably expect, especially since our energy flows are about to decline at ever increasing rates. We need to parse the value of goods and services into real energy costs (emergy), tool value (how much energy saved, but really saved, and reasonable profit (income energy to the purveyor) in establishing prices. Pure market mechanisms do not provide adequate information on these value elements, so have become very poor ways to establish prices. The solution that has been offered is to establish an energy standard for money. By doing this we can establish a cost accounting system that will provide the basic cost accumulations in producing products and services. Buyers will need to grasp the significant difference between tool value and psychological desires and be able to assess the premium they might be willing to pay for that energy advantage. My guess is that once all of the energy costs, including externalities, are included in the cost basis of price, there will be very little room to pay a price for an object or service that includes a fair profit for the seller, such that most buyers will think many times about purchasing things that fulfill wants primarily.

Therein lies the problem. Humans have already demonstrated a lack of judgment when it comes to deciding on purchases. They are not the rational beings most economists had assumed. Even with more actual or real cost information and given a basic understanding of the role energy plays in production and distribution, they are not likely to, on average, make sound decisions in terms of willingness to pay for things that do not substantially contribute to their comfort (except in the hedonic sense). Could a better education turn this around? And, if it could, could we reorient the educational institutions to provide it in time to matter? Always more questions.

Comments

[GaryA]

I'm genuinely surprised in Georges various articles on money,energy and value in failing to find any reference to something which can recouple these things together; This is a form of negative interest called demurrage. Periodically, a stamp costing a tiny fraction of the currency's denomination must be affixed to it, in effect a 'user fee' Unlike every currency in the world demmurrage currency depreciates in value as it ages.demurrage works by freeing material goods, which are subject to natural cyclic processes of renewal and decay, from their linkage with a money that only grows, linearly over time.
Proposed by Silvio Gesell here is a illuminating quote:
"Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money".

Whereas interest tends to concentrate wealth, demurrage promotes its distribution it encourages reciprocation, sharing, and the rapid circulation of wealth...also in a demurrage-based money system it is sharing and not personal accumulation that forms the basis of security.It encourages long-term thinking rather than cashing in ecological resources for short term interest.
In case any readers think this is an utopian fantasy, it has been tried and worked so well in Worgl, Austria 1932 it was banned by the Austrian government at the behest of thretened central bankers!

http://alt-money.tribe.net/thread/70e5eb29-853d-44ca-9faa-b789d1757037

No Corporation does business to contribute to the community, only to extract wealth from the community to be sent, eventually, to far-away headquarters or shareholders....LETS (local exchange trading system)and demurrage forces then to act locally.

Finally another quote;
Prosperity is relating, not acquiring.
-- Tom Brown, Jr.
I think those are magnificent words....!

[George Mobus]

Gee GaryA, can't you cut me some slack??? I'm still a student of how the world works (or could work). So this demmurrage thing hasn't surfaced in my view until now. Thanks for alerting me (us). I will definitely check it out.

H.T. Odum's view of money was a bit different. It didn't wear out, but cycled, acting like a pump cylinder, but to 'grease' the flow of energy. I don't recall how he thought about what happens when money, flowing in the opposite direction of emergy, reached its final end point, the extractors.

Good points all. I'll get back to you when I think I understand it. Meanwhile thanks again.

George