One of the oldest and most persistent fallacies in economics is the idea that goods and services have inherent value in the marketplace. These days, you’re most likely to encounter this mistake in the form of labor protests, in which employers are accused of not paying workers what they are “really worth.” For most of economic history, however, the subject of value was a very serious and contentious one among the field’s top scholars.
Figuring out what things are worth is more than just an intellectual exercise. It has practical implications, especially for those who wish to design a more efficient economic system than the apparent chaos of the free market. Hypothetically, if goods have objective value, and retailers are selling them for the wrong price, a well-meaning central planner could improve the situation by correcting the prices. On the other hand, if goods have no inherent value, attempts by planners to set prices without the feedback mechanism of the market are doomed to failure. This is the central point in economist Ludwig von Mises’ epic critique of socialism, imaginatively titled “Socialism.”
In what is now called “the Marginal Revolution,” an Austrian economist named Carl Menger posited that there is no such thing as inherent value, and that individuals evaluate value at the margin, meaning that the last unit consumed will have a different value than previous units. It was an insight that transformed the economics profession, although many laypeople, as noted above, remain unconvinced.
How do we know that Menger was right? How do we know that value is subjective, and not an inherent characteristic of goods? One way is to look at what goes on at Liquidation.com.
Liquidation.com is a site that sells items other people purchased, and then returned, to online retailers like Amazon. These “barely used” items can’t really be sold as new, but they can be bundled together and sold in giant lots to people willing to pay for them. On the site, it’s common to be able to pick up thousands of dollars’ worth of basically new merchandise for a fraction of its suggested retail price. And by “fraction” I mean a low fraction. How about paying $100 for lots estimated at $3,000 or more? Sounds like a pretty good deal, doesn’t it?
Liquidation.com is not a massive secret. You don’t need a special handshake or a password to get in. Anyone can buy this stuff, at any time. So why don’t they? Why aren’t consumers flooding the site to get these incredible bargains? The reason is simple; value is subjective, and what’s worth thousands to a major retailer might be worth literally less than nothing to an individual.
Suppose you buy one of these packages. What you get is a more or less random assortment of merchandise, everything from laser hair removal kits to toaster overs to memory foam pillows. Now, there are lots of people who would pay good money for these items, but not everyone would. Unless you happen to need some hair removed, something toasted, or a new pillow, not only would you not be willing to pay for this kind of merchandise, you would actively want to get rid of it to stop it taking up room in your home. Even a high-end home furnishing is worse than useless if you don’t want it.
The fact that Liquidation.com exists, and that it doesn’t drive higher-priced retailers out of business, demonstrates that Menger was right. The value an item has depends entirely on how useful it is to the buyer at any given moment, and even people who would pay for one laser hair remover would be unlikely to buy a second. The ultra-cheap lots are generally undesirable to individuals, unless you want to take the time to resell each item individually, perhaps on eBay or Craigslist, a task which involves a huge amount of effort.
Liquidation.com teaches us that there is no such thing as what goods, including labor and other services, are really worth. Value, like beauty, is in the eye of the beholder.