I was particularly pleased by Old woman of the north, blogstrop and danger mouse who saw Mill’s genius in my previous post on Mill’s Principles of Political Economy. I could not agree more with OWOTN where she wrote “What beautiful, clear English! The thought processes flow.” And so they do. And Mr Bear, Ted if I may, I just mention the book because I do think it would be an aid to governments who are sinking our economic ship. I merely translate Mill into language that is easier to read in the twenty-first century. This is my attempt to say what Mill said in that same passage. Nowhere as poetic, nowhere as deep, but hopefully getting to the same point. These are the opening paras of Chapter 3.
Possibly the most difficult area to understand about economics is one that you would think would be amongst the easiest and most commonly understood. This is the area of value and value added.
If economics were going to provide an understanding of anything, it would have to be, you would think, an understanding of what value is and where it comes from. And while economists do have such theories, they are relatively obscure and are almost never discussed at the introductory level. Value in economics is a very difficult idea.
Yet for all that, it is not possible to have a clear understanding of either economics or economic policy unless one has a reasonably clear idea about what value is and how it is created. And unless one has this reasonably clear idea about the nature of value, it is almost impossible to make judgements about almost anything done in an economy, from its very organization to the finer details of individual decisions.
That the aim of economic activity is to create value is obvious and straightforward, for all the difficulty in knowing just what value actually is. Something has value to the extent that a person is better off with it than without it. In economics we frequently say that a good or service has value if it is able to provide utility. Economic activity is aimed at providing individuals with increased levels of personal utility.
But it is also true that in almost all cases to produce something of value it is first necessary to use up some of our resources that also have value. Nothing comes from nothing. And this is where the notion of value needs to be further refined. A tonne of steel also has value, but not as a final good providing utility. It has value only as a productive input that can be used to produce the goods and services that do provide that utility. The value of such inputs is derived from the value of the final goods and services they can be used to produce. Which brings us to the crucial issue of value added.
To create value in the form of the final goods and services that provide utility is the central purpose of economic activity. In the process of creating such value, some part of the resources that exist must be used up in the process. Value added underscores what is too often forgotten, that to add value one must also at the same time destroy value. The word ‘added’ is there to remind us that we have also had to subtract the resources used up in producing whatever has now been brought into existence. Value added is thus the net result of using up various resources which already have value, to create other products that have even more value.
It is only if the value of the products newly produced is greater than the value of the resources used up that value adding has occurred. Economic growth is the way we normally discuss value adding activities. They are one and the same. The value of output must exceed the value of the inputs used up if economic growth across an economy is to occur.
My advice is to read Mill if you can. But if you would like a modern version, then you will need to read this.