There's a question which sometimes gets asked in freshman economics classes to see how clued in the student are. It goes like this:
Amy buys a car from Bob for $500. Who benefits?
A.) Amy
B.) Bob
C.) Both
D.) Neither
E.) Not enough information.
Most people tend to get this wrong (for some reason, they usually seem to choose the seller, ie, answer B) - the answer is, of course, answer C. If either party was not benefiting, then the transaction would not take place. In a more general form, a transaction (assuming there was no coercion) is ipso facto proof that both parties have traded something they own for something they value more. We cannot say that they are now happier post-transaction, but we can say they expected to be so.
This idea is fundamental to a great deal of economic thought. The implication is that transactions should be assumed to be good things, absent information that one party was coerced, had false information, or was not rational.
It also ties in with another concept in economics, the diamond-water paradox. This paradox notes that a pound of diamonds tends to cost a lot more than a pound of water, which is curious, since diamonds have few useful applications (pretty much the only one I'm aware of is as an industrial abrasive), whereas water is necessary for life. Shouldn't "useful" things be worth more than "useless" things?
Initial attempts to answer this paradox gave us the labour theory of value (a cornerstone of Marxist theory), which argued that diamonds are worth more because they take more effort to produce, but this falls apart in a hundred different ways when we look at the world around us. An obvious example is that a used car sells for less than a new one, despite the fact that the labour used to produce each car is the same.
The next major attempt to answer it, and the currently accepted answer today, is the concept of utility. This says that there is no "inherent" value in anything - that under no conditions can it be said that, say, an apple is "worth" $1. Instead, utility theory argues that everyone values everything differently. Someone who wants an apple will value it highly, someone who doesn't want one will place little value on it, but the apple, in and of itself, has no value, except to the extent that people value it.
This concept seems fairly tame now, but was revolutionary when first proposed. Not only does it destroy a decent chunk of the underpinnings of Marxism, it also has interesting practical implications. One is that, since a good or service has no intrinsic value, no outside agency can determine a value. All we can really do is look at its "market value" (for items which have one, anyhow), and this is what accounting rules do. But it also means that we have no ability to look at a transaction and decide if it the parties were rational. In the above example about a car, it's would be nice if we could put an "inherent" value to the car.
Why? Well, if we could work out an inherent value, and say the car was clearly worth $1000, then Amy is trading $500 of cash for $1000 in car (gaining $500), while Bob is trading $1000 in car for $500 of cash (losing $500). Amy won, Bob lost, and it might be fruitful to work out why, and correct the injustice.
Or if we could say the car was clearly worth $500, the trade would be even (begging the question of why they even bothered to trade). Or if we could say the car was clearly worth $250 the trade would have cost Amy $250, and benefited Bob by $250 - again, we now have winners and losers, and an injustice which may need correcting.
But we have no ability to do so. We know that Amy valued the car at more than $500, but we don't know how much more. We know that Bob valued the car at less than $500, but we don't know how much less. The only thing we do know is that each person valued it differently, and traded for something which they valued higher. But to borrow the post-modern phrase, we have no reason or ability to privilege one of those valuations over the other.
Right! Now, the thing is, a great deal of the activities of the state are centered around changing peoples actions. Laws, regulations, taxes, tariffs, and so on are all (to a greater or lesser degree) designed to change how we act. Yet if people make decisions so as to maximise their own utility, then clearly they gain more utility from whatever actions they wish to take than from all other things they could do. Any attempt to stop, limit, penalise, or even discourage their action would (obviously) diminish the utility they gain - or in simple terms, decrease the sum total of human happiness.
Do you disagree? If so, why? Or if you agree, what impact should this have on the way the state goes about its afairs? Or, to put it in simple terms, in what circumstances can it be moral for the state to interfere in the day-to-day decisions of its citizens?
As always, if you have any thoughts on this question, drop me a line.