Suppose that you are a defense contractor and that one night you are abducted by aliens who are bent on undermining Earth’s planetary defenses.
The aliens tamper with your brain and implant the idea that, instead of building your current defense project (a new kind of jet fighter that is just the thing to knock down pesky flying saucers) out of metal, you should build it out of toothpicks instead as this will make it really extra strong and light and good at knocking down flying saucers.
They also also abduct all of your employees, so they all think this is a great idea, too.
Thus you set to work building the great toothpick fighterplane.
You order large quantities of toothpicks and glue and your workers eagerly set about building the toothpick fighters. MillionsBillions of dollars are spent on acquiring enough toothpicks and glue to make numerous planes entirely out of toothpicks.
Your brain-poisoned employees labor happily and energetically and put in long hours, for which you happily pay them their salaries plus overtime, they are such effective and enthusiastic workers.
You also pay for their medical insurance, which is needed to cover the innumerable and unavoidable splinters in workers’ fingers, the resulting infections, and the constant faintings and work-related accidents from inhaling too much of the everpresent glue fumes.
Finally, the fighters are ready to deliver to the Pentagon (which for some reason has been remarkably lax when it comes to inspecting how the project is going). You and your workers couldn’t be prouder of the wobbly, creaky fleet of toothpick fighters that you have produced, and you are very much looking forward to the Pentagon taking delivery of them and giving you the multi-billion dollar check you need to replenish your company’s now badly-depleted bank accounts.
It therefore comes as a total shock to you when the Pentagon says that it won’t pay!
You’re devastated!
You complain!
You try to argue them into paying!
You point out all the "advantages" that the aliens made you believe toothpick fighters would have!
You point out that vast sums of money went into the raw materials for the planes!
You have your human resources department trot out documentation showing all of the countless hours of regular time and overtime that your workers worked.
You point out that Catholic social doctrine holds that workers need to be paid a just wage allowing them to support themselves and their families with human dignity.
Yet for all this the Pentagon remains completely unmoved.
It believes the planes are, in its word, "Useless."
And, again in it’s words, it’s "Not paying."
What does this teach us?
That we all need to sleep with a can of Grey-Away next to our beds?
That we need to constantly monitor ourselves for traces of alien mind manipulation?
That an invasion is imminent?
No.
It does, however, teach us a very fundamental lesson about economics.
Many people, thinking from the viewpoint of a product producer, suppose that the value of an item is determined by the raw materials or the labor that went into making it.
This is false.
The real value of an item is not determined by raw materials or labor but utility. A fleet of toothpick fighter planes is useless for making war against aliens since they will shake apart before they even lift off the runway. They thus have no value to the Pentagon.
This shows something about where value is established: It isn’t fundamentally determined on the side of the seller but on the part of the buyer (at least in the sense of the word that I’m discussing). Buyers who place more value on a product will pay more for it.
Of course, the seller can try to generate value in the buyer’s mind by advertising to him all of the ways in which the thing could be useful to him (even if that’s just making the buyer look more "cool" and "hip" to others). He can even refuse to sell the item if his price isn’t met and thus try convincing the seller up in what price he’s willing to pay, but that is just a way of sharpening for the buyer a choice between having the item and the value he perceives in it and not having it.
Ultimately, it is how useful a buyer perceives an item to be, or how much he values it, that determines what price he is willing to pay for it.
Now that the Pentagon has passed on your fleet of toothpick fighter planes, your best bet is to sell them as works of art (at vastly reduced prices that will at best only recoup part of your costs in making them).
You and your employees also probably want to let the Pentagon study your brains to figure out what the aliens did to them and how to protect other defense contactors from the same treatment.
An alien invasion may be imminent.
I heard they had some toothpick fighter planes in Iraq. . . .
I really thought that with all those millions and billions of toothpicks you would have had at least one good point. But I seem to have missed it. Sorry.
I think Mr. Akin is saying that things are worth what people will pay for them, not what people are willing to sell them for. Of course, the Pentagon isn’t hampered by ordinary human concerns of going bankrupt or overdrawing a checking account, so they have a distorted notion of what things are actually worth. 😉 They (the government) are definitely not a good example of how economics is supposed to work.
Also, Jimmy’s example does not touch upon the idea of a contract. If the defense contractor had a contract to provide fighter planes that could do X, Y, and Z, and the toothpick planes met the terms of the contract, then the Pentagon should pay. If the planes did not meet the terms of the contract, then they should not pay, no matter how much the contractor cries about it.
As another example, consider fine carriages – the kind your local nobleman would ride around in, not the things tourists ride around Central Park.
We can safely assume that there was a healthy industry for fine carriages back before the automobile took over, and you could make a good living selling carriages.
The automobile became more reliable and popular, and the effective worth of a fine carriage dropped at the same time. Fine carriages didn’t become much easier to make, nor did the materials used in their construction become much cheaper. There was simply a much more attractive alternative that took away all the demand. Soon, if you decided to become a carriage maker, you were condemning yourself to poverty.
This principle is also clearly demonstrated by many examples of what passes for art nowadays. The artist may have put hours and hours and various endowment agencies thousands of dollars into the piece and yet, somehow, it remains a pile of welded scrap with little intrinsic worth.
And in a final twist, the taxpayer has to pay to have it hauled away once a decent period of time has passed.