1

Economic Value Theory

( Peter W. Cooper October 19, 2013 )

An economic theory of value which pertains to market economics may also be characterized as a "theory of economic value". An economic value is the worth of a good or service as determined by the market. Among market participants a "price" is the quantity of payment by one party to another in exchange for a good or service. Conceptually, economic value is not the same as price, being that value is only linked to price through the mechanism of exchange. he term "money" denotes a type of economic good which by convention serves as a medium of exchange and a unit of account. As indicated by its price, a good has "value in exchange" if it can be exchanged for money or for other goods of commensurate economic value. A good has "value in use" if it is in some way deemed useful or important.1 !arket participants tend to trade freely for goods at the given prices only if the anticipated "use values" are greater than the respective "exchange values". herefore, the total value"in"use tends to be greater than the total value"in" exchange. #ub$ective theories of value hold that for a good %or service& to have economic value %i.e., a non"zero price&, the good must be useful in satisfying human wants and it must be in limited supply. 'ntrinsic %ob$ective& theories of economic value hold that the price of a good or service is not a function of sub$ective $udgment. 2 (hether in a sub$ective or ob$ective context, a "commodity" as an economic good is here defined to be any useful thing which has more economic value %higher price& if more scarce. he unanswered question is whether a commodity is valued because it is wanted or it is wanted because it is valuable. Consideration of the valuation of goods, either in their exchange or use, gives rise to two opposing economic paradigms. he )donor) paradigm emphasizes an intrinsic )exchange value) since it views value as originating from the incurred production cost of a good to the seller"donor "" before exchange with a buyer"recipient. he )recipient) paradigm emphasizes a sub$ective )use value) since it views value as arising from the anticipated beneficial use of a good by the buyer"recipient "" after exchange with a seller"donor.3

Labor and Marginalist theories o !al"e

Classical *conomics presents a )donor) type theory of value. he classical economists posit that value is determined in production, that is, in the workshop or the factory. 'n conventional economic theory "land" %i.e. natural resource&, as a primary factor of production, has no value outside of its economic usefulness "" that is, it has no intrinsic value. Assuming most of the cost of production can be analyzed in terms of the intrinsic value of labor, the )classicist) approach was refined into the +abor heory of ,alue. his theory posits that the true values of goods and services are related to the labor needed to produce them. A fundamental tenet of the Classical school is that labor " a primary factor of production " is the source of most all value. A primitive, qualified )labor theory of value) was first formalized by Adam #mith in -../ in his book The Wealth of Nations. 0avid 1icardo expanded on the theory by positing that the market price of a good is set by the producer that uses the most labor to produce the good. he Classicist 2arl !arx argued that even the value of labor itself was set by the quantity of labor required to produce it.4 'n contrast, 3eoclassical *conomics presents a )recipient) type theory of value. he 3eoclassical school teaches that the capacity to satisfy sub$ective human wants is the overriding factor in the valuation of goods. )4tility) is the benefit derived from using a good. Adam #mith dismissed a theory of economic value based on utility because things which have the greatest )use value) frequently have little )exchange value) %e.g. "water"&5 and things which have the greatest )exchange value) frequently have little )use value) %e.g. "diamonds"&. 'n the -6.7s the 3eoclassicists " #tanley 8evons, +eon (alras, Carl !enger " independently resolved the above paradox by positing a consistent )marginalist theory of value) whereby use"value is considered in terms of marginal utility. )!arginal utility) refers to the utility only obtained from the last unit received or used up. 9or example, consider the difference in the economic value of diamonds and water. he first units of water used up have a high marginal utility, but as our thirst is quenched, the marginal utility of water becomes very small. #imilarly, the first few diamonds we own are very precious, but the extra utility obtained from additional diamonds diminishes. !ost of us have plenty of water so additional units have relatively little value "" that is, the low economic value of an abundant

2 good is reflected in the correspondence between low marginal utility and low exchange value. :n the other hand, most of us have very few diamonds, so additional diamonds are very dear "" that is, the high economic value of a scarce good is reflected in the correspondence between high marginal utility and high exchange value. 5 he Classical and 3eoclassical theories of value represent opposing donor and recipient paradigms which are on respective sides of the production"consumption divide. :n the production side the Classicist labor"valuation of the supply of goods derives the cost of production for the producer"donor and ultimately drives consumer prices. hat is, the economic value of the factors of production are price"determining rather than price"determined. :n the consumption side the 3eoclassicist marginalist"valuation of the demand for goods is reflected in the price of consumption for the consumer"recipient and ultimately drives producer costs. hat is, the economic value of the factors of production are price"determined rather than price"determining. 'nsofar as supply and demand meet under perfect competition, such that unit cost of production equals market price, the Classical donor"type and 3eoclassical recipient"type theories of value also meet. he )donor) paradigm suggests the value of goods and services derives from the intrinsic values of the factors of production "" "land", labor, and real capital. +abor produces goods from scarce natural resources %"land"& by means of capital. Conventional economic theory assumes natural resources have no intrinsic value. A capital good then would have value only in relation to its productive use by labor. herefore, whereas 3eoclassical economists dispense altogether with the notion of intrinsic value, Classical economists consider primarily an intrinsic value"cost of human labor in the valuation of goods " including capital goods. ;ut what if some natural resources have intrinsic value< 3atural resources are either material or energetic. (hat if energy resources presumptively have an intrinsic value analogous in principle to that of labor< hen a donor"type theory of value based on energy would be feasible.

#nerg$ theor$ o !al"e

A simple definition of )energy) is the capacity to do work. ;oth the labor and energy theories of value are based on the principle that the ob$ective value of goods or services is equal to the quantity of work required for their production from natural reources. 9or the )labor theory of value) such work is measured as an amount of human labor in units of time. 9or the )energy theory of value) such work is ob$ectively measured in units of physical energy. 1ecent history has shown that most economists have given short shrift to donor"type theories of value based on work and, instead, favor a !arginalist recipient"type theory of value. he present neoclassical orthodoxy denies the very notion that the worth of any factor of production, including energy resources %"fuel"&, can be based on an intrinsic value. hat is, society ultimately derives the economic value of "land", labor, or capital from sub$ective )use values) indicated by consumer demand in the marketplace, rather than from producer costs based on an intrinsic value indicated by respective "rents", wages, and interest. 3evertheless, although the +abor theory value is now largely discredited,6 the possibility of a )cost of production) donor"type theory of value has remained viable from the time of Adam #mith.7 9rom the beginning of the 'ndustrial 1evolution, human labor increasingly has been replaced by machinery in the performance of productive work. +arge"scale industrial production is significantly correlated with the energy requirements of mechanization, such that the contribution of human % and animal & "muscle" work to the total work performed is negligible. hat is, human labor primarily organizes and operates an automated production process rather than directly performs the physical work of manufacturing. )!echanization) both motivated and resulted from the discovery, by physicists and engineers, of how matter and energy are ordered in accordance with laws of nature. 'n the middle -=th century the laws of thermodynamics were formalized, so that economics conceivably could be reduced to a biophysical study of how society employs energy to produce, from material and energetic resources, various goods for consumption, as distributed among people and groups in society. (hereas )energy) and its conservation is addressed in the 9irst law of hermodynamics, )entropy) as a measure of disorder and its overall increase is addressed in the #econd +aw. hese considerations have given rise to a broad body of research known as ;iophysical *conomics. 8 he notion that )energy) could serve as a unifying concept for economic, social, and political analysis, reached a high point with the echnocratic movement in the 4#A and Canada during the -=>7s. he echnocratic philosophy assumed that energy was the critical factor determining economic and social development. he technocratic pioneer, 9rederick #oddy, believed economists confused wealth with debt, leading to the development of financial institutions that were divorced from the thermodynamic principles underlying the production of wealth. At the core of

3 the technocratic vision was "an energy theory of value". #ince the basic measure common to the production of all goods and services was energy, it was reasoned "that the sole scientific foundation for the monetary system was also energy". A "technocratic" innovation was that money would be replaced by energy certificates as the standard unit of account, the total supply of which would be determined by the total amount of energy used in the production of goods and services. he echnocratic movement waned because a skeptical public found unacceptable the notion that the economic life of the nation would be better served by the rule of scientists and engineers rather than politicians or the marketplace "" "the idea of political democracy still represented a stronger ideal than technological elitism." 9 "'nherent in an energy theory of value is the principle that a society, or individual, maintains its existence by securing material and energetic resources from its natural environment for the purpose of producing those goods and services that facilitate survival ?". @owever, not all of a store or flow of energy is available to do the work of production. "#ince low"entropy energy is the primary requisite for the survival of any living system, the useful work contributed by an individual economic unit is a measure of its value to the society as a whole." 10a he science of thermodynamics implies that useful work in an economic process occurs with the consumption of "available energy", whereby material and energetic resources are ordered, sorted, or arranged into the form of some good or service. he term )entropy) is understood, somewhat imprecisely, as a measure of disorder. herefore, this ordering, sorting, and arranging corresponds to a reduction of entropy within the economic system and the transport of excess entropy, as "waste", outside the system. he term "exergy" denotes the maximum energy that is available for useful work. 'n the -=.7)s @oward . :dum sought to answer more precisely how exergy might be a source of economic value. @is student 1obert Costanza argued from empirical evidence for "an embodied energy theory of economic value which maintains that the value of any good or service to humans is ultimately related to the quantity of energy AexergyB directly and indirectly used in its production." 11 @owever, the respective exergies embodied in any good or service may be of different kinds, depending on the "quality" of the energy "available" to do useful work. 0ifferent kinds of exergy cannot be added together since they are not equivalent measures of work done. 9or this reason :dum adopted the term "emergy" to define that measure of "the available energy of one kind previously used up directly or indirectly to make a product or service." 12 he concept of emergy allows for the rigorous calculation of a hypothesized economic value of a good or service in terms of an ob$ectively comparable measure of available energy. *xergy and, in turn, added emergy are truer measures of the cost of production than $ust total physical energy and, thereby, each constitutes a truer basis for a donor"type, energy theory of value. An exergy theory of value forms the biophysical basis for a field of research called *cological *conomics. " he ob$ective of Aexergy"emergyB analysis is to understand how energy availability and use influence the rate and direction of economic and cultural development. ? ;ecause such impacts of energy use occur during the production process, *cological *conomists tend to focus on production $ust like Classical economists." 10b he question remains whether, in fact, available energy is a source of economic value. 4se of available energy is certainly necessary for the extraction and transformation of low entropy in an economic process. @owever, a pioneer in the field, Ceorgescu"1oegen %-=.-&, dismissed the notion that energy itself is the source of value. 1ather, he posited that "the basic nature of the economic process is entropic" and low entropy is a necessary but not sufficient condition for a thing to have value. 'n fact, "the real source of economic value is the value that life has for every life"bearing individual". hat is, "the true )output) of the economic process is ? the enjoyment of life (ithout the concepts of purposive activity and enjoyment of life we cannot be in the economic world." 13 o explain economic phenomena, "an energy theory of value emphasizes basic physical laws rather than the psychical attitude of humans. *nergy, however, is not a necessary and sufficient cause of economic value because many economic decisions are not influenced by energy quality and availability", but clearly are influenced by the human psyche. "Criteria other than biophysical laws must be considered when developing models to explain and predict human economic behavior." 10c 9or this reason the biophysical perspective of *cological *conomics is very different from the 3eoclassical approach to economic analysis. ;ut perhaps the late Ceorgescu"1oegen was mistaken that low entropy is not a sufficient condition for a thing to have value< 'n -=D6 Claude *. #hannon established 'nformation heory as a science by postulating "entropy" as an informational measure of uncertainty and then defining "information" as a reduction of such entropy. (hat if economic value, as it relates to the psychical attitude of humans, can be reduced to a generalized notion of low "informational" entropy< hat is, what if the !arginalist theory of value could be formulated in terms of 'nformation heory< o this end the recent work of 8ing Chen %E77F& strives to lay the foundation for an entropy theory of value.

#ntrop$ theor$ o !al"e

he economic world consists of the purposive activity of individuals in society to acquire goods and services "" the usefulness of which facilitates survival and contributes to the en$oyment of life. All productive human activities represent extraction and transformation of low entropy from the environment. herefore, it is natural to relate economic value to low entropy. Accompanying the production of economic goods is a reduction of entropy within an economic system and a return of high entropy )waste) to the environment. his would suggest that most economic values can be analyzed characteristically in terms of low physical entropy. @owever, economic value clearly has a psychical, non"physical component that defies analysis solely in terms of physical entropy. 3ote that the reduction of entropy resulting from the use of available energy in the production process by human labor is a consequence, not the source of human purposiveness. his indicates the attendant psychical attitude of the human actors outside the economic system is the "cause" rather than the effect of the reduction of physical entropy within an economic system. Consider that the main function of "mind" is information processing. (ith the development of 'nformation heory the notion of entropy has been generalized, by means of the statistical "entropy function", and applies to both a non"physical, information entropy and the physical, thermodynamic entropy. 8ing Chen %E77F& has proposed an entropy theory of the human mind 14, whereby human psychology and intentionality are analyzed in terms of 'nformation heory. #ince )information) is the reduction of entropy, an entropy theory of economic value is inevitably an information theory of value. @ow then might an informational entropy theory of value relate to the existing theories of economic value< 3eoclassical economics, the current mainstream economic theory, emphasizes that the value of an economic good is related to its utility in satisfying human wants. :ne of the chief architects of neoclassical economics, +eon (alras, posited the economic value of a unit commodity is directly related to its scarcity. An economic good is more valuable if more useful and if more scarce. 1egarding the usefulness of an economic good, Chen argues for an "entropy theory of the mind" from the evidence that human beings favor low entropy sources. his observation offers a straightforward path from an entropy theory of value to the sub$ective utility theory of value . G!ind is an organ of computation ? 't calculates the entropy level and sends out signals of pleasure for accumulating and displaying low entropy and signals of pain for dissipation of low entropy. 8evons attempted to treat economy as a calculus of pleasure and pain. Hleasure is generally associated with the accumulation or display of low entropy level, such as the accumulation of wealth, and conspicuous consumption. Hain is associated with dissipation of low entropy, such as work and the loss of money. #o value in sub$ective theory, as a measure for pleasure and pain, is intrinsically linked to the level of entropy." 15 1egarding the scarcity of an economic good, Chen argues for an entropy theory of value that is the analytical formalization of (alrasI vision of value per unit good as an increasing function of scarcity %i.e., as a decreasing function of abundance " see adjacent illustration&. "9rom the properties that the value of commodities should satisfy, it can be derived that the only mathematical formula to represent value, as a function of scarcity, is the entropy function. his is parallel to the idea that the only mathematical formula to represent information, as a function of probability, is the entropy function." 16 +et us define "marginal information gain" of a good to be the added information %entropy reduction& associated with the last unit produced or acquired. #o then, a lesser marginal information gain at a relatively lower entropy is associated with greater abundance. *quivalently, a greater marginal information gain at a relatively higher entropy is associated with greater scarcity.
Value &er 'nit ( Entro&y ) * +n
5 4 3 2 1 0 0.01

0.2

0.4

0.6

0.8

1.0

Scarcity << robability !

" ## $bun%ance

At least for physical systems, an ob$ective theory of value then also follows from the above entropy theory of value. #ince the entropy level of any system tends to increase spontaneously, the reduction of physical entropy in an economic system represents the effort to produce the supply of goods, as measured by the amount of available energy used up. hus for the "classical" economist, entropy reduction in terms of the use of available energy may be the best candidate for a common measure of ob$ective economic value for both the supply of goods and "labor".

5 herefore, Chen)s entropy theory of value offers an analytical theory that is highly consistent with the neoclassicist)s understanding of sub$ective economic value, but also establishes an explicit link between physical entropy and the classicist)s notion of ob$ective value. *conomic value is here based on the )information) gained marginally with the reduction of informational entropy accompanying the production and acquisition of the "last"unit" economic good. As implied by the )entropy function), a greater marginal information gain reflects the relatively higher informational entropy associated with greater scarcity. herefore, the notion of )marginal information gain) is analogically similar to )marginal utility). ;ecause of the postulated equivalence of entropy reduction and information gain, an entropy theory of value is necessarily an information theory of value. he total value of a )physical) commodity corresponds to the information gain associated with the reduction of total physical entropy accompanying the production of a quantity of the commodity. 'n comparison, the total economic value of a given quantity of commodity is determined by assuming each unit is evaluated at its last"unit, marginal information gain. hus, as is well known, when the quantity produced reaches a certain degree of abundance, the total economic value will start to decrease %see adjacent illustration&.16 herefore, identifying value with the reduction of entropy or, equivalently, a gain of information is highly consistent with our intuitive understanding of economic value.
Total Econom ic Value - * 0.4 0.3 0.2 0.1 0 0.01 +n .

0.2

0.4

0.6

0.8

1.0

Scarcity << robability !

" ## $bun%ance

@owever, consider that )information) itself can also be regarded as a commodity, albeit an unusual one. he distinction between purely informational and physical commodities reflects the conceptual distinction between informational and physical entropy. 'nformational entropy is defined by 'nformation heory. Hhysical entropy is defined by the End +aw of hermodynamics. 9or a primarily non"physical, )informational) commodity there would not be an appreciable reduction of physical entropy accompanying its reproduction which is predominantly non" physical duplication rather than precisely physical "production". #ince the supply of energy required for the production of a physical commodity is sub$ect to natural limitation, a physical commodity is naturally scarce with a non"zero price which corresponds to an associated marginal information gain. 'n contrast, a purely informational commodity requires, in principle, an insignificant amount of physical energy for its reproduction and, as such, would seem to have an economic value %non"zero price& only if its supply were to be artificially limited. 3evertheless, from the perspective of Chen)s entropy theory of value, informational and physical commodities share the pertinent properties necessary for having economic value. As described in this section, economic valuation of a good reflects an associated "low entropy" %high information& as an indication of usefulness and an associated "marginal entropy reduction" as a measure of scarcity. herefore, this *ntropy theory of value is analogous in its sub$ectivity to the !arginalist theory of value. 't is a recipient"type theory and, as such, is price"determining with respect to the costs of the factors of production. @owever, the *ntropy theory of value is based on )information) rather than utility, and on marginal )information gain) rather than marginal utility.

%o&ard a "ni ied theor$ o econo'ic !al"e

*conomic theories of value are typologically either donor"type or recipient"type and either ob$ective or sub$ective. A sub$ective theory holds that the value of an economic good derives from a $udgment of its usefulness in satisfying human wants. An ob$ective theory posits that the value of an economic good is intrinsic to the good itself and is not a function of sub$ective $udgments. he donor paradigm posits value is added during production. he +abor and *nergy theories of value are each an ob$ective, donor"type theory. he recipient paradigm posits the value of an economic good originates after production and prior to consumption with a sub$ective evaluation by the consumer. he !arginalist and *ntropy theories of value are each a sub$ective, recipient"type theory. *conomic value is determined by the market. *conomic value is linked to price in a market through the exchange of goods between the producers and the consumers. 9or the producers who supply the good or service, the market sell"price reflects, at the least, a donor"type value"cost. 9or the consumers who demand the good or service, the market bid"price reflects, at the most, a recipient"type value"price. 'n a competitive market the forces of supply and demand for an economic good tend to balance at an "equilibrium" or "steady"state" market price which approximates respectively the value"cost of production and the value"price of consumption.

6 he question is whether the consumer prices are basically determined by a donor"type evaluation of producer costs or whether producer costs are ultimately based on a recipient"type evaluation of the produced commodities. 'n the labor vis"J"vis utility context regarding a commodity, the question is whether its consumer price is determined from the amount of labor necessary for its production or whether its production costs are ultimately determined by a higher utility reflected in an additional marginal utility derived from its anticipated consumption. 'n the exergy" emergy vis"J"vis entropy context regarding a physical commodity, the question is whether its consumer price is determined from the amount of available energy used up in its production or whether its production costs are ultimately based on the lower physical entropy reflected in the )information gain) requisite for its consumption. 'ndeed, for a physical commodity the exergy"emergy vis"J"vis entropy comparison allows for a "unified theory of economic value." he available energy used up in the production of a physical commodity is precisely a measure of the reduction of physical entropy reflected in the )information gain) required for its consumption. he market price for a commodity resolves the inherent tension between the ob$ective, donor"type evaluation of its exergy"emergy cost and the sub$ective, recipient"type evaluation of its )informational entropy) price. hus, market prices reflect this economic evaluation in terms of a marginal %last"unit& )information gain), by which society is "informed" as to what goods are to be produced and in what quantities they are to be consumed. he question remains whether economic evaluation in terms of a reduction of informational entropy always can be linked in some manner to low physical entropy. 's there a common measure of economic value between informational and physical commodities< hese questions can be answered affirmatively "" first from the perspective of the human consumer and then from an analysis of the competitive marketplace. 9or the individual human consumer, economic goods are useful in satisfying either ob$ective, physical needs or sub$ective wants. 'ndividual human beings, in the overall scheme of things, are relatively similar in what they require by way of ob$ectively"measurable physical goods. 'n order to satisfy their minimum physical needs. humans need a certain normalizable minimum daily requirement of food to satisfy hunger, of water to satisfy thirst, of shelter to maintain biological homeostasis, etc. :ther things being equal, physical commodities which would satisfy one)s unmet physical needs are always valued more than informational commodities which satisfy only one)s relatively superficial, sub$ective wants. A starving person will trade most anything for a bit of food. herefore, the intrinsic value of need"satisfying physical goods constitutes a natural basis for evaluating exchanges between informational and physical commodities. hat is, for an individual consumer a given informational commodity can be "priced" in terms of the value of a given need"satisfying physical good. 'n this manner the abstract )informational gain) entailed in an informational commodity is ultimately linked with the relatively low physical entropy of need" satisfying physical goods. An analysis of the marketplace serves as a direct approach to answering whether there is or can be a common measure of economic value between informational and physical commodities. "Ceneral equilibrium theory" teaches that the behavior of supply and demand in the interacting markets which comprise a whole competitive economy tends to a set of prices that results in an overall equilibrium between the markets. 17 hat is, at market equilibrium all goods can be priced in terms of each other. Consider a purely informational "commodity" such as, for instance, the skill necessary to translate one language to another. Also, consider a mostly physical commodity such as pasteurized mik. As disparate as the markets for language translation skills and for pasteurized milk might be, there exists a pricing mechanism which is reflected in the equilibration of the medium of exchange between this purely informational commodity market and this physical commodity market. #o then the economic )exchange value) of this medium of exchange which constitutes the given species of "money", is itself thereby fundamentally linked with the low physical entropy of need"satisfying physical goods. *conomic valuation within human society, in terms of a reduction of informational entropy, is linked to relatively low physical entropy, by means of price equilibration between respective, interacting markets. @ence, there is a common measure of economic value between informational and physical commodities. his common measure is marginal )information gain) and allows for a unified theory of economic value. his "last"unit" information gain is analogous to )marginal utility) but links back to the emergy"added content of need"satisfying physical goods. he notion of )information gain) indicates a resolution to the apparent conflict between the ob$ective, donor"type *nergy theory and the sub$ective, recipient"type !arginalist theory. #o then here anticipated is a unified Information Theory of Economic Value . he market price of an economic good reflects a marginal %last"unit& )information gain) which translates as a sub$ective, recipient"type evaluation if viewed from the consumption side, and as an ob$ective, donor"type evaluation if viewed from the production side. 'mportantly, the notion of )information gain) subsumes the notion of )physical entropy reduction). hat is, any physical good can be reconceptualized as a type of )informational) commodity. 'ndeed, the price of any physical or informational good, as a measure of economic value, both reflects and is reflected in the corresponding marginal

7 information gain. he associated information gain is valued because of the usefulness of such information, and such information is useful because it is valuable. 'n simplest terms, a commodity is valued because it is wanted and it is wanted because it is valuable.

Proposal( )n or'ation theor$ o econo'ic !al"e

An Information Theory of Economic Value %' *,& postulates that an economic good constitutes a form of useful information. An economic good is evaluated according to the quality and quantity of its information content. he economic value of a good is associated with an intrinsic quantity of information, such as would be deemed qualitatively useful, and with a marginal information gain, such as would indicate the good)s scarcity. he economic value of a unit good is determined through price discovery in the marketplace. An ' *, "commodity" is an economic good, defined to be such useful information which has more economic value, as indicated by a higher price, if more scarce. @enceforth in this ' *, proposal, the term "commodity" is implicitly taken to mean an otherwise abstract embodiment of useful information which, as such, can be priced in a market. :ne non"technical definition of information is "knowledge acquired in any manner". An economic system is society)s answer to three fundamental economic questionsK what, how, and for whom are goods produced. herefore, individual human intellection and $udgment are decisive in the purposive production and acquisition of economic goods. 4nsurprisingly, the attainment and application of knowledge is fundamental for any economic system to function. An information theory of economic value reconceptualizes an economic good to be a form of reified knowledge. 2nowledge is here defined to be "useful information". 'nformation is ordered or arranged data, and thereby has significance. 0ata is abstractly that which is sub$ect to ordering or arrangement, and by itself has no significance. 18 0ata can be typified as either physical or psychical. Hhysical data are substantially energetic and entropic "" that is, physical data are amenable to analysis in terms of the 9irst and #econd +aws of thermodynamics. Hsychical data are characteristically non"physical in that they originate from mental processes "" the physicality of which is, at the most, perhaps an epiphenomenon of underlying physical processes. 'nformation, as ordered or arranged data, can be typified as either physical or psychical. Creater physical information corresponds to lower physical entropy, signifying an ordering or arranging of physical data. Hsychical information is a form of intellection, signifying an ordering or arranging of psychical data "" that is, a reduction of "informational" entropy. 'n this non"physical context, psychical information is "pure" information. An ' *, commodity is physical or psychical, such that any information gain corresponds to a reduction of either physical or informational entropy, or some combination thereof. he economic value of a commodity is related to an associated "marginal information gain" if such information is useful and a function of scarcity. 9irstly, information is useful only if it constitutes a form of knowledge. An economic system is a subsystem of society, serendipitously instituted by society to produce wealth, but is not itself "society". herefore, information is economically useful only for reasons located in society, specifically with the human psyche or intellect. As such, information itself has no inherent economic value. ,iewed from the consumption side, economic value is related to an intrinsic quantity of information if the corresponding physical or psychical information gain is useful to the recipient for satisfying sub$ective, human wants. ,iewed from the production side, the capacity of human intellection %or $udgment& is essentially a primary factor of production for the donor %viz. associated with "labor"& in that it occurs within society outside the economic system. hat is, information is not useful for either production or for satisfying human wants, unless so deemed through human intellection. 3ote that "knowledge" is a psychical or purely informational good and is acquired in its useful form through a communicative or an educative process. #econdly, the economic value of a commodity is related to marginal information gain as a function of scarcity. 9or either physical or psychical commodities a greater marginal information gain at a relatively higher informational entropy is associated with greater scarcity. #carcity % lack of abundance & or limited supply results from practical limits to the utilization or employment of the primary factors of production "" "land" %natural resource& and "labor" %human resource&. he term "land" denotes the material or energetic resources present in the natural environment, utilized for the production of physical goods. he term "labor" denotes the intellective resources present within human society, productively employed in the intellection of useful information. he scarcity of a physical good indicates a limited utilization of otherwise available natural resources %"land"& for the good)s production. *nergy is necessary for the extraction of the material and energetic resources required for the

8 production of a physical commodity. A physical commodity is no less than an embodiment of this energy, used in the reduction of physical entropy associated with a physical information gain. he scarcity of a physical commodity is ultimately the consequence of an insufficient supply of the useable energy that is necessary to maintain a rate of production. he provision of energy is limited by the rate at which this energy itself can be produced. he scarcity of a psychical or purely informational good indicates a limited employment of the human resources %"labor"& necessary for the good)s production, reproduction, or dissemination. 2nowledge as useful information is necessary for the impartation of the psychical information required for the production and reproduction of a psychical commodity. A psychical commodity is no less than an abstract embodiment of this useful psychical information, employed by the donor in the reduction of informational entropy associated with a psychical information gain. 'n turn, the usefulness of this psychical information is comprehended or experienced by the recipient. An inability of potential recipients to apprehend the otherwise usefulness of a purely informational good translates as lower demand and is a hindrance to dissemination. here is no reason for the donor to reproduce "pure" information for which there is no demand. he provision of adequate productive human resources is limited by and sub$ect to the rate at which this useful "pure" information can be imparted or acquired through such intellective processes as communication, education, or edification. Harenthetically, regarding the availability of human resources %"labor"& necessary for the production of a psychical good, an important consideration is that the real"world communicative processes of education and edification also entail the using up of "available energy" %exergy"emergy&. Assuming human intellection is an epiphenomenon of underlying physical processes within the human brain interacting with a broader physically"based societal milieu, the production of psychical information can also be analyzed in terms of an underlying physical entropy reduction. his suggests the development, employment, and maintenance of the necessary human resources as a factor of production for psychical goods, would require an appreciable physical energy. 19 @owever, after the first unit of a psychical or purely informational good has been produced, its reproduction does not require any significant amount of physical energy. As such, in principle, there is little or no natural limitation to the supply of a psychical good. (ithout the scarcity necessary for it to have economic value %a non"zero price&, then a purely informational good does not meet the strict definition of a "commodity". 'n order to be marketable, useful "pure" information must be commodified by artificially limiting its supply. hat which today)s economists term an "information good" most closely corresponds with the above notion of a "purely informational commodity". An information good is defined to be a type of commodity whose main market value is derived from the information it contains, rather than from any otherwise physical embodiment. 20 A generic example of an information good is anything that can be digitized.21 hat the information actually be digitized, is not required here. Clearly, the economic value of an information good which can be represented in a digital form, is derived from the information itself rather than from any corresponding digital data. 'nformation as a commodity is understood to be restricted in access, costly, and often only partially available. 22 hat is, an "information good" typically would be incompletely known, with a non"zero cost, and relatively scarce. "Hure" information conceptually has at least three characteristics which pose difficulties for its commodificationK information ideally has completely accessible content and is instantly available for everybody at no cost. @al 1. ,arian %-==6& explains how the above three properties of ideal information " unrestricted accessibility, zero cost, and unlimited availability " prove to be problematical for information to be an ob$ect of real market transactions. %-& 'nformational content must be experienced before its usefulness can be apprehended. ;ut then why would there be any demand for an information good if its complete content were already known to and, as such, received by the recipient< :n the other hand, an information good cannot be efficiently "priced" if its usefulness were incompletely known or its content were mostly inaccessible. %E& 'nformation typically has a high fixed cost of production but a low marginal cost of reproduction. hat is, it is costly to produce but cheap to reproduce. herefore, competitive markets tend to push the price of an information good to a marginal cost which is practically zero. %>& 'nformation goods are not naturally scarce. 0ue to the miniscule cost of reproduction, information goods are inherently non"rival, meaning that "one person)s consumption doesn)t diminish the amount available to other people". Also, information goods are presumptively nonexcludable, meaning that one person cannot necessarily exclude another person from accessing the information in question. A pure public good is both nonrival and nonexcludable. An information good, in its first instance, is a type of public good and therefore, as such, is not a proper ob$ect of market transactions. 3evertheless, information as an economic good seems to be dealt with rather well by real markets. @owever, there is one caveatK commodification requires that the market structure for most information goods be one of imperfect or monopolistic competition. ,arian %-==6& outlines a few marketing strategies for information goodsK "previewing" to

9 engender consumer demand and thereby overcome the "experience" problem, "product differentiation" to avoid trading in a competitive market and thereby overcome the "zero marginal cost" problem, and "artificial scarcity" to overcome the problems of nonrivalness and nonexcludability, which would otherwise preclude any real market for private information goods. "Artificial scarcity describes the scarcity of items even though the technology and production capacity exists to create an abundance."23 he term is aptly applied to any non"rival information good, since there is no natural limitation to its supply. herefore, in order for an information good to be the proper ob$ect of real market transactions, it must be excludable according to some type of legal regime. 9or instance, in most countries intellectual property laws % copyrights, patents, etc.& exist which permit information goods to be excludable. @ence, the scarcity of an information good is artificial rather than natural, in that such scarcity is a matter of mere legal convention rather than of an intrinsic property of the good itself. Concluding, this ' *, posits that an economic good is a form of useful information which may be more or less physical or psychical. As a form of reified knowledge, the information content of an economic good is evaluated by the human intellect "" qualitatively with respect to the usefulness of its information content and quantitatively with respect to scarcity as indicated by its marginal information gain. #ince the psychical or purely informational content of a good is not naturally scarce, commodification of such useful information may require its supply be artificially limited. Cenerally, an ' *, commodity is scarce because of limited human resources %"labor"& to acquire or impart the necessary useful information and because of limited natural resources %"land"& to provide the necessary energy for its production. he use of energy for the purposes of producing an economic good requires the communication of useful information. As previously stated, although the direct use of energy is required for the production of physical commodities, energy is also used, albeit indirectly, in the production of psychical commodities. @ence, it would seem that the basis of information use is energy and the basis of energy use is information. he precise relation between information and energy is regarded here to be a non"trivial question whose answer is perhaps outside the competency of "economics" per se. 9rom the point of view of economics, much would be gained if the basis for the production of an economic good could be reduced exclusively to information or exclusively to energy "" that is, either energy use could be analyzed entirely in terms of "information" or information use could be analyzed entirely in terms of "energy". @owever, no present resolution is here forthcoming to this question. 3evertheless, when considering the use of information and energy as the basis for economic value, because the source of useful information is +abor and the source of energy is +and, it is noteworthy that these respective primary factors of production can be presumptively taken to be interdependent. An ' *, commodity is a reification of a form of knowledge shared between and evaluated by both the producer and consumer. Clearly, regarding this same informational content, the scarcity of a commodity, as supplied, is ob$ectively determined by the donor"producer, and its usefulness, as demanded, is sub$ectively ascertained by the recipient"consumer. herefore, price discovery in the marketplace is the result of the respective supply"demand interplay of the ob$ective donor"type and sub$ective recipient"type evaluations of the same useful information. he suggestion here is that this Information Theory of Economic Value points to a conceptual synthesis of the otherwise opposing donor and recipient paradigms.

*"''ar$
heories of economic value are typified according to the basis by which the value of a commodity or service is linked to a market price through the mechanism of exchange between producer"donor and consumer"recipient. he market price of an economic good generally reflects an ob$ective, donor"type evaluation if viewed from the production side, and a sub$ective, recipient"type evaluation if viewed from the consumption side. @istorically, consideration of the basis for economic value has given rise to different schools of economics which paradigmatically are either donor"type or recipient"type. An ob$ective donor"type +abor heory of ,alue was posited by the early Classical economists. he "labor" value of an economic good is ob$ectively measurable by the quantity of human work required for its production. he later 3eoclassical economists presented a sub$ective, recipient"type !arginalist heory of ,alue by basing economic value on "marginal utility", thereby addressing Adam #mith)s criticism of a strictly utility"based theory. 9or the "marginalist" school the capacity to satisfy sub$ective human wants is the overriding factor in the valuation of goods. he scientific discovery that the physical world is governed by laws of thermodynamics implied the possibility of conceptualizing economic value in terms of energy or entropy. he disciplines of *cological and ;iophysical

10 economics attempt to apply the laws of thermodynamics to economic theory. o this end the question arises whether "energy" or "entropy" is the more correct basis for the evaluation of an economic good. An *nergy heory of ,alue posits the value of an economic good is ob$ectively measurable by the quantity of physical energy used up in its production. A simple definition of )energy) is the capacity to do work. Conceptually analogous to the +abor theory, an *nergy heory of ,alue is an ob$ective donor"type theory whereby physical, thermodynamically"defined work is instead taken to be the basis of economic value. All productive human activities use up "available energy" for the extraction and transformation of low entropy from the environment. Accompanying the production of economic goods is a reduction of entropy within an economic system. herefore, it is natural to relate economic value to low entropy. An *ntropy heory of ,alue posits the value of an economic good reflects the natural, sub$ective predisposition of human beings to favor low entropy sources. A simple definition of )entropy) is a state of disorder. herefore, the inherent ordering and arranging of matter associated with the production of an economic good results in an appropriately specific reduction of physical entropy which, ipso facto, has psychical favor with the consumer. his observation offers a straightforward path from an entropy theory of value to the sub$ective "utility" theory. Conceptually analogous to the !arginalist theory, an *ntropy heory of ,alue is a sub$ective recipient"type theory whereby a reduction of entropy is instead taken to be the basis of economic value. A corollary to (alrasian "general equilibrium theory" is that any psychical good can be priced in terms of need" satisfying physical good. Although the satisfaction of sub$ective human wants is highly variable among human beings, there is relatively little variation regarding the ob$ective, normalized measure of the sufficient physical good required to satisfy physical need. 'n turn, the production of such purely physical good corresponds with ob$ectively measurable reductions of physical entropy. #hannon)s 'nformation heory associates "information" with a reduction in uncertainty, as indicated by an order or arrangement of data such that information gain corresponds to a type of entropy reduction. ;ecause informational data can be either physical or psychical, "information theory" offers a framework whereby the "energy" and "entropy" theories of value conceivably could be synthesized into a unified "information theory of economic value". 'ndeed, postulating an economic good is a form of useful information, allows for a reconceptualization of the notion of a "commodity" to include economic goods which are characteristically psychical, not necessarily physical, and perhaps purely informational. his notion of a "purely informational commodity" most closely corresponds with what today)s economists would term an ideal "information good". 'nformation goods are dealt with rather well by real markets. he commodification of useful information requires a degree of scarcity regarding the supply of physical or psychical information necessary for producing such "useful information". hat is, useful information has economic value only if there are practical limits to the utilization of natural resources for the production of physical information or to the employment of human resources for the dissemination of psychical information. 0istinct from simple information, "useful information" can be defined to be a type of "knowledge". herefore, by reconceptualizing an economic good to be a form of reified knowledge, an Information Theory of Economic Value is here proposed which offers an overarching synthesis of the otherwise opposing ob$ective donor and sub$ective recipient paradigms.

Value Theory -. httpKLLen.wikipedia.orgLwikiL,alueMNE6economicsNE= E. httpKLLen.wikipedia.orgLwikiL heoryMofMvalueMNE6economicsNE= >. @oward . :dum %-==/& Environmental Accountin , Ch.-D, p. E/7 httpKLLen.wikipedia.orgLwikiL,alueMtheoryO*conomics httpKLLwww.wisegeek.comLwhat"is"value"theory.htm +abor an% /ar0inali1t theorie1 o2 3alue D. httpKLLwww.eoearth.orgLarticleL,alueMtheoryOClassicalM*conomics A httpKLLwww.eoearth.orgLviewLarticleL-F76EFOClassicalM*conomics B

11 F. httpKLLwww.eoearth.orgLarticleL,alueMtheoryO3eoclassicalM*conomics A httpKLLwww.eoearth.orgLviewLarticleL-F76EFO 3eoclassicalM*conomics B Ener0y theory o2 3alue /. httpKLLdelong.typepad.comLsd$LE77FL7DLlireMleMcapital.html .. httpKLLen.wikipedia.orgLwikiLCost"of"productionMtheoryMofMvalueO@istoricalMdevelopmentMofMtheory 6. httpKLLwww.eoearth.orgLarticleL;iophysicalMeconomics A httpKLLwww.eoearth.orgLviewLarticleL-F7//F B =. httpKLLen.wikipedia.orgLwikiL echnocracyMmovementOciteMref"E/ httpKLLwww.eoearth.orgLarticleL;iophysicalMeconomicsO*arlyM wentiethMCentury A httpKLLwww.eoearth.orgLviewLarticleL-F7//FO*arlyM wentiethMCentury B -7 a,b,c httpKLLwww.eoearth.orgLarticleL,alueMtheoryO4nitMofMAnalysisM> A httpKLLwww.eoearth.orgLviewLarticleL-F76EFO4nitMofMAnalysisM> B --. httpKLLwww.eoearth.orgLarticleL;iophysicalMeconomicsO heM-=.7s A httpKLLwww.eoearth.orgLviewLarticleL-F7//FO heM-=.7s B -E. @oward . :dum %E77.& Environment! "o#er! and $ociety for the T#enty%first &entury , Ch.D, p. /= ->. 3icholas Ceorgescu"1oegen %-=.-& Entropy 'a# and the Economic "rocess, Ch.-7, pp. E6-"E6> Entro&y theory o2 3alue -D. 8ing Chen %E77F& The "hysical (oundation of Economics % An Analytical Thermodynamic Theory AhttpKLLweb.unbc.caLPchen$Lbook.pdfB -F. 8ing Chen %E77F&, Chapter -KThe Entropy Theory of )uman *ind, AhttpKLLweb.unbc.caLPchen$L-.pdf %p.-&B -/. 8ing Chen %E77F&, Chapter EKThe Entropy Theory of Value , AhttpKLLweb.unbc.caLPchen$LE.pdf %pp.E,F,=&B To4ar% a uni2ie% economic theory o2 3alue -.. httpKLLen.wikipedia.orgLwikiLCeneralMequilibriumMtheory ro&o1al5 6n2ormation theory o2 economic 3alue -6. httpKLLwww.differencebetween.netLlanguageLdifference"between"knowledge"and"informationL httpKLLwww.differencebetween.netLlanguageLdifference"between"data"and"informationL -=. Emer y in 'abor + Approaches for Evaluatin ,no#led e % ;ergquist, 'ngwersen, +iebenow & A httpKLLwww.cep.ees.ufl.eduLemergyLdocumentsLconferencesL*1C7/ME7-7L*1C7/ME7-7MChapterMD-.pdf B Emer y Evaluation of Educational Attainment in the -nited $tates % Campbell, +u, 2olb & A httpKLLwww.cep.ees.ufl.eduLemergyLdocumentsLconferencesL*1C7/ME7-7L*1C7/ME7-7MChapterMD7.pdf B E7. httpKLLen.wikipedia.orgLwikiL'nformationMgood E-. @al 1. ,arian %-==6& *ar.ets for Information /oods A httpKLLpeople.ischool.berkeley.eduLPhalLHapersL$apanL$apan.htmlO#*C ':3777E7777777777777777 B EE. httpKLLen.wikipedia.orgLwikiL'nformationMgoodO*conomicM heoryMandMtheMtreatmentMofM'nformation E>. httpKLLen.wikipedia.orgLwikiLArtificialMscarcity Summary