The Lauderdale Paradox
In 1819, James Maitland, Lord Lauderdale, reasoned that any good that nature provides plentifully and freely, no one has any reason to purchase. It cannot fetch a price in a competitive market, even where markets for it exist, and so it has no exchange value - this is, no one can get anything in exchange for it. The result is a paradox. The more freely and lavishly nature benefits us, the lower the price the "marginal" unit of a natural product or service will fetch or, to say the same thing in other words, the less exchange value nature will possess.42
Manna from Heaven illustrates Lauderdale's paradox. According to Scripture, enough manna fell from Heaven during the Exodus to provide the Israelites with plenty of bread. Accordingly, no one had a reason to gather or hoard more manna than he or she could consume. The Israelites, the Bible tells us, stored up manna to eat on the Sabbath since none fell on that day. Since everyone could easily acquire as much as he wished without charge, the marginal unit of manna could not command a market price. Manna had no economic value (in the sense of a market price or exchange value) except perhaps on the Sabbath when it did not fall from Heaven (Exodus 16: 23-26).
The principal condition for production, exchange, and therefore economic value, Lauderdale argued, is scarcity. He defended two principles:
1. That things [with desirable qualities] are alone valuable in consequence of... existing in a certain degree of scarcity.
2. That the degree of value which every commodity possesses, depends upon the proportion betwixt the quantity of it and the demand for it.43
For Lauderdale, "economic value" should be understood in terms of what Adam Smith called "value in exchange" or what can be obtained in exchange for that good. Lauderdale thought that value thus defined can be located at the intersection of supply and demand for the incremental unit of that good, that is, at its price in a competitive market. Economic theory suggests that competition drives consumer prices down to producer costs. Goods that cost the least to produce - no matter how beneficial they may be to the consumer - will fetch the lowest prices, especially if supply vastly exceeds demand.
Market price or "value in exchange" does not correlate with benefit - however one understands that concept. That you inhaled a lot of air yesterday, for example, does not make the air you breathe any less beneficial today. As long as the air you breathe is abundant and free, however, its price is zero. It lacks value in exchange; that it is beneficial, even exigent, does not determine its price. Benefit does not correlate with price but may even vary inversely with it: for example, the best things in life are free.
Advances in technology, by driving down the production costs of a good, lower its competitive market price. The consumer pays less for his or her next purchase but may obtain the same or a greater benefit. Any phone call may soon be free - the Internet already allows this - and thus it will have no market price. The benefit of a call to 911, to your bookie, or to your broker remains the same. When the antibiotic Cipro lost its patent, generic equivalents appeared at a tenth of the price. The "next" prescription may do just as much good even if it costs ten times less.
Today the music industry is full of fear and loathing because potential consumers are ripping and burning songs for free for which they paid big bucks a few years ago. The entire industry, which once earned billions, may go bankrupt because no one will buy what he or she can acquire gratis. People enjoy the music - now on their iPods - more than ever, but they use the money they spent on music to purchase other things. The price the music fetches in a competitive market is zero; the "value in exchange" is zero; but the benefit is as great as ever. The music industry, of course, cannot stay in business if its product cannot fetch a price - if everyone gets as much as he or she wants for free. Nature can benefit everyone freely, however, without worrying about creating scarcity by policing intellectual and other property rights. It has no operating costs.
Continue reading here: The Supply Of Fresh Water
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