Venue:

Narxoz University, Almaty, Kazakhstan https://narxoz.edu.kz/

Topic:

A Hypothesis for Unifying the Main Theories of Value on a Common Ontological Foundation and Its Practical Implications for Academic Practice.

     1.   Introduction:

Good afternoon! Thank you to everyone who took the time to listen to me today. I will present a hypothesis about the Probabilistic-Temporal Nature of Value. This is not yet a fully formed theory, but a set of hypotheses within a unified approach that requires testing. For brevity, I will use affirmative language, but it is important to remember that this is a hypothesis in the development stage.

So, the question of the nature of value, as value as opposed to price, remains unresolved to this day since the time of Aristotle. We understand that value is not equal to price, but we still do not understand its nature.

     2.   Main Schools of Value:

Currently, three main schools of value have emerged.

• Cost-based, primarily Labor-based.
• Marginal.
• Behavioral.

Besides the first, which understands value as an expression of socially useful labor, the other two perceive value as an exogenous factor. Each school describes a specific class of economic phenomena well and generally complements each other.

• The labor school cannot explain the often significantly different prices of goods or services whose creation required the same socially useful labor and time, or the very different prices for the same product in different markets or for different market participants.
• Marginalism, the main school today, declares value to be entirely subjective, i.e., it relegates it to the realm of psychology rather than economics. It relies on the concept of abstract utility, which is unobservable, measurable, and non-aggregatable. It is unable to explain irrational or altruistic consumer behavior, nor the intransitivity of preferences.
• The behavioral school has shifted its focus to cognitive biases in decision making and irrationality in consumer behavior, i.e., It has deliberately limited its scope of functionality.

As a result, we are quite good at modeling the behavior of economic agents because we have thoroughly studied the manifestation of value, but we do not understand its underlying basis.

     3.   The PTTV Hypothesis:

I propose the following hypothesis:

The nature of value is probabilistic and temporal, and the value of any resource is the expected time it can transfer to a system (individual, family, company, nation), taking into account the probability of fulfilling this function:

V = T * P

Where:

T: the amount of time the resource can add to the system expected by the system (saving time on completing a task and/or extending its life);

P: the probability that this resource will transfer the expected time.

For example, if a medicine prolongs life by 10 years with a 50% probability, then the value of the medicine is 5 years.

As you can see, value, unlike price, is measured in units of time. It is important to understand that we are talking about objective physical time, not the subjective perception of time.

What does this hypothesis give us?

• An ontological justification for all three main schools of value, without rejecting them.
• Reconciliation of the concepts of subjective and objective value.
• Aggregation of values.
• Interpersonal, intermarket, and intertemporal comparisons through the "zero point."
• Explanation of well-known economic phenomena.
• New predictions, new mathematical apparatus, new tools in economics.

I will immediately note that this concept of value is not a new name for "utility", since utility is abstract, immeasurable, ordinal, incomparable for different economic agents, and has no "zero" point. Value, on the other hand, as time is concrete, measurable, cardinal, comparable, and has a "zero" point.

Let's continue.

     4.   The Basis for the Probability-Time Theory of Value:

What are the basic ideas underlying the PTTV hypothesis?

The hypothesis of the probabilistic-temporal nature of value is based on the following set of assumptions and observations.

• Value is inherent in anything that can satisfy the key need of any economic system, which is survival in nature and society, both biologically and socially. This thesis is based on the theory of evolution and the natural need of any system for survival. It should be noted right away that survival goals are achieved through the entire range of tools developed by evolution: from extreme egoism – I, in my own person, will save humanity, a nation, or a family – to extreme altruism – I, in someone else's person, will save humanity, a nation, or a family.
• Value is perceived not directly, but through a complex prism of indirect signals from biological and social assessment tools developed by natural and social selection. We don't want energy – we want food. We don't seek procreation—we want sex. We don't think in terms of social survival—we strive for self-realization, status, and wealth.
• People's needs and preferences are subject to statistical laws; this is still an open empirical question, but they are most likely described by a distribution similar to a lognormal distribution, based on the Central Limit Theorem. I should immediately note that the distribution itself is not critical for the PTTV.
• The value of a resource is linearly determined by the time this resource can provide to an individual.
• The value of a resource is necessarily determined by the risk of non-satisfaction of the need, i.e., by the risk that the expected time will not be realized. Since value is time that we will receive in the future, there is always a possibility that the expected time will not be fully realized. This is why a dollar today is better than a dollar in 10 days, as its purchasing power may decline.
• Expected time and expected risk are subjective assessments. An individual never has sufficient information and computational resources to accurately evaluate them in a situation of everyday uncertainty.

     5.   A Common Ontology for the Main Schools of Value.

The probabilistic-temporal approach does not reject or contradict the main schools of value theory; on the contrary, it serves as a unifying meta-hypothesis for them.

• Labor truly creates value. Any good or service allows a buyer to live longer or better, or increases the consumer's available time by increasing the probability of obtaining what they want. For example, an experienced tailor will sew a suit that fits you perfectly with a much higher probability than if you tried to sew it yourself. But not all labor creates value, and different people value the same products of labor very differently, since value lies not in the labor itself, but in its results.
• Each subsequent apple eaten does indeed bring less and less benefit, as the theory of marginal utility indicates. However, this is only because with each apple eaten, the probability of non-survival decreases. Economic agents do indeed generally try to maximize utility, but only because they want to increase their chances of survival. However, you value an apple that someone is trying to take away from you more highly than an identical one that is given to you because the loss threatens survival more than the acquisition prolongs life.
• Humans do indeed often act "irrationally," but this is not the result of a malfunction of the economic program. It is the result of the use of biological signals in the social environment. What behavioral economics describes perfectly are the results of subjective overestimation or underestimation of risks and the expected time gained. Students do indeed begin to eat more healthy food if it is placed at the beginning of the cafeteria belt, but not because they are irrational, but because biology compels them to eat what is available at a particular moment, since food may no longer be available later.

Thus, the concepts of the basic theory of value act as special cases of the PTTV, rather than being rejected by it.

Let's move on to the key conclusions of the PTTV hypothesis:

     6.   Key findings. Subjective and objective value.

An individual perceives value subjectively through a system of biological and social signals:

V_s = T_s * P_s   

where S is a marker of subjectivity.

For example, one person believes that a certain dietary supplement will almost certainly help him lose significant weight and is therefore willing to pay a good price for it. Another considers it a marketing ploy and is not willing to pay a penny for it.

On the other hand, we know perfectly well that both time and probability can be measured entirely objectively. For example, if you hire a professional roofer to replace your roof, they will not only complete the job much faster than you, but they will also be more likely to achieve the desired result. The difference in time between how quickly you and the roofer complete the task is entirely objective and does not depend on your opinion or perception. The same applies to the probability of you and the roofer completing a task to the required standard – it depends on dexterity, skill, and experience, but it doesn't depend on your subjective perception of reality.

Where is objective value if it depends on the recipient of the value? There's no contradiction here. For example, eyeglasses may have objective value for one person and not for another. The value of specific eyeglasses or the roofer's services, or any other resource, is objective, but it's objective in relation to you. That is, such value isn't universal, in the sense that it's the same for everyone and at all times, but it's no less objective for that.

As a result, we arrive at a similar formula for individual objective value:

V_i = T_i * P_i

Where:

T_i: the expected objective amount of time the resource can add to your life by saving you time and/or extending your life;

P_i: the probability that this resource will perform as it does, relative to your current capabilities.

Now, if we collect all V_i values ​​in a given market, we obtain an array of V_i values ​​in the form of a certain distribution. This distribution is the desired objective (universal) value of the resource in this market. Thus, objective value is not a point or a function—it is a distribution that is independent of prices. And price is the cutoff of this distribution by supply and demand.
Value is simultaneously objective, since time and probability are measurable physical quantities, and subjective, since it is perceived individually by a specific individual. This contradiction is resolved by statistics: individual objectivities form a common objective distribution.

     7.   Key Conclusions. Convergence of V_s to V_i

There is every reason to believe that there is a statistically significant positive correlation between V_s and V_i over long periods or with a large number of transactions. Yes, bubbles exist, but they inevitably burst sooner or later precisely because of the wide divergence of these values. I believe that V_s converges to V_i for the following reasons. If the subjective value of some market participants is higher than the objective value, then with a large number of transactions at "inflated prices," these market participants are more likely to go bankrupt and are forced to adjust their perception of value. If the subjective value of some market participants is lower than the objective value, they will forgo profitable deals in favor of goods with a relatively inflated subjective value until the mechanism described above forces them to return to the product. As a result, it is now almost impossible to convince anyone to buy a tulip bulb at the price of a house.

This mechanism allows us to identify market bubbles—i.e., situations where V_s significantly deviates from V_i on a large scale—before they burst. This is beyond the capabilities of marginal theory, which considers any price objective within the framework of the efficient market concept, since it reflects all available information and all agents act as rationally as possible.

     8.   Key Conclusions. Aggregation and the Market.

Understanding objective value as a distribution of individual objective values implies the possibility of aggregating such values. But is this even possible, since an engineer's time and a pensioner's time are worth completely different amounts?

The Sonnenschein–Mantel–Debreu (SMD) theorem argues against such aggregation. In simple terms, it sounds something like this: even if every individual in the market behaves perfectly rationally, the behavior of the entire market could be anything. This is because the preferences of market participants are not commensurable and incomparable. It is impossible to aggregate preferences in the market in this way, and this is a proven mathematical fact.

However, the point is that the SMD theorem speaks of heterogeneous preferences among market participants, expressed in prices, while the PTTV speaks of homogeneous value, expressed in units of time. We cannot say that an engineer's time and a pensioner's time have different values, since time is value. Arguing that they have different values ​​is like arguing that a meter of an engineer’s height is not equal to a meter of a pensioner’s height. We can only assert that an engineer's time and a pensioner's time are converted into money differently.

That is, the PTTV does not deny the SMD theorem, but limits its validity to the behavior of preferences, while proposing a normative, true, and measurable distribution of the value of individual V_i. Ultimately, the PTTV is not simply compatible with the SMD theorem; on the contrary, it is a logical extension and shows a way out of the problem the SMD theorem revealed. Thus, the PTTV does not challenge the SMD theorem, but embraces it and offers a fundamentally different—statistical—view of the economy, where the micro- and macro-levels are linked through measurable distributions, potentially enabling a transition from microeconomics to macroeconomics.

     9.   Key Conclusions. Zero Point.

If value is potentially transferred time, then it has all the properties of time, in particular, a zero point. This is not an arbitrary zero as in a utility curve, but a physical zero. Such a point allows not only to compare different values ​​but also to measure them.

The measurability of value makes it possible not only to assert that one resource is more useful than another, but also to indicate by how much. This allows for interpersonal, intermarket, and intertemporal comparisons, eliminating the very complex and highly subjective adjustments for inflation, exchange rates, and interest rates. For example, one can compare not only the value of a television in the USSR in 1983 with the value of a television in the US in 1974, but also, in theory, compare something as exotic as the value of a laptop today with the value of a bronze axe in Egypt during the construction of the Great Pyramid of Giza.

The zero point allows one to estimate the value of projects, goods, and services that have no analogues or no cash flows at all—for example, a new drug or a public park.

This makes it possible to identify resources or projects with negative value.

Currently, the PTTV lacks a mathematical framework due to the very young age of the theory, but the presence of a natural zero and a cardinal value scale allows for the application of standard mathematical statistics and optimization tools. In particular, it becomes possible to:

• normalize the distributions of individual values,
• introduce density functions,
• construct loss functions reflecting the discrepancy between subjective and objective value assessments.

This opens the possibility of formalizing the behavior of economic agents as a process of minimizing estimation error, which is unavailable within ordinal utility models.

     10.   Old Phenomena and Paradoxes in a New Light.

Let's look at well-known economic concepts and paradoxes through the lens of PTTV.

"The Water and Diamond Paradox." According to marginal theory, although water is critical to life, it is significantly less valuable than a diamond, as water is abundant and the marginal utility of the last glass is very low, while diamonds are scarce and even the last available one is very important to someone. From the perspective of the PTTV, it's not the rarity itself that matters, but the ability and probability of a resource to extend a subject's life. Water, although important, offers a very short lifespan, which is why we drink so often. But in our society, a diamond, due to social status through exchange for other goods, will provide its owner with a much greater lifespan than a glass or even a bucket of water. To be precise, there is no paradox, but rather a confusion between price and value. If there were only one glass of water left on Earth, its subjective value would skyrocket, as without it you would die. So you'd be willing to give up all the diamonds in the world. The price of water would rise dramatically, following its subjective value. However, this glass would give you roughly the same amount of lifespan as it would otherwise, meaning its objective value would remain unchanged. Generally, rarity, like price, is a convenient indicator of value, but not its cause.

The "availability heuristic" effect from behavioral economics, where people assess the probability of an event or the importance of a phenomenon based on how easily relevant examples come to mind, rather than based on actual statistics. For example, after watching news about an epidemic, a person subjectively overestimates the risk of infection and underestimates the risks of more everyday illnesses, even though statistically the latter risk is higher. From a PTTV perspective, this is also no surprise. Since our assessment of the importance (value) of an event is shaped, among other things, by biological mechanisms for assessing survival risks, an event that occurred or was mentioned recently is perceived as more probable because it has left a stronger imprint on the nervous system. In a sense, an event that occurred a week ago seems to occur with a frequency of once a week, while one that occurred a year ago seems to occur with a frequency of once a year.

The wealth effect, namely, the change in demand caused by a change in wealth while prices remain constant. In the marginal school, a person maximizes utility but is constrained by resources (budget), and when available resources change, the optimal choice changes. If a person's budget grows, they begin to consume more normal goods but fewer inferior goods. The marginal school doesn't explain the difference in the nature of normal goods from inferior goods—it's a given, a property of them. However, an increase in wealth doesn't always lead to increased consumption. This is considered a paradox. From the perspective of the PTTV, it's not the volume of resources that matters, but rather how much they increase the probability of survival, or, in other words, how much they reduce the risk of a bad future. If a person is confident about the future, they can spend more, even with decreasing wealth. But if they are unsure, i.e., the risk of survival decreases, they begin to spend less, even with increasing wealth. Naturally, most people associate increasing wealth with increased life expectancy, but the PTTV also describes well the paradoxes of the wealth effect, when people act in exactly the opposite way. Moreover, the PTTV allows us to formalize the distinction between normal and inferior goods: normal goods provide an increase in time in both the short and long term, while inferior goods provide an increase only in the short term. Therefore, quinoa soup may be a solution during times of acute famine, but as soon as the situation improves, its consumption drops sharply or ceases altogether.

In marginal utility theory, preferences for goods are transitive, which ignores reality and, in particular, the "preference reversal effect." In the PTTV, this is a natural state when subjective assessments of value deviate from their objective value.

     11.   Results and Prospects.

Let me summarize the main results.

The hypothesis of the probabilistic-temporal nature of value allows:

• Creates an ontological unifying foundation for the main schools of value theory.
• A different perspective on the relationship between the subjective and objective in economics.
• Offers a cardinal concept that allows for the direct measurement of value, interpersonal, intermarket, and intertemporal comparative analysis of value, and the valuation of assets that have no analogues or cash flows.
• Allows for the aggregation of values, thereby potentially creating a bridge between micro- and macroeconomics.
• Allows for a different explanation and description of well-known economic phenomena and paradoxes.
• Integrates economics with other sciences, particularly physics, sociology, psychology, and biology.

However, since this is a very young hypothesis, it does not yet have:

• Mathematical apparatus
• Empirical basis
• A well-formed theoretical core
• Educational and methodological materials.

I invite everyone not only to criticize but also to collaborate, and I welcome any constructive participation.

My contact information is on the slide.

I am happy to answer your questions.