Dredging Up A "Valued" College Paper

I stumbled across a paper I did for my Accounting Theory class in college. It was more of an economics paper masquerading as something I could slip by, and the professor was correct that I should have emphasized the accounting theory relevance more. Her comments I will reproduce at the end, after the footnotes that signal the end of the paper I transcribed.

Accounting Theory was basically the capstone course for an accounting degree as the major existed at the time. That was where we went into the operations and decisions of FASB, the theoretical ways things could be done versus the practical accomodations that were sometimes made, and also some advanced or breaking topics like capital leases.

What follows, contents of the title page through the footnotes, is my paper on theory of value and money:

December 8, 1986

The Value Of A Thing...

...Is what that thing will bring. What does this maxim mean, and what relevance does it have to the accounting realm?

The concept of value is most central to accounting. We attempt to measure and record value and changes in value. Such an elemental factor to accounting, indeed, to the entire theory of capitalism, deserves to be examined and understood by the profession. Just as it is necessary to check your moral premises at times, so should we check our most basic premises when seeking to solve or evaluate accounting issues.

This paper seeks to explore, though far from exhaustively, the notion of value and its cognates. The objective is to provoke some thought on a most basic topic, pointing out the advisability of considering such root issues in formulating accounting policy.

When we think of value, certain things come to mind. There must be something to value. There must be someone to whom it is of value. In fact, this is a key point to the value concept, one to which we shall return.

When people think of value, they might think of property, money, wealth, worth, or other allied terms. As a starting point, the dictionary becomes handy.¹

¹Value _n 1: a fair return or equivalent in money, goods, or services for something exchanged 2: the worth of a thing: market price, purchasing power, or estimated worth

²Value _vb 1: to estimate the monetary worth of 2: to rate in usefulness, importance, or general worth

²Worth _n 1: monetary value: the equivalent of a specified amount or figure 2: the value of something measured by its qualities or by the esteem in which it is held 4: wealth, riches

Wealth _n 3: all property that has a money or an exchange value; also: all objects or resources that have usefulness for a man

Money _n 1: something accepted as a medium of exchange 2: wealth reckoned in monetary terms

Property _n 2: something owned

Utility _n 1: usefulness 2: something useful or designed for use

This last term is included due to its common use in economics.

So where do all these definitions lead us? Certain factors are in evidence: usefulness - to someone, property - owned by someone, exchange - of something with someone. Permeating all of this is money.

Before continuing with a discussion of money, let it be clear that "property," or "goods," or "commodities," as used henceforth in reference to value and exchange, should also be construed to include "services." Aside from the convenience in lumping terms, this is in keeping with the premise that a man owns his own life, and is free to utilize or exchange his services freely to obtain wealth. Thus property rights assume property as an extension of man's life.

Money is a medium of exchange. Money is not true wealth, though often mistaken as such. Money arose to make exchange transactions easier, since barter has limits. According to Robert Ringer: "Money, then, is nothing more than a commodity. But it has one great distinguishing feature: It is highly acceptable to most people as a medium of exchange. In order for people to accept money in exchange for goods and services, they must have confidence that others will in turn accept it from them in exchange for things they subsequently will want to acquire."²

Ayn Rand had much to say about money: "...it is a tool of saving, which permits delayed consumption and buys time for future production. To fulfill this requirement, money has to be some material commodity which is imperishable, rare, homogeneous, easily stored, not subject to wide fluctuations of value, and always in demand among those you trade with."³ "Money is a tool of exchange which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must give value for value."⁴ "Money rests on the axiom that every man is the owner of his mind and his effort. Money allows no power to prescribe the value of your effort except the voluntary choice of the man who is willing to trade you his effort in return. Money permits you to obtain for your goods and your labor that which they are worth to the men who buy them, but no more."⁵

Why so much on money? The theories of value and money are so intertwined that a discourse on one can not exclude the other. More to the point, money is the unit of measurement of accounting. It provides the means for recording values and comparing values in a meaningful way. It is vital to the transition from subjective to market value.

A serious accounting problem has been "price level" changes. The historical cost principle has been battered around by inflation. The profession has developed methods of varying merit in an effort to cope with it. Measurement is difficult indeed if the ruler keeps changing length. There lies the problem: the current status of money. Fiat currency which can be arbitrarily manipulated at the whim of the issuing government is the problem, rather than just flaws in accounting theory. There is merit to the question of whether issuing currency is even properly a function of government. Regardless, stable money would make easier the measurement of real fluctuations in values. Monetary theory should not be left solely to economists, for accountants are end users of sorts in the practical application of such theories, and would do well to make their input heard.

The idea of value, as stated previously, rests on the existence of someone to whom a thing is of value. It is a subjective judgment by a living, thinking entity capable of rationally making such judgments. A comparison is made, in which two things may be judged equivalent, or one may be deemed more valuable. This implies that different individuals may not apply equal assessments of value to the same object. In a voluntary exchange, the item given up is of lesser subjective value than the item received, leaving both parties better off. One may indicate examples in which this is apparently untrue, but this can be explained by non-physical utility derived from the exchange. Exchange transactions lead to creation of wealth. An individual may apply his efforts to his property to improve it, thereby increasing his wealth. If human action and free trade is the source of wealth, then it is constantly being created , summarily dismissing the notion of static wealth.

Clearly, the previous discussion simplified matters into pre-monetary, barter terms. That does not diminish its significance. Before continuing further, it behooves us to sample what others have to say on value.

From Rand: "The market value of a product is not an intrinsic value, not a 'value in itself' hanging in a vacuum. A free market never loses sight of the question: Of value to whom? And, within the broad field of objectivity, the market value of a product does not reflect its philosophically objective value, but only its socially objective value."⁶

She goes on to explain philosophically objective value as that "estimated from the standpoint of the best possible to man." Socially objective value is "the sum of the individual judgments of all the men involved in trade at a given time, the sum of what they valued, each in the context of his own life."⁷

"The economic value of a man's work is determined, on a free market, by a single principle: by the voluntary consent of those who are willing to trade him their work or products in return."⁸

"'Value' is that which one acts to gain and/or keep. The concept 'value' is not a primary; it presupposes an answer to the question: of value to whom and for what?"⁹

From Von Mises: "Value can rightly be spoken of only with regard to specific acts of appraisal. It exists in such connexions (sic) only; there is no value outside the process of valuation. There is no such thing as an abstract value. Total value can be spoken of only with reference to a particular instance of an individual or other valuing 'subject' having to choose between the total available quantities of certain economic goods."¹⁰

He goes on to speak of the unmeasurability of objective exchange value, and the misleading but convenient use of money in doing just that.¹¹

From the discussions to this point, certain things are evident. The economic term "value" has a basis in philosophy, and is related to "value" or "values" in the non-physical sense. This is especially true to whatever degree utility is subjectively attached to intangible or psychic properties, rather than objectively reckoned characteristics.

Market value is not unrelated to the value judgments of the market participants. In an unrestricted trading environment, the market price is derived by the dynamic interaction of the relative valuations of the various parties involved. Market value is not the same as optimum value. Optimum value is the judgment of the individual most knowledgeable, whose personal context is most pertinent to judging value of a specific object.

Finally, money is inextricably involved in valuation as a measurement tool. It makes value seem conceptually less abstract. Money has value in terms of the commodities it can be exchanged for, but it is not inherently valuable unless it is itself a physical commodity. (for example, gold or stringently gold based currency) According to Von Mises: "The subjective value of money must be measured by the marginal utility of the goods for which the money can be exchanged."¹² He discusses the establishment of an exchange-ratio between money and commodities, and the fact that there is a continuity of influence of past value on current valuation.¹³

A most notable factor in favor of money as a unit of measurement is its universal nature. That is, it may be used in exchange for a vast array of dissimilar goods, while itself maintaining uniformity enough to compare amounts expended with a degree of objectivity. The danger lies in making comparisons over time. When the exchange ratio of money to goods changes more rapidly than the subjective value of commodities, comparability between time frames ceases.

There is much to be learned about value and monetary theory. Failure to consider these, at the very basis of accounting, would be culpable indeed. Von Mises pointed out problems in accountancy in the early 1900's: "But there are also shortcomings in accountancy that are due to the uncertainty in its valuations that results from the liability to variation in the value of money itself. Of this, the merchant, the accountant, and the commercial court are alike unsuspicious. They hold money to be a measure of price and value, and they reckon as freely in monetary units as in units of length, area, capacity, and weight. And if an economist happens to draw their attention to the dubious nature of this procedure, they do not even understand the point of his remarks."¹⁴

It is time for the profession to strive harder for economic understanding, to attain realization of the economic basis of our purported aims, and to achieve more realistic results by so doing.

1. All dictionary definitions come out of The Merriam Webster Dictionary, New York, New York, Pocket Books, 1974



2. Ringer, Robert J., Restoring The American Dream, New York, New York, CBS Publications, 1979 p. 257



3. Rand, Ayn, Philosophy: Who Needs It, New York, New York, The New American Library, 1982 p. 127



4. Rand, Ayn, For The New Intellectual, New York, New York, The New American Library, 1961 pp. 88-89



5. Ibid, pp. 88-89



6. Rand, Ayn, Capitalism: The Unknown Ideal, New York, New York, The New American Library, 1967 p. 24



7. Ibid, pp. 24-25



8. Ibid, p. 26



9. Rand, Ayn, The Virtue Of Selfishness, New York, New York, The New American Library, 1964 p. 15



10. Von Mises, Ludwig, The Theory of Money and Credit, New Haven, Connecticut, Yale University Press, 1953 pp. 46-47



11. Ibid, pp. 47-49



12. Ibid, p. 109



13. Ibid



14. Ibid, p. 204

And that was it. The professor had the following to say, beside assigning it an A- grade:

Very well written. An interesting discussion of the concept of value.

I would have spent a little less on the theory of value and a little more on specific problems as they relate to accounting theory.

She was completely correct. As I recall, this wasn't as last minute as most of my papers were, but the bulk of it was done late in the semester, just before it was due.

I found it fascinating to read it again after all this time. It was in a box I looked in while attempting to find something in the new apartment when all was yet to be unpacked. It still has yet to be. I was sure I had lost it forever, much as I did when I loaned my Cost Accounting tests to Barbara Princiotta for her to study from, only to lose touch with her and never get them back. Which is mainly a matter of pride, since I got 100 or near it on each one.

Speaking of which, my Cost professor and Theory professor were one and the same, so she expected a lot of me. A strange thing happened in that class. There were only five of us. The professor clearly favored the one female student in Theory, who was decent but not stellar. I helped the female student get through the semester, including briefing her outside the door of the class when she hadn't studied. It was a participation class and we couldn't hide, with so few. It was always a bit freaky to hear the female student repeat back what I had told her before the class verbatim when she had to answer. These papers were a large component of our final grades. I read hers, and found it was adequate but nothing special.

The female student I nursed through the class got an A on the paper and an A- for the semester. I and my sometime rival for most favored student in the department were both B+ for the semester. In my case I didn't consider that unfair or inappropriate. I was just floored in the end by the results of my having propped up the student who was also gender-favored by the professor.

But I digress. I posted this paper for posterity; now it's in more than one form and place, and to see what people think.

MORE...

I found that old paper of yours quite interesting. But I've got a BS in accounting. I suspect you probably lost most people after the second or third paragraph.

As far as philosophical 'value', I think that you must also consider the philosophical 'cost'. Not necessarily the same thing (in economics or philosophy).

The cost is what you pay to get that value. Too many in finance only pay attention to one or the other. Both are important. Nor are value and cost something which can be given the same name (I think you do that in your paper).

On a totally non-money topic. The cost of freedom might be my death (or yours). Is the value equal to the cost? (I'd say yes, you might not agree.)

(And it's thoughts like that which dragged me out of accounting...).

As a once avid ready of Ayn Rand, I found your paper a good read.

While not an accountant, my experience in business has taught me that the accounting profession continues to struggle with issues of value.