The two are not unrelated, despite theory. And yes, I know what the theory says. I simply think it’s wrong. Javelineer says
Two persons cannot compare values. By extension, no one can know what a society values. All we know is (1) what is demanded, and (2) what is demanded is valued more than the exchange-value of the money-price. But we never know how much more it was valued. It’s not even clear what this means, since value is strictly an ordinal concept.
For a few months short of twenty-five years I worked for a company that sold and serviced high-tech equipment (I still do the service, but as an independent consultant). During that time I talked to a lot of customers, prospective customers, and people in the business who wouldn’t have bought anything at all from us under any circumstances. The equipment we sold was not top-of-the-line in some ways, but it contained some very real advances in the tech and compared, overall, very well with its competitors, and was a good bit less expensive. Nevertheless, our sales were always less than those of our competitors, and one of the things I always tried to ask people was why that was the case.
There were lots of answers to that question, but one common thread ran through the replies: We didn’t charge enough. If the stuff was that cheap, people reasoned, it couldn’t be that good.
In the course of that employment I had a lot of drinks in the bars of the sort of high-end hotels that cater to conventions and business travelers. Except in a very few cases, it was easy to walk a few dozen steps and find a bar that sold exactly the same liquor at anywhere from three-quarters to half the price — but few people ever took the trouble. If you asked them why, they would normally get defensive: “The drinks are just better here, and besides I’d have to go outside.”
In the first case, people were saying that if the price were higher it would reflect better quality — more value — and they voted with their pocketbooks, by buying competitive gear that didn’t perform any better and broke down just as often while costing more. In the second case, people were defending paying a higher price on the ground of getting more value, when that was clearly not the case. (All the advertisers in Architectural Digest and Fortune, along with three-quarters of those in airline inflight magazines, make their profit off that effect.)
In both cases, the people involved are declaring that in their perceptions “price” is a function of “value”, and since “value” itself is a function of people’s perceptions, saying so makes it true. Note that the second case is a trap. If you try to argue that patrons are paying for convenience (not having to walk out of the hotel), access to others who feel the same way, and/or ambiance, you are effectively arguing that the drink itself has a constant value — which violates the basic assumption that “value” is a hidden variable dependent on perception, and which cannot be determined.
I am not a person who thinks public opinion is controlling; indeed, it is frequently flatly wrong. But in this case it is definitionally correct: “Price” is a function of “value”. It isn’t a simple or linear function — it can’t be; “value” is an ordinal (as Javelineer points out, and I thank him for reminding me of the word for the concept) where “price” is a singular value. But the perceived value of a good (which is the only value it has) is one of the factors, probably the principal factor, used by “the market” to set the price. Perceptions set the value, negotiations set the price based on perceived value.
The theory Javelineer and others recount has the maximal virtue possible for a scientific theory: it correctly predicts what will happen in many, perhaps most, cases, and is therefore useful. It is not, however, widely accepted by the general public, and in fact if you explain it just as Javelineer did to a random citizen you are apt to get a decisive rejection. Why is that? –Well, if you tell them “price” has nothing to do with “value”, that “price” is set only by “the market”, they know right away that you’re talking bullshit and quit listening, or else flatly declare “the market” evil. If you want to get better answers and get your theory accepted, you need to accept that the relationship exists and factor it in, regardless of what F. Hayek may have to say on the matter.
Note: “Useful” is the maximum accolade for a scientific theory. If you hear people talking about “true” and “false”, brace yourself for a babble of belief.