Chapter 1: Overview
Chapter 2: Labor, Cost and Value
The study of economics is the study of the optimal allocation of labor, i.e. human effort over time to create value. Economics is both normative and descriptive: normative regarding the definition of "optimal", and descriptive in terms of how people behave economically, and how they ought to behave to achieve some definition of optimality. Economics consists 99% of of how labor is directly allocated; the rest consists of how to allocate physical resources (especially land) in order to optimally allocate labor.
This definition of economics simply restates Adam Smith's observation that all value is actually created, i.e. physically instantiated, by human effort over time. (There are other conditions, of course, that apply to value: one must, for example, create something that someone (one's self or another) actually wants.) Even when something is "intrinsically" valuable, such as an apply hanging on a tree, there must be some human labor, i.e. picking the apple, chewing and swallowing it, for the value to be actually realized or instantiated. By definition, such "intrinsic" value is beyond our control — it is not subject to any sort of choice — and is therefore irrelevant to the optimal allocation of labor, and therefore consists of noneconomic value.
There's no basis to assume, presuppose or hypothesize that any individual's labor is inherently more valuable than another's: there are only more or less valuable uses to which one's labor can be put. Furthermore, to simplify matters, we will assume that the amount of effort any individual uses over time to create value is relatively constant. (It's not really, but we can take varying amounts of effort into account "on top of" a theory that assumes constant effort.)
Considering the above, it makes sense from a scientific perspective only to discuss economics in terms of time, i.e. the person-hour. Discussing economics in terms of money, especially in a modern economy when money has become almost entirely divorced from actual effort, conceptually if not actually, just obscures (probably intentionally) the basis of economics in human effort over time, i.e. labor.
Cost and Use Value
There are three fundamental things we are interested in measuring: cost, use-value, and exchange value. I'll discuss the first two now; I'll discuss exchange value in the chapter on commodity relations.
The cost of some "item of value"* is simply the total number of person-hours necessary to create the item. We can measure the specific cost of some specific item, i.e. the number of hours Alice actually uses to create a hat. We must, of course, count the number of hours necessary to create the tools Alice uses to create hats, as well as the training and education necessary to create hats, and amortize that time over the number of hats Alice produces.
*I mean "item of value" in a vague, generic sense for which ordinary intuition will presently suffice. I'll go into more detail in the chapter on commodity relations.
We can also create statistical measures of the cost of hats in general. If Alice, Bob, Carol, ... Zane all create hats, we can compute the mean and median cost of hats, the distribution of actual costs, and other fancy statistical mumbo-jumbo. Based on these statistics, we can talk reasonably about the context-dependent socially necessary labor time required to produce hats in general.
Costs depend overwhelmingly on objective reality (tools, materials, energy expended) and our understanding of objective reality (science, knowledge, and skill). Because costs are reality-dependent, they are relatively constant, and variations in costs are most uncorrelated.
If it takes an hour — all things considered — for Alice to make a hat today, it'll take about an hour to make one tomorrow, and took about an hour to make one yesterday. Furthermore, if Alice can make a hat in an hour, it'll take about an hour for Bob, Carol, etc. to make a hat. What variations can be easily, meaningfully and precisely averaged out or consolidated with more sophisticated statistical measures. (I will henceforth use the average to denote whatever specific statistical measures we use to consolidate and generalize various quantities.)
Because costs are mostly objective and constant (with uncorrelated variability), it is meaningful and useful to talk about the cost "inherent in" an item of value. If it takes an hour for Alice to create a specific hat, we can say that there's one person-hour of labor time inherent in that specific hat. If it takes on average an hour to create a hat, we can say that there's one hour of socially necessary labor time inherent in a generic hat.
The use value of an item of value is the user's subjective "enjoyment" (in a general sense) of the item. A hat's use value consists of the enjoyment the wearer receives at having a dry head in a rainstorm, a cool, non-sunburned head when it's sunny, a warm head in the winter, the aesthetic enjoyment of the appearance of the hat, and/or the social status conferred by owning and wearing the hat, etc.
Unlike cost, use value is extremely variable, both among people and over time in the same person. If I'm hungry, a hamburger has some use value; If I've just eaten lunch, a hamburger has no use value (not even potential use value: it will be soggy, cold and unappetizing by the time I'm hungry again). A sewing machine has use value, but if I already have one sewing machine, a second, identical sewing machine has no use value at all: I can use only one sewing machine at a time.
In contrast to costs, the subjectivity and correlated variations in use value entail that use value cannot be precisely, meaningfully or usefully averaged to form a concept such as "socially-constructed general use-value"; at least not easily, and to the extent that such measures can be computed, they are at best of limited utility. Our inability to usefully average use value notwithstanding, use value is still a critical concept in understanding economic behavior.