Value is the material result of ideas applied to physical reality to yield a good or service that enhances human life.
For example, if three people are on a deserted island, the person who decides to collect materials to build a shelter and does it has created economic value.
Why?
Because for human life, having shelter is generally better than being exposed to the elements.
The other two residents, if they desire shelter, can either learn to build their own homes or trade their good and services (maybe while our home-builder was building they learned how to fish) for a home.
In very simple economies folks will tend to do the many tasks required to maintain life (building, gathering, cooking, making, organizing, etc) all by themselves.
In complex economies a division of labor occurs and people will start to do one specific thing and trade their good or service, either directly or through currency, for goods and services produced by others.
But the creation of value is the same whether building a hut on a deserted island or advanced silicon micro-chips: a human mind gets an idea, applies it to physical reality, and based on a combination of intellectual and physical effort, produces a good or service that enhances human life.
Capital is saved value.
For example, let’s assume that our homebuilder built three houses and only needs one to live in.
He now has, in this island economy, two “units” of capital: in other words, he’s got value that he’s produced but hasn’t consumed.
He can:
- Do nothing.
- Alternate living between the 3 houses.
- Rent the 2 extra houses to our other 2 residents with payment to be rendered by either the services or goods produced by citizens 2 and 3.
- Sell the houses to citizens 2 and 3 at the “going rate” for a house on this island and receive goods and/or services from citizens 2 and 3 which he can use for his benefit.
The point is that citizen 1 has “extra house” and, since houses on this island probably have economic value because they can be used by the other 2 residents to protect themselves from the elements, citizen 1 can use his “extra value” or capital to benefit his life in ways beyond what he normally produces (houses).
And that, in a nutshell, is what economic value and capital are.
For more information I would recommend reading Adam Smith’s Wealth of Nations and Ayn Rand’s Capitalism: The Unknown Ideal.
