An Entropy Theory of Value

Value theory is the foundation of economic theory. Currently, the standard theory of value is the Arrow Debreu theory. It is based on topology. It is not quantitative. In a topological theory, one dollar is the same as one billion dollar. Many attempts have been made to provide a quantitative theory. Arrow himself had investigated the possibility of an entropy theory of value. He concluded from his investigation,

“the well-known Shannon measure which has been so useful in communications engineering is not in general appropriate for economic analysis because it gives no weight to the value of the information. If beforehand a large manufacturer regards it as equally likely whether the price of his product will go up or down, then learning which is true conveys no more information, in the Shannon sense, than observing the toss of a fair coin”

The Shannon measure actually gives the weight to the value of the information. That is why an article usually contain many words instead of a single word. That is why information highway can become congested, just like city highways. Similarly, the value of the information about the future price is higher to a large manufacturer than to a small manufacturer, other things being equal.

In an entropy theory of value, the basic representation of value is the simple logarithm function, the same as in information theory. From this function, the main factors that influence the value of a commodity are scarcity of the commodity, the number of producers, and the market size.  In particular, monopolies and near monopolies, which have small number of producers or service providers, have high valuations. Many of the important institutional structures, such as religions, governments, unions, patents and regulations, industry standards, obtain high valuation through monopoly.

This entropy theory of value provides a simple understanding on many fundamental problems in life. It is very simple mathematically. It can be applied to a broad range of problems in research and teaching.

Further reading

  An Entropy Theory of Value, Structural Change and Economic Dynamics, (2018), December, Vol 47, 73-81