One accusation made against economists, and particularly those of us strongly inclined to support free markets, is that we only, or mostly, care about material things. This totally misunderstands economics and how economists understand the world. In fact, the truth is just the opposite. For good economists the material world is secondary to the subjective perceptions of human beings, and what makes us wealthy is not more stuff per se, but rather the increasing satisfaction of our wants–whatever they might be.
The most fundamental way to demonstrate this is with a reminder of the history of value theory. The early economists, Adam Smith included, believed that a good’s exchange-value (or relative price) is determined by the cost of producing it, which in turn is based on the physical characteristics of the inputs. It was the material world that gave objects their value. In many ways the apex of this perspective was Marx’s economics, which gave the starring role to the labor theory of value in both his economic analysis and his ethical doctrine that labor was exploited in the market.
It was in the hands of Carl Menger (and to a lesser degree William Stanley Jevons and Leon Walras) that value theory was revolutionized. What Menger argued was that the classicals had the direction of causation wrong. It is not the physical inputs that determine the exchange-value of the final product, but rather that people find the product useful and are willing to give up something else to obtain it. Hamburgers do not command a price on the market because labor went into making them or because beef, cheese, and bread are costly. The ingredients and McDonald’s employees’ labor are valuable because we like Big Macs. The value of the inputs derives from the value we attach to the outputs.
The value of the outputs is of course subjective. What makes a good valuable is that individuals believe it can satisfy some want. We are hungry and are looking for means to satisfy our end: relief of the hunger. It’s possible we might be wrong about whether a given good will in fact satisfy the end, but that does not matter. As long as we perceive that it will, the good will have value and therefore so will the inputs.
Notice the implication here: What creates value–and makes people better off–is not physical things but the human mind. People are made better off not by physical goods per se, but by having their wants satisfied. We have wants that need physical goods to satisfy them, but we also have wants that can be satisfied by friendship, love, or a religious experience. Economics cares only that people have wants. For economic analysis, it doesn’t matter what those wants are. Material goods are a potential means to satisfy them, but material wants are far from our only ends.
The story of economic growth is the story of being better able to satisfy more and more wants with fewer and fewer resources, leaving resources to satisfy new wants that emerge. Growth also involves more easily satisfying our basic material wants for food, shelter, and clothing, and making us better able to satisfy less material wants, such as education. Think about how much that folks in wealthy market economies spend on entertainment, education, and other nonmaterial wants.
Economics is not materialistic. We don’t prioritize the material over the nonmaterial. Value is in whatever people think will satisfy their wants.
Economists understand that markets best satisfy our wants and enable us to enjoy the nonmaterial goods that make for a truly human life.