Hello,
I am reading my first economics textbook, Principles of Economics by George Mankiw. Mankiw says that markets are efficient because they maximise total surplus (consumer + producer surplus). Consumer surplus is defined as value to buyers minus amount paid by buyers. The thing I do not understand is how anyone can calculate value in monetary units. Consider this example: the price of bread is £1 for a loaf. A hypothetical rich person would be willing to pay as much as £20 for the loaf. A hypothetical pauper cannot even pay £1. Now Mankiw would say that markets are efficient because they allocate the bread to the person for whom the bread has the highest value, i.e., in this example, the rich person (£20 as opposed to less than £1). But it is only monetary value which is the highest for the rich person. If we wanted to allocate resources according to the real value placed on bread, surely the distribution would be different. Is not economics, therefore, just propagating free markets due to principles tacitly inscribed in the very core of the science? What would an Austrian economist say about Mankiw's analysis? Thank you.
Your reaction is not unfounded. Have a look at these:
"Subjective Value and Market prices"
"Cardinal Utility: Its Worse Than You Thought"
"Ordinal Marginal Utility and 'Total Utility'"
"Problems with the Cost Theory of Value"
"Subjective-Value Theory"
And I'm assuming you're reading that textbook for a school class? I would strongly recommend one of these to at least go along with it (of course if you don't have to read Mankiw, you may wish to find a better use for your time.)
Any one of the ones on the top row here. And these here. (I would also add Basic Economics to that top row as well). For a more formal introduction to real economics, check out the links here. The home study course and the Mises Academy are top notch.
Thank you.