Sunday, June 24, 2012

Q&A: The Difference Between Value and Price? By Sheikh Ata' Abu Rashta

The following is the translation of an Arabic Q&A from the website of Sheikh Ata' Abu Rashta.


Question: What came in the economic system about the value and the price is not clear and in particular the issue of recording the dowry (mahr) in terms of value and price. Please explain this in some detail, may Allah bless you?

Answer:

The value is the amount of benefit present within the commodity, which is fixed at all times and places. So the benefit of a jug is estimated, in itself as an object, by the materials it is made of, its suitability for carrying water, whether for drinking or ablution. These uses are never detached of it today or tomorrow, whether its price increased or declined. If it is estimated by the benefit of another commodity, the benefit of the other commodity should be equal to the benefit of the jug at the moment of estimation. If the value of the jug was estimated by the value of a chair as an example, then it is necessary that the internal benefit of the jug is equal to the internal benefit of the chair, in terms of its constituents (components), its use (function).....etc. This estimation by value does not differ from time to time, or from a place to a place. If for example, the benefit of the jug for a man is equal to the benefit of half a chair, this value remains the same every time, because it is estimated by the physical components of the commodity and its uses, which are fixed in it no matter whether the price increased or decreased.

If the price of the jug has increased, this does not mean that its components have increased, or its uses have increased, for its value is constant (fixed) though its price increased or decreased? This applies to the wardrobe, its components as well as its uses are fixed (constant) whether the price increased or decreased.

Similarly, if the value of the wardrobe was estimated by the value of another commodity, by gold for example, and it was found that the benefit of the wardrobe is equal to twice the benefit of a piece of gold, this value remains constant because it is estimated by the components of the substance of the wardrobe and the components of the substance of gold, and man's benefitting of the wardrobe and his benefitting of gold. Therefore, the value of the wardrobe remains equal to half the value of the golden piece, whether the price of the wardrobe or the price of the golden piece increased or decreased. This is because the value depends on the physical components of the commodity and man's benefitting of it in terms of its uses.

As regards the estimation of the commodity by the price, this is not necessarily equal to the physical components of the commodity and its benefit to man as a human being; rather such estimation by price is controlled by supply and demand.

The important observation in the subject is that the estimation of the commodity by the price does not consider the physical benefit of the commodity. It might rather estimate the price of wheat by paper currency regardless of the benefit of the physical substance of the wheat, which is great, while the benefit of the physical substance of the banknote is almost nothing more than the type of paper, drawings on it and its technical production. This is because the price is related to the supply and demand. So a wrongdoer might sell a bag of wheat to buy a bottle of wine, despite the wide gap between the benefit of the physical substance of the wheat bag and the benefit of the physical substance of the bottle.

However, when the value is estimated it is assessed by an equal benefit present in both sides. Therefore, we do not say the value of wheat bag is equal to twenty paper dinars, because the physical benefit present in the substance of wheat in the bag is equal to thousands of the physical benefit present in the substance of the twenty paper dinars.

Value is estimated by the physical benefit present in the commodity; therefore the value of a bag of wheat is estimated by such and such golden dinars or such and such commodity that has equal benefit.

Thus, while price is estimated by any commodity no matter how much benefit exists in it, the value of a commodity cannot be estimated by another commodity unless both commodities have equal inherent benefit.

And I think you have now got the answer to the issue of the wardrobe automatically.

Perhaps you thought the statement in the book (if a man marries a woman and made her dowry a certain specified wardrobe, and it was stated that its value is fifty Dinars..) You thought that the fifty dinars are paper money. This is not the case, because the value does not change in terms of the benefit of its substance, so the dinars here are golden dinars.

In this case, she is entitled to have a wardrobe whose value is fifty Dinars in gold, at every time and place. If the wardrobe was damaged then she is entitled to have fifty Dinars in gold. If what was mentioned is a wardrobe whose value is fifty Jordanian Dinars, for example, then the term of value in this context is redundant; and what is intended is the price.

For your information, this distinction is not explained in the books of fiqh as it is in ours, and the value is often used to mean price.

The reason for highlighting this in our studies is (the deformation) of the value by the capitalists and considering it nominal (relative), where it rises and falls according to the greed, oppression and exploitation. So, we highlighted this and explained it thoroughly. Therefore, if a wardrobe was stated in the contract of marriage, whose value is such and such, and a lawsuit case was submitted to judiciary, then the relevant parties should be asked if they are aware of this meaning, or they understand the value as price. Ignorance (of this difference) in this case is excused, because many people of their like do not know such difference. So, if they heard (the value of an item is twenty Dinars), they thought its price is twenty. I think the difference between the two cases is now clear:

1 - If he recorded its value as fifty Dinars (i.e. a currency that has inherent benefit, and it is invalid to register it as paper money  ...), then fulfillment of this record is according to the text of the contract: returning back the wardrobe which he robbed, based on the hadiths:

«على اليد ما أخذت حتى تؤديه» رواه ابن ماجه وأحمد والدارمي.

 «The hand (person) is obliged of that which he took until he returns it back",
As narrated by Ibn Majah, Ahmad and Al-Darimi.

«وإذا أخذ أحدكم عصا أخيه فليرْدُدْها عليه» رواه أحمد

«If any one of you took the stick (staff) of his brother, he should return it back to him", As narrated by Ahmad.

If, however, it was damaged he should pay its value, which is fifty Dinars worth of gold, and nothing else. This is because the value does not change with time, place or supply or demand.. Therefore, the value is not a price by which one can buy a wardrobe.

2 - If he recorded its price as fifty Dinars (where he can here register it as paper, gold, etc... because the price is not related to the inherent benefit of the substance of currency), then fulfillment of this is according to the contract text:

It is returning back the wardrobe, which he robbed based on the previous hadiths. If it was however damaged he would pay the recorded price or buy a wardrobe by this price.

Thus, he would have fulfilled the contract text.

As for your offshoot question that says: (if we assume that the husband made a part the wife dowry jewels instead of the wardrobe and he recorded the value as fifty dinars ...), in this case it is not valid to register the value in paper; he has rather either register it in the contract: dowry is jewels whose value is fifty Dinars of gold, and in this case he returns to her the jewels, and if it perished he returns to her fifty dinars of gold, because the value is fixed, which is estimated by the benefit present in the commodity substance in relation to man as a human being.

Or otherwise he registers to her jewels whose price is fifty dinars of paper or gold or whatever else.

In this case, he returns to her the jewels; and if not possible he would buy her jewels worth of fifty dinars, which is the recorded price, or he pays her the recorded price, i.e. fifty dinars. If the State has reduced its paper currency by a percentage it declared after the contract, then this percentage is taken into account at time of demand.

27/10/2006

7 comments:

Amjad R said...

Assalaamu 'alaikum

I'm not sure if I understand (or agree) with the definition of 'value' that was put forward in this article.

How can the amount of benefit within a commodity be fixed in all times and places?

Essentially it is being said that objects contain intrinsic use-value or benefits, that can be objectively determined irrespective of individual value judgements. Which is axiomatically saying that individual judgements on value are not taken into account.

So given the example of the wardrobe, it is said in the article that the value is determined solely by the aggregate of it's 'components' (or what I presume it means to say is the utility of the wardrobe). But this is not the case when individual preference is involved. One person may assign a higher value to the wardrobe if it was a family heirloom. Another may view it's use-value irrelevant if the wardrobe is grossly out of fashion. Is this not a subjective valuation of value?

To give some more examples:

If someone bought a personal computer in 1995 for 50 gold dinars, would it's intrinsic value remain the same in 2012?

500 years ago, a barrel of oil from the Kuwait oil tars could hypothetically be bought for 1 Dirham. Would you really say that the same barrel of oil only has a value of 1 Dirham in today's age (I'm not saying the price or exchange value here, just 'value')? I would argue here that even the intrinsic benefits are subjective to time and place i.e. 500 years ago, the oil had limited uses, today it produces many more benefits - even though it is the same oil.

Any further clarity would be most welcome.

Jzk.

Ma'salaam,

Amjad

Anonymous said...

Salam Amjad,

Before going into this in some detail, it is good to review the source text which the questioner referred to i.e. The Economic System of Islam by Sheikh Taqiuddin an-Nabhani, a few quotations:

"Capitalism considers value as being relative and not real, and so is treated as a subjective measurement. Hence, the value of a yard of cloth is the marginal benefit of it assuming its availability in the market. Its value is also the quantity of commodities and efforts that could be exchanged for it. The value becomes a price if what is obtained for the yard of cloth is money. These two values, in their view, are separate, and they have two distinct names; benefit and the value of exchange. The meaning of value according to this definition is wrong, because the value of any commodity is the quantity of benefit in it, taking into account the element of scarcity. So the real view towards any commodity is to observe its benefit whilst taking into account its scarcity, whether it is possessed by man from the start like a hunt, or by exchange like selling, and whether this was related to the person or related to the thing. Thus, value is a name for a designated thing which has a specific reality, and not a name for a relative thing, which applies to it in one respect and is not applicable in another. So value is an objective measurement and not a relative thing. Therefore, the view of the economists towards value is wrong from its basis.

What is referred to as the marginal utility value is an estimation meant to concentrate production based on the worst case scenario of distributing the commodity. Thus the value of a commodity is estimated based on the lowest limit so that production proceeds on a guaranteed basis. The marginal utility is not really the value of the commodity, nor even the price of the commodity, because the value of the commodity should be estimated by the amount of benefit in it at the time of estimation, taking into account the element of scarcity at that time. Its value would not drop if its price decreases later on, nor would it rise if its price increases as well, because its value was considered at the time of its evaluation. Therefore, marginal utility theory is a theory for price and not a theory for value, and there is a difference between price and value, even in the view of Capitalist economists. What governs the estimation of price is the abundance of demand together with the scarcity of supply or the abundance of supply together with the scarcity of demand; these matters are related to the level of production of a commodity, and not related to its distribution. Whilst value is estimated by the quantity of benefit present in the commodity at the time of evaluation, bearing in mind the element of scarcity. Scarcity it is not considered the main factor in the estimation; so supply and demand are not the main determinants of value.

Therefore, the subject of value is wrong from its basis, and any subject based on it is definitely wrong since the basic concept is false. However, if the value of the commodity or service was evaluated according to the benefit or the effort expended, then such an evaluation would be correct and would lead to much greater stability. If the value was estimated by the price, the evaluation would be relative not real, and it comes closer to changing every time according to the market. In this latter situation, it is false to refer to it as a value, and so the term value would not truly apply. It would rather become a means to obtain money according to the market and not according to what it possesses of benefit."

Anonymous said...

Continued...

"One of the best known theories of Karl Marx is the theory of value, which he took from the thinkers of Capitalism, and upon which he attacked Capitalism. Adam Smith, who is considered the leader of the Free School of Thought in England and is viewed as the person who put the basis of the political economy i.e. the Capitalist economic system, defined value by saying: ‘The value of any commodity depends on the magnitude (quantity) of effort spent in its production.’ So the value of the commodity whose production needs two hours is worth twice the value of the commodity whose production needs only one hour. Ricardo who came after Adam Smith, explained his theory of work, when he defined value, saying: ‘What limits the value of the commodity is not only the quantity of work spent directly in its production, but should include the work spent, in the past, in producing the tools and machines used in the production process as well.’ This means that Ricardo believed that the value of the commodity depends on the expenses incurred during production. He referred these expenses to one element, which is the work.

After this, Karl Marx used Ricardo’s theory of value in Capitalism as a weapon to attack the concept of private property and Capitalism as a whole. He said that the only source of value is the work spent in a commodity’s production, and that the Capitalist financier buys the energy of a worker with a wage that does not exceed the limit necessary to keep him alive, and able to continue working. The financier then exploits the energy of the worker by making him produce commodities, whose value greatly exceed that which is paid to the worker. Karl Marx called the difference between what the worker produces and what he is actually paid, the surplus value. He determined that this value represents what the landlords and the business people usurp from the worker’s rights, in the name of revenue, profit, or rate of return on capital, a matter which he did not acknowledge as valid."

"Firstly: His opinion on the theory of value is erroneous and disagrees with reality. The opinion, stating that the only source for the value of the commodity is the work spent in its production, disagrees with reality since the spent work is only one (but not the only) source of its value. There are other elements, besides the work, that the value of the commodity could be comprised of such as the raw material upon which the work was carried out, or the demand for the benefit of the commodity as well. The raw material could contain a benefit that exceeds the work spent in its procurement such as in hunting for example. The benefit of the commodity could have no demand in the market, and be forbidden for export, such as wine for Muslims. So putting work as the only source of value is untrue, and does not conform to the reality of the commodity as it is."

Anonymous said...

Continued...

"In regard with the value to the Communists, Karl Marx mentioned that the only source of value is the work spent in its production, and that the Capitalist financier buys the power of the worker for a wage which is not more than he necessitates to stay alive and able to work. Then he exploits this power to produce commodities whose value greatly exceeds that which he pays to the worker. Marx called the difference between what the worker produces and what is really paid to him 'the surplus value'. He stated that this surplus value represents the amount which landlords and businessmen usurp of the worker’s rights under the name of revenue, profit and capital interest the legality of which he of course, did not acknowledge.

The fact is that the value of any commodity is the amount of its benefit, taking into consideration the factor of its scarcity (shortage). Though work is a means to obtain this benefit, or a means to produce it, it is not considered at all when this commodity is exchanged with another, nor when using it. The true view therefore of any commodity is the view towards its benefit, taking into consideration the element of its shortage, whether this commodity was possessed by man initially like the hunted prey, or by exchange like trading. There is no difference regarding this matter in the society of Moscow, the society of Paris and the society of the Madinah. This is because man everywhere, when he strives to obtain a commodity assesses the amount of benefit that exists in it, taking in to account its shortage in the market. This is the value of the commodity as man views it, which is its true value.

However, the actual value of the commodity is estimated by the amount of its exchange with another thing, whether a commodity or money. This value, by this sense, remains constant despite the change of time, place and circumstances with regard to the price of the commodity, it is the amount of money which is given in exchange of one unit of this commodity in a certain time, certain place and in certain circumstances. This amount changes as the time, place and circumstances change. In other words, the price is the ratio of exchange between the amount of money and the equivalent amount of commodities.

If a man married a woman and made, as a part of her dowry, a specific cupboard, and he stated its value as fifty dinars, and he eventually handed it to her, then the value of the cupboard had been designated through her receiving it as a commodity. If he took it back from her later and she brought a lawsuit against him about it, then he would have to hand over to her the cupboard itself not its price of fifty dinars. If the cupboard was proved to be damaged, or he alleged that it was damaged, then he should pay to her fifty dinars, because this is the value of the cupboard whether the identical cupboard at that time of the court case was more or less than fifty dinars, because this is its actual estimated value. The price of an identical cupboard is not considered. This is different than the case where it was stated in the marriage contract that the price of the cupboard was fifty dinars before the husband gave the cupboard to his wife. If he subsequently took it from her and she brought a lawsuit against him about it, he would have the choice to hand the cupboard over to her, to pay her its price of fifty dinars, or to buy her another cupboard with fifty dinars (whether the cupboard at the time of the court case was more or less than fifty dinars.) He would be obliged therefore, to give to her a cupboard with a price of fifty dinars in any case.

This is because the value does not change but the price changes. The actual value of the commodity is the amount of its exchange at the time of estimation, and the price of the commodity is the amount of money paid in the market as an exchange for it. This differentiation between the value and the price applies in trading and the different types of exchange."

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

Sa.
The value of things depends on one of two things. What we attach to them and what they can be used for. Regarding what we attatch to them this is based on how we view life and the source we use to judge things. Therefore a woman about to go out would use a table cloth if she had to to cover her awrah because the covering of the awrah gave the table cloth a new value. regarding the second (their use) the thing in itself over time acquires value due to its scarcity. Gold for instance is deemed valuable not because of any person's view point of life but because people have agitations that causes them to be attracted to gold. A loaded statement yes. The causes of inflation and so on are not related here because the question of the reason for things having a value are related to their percieved value regarding the benefit derived from them as well as the effort it requires to get them. Inflation is linked to how much money changes hand in an interest based economy and therefore when raising the issue in an Islamic one, it hardly makes any sense. That is why the wage of workers, the price of commodities and types of commodities themselves hardly increased to the extent of what we have today. Yemeni shoes were the in thing in Mecca and were expensive before Islam because of the work distance and quality of leather used to produce them. The item used to barter or trade for them varried but the most valuable currency one could use was GOLD.
To conclude therefore it is necessary to consider what people consider as valuable and what they can be used for.
JZK

Anonymous said...

So basically:

1. The value is the amount of benefit present within the commodity is intrinsic. This benefit generally does not change unless a new benefit is discovered in the thing that was not known before such as with the example of oil you gave.

2. What you mentioned about the relative value of something is not related to the intrinsic benefit of the thing but a personal subjective attachment to the object. This is unrelated to the topic of determining the value of things, it may affect the price (exchange value) of something as the individual may not be willing to part with the item unless it is for a high price.

2. The statement of the Sheikh could be misunderstood when he says: "Perhaps you thought the statement in the book (if a man marries a woman and made her dowry a certain specified wardrobe, and it was stated that its value is fifty Dinars..) You thought that the fifty dinars are paper money. This is not the case, because the value does not change in terms of the benefit of its substance, so the dinars here are golden dinars.

In this case, she is entitled to have a wardrobe whose value is fifty Dinars in gold, at every time and place."

This is discussing a fiqhi point to do with adherence to the contract, as the contract mentioned the 'value' as 50 dinars, this means it was estimated at the time of contract for that to be its exchange value i.e. price. This means it is binding to adhere to this price even if in time the price of the wardrobe changes. This does not mean that the price of the wardrobe will always remain in the market as 50 dinars, as that will change according to supply and demand.

3. Regarding the example you gave of a computer 1995, the intrinsic value of that computer remains if it is a functioning computer. However its price will change. For example, in some rural villages in India they still use computers from that time as its functions remain and they find utility in it. However its price has changed. The value remains if the benefit remains. Only if the benefit ceases does the value cease e.g. if it stops working. Of course the value of modern day computers will be more as the benefit of them is more i.e. they have the ability to undertake more functions, at a faster speed, with better quality graphics, etc. What happens over time in many areas is the development of newer products with more benefit within them. Usually the price (exchange value) of these may be higher but as another example of the distinction between value and price sometimes the older items such as the first computers are much more highly priced as they have become collectors items even though they have very basic functionality.