Here's a quote from Smith in Wealth of Nations that explains the difference:
The word value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called "value in use", the other, "value in exchange." The things which have the greatest value in use frequently little or no value in exchange; and on the contrary, these which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.Determining Exchange Value
Exchange value is an easier concept to understand: it is simply the price an object or service will fetch when sold. There's obviously some wiggle room here, with the realization that different buyers are willing to pay different prices and the ever-present possibility of negotiation. But while the price itself is a bit of a variable, the concept of exchange value is a simple one.
Let's take our scooter as an example. Today I looked up the Kelley Blue Book Value for a 2007 Yamaha Vino in excellent condition, and I see a price of $1,390. Depending on the circumstances, I might sell it for as little as $1,100 or for more than $1,500; but whatever figure I can actually sell it for is the exchange value.
Determining Use Value
Use value is much harder to calculate. Even if something won't fetch much of a price in a sale, it still might be worth quite a lot to the owner. In a world in which everything is reduced to a commodity, it's a bit unusual to value something in a manner that doesn't involve its purchase price. But here are the methods I try to employ:
- Savings Over Useful Life (SOUL): One way I like to calculate use value is to determine how much its use will likely save me over the life of that object. Let's look at the scooter example again. In a rough calculation of total cost of ownership, I can expect to save $250 for every 5,000 miles that I ride the scooter instead of my car. If I ride approximately 5,000 miles a year and I assume the scooter will last for five more years, I can estimate the savings over its useful life, and thus its use value, to be $1,250 ($250 x 5 years).
- Worth Over Useful Life (WOUL): But what if the item doesn't have any hard-dollar savings, but still is worth something to the owner? Or what if the scooter is worth something above and beyond the money it saves us? What about the fact that riding a scooter is fun? Another way to think about use value is to ask what you would pay to use or own an item, and then calculate that figure over its useful life. For example, I like the painting of a tree that I keep over my desk. I've had it for years and even though Mrs. DB40 thinks its a bit of an eyesore, I get some enjoyment out of it. Let's say that painting is worth $20 a year to me. I'd pay $20 a year to rent it and continue getting the pleasure of seeing it every day, but no more (since I'm cheap). And let's assume the painting can reasonably be expected to last the rest of my life: say, fifty more years. So in this case, the painting's worth over its useful life, and thus its use value, is $1,000 (in non-inflation adjusted dollars).
These are all pretty subjective valuations, but since the decisions to keep or sell the items you've accumulated over the years are personal, the valuations have to be similarly personal. If I am considering selling a piece of furniture that a relative left to me in a will, I need to be honest about what that furniture is really worth to me. The method we use is to compare the long term Exchange Value to our calculation of the Use Value.
So in the calculation above with my painting, if I can only sell it for $100 and I think it's really worth $1,000 over its useful life, then the exchange value is less than the use value, and I should keep the painting. Right? Not exactly. The final step is to consider what I'll do with that $100 I would get if I sold the painting.
Assuming I'm in a position to invest the $100 (and not spend it on some other thing), and assuming a 7% annual gain, over the 50 year useful life of the painting, the true exchange value is $2,946, not just $100. This obviously heavily skews our decisions towards selling items, since we can reasonably assume that any money gained from selling an item is going straight into our early retirement funds. And this is at least part of the reason we are trying to own fewer things. I do get a lot of satisfaction from bringing boxes to the donation center or selling an item over Craigslist. And it's nice to have less clutter. But when we consider the fact that even a small investment into retirement funds can pay huge returns over the rest of our lives, in most cases I'd rather have (and invest) the cash than to have one more tchotchky in the house.
Astute readers will note that this means the math points us towards selling the scooter, as the $1,390 in a sale translates to $1,950 in real exchange value over five years. Much more, if we extend that investment over the next fifty years of our lives. And to those astute readers, I say, "Shut your stupid face." It is my scooter and I am keeping it.
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*Photo is from jimmy brown at Flickr Creative Commons.