Consumption and Welfare: Two Views of Value Added

The standard view is that value is added to raw material by labor and capital. The question here discussed is whether or not raw material must contain value previously added by nature, or whether it can be simply inert indestructible building blocks. Can humanly added value substitute for value added by nature? If the answer were yes, it should be possible, since matter-energy is not destroyed in consumption, to substitute the waste flow of matter-energy for the flow of fresh natural resources (raw materials). But this would contradict the second law of thermodynamics. The quality of low entropy is what differentiates raw material from waste, and we know of no process whose net effect is to lower the entropy of the total system on which we depend. We must focus more on “that to which value is added,” and not just on value added. This is especially true as the former more and more replaces the latter as the limiting factor in production. Further consequences of the two different views about value added for theory and policy are discussed.