The truth of the matter is we are compensated nowhere near the value we create. And so if you work for yourself, and actually do create something that others will pay for, you will usually far exceed your normal salary.
And it is trivial to see one’s self deriving great value from things like eating fresh fruit and produce and drinking clean water, but not paying anywhere near its “value” for it.
Edit: replace the word value with utility in my comment to get a clearer idea of what I am trying to convey. Value is too vague of an idea to use for this topic.
Basic economics.
> Even the most basic high school microeconomics course must teach students that prices are the intersection of supply and demand curves.
Demand curve is marginal (internalized) value @ quantity, so saying that prices are the intersection of supply and demand curves is exactly saying that they are a function of value at market-clearing quantity, plus telling you where markey-clearing quantity comes from.
In that sense, prices are not a function of an individual’s perceived value of work.
Correct. This is the law of demand, and why price curves slope down with most goods (luxury goods excluded).
I highly recommend listening to "Bullshit Jobs" by David Graeber on the observed inverse relationship between pay and [actual] value (if we're talking about societal value, for example). There are exceptions to the rule, but the correlation is quite strong.
For example, paying $0.02 per gallon for clean, potable water, which surely one can agree has extremely high utility since it allows us to survive. But also paying $100 for a Christmas tree, which has lower utility. This is because we can get water for cheaper and the lowest price for the Christmas tree we could find was $100, but if water stopped being available for $0.02, then you bet people would pay $100 and even $1,000 for a gallon of water.
Does that mean water started having more utility? Not according to the definition economics used. Whether or not water became more valuable depends on how you are using the word value, so that is why I think it is not really a good word for discussions of how prices are determined.
You can sell a service to a business that is crucial to their continued operations all day long, but if someone else is willing to sell to them for less, then do not expect to get paid based on how “valuable” you are to the buyer.
Your own example should make it obvious that "utility" is not a good way to think about value. Should people pay 100$ per glass of water, even if they live next to a river of fresh water? It wouldn't lead to good economic results to set prices that way.
I think anything else than "what people are willing to pay" will ultimately lead to bad results. For example the misguided "value theory of labor" keeps messing things up and leading people down the destructive path to communism.
If someone is working at a prominent company, and (for example) making $200k while their employer is making $500k in revenue per employee, that's the personal output($) : input($) value ratio in the context of that job environment.
Shifting to working for yourself doesn't mean immediately realizing that $500k monetary value equivalent for yourself instead. It depends on the business, business model, clients, capital, sales, operations, growth, etc, etc.
In what I've observed from some colleagues that have done both, using this information as leverage for a raise or jumping ship to "climb the ladder" elsewhere can yield equally good if not better compensation results than just being your own business.
Obviously there's nothing wrong with doing that and it's personal preference, it's just more of a naive assumption that own-boss money is always going to be >= job money.