Glad the Guardian\’s noticed

How much a gold bar is worth is really down to whatever a buyer and seller agree it\’s worth.

Now all we have to do to get them up to speed is to point out that this applies to everything, not just gold.

32 thoughts on “Glad the Guardian\’s noticed”

  1. Sorry to be a pendant, but isn’t that “what it costs” rather than what it’s worth?

    After all, exchange only happens (for rational actors) when the agreed price exceeds the value to the seller and is less than the value to the buyer.

    I sometimes think that guardianista-style economics isn’t far from ours, they just put more emphasis on the fact that a lot of transactions are not economically rational. They however want to stop people doing that kind of thing whereas I regard being able to spend (some of) my money in economically irrational ways as the very definition of wealth.

  2. JamesV- there’s no difference. The only value we have is the price at the moment of transaction; from which we know that the person selling values it less than the price, and the person buying values it more than the price. So, that’s what it’s worth.

    If somebody will only offer me £5 per hour as a shit shoveler, that’s what I’m worth.

    Nobody has the power to decide, for that very reason, what free transactions are “rational”. It is all entirely subjective. Because value is. When somebody says that some transaction by other people is irrational, they just mean that they wouldn’t pay that price for that thing.

  3. “What it costs” is what you get when someone’s setting a price – minimum wage, or in the other direction, price controls. “What it’s worth” is correct for a voluntary transaction.

  4. Surreptitious Evil

    Ltz @ #4 🙂

    And when there is a significant difference between the two, you get shortages. Either because no-one will produce them because there is no way to make money selling them at “what it costs”.

    Or because people in the production and distribution chain (which includes the politically connected) will buy them up before they reach the consumer sales point for resale on the black market at “what it’s worth”.

  5. I often think that much of my later politics was shaped by, aged about five, being in the back of my parents’ car as they house-hunted, listening to my mum go on about how this and that house “certainly aren’t worth X”. And wondering why they got so upset when they were subsequently sold.

    Inter alia, this is why I have a problem with people talking about ‘affordable housing’ when they mean ‘cheap housing.’

  6. I broadly agree, but….would Warren Buffett agree? I am hazy on the details, but has he not made himself very rich by buying things for less than they are worth? (I would like to use some quote marks there.).

  7. sam, yes, it does seem rather paradoxical that there can be simultaneously a housing shortage and too many ‘over-priced’ houses. Seems to me you can have one or the other, but not both, unless someone’s been messin’ where they shouldn’ta been a-messin’.

  8. Surreptitious Evil

    Buffett makes his money by buying things he thinks are worth more than other people think they do.

    He’s not the only one.

    Although a lot of people lose money by employing exactly the same formula.

  9. Surreptitious Evil

    David,

    All it takes is an ignorance about real value.

    I have to declare, occasionally, what my house is worth. Last time I said “who knows?” When pressed I started talking about liquidity in the housing market etc, etc. In the end, I declared a sum I know my house would sell for, even in this depressed market. Immediate response? “That’s a lot less than you said last time!”

    Err, well, duh …

  10. Luke,

    The point is that value is different for every individual, and is instantaneous. Nothing has an intrinsic value. So, if you’re canny, you can find a Person A at time T1 and a Person B at time T2 such that the good has a lower value to A than it has to B, and buy it at A’s value and sell it at B’s value.

    Which is the basis of mercantilism. Like, a spice is lower value to a Chinaman than an Englishman, such that you can still make a profit despite all the expense of transporting it along the Silk Road to England. Spice Road. Whatever it was. Carried by Spice Girls.

    There isn’t an objective “worth” to the spice.

  11. So Much for Subtlety

    JamesV – “Sorry to be a pendant, but isn-t that [what it costs] rather than what it-s worth?”

    Depends. What it costs is determined by how much *you* will pay for it. What it is worth is determined by how much *I* might pay for it.

    Ian B – “Like, a spice is lower value to a Chinaman than an Englishman, such that you can still make a profit despite all the expense of transporting it along the Silk Road to England. Spice Road. Whatever it was. Carried by Spice Girls.”

    I know what point you are making but in the interests of pendant-ery, spices did not come from China. Tea did. Spices came from the Spice islands or what is now called Indonesia. So the Chinese might have paid a lot for them.

    Just in passing, and completely off topic, the slightly more yobbish porn Spice actually did something that made me think better of her. She tweeted something nice about Thatcher, then deleted it, and then backtracked, criticising herself for a lack of courage of a sort that Maggie would not have suffered. It is nice when even Britain-s Slappers show some backbone.

  12. Which is the basis of mercantilism.

    Ian B, I think you’re describing arbitrage, not mercantilism. And it doesn’t really apply to the spice trade. The difference in price between the plantations in SE Asia vs Europe was completely rational, and due to the incredible risks involved in transporting it by ship. If you like, being willing to take those risks was the value added.

  13. Yes, I meant arbitrage. I thought that the word “mercantilism” could be used either to describe the economic system or more generally to mean doing merchant-y things. You live and learn 😉

  14. Ian B and others….Are there some things that you can at least try to value on the basis of some fundamental worth, like how much cash flow a company produces? Or even how much enjoyment you get from a work of art? Whereas others, like gold (or banknotes), can only be valued on the basis of what someone else will give you in return.

    I am not denying that for many purposes market value (ie what you can sell it for right now) is just as important as fundamental value (should have quotes). Nor am I saying it is easy (or, for most of us, possible) to tell when market value is different to fundamental value.

  15. Surreptitious Evil

    some fundamental worth, like how much cash flow a company produces? Or even how much enjoyment you get from a work of art?

    One man’s art is another man’s ruined canvas? Remember our discussion about modern art a few days ago?

    And, I’m not sure about the cash flow either – because that’s likely to be dependent on one or more currencies and, as you point out, a banknote has no fundamental value.

    I suppose you could try to create a fundamental value measuring schema with things like:

    * “balanced diet for one mostly sedentary adult for one day”
    * some measure of “reasonable” accommodation for a 2+2 family.

    But it seems like an awful lot of work (especially as you are going to need an awful lot of variables.) So any measure of fundamental value is probably going to retain a huge subjective component.

  16. Nope. There is no fundamental intrinsic value, for anything, as the subjective nature of “enjoyment” of an artwork demonstrates. This is absolutely fundamental to economics. If you don’t have this as an axiom, any further economic thinking goes wrong; hence Smith (intrinsic value) led to Ricardo, Marx, all trying to find that intrinsic worth that doesn’t exist.

    SE-

    Your example is useful. Ricardo tried to generate an arithmetic of value and came up with this barking nonsense that rentiers would drive everyone’s wage down to “subsistence” (measured in corn), but then even he had recognised that he’d run into a brick wall, because he couldn’t calculate what “subsistence” is and had to grudgingly admit that it would vary from man to man. A cleaner’s idea of a basic living is quite different to a banker’s.

    It’s a dead end this. There is no objective value. That’s just a law of the universe.

  17. You live and learn

    Fair enough Ian B, just my little bit of pendatry 🙂 Your example was still instructive.

    Are there some things that you can at least try to value on the basis of some fundamental worth

    No. Doesn’t exist, because not everyone’s opinion will be the same, ever, on anything.

  18. This is a lot of Austrian tosh: there is nothing subjective about value whatsoever.
    People cannot pay the price sellers think things are worth because they don’t have enough money.
    While working people have to pay for food and rooves over their heads to stay alive ,sellers don’t have to sell them with anywhere near the same urgency and so hang out for the price they will eventually get (This is why with huge demand for houses, developers are dribbling out supply while banking land) .In the meantime ,of course the workers and those needing houses are pushed to the limit. Adam Smith and Henry George worked out that you would have to equalise the pressure that land owners and workers faced by taxing land so the owners could n’t sit on it or keep it off the market forever. Gesell would have gone further by also putting pressure on the rich who kept money in the bank or hoarded it in things that kept their value with a monetary reform which would pressurise money onto the market the same way workers were forced onto the labour market. Tim believes in the market( and Henry George) but cannot see that the subjective theory of value is an excuse for the moneybags not to enter any market whatsoever. Markets might be alright if all parties to the productive process took part. At the moment Money is allowed to sit it out but who knows with the end of Thatcherism and an end to the laissez faire Gothic revivalism which allows the rich the liberty not to take part in economic society?

  19. DBC,

    SIgh. It’s not “Austrian” tosh. It’s mainstream economics tosh, ever since the marginal revolution. The reason that we don’t these days believe in the value theories of the nineteenth century is that they have been superceded by better understanding.

    If you price a good higher than the potential purchaser’s subject valuation of it, he will not buy it.Thus, sellers attempt to find a sweet spot that maximises (units sold x unit profit). They rarely find it, but that’s what they’re hunting for.

    This is true even of a monopolist, as Carl Menger (yes, he’s an Austrian) first demonstrated. The monopolist can set the price, or the quantity, but not both.

    Please, DBC, read a book of economic theory that postdates 1850. Just one. Go on.

  20. @ ian b
    That’s funny : Wikipedia describes subjective value theory as “a core theory of the Austrian School of Economics”. a school I’ve studied enough to know this and to have had my fill of this particular fallacy. Dunno about post 1850? Henry George, JS Mill, JM Keynes, Gesell (you did n’t notice him in the above) Quantitative Easing for the People proponents in the last year have all been mentioned by me and ridiculed by the know nothings on here who have no interest in Economics at all .All they want is laissez faire to work like forces of nature untouched by human intervention ,favouring the strong and destroying the weak in a straight Social Darwinist way. Laissez faire is not an Economic theory : it is the absence of Economics as implemented theory. It is an anti-theory which is supposed to work with nobody having to think or do anything.

  21. Why don’t you Google” subjective value theory” and “Austrian School” instead and it will come up with the quote I used? You cannot fault the logic: subjective value is Austrian tosh; it may be other kinds of tosh as well.I was n’t saying it was n’t. But it is the distinctive theory of the Austrian School.Right that’s that cleared up.
    I tried the websites and found the blog of the Economist Tyler Cowen who believes it is an academic advantage

  22. Why don’t you Google” subjective value theory” and “Austrian School” instead and it will come up with the quote I used? You cannot fault my logic: subjective value is Austrian tosh; it may be other kinds of tosh as well.I was n’t saying it was n’t. But it is the distinctive theory of the Austrian School.Right that’s that cleared up.

    I tried the websites you ordered me to read and found the MR blog of the Economist Tyler Cowen( who believes it is an advantage to be autistic in academic life) and some straight forward explanations of marginal utility which did n’t mention subjective value, though the connection must obviously be there.
    I just happen to believe that prices are fixed by sellers, depending on the effective demand among potential buyers. It is no use brandishing names at each other.

  23. So sellers don’t have costs associated with the storage of their goods, they don’t have salaries and loans to pay back, a wage to earn which all pressures them to sell ASAP.

    Oh and subjective value predates the Austrian school by centuries.

  24. You can believe what you like DBC, it’s your right in a free society to wallow around in ignorance. You really haven’t got a clue what you’re talking about. I don’t mean to be rude.

    Hell, yes I do. If you’re going to pontificate, make some effort to grasp what you are pontificating about. Marginal utility is the theory of subjective value. It describes how the marginal utility of a good…

    Oh, what’s the point? I mean what the fuck is this supposed to mean…?

    I just happen to believe that prices are fixed by sellers, depending on the effective demand among potential buyers.

    I mean there are words there, and grammar. But what the hell is the meaning of it? “Prices are fixed by sellers”… okay… “depending on the effective demand among potential buyers”. So, not “fixed by sellers” then.

    I can’t fault your logic because I have yet to see you deploy any.

  25. You cannot fault my logic: subjective value is Austrian tosh

    Ok, DBC Reed, I’ll concede your irrelevant, distracting point that subjective value is a core value of the Austrian school. So what? Is that meant to be a devastating putdown? They were right.

    Of course sellers hang on for a better price if they can. Of course buyers want to pay less. And in the end they settle on “not quite what I wanted, but as much (or as little) as I can accept”. That appears to be what you describe as pushing buyers to the limit. Exactly how this proves that anything has a determinable value beyond what people are willing to pay for it is beyond me.

    but cannot see that the subjective theory of value is an excuse for the moneybags not to enter any market whatsoever. Markets might be alright if all parties to the productive process took part. At the moment Money is allowed to sit it out but who knows with the end of Thatcherism and an end to the laissez faire Gothic revivalism which allows the rich the liberty not to take part in economic society

    Um, yes, they are, and should be. People rarely do though, because stuffing money, or whatever other assets we might be talking about, in your mattress is a losing proposition vs inflation. But if someone wants to hang on to a house and keep it empty – with all the costs that entails, upkeep, rates, and so on – because they think the price people are willing to pay will pick up in a few years, you think they should not be “allowed” to?

  26. I just happen to believe that prices are fixed by sellers, depending on the effective demand among potential buyers. It is no use brandishing names at each other.

    I agree with Ian B, how can sellers fix the price if buyers do not want to, or cannot, pay? Who do you want to fix the prices then? As for the name-brandishing, if you go back I think you will find you started it.

  27. @LTW
    Since Ian b has imploded ,it is a pleasure to debate with a more reasonable adversary.
    You are quite right: the question of subjective value being a core value of the Austrian School is largely irrelevant; it should be considered on its own merits not attacked by association with the Austrians( or defended by saying Jevons and Walras believed in it as well).
    In most deals there is no bargain struck between
    buyer and seller: if you cannot afford a price in a shop ,you go without. You do not haggle in Tescos .In big deals like selling houses or cars there is a subjective and personal element but this is swiftly negated by going to the local estate agents window and looking up what similar houses in your area are going for.In my young day, you might think your car was worth a lot but would then check it out with a dealer’s Glass’s guide which would tell you in print how much it was really worth.Values could be subjective possibly but prices are going to be objective and inflexibly so.
    It was kind of you to rescue my argument about property owners hanging onto property and not coming to market with them: it had been lost in all the anger. The argument works best with land; sites can lie empty for years until the price rises enough to tempt the owner to sell or develop. If you are not convinced of the case with regard to developers of houses and their land banks consider the recently publicised case of Tescos, who it was reported in their recent downturn ,had bought up numerous sites, not to develop themselves but to block rivals from such advantageous trading positions .Surely in the interests of free-market competition this behaviour should be discouraged? And going from this to developers’ land banks is not a giant step?

  28. Surreptitious Evil

    if you cannot afford a price in a shop ,you go without. You do not haggle in Tescos

    You can buy Tesco Finest, Tesco or Tesco Value ranges.

    Just picking one item, that gives you range of 40p to 9p per 100ml.

    And you can shop in Aldi or Lidl if you are more price conscious, Waitrose or a specialist deli if less.

  29. a dealer’s Glass’s guide which would tell you in print how much it was really worth.Values could be subjective possibly but prices are going to be objective and inflexibly so.

    Thanks for your nice words DBC, but I’m still going to have to disagree with you. Glass’s tells you the subjective price, that is, what other people are willing to pay. Because it’s been distilled from a number of other people’s decisions doesn’t make it objective value. It’s the subjective value but you’re getting some inside knowledge.

    Tesco’s – ok you don’t get to haggle, but you choose to buy or not, or to shop elsewhere. And they can choose where to set their prices accordingly. Same thing. It’s not necessarily a frictionless process, but it works itself out, in the same way a property transaction does.

    Land banks – I think you missed my point. I was saying there’s nothing wrong with a property owner holding on to land and doing nothing with it – it’s their property and maybe they have a reason, and they have their opportunity cost on that locked up capital to deal with in the meantime. Tescos may well have done that, but it’s self-limiting – eventually it would get too expensive to hold all the available sites, and some competitor will cut their lunch. Developers hold land banks for a different reason, getting planning permission takes so long and is so unpredictable you need a surplus inventory at the top end to keep a consistent flow of projects going to your (hopefully) stable workforce.

    I’m not quite sure how you would discourage that behaviour. What rule would you write for where Tescos can buy, and how long before they have to do something with it? More than 5 miles and less than 5 years? Perhaps they have a plan for that land in 5 years time, and are grabbing hold of it now before someone else buys it.

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