May 12, 2007

What’s aught but as ’tis valued?

Filed under: Economics — duncan @ 4:22 pm

Perhaps now is the time to take a first step into very deep waters indeed: the question of ‘intrinsic value’ in economics. Here is the definition of Intrinsic Value in dear Tony Cleaver’s glossary.

“The value of something in terms of the direct utility it provides to the consumer, as opposed to its officially declared value or administered price.”

That is to say: a commodity’s intrinsic value is defined in terms of the satisfaction or pleasure it brings. (‘Utility’ is defined bluntly as ‘level of satisfaction’.) But satisfaction and pleasure are – are they not? – subjective qualities. What could be less ‘intrinsic’ to an object than how much pleasure it brings us? Since you can take pleasure in something that I despise, this value is pretty much non-intrinsic, it would seem.

But that, of course, is to assume that we know what we mean by ‘intrinsic’ here; by ‘subjective’ and ‘objective’. Everything in economics comes down to desire and pleasure. This is the whole point of the concept of utility, or welfare, to which everything else is referred. Economic value is created by the intersection of desire and reality; it does not reside in reality alone. But if value itself is in this sense non-intrinsic, what does it mean to distinguish between different levels of reality in value? Different levels of the intrinsic?

At times, in the stock markets, various shares are said to be over-valued or under-valued. What does this mean? Most obviously, it means that they are not valued by the market at what they are ‘really’ worth. But what is the force of this ‘really’? The entire system of valuation within which we are operating here is arbitrary – a human invention, spun out of air and words. To say that a certain company ‘really’ has a certain value, independent of our financial and social needs, independent of the wealth or pleasure it might bring us, seems the wildest fantasy. We are not, after all, guessing at these companies’ value in God’s eyes; we are guessing at their value for us, here, now. Well then: if this is what we judge their value to be, who is to say we are wrong? If it is in our power to grant value, how can we grant it incorrectly? But then, of course, the question becomes one of ignorance, of time, of changing circumstances and changing temperaments. We may value a company at such-and-such a price today, and yet value it at such-and-such another price tomorrow. And if we foresee that such a change in valuation is inevitable, or at least likely, we may say: this company is not valued at its true worth. There will be a correction in the markets. This valuation, now, is a blip; the company’s real, intrinsic value will sooner or later reassert itself. And when it does, we will say – this stock has returned to its intrinsic value.

There is nothing wrong in this; so long as we do not believe that we have distinguished between two types of value, different in essence. There is not a surface, illusory value (the product of a bubble or a slump) and then, beneath this superficial value, the true, intrinsic, ungainsayable value which it is our job to uncover. There are, rather, two different versions of the same kind of value: a value that we choose; or, rather, that our minds discover in the utility, welfare, pleasure or desire that our bodies and hearts choose for us. Divided against ourselves, we may see that what we choose now will not be what we choose tomorrow, or on any other day of our lives. But this is not a movement from the intrinsic; it is a movement of our souls.

To say that a stock is over-valued or under-valued, then, is to say its value has departed from some mean; from some equilibrium point to which, we believe, in the long run it must return. And yet (already the same difficulties crowd in) what exactly do we mean here by the long run? As Keynes famously said – in the long run we’re all dead. This remark is of the greatest profundity. Its implications are: that there is no final equilibrium to which we may refer our valuations, even in our imaginations. Human history will have been an agglomeration of longer and shorter short runs; the scale may differ, the phenomena are the same. To treat a stock market bubble as a deviation from stocks’ true values is correct as far as it goes; but our choice of tomorrow’s real values over today’s inflated values is always going to be dependent on our choice of scale, which is itself dependent on our needs and desires – or on the utility our choice will bring us. If we try to refer ourselves to the limit case of all time (the longest run of all), we find that our economic judgements lose all meaning – for in the long run, our entire economy is a bubble. One day it will burst, and all the value that we so proudly display on the financial pages of our newspapers will turn back into ink and paper, ashes and air. This isn’t to say that economic value is unreal; it derives its reality from the world that grants its worth; and this is the world we inhabit. But when the bubble of the human race bursts, and the insects or algae turn their senses toward our remains, they will not uncover the intrinsic value that, all the while, underlay our civilisation. They will discover their own strange objects of attention, unthinkable to us; and our bones will form the basis of altogether different bubbles and speculations.

Am I sounding relativist? Do I seem to say that economic value is illusory? I don’t think you should think so. Our commodity’s prices may be nothing but the product of love and suffering; but love and suffering are real. This is one of the strange paradoxes of economics: it insists on referring everything back to utility; yet it scarcely speaks of the real meaning of this concept. Having declared the overwhelming influence that desire, joy, pain, hunger and all the other human emotions and drives play in the construction of our economies, these drives are then relegated to the back rooms of the discipline; locked away in filing cabinets where they need not disturb the construction of economic models. Economics is based on the subordination of value to desire; yet the entire thrust of the discipline is the subordination of desire to (economic) value.

Well, all this is more than a little simplistic. But these are themes to which we’ll have to return. Sooner or later. In the short long run.

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