Friday, May 15, 2020

Prices and Value

Writing about actions to control the spread of the coronavirus, a lawyer recently wrote, “Value counts more than price during an emergency”. He then misquoted Oscar Wilde. What Wilde actually said was, “A cynic knows the price of everything but the value of nothing.

From an economic point of view neither statement makes sense. The problem is that value is a subjective thing. We all put different values on different things and experiences. An absolute standard of value does not exist, except in the mind of God. He is omniscient, so he can assess the goodness of everything.

Humans are left with their subjective valuations. You might place a high value on rock music, whereas I might think that classical music is more valuable. There is no way of comparing the strength of the valuations of different people, and no way of aggregating the valuations of different people.

We could get large groups of people together and debate the value of things, but that would not get us anywhere.

It is not perfect, but in this situation, price is often the best indication of value that we can get. If a rock album sells in reasonable numbers for $10.00, that indicates that a significant number of people value the record more than they value other things they could get with $10.00. On the other hand, the people selling the album are willing to take that price, because they value the album less than what they could buy with $10.00. This implies that $10.00 is not a bad estimate of the value of the album.

Of course, there will be exceptions to this. If no one actually buys the album at the price, that would suggest that most people consider its value to be less than $10.00. The producer would have to shut sales of the album down because it over-estimated its value. If only rich people are willing to pay $10.00 for the album, then this price is a poor estimate of the value of the product.

However, in most situations, where a product is buying and selling in a relatively free market, the price is a reasonable indicator of the value that a large number of people assign to it.

When making decisions about what to do, prices are useful information, which should be included in the decision-making process. They are not perfect, but they are indicative of value. Making a decision without taking costs and prices into account is foolish, and will often lead to bad decisions.

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