October 13, 2008 § 10 Comments
One of the deceptive ideas going around is that the monetary value of a thing is, as a necessary and sufficient determination, whatever it can be sold for on the open market today. While that is one way of measuring the value of a thing, it is not the only way, and indeed sometimes it is a very nonsensical way.
Suppose I have a magic box. Every day I open up this magic box to see what is inside. On some days there is an ingot of gold inside, of varying size. On other days there is nothing.
Now there are two ways I might look at how much this magic box is worth.
One way is to take it to the flea market, show it around, and see how much someone will offer me for it. Suppose I do so for a week, and for that whole week no gold ingots appear, though I tell everyone of its magical qualities. Someone at the flea market offers me $1 for the box; and that is the only offer I get. Under a market price theory of value my box is worth $1, and that is the necessary and sufficient end of the story.
However, I may not decide to sell the magic box for $1, especially if I don’t need the money right now. Suppose I keep it for ten years, at which point it disappears; and over that ten years it produces $10 million worth of gold ingots. Under a hold-to-maturity theory of value, my magic box is worth $10 million. (Actually it is worth $10 million discounted to today’s value of money, but there is no need to complicate the discussion with such minutiae).
The point here is that the actual value of a financial asset to an investor capable of holding it to maturity is not simply the market value. Markets are not omniscient, and are often flat wrong in their predictions of the future. If they weren’t often wrong, we would never see markets go up and down. And I don’t need to tell anyone who has been conscious during the past week that markets in fact do go up and down.
It seems to me that the only reason to cling dogmatically to a market price theory of value is if we believe that the market has become omniscient, like God. I put forward the hypothesis that it is always a mistake to predicate one of the transcendent qualities of God to an earthly thing.