Hypostatic Markets?

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.

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§ 10 Responses to Hypostatic Markets?

  • August says:

    How do you determine the value of the ingot? No matter how you build the pyramid, eventually you’ll need a market. They don’t outperform God, they out perform us, especially those of us who are arrogant enough to think we can plan economies

  • e. says:

    Zippy,Wouldn’t your post here advocate the argument <>against<> mark-to-market accounting, which previously you seemed to be against removing entirely due to transparency issues?Also, how long do you think the government would be willing to hold such securities and do you actually think they will do so to the point of achieving such level of return?

  • zippy says:

    <>…eventually you’ll need a market.<>Even that isn’t <>strictly<> true. If something I’ve invested in provides something <>I<> need over time – say I am living off of crops I grow on my land, for example – then what some other particular person is willing to pay for my land is merely a piece of data, not a transcendent determinant of value.The current price offered for a thing in some marketplace or other is just a piece of information: one piece of information in an ocean of information. It isn’t a God. And market prices <>don’t<> outperform us as a general thing, or else there would be no point to ever making any contrarian investment decisions. But history (even personal history) shows that often those who make contrarian investment decisions do very well.

  • zippy says:

    e: I think that there is no particularly obvious good answer when it comes to mark-to-market. Given that the price of a thing in some market is just a piece of data, we ought to be able to present that data, for the sake of transparency, without treating that piece of data as if it were a transcendent determinant of value, which it is not.

  • Anonymous says:

    You’re the blogging equivalent of Mae West. When I agree with you, you’re very, very good. When I don’t, you’re very, very bad.

  • August says:

    Well, I’m not looking for a transcendant value, rather the value at which the transaction will take place- for both parties.The current market price is information. A contrarian uses that information and contributes to it. The price changes to reflect the new information. This may take time, but it takes considerably less time than it would to make us all aware of all the knowledge individually.A socialist removes this information. Read Hayek. Read some Soviet history. They were wildly incompetent.

  • zippy says:

    Recognizing the manifest fact that a market price is simply one piece of sometimes deceptive and always imperfect information in a sea of information is not the same thing as embracing Communism or Socialism.In fact, Communism is itself based in not insignificant part on another reductionist theory of value, the Labor Theory of Value. I’m against all such reductionist theories because, well, they are manifestly false.

  • August says:

    I shall now agree most heartily…… with anonymous.You are so Mae West!You are embracing socialist action. You are fine with what Paulson/Bernanke are doing, and it is socialism.

  • Don't Know Nothin' says:

    There is no such thing as an absolute “market price” for any item, in point of fact. What happens on the market is I offer to pay $300, and someone out there who has told his broker to sell on an offer of $300, is matched up to me by the brokers, and a sale takes place. 2 seconds later, someone else in Tokyo offers to buy at $310, and someone else in Singapore who told his broker to sell at $310 is matched up. 3 seconds after that, someone offers $290 and is matched up. What is THE PRICE? An average of the prices is $300, but the security is also selling at other prices as well. At the instant of sale, the price that represents the value is the price agreed upon by the actual seller and the actual buyer. For that very moment, TO THOSE PERSONS, the value is exactly the amount agreed upon. But those qualifiers are not transferable to another moment or another buyer/seller. By definition, then, there is no definitive market “price” that is absolutely valid across the board. If I have enormous wealth at hand in actual goods, and I am using a gold ingot as a paperweight these days, the value of it <> to me <> might be exactly the replacement cost (including time and trouble to find one) of an equally effective paperweight. If someone thinks “but its worth on the market is much higher” he is merely thinking about the value to a certain finite group of other individuals, not some absolute. If tomorrow someone comes up with a cheap way to manufacture gold out of dirt, the “value” at $900 per ounce will all of a sudden vanish, and once again it will be as useful as a paperweight and just as valuable.

  • zippy says:

    That’s what I’m talking about. 🙂

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