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May 18, 2005
The meaning of "value", Wed., May 18, 2005, 12:19 PM
Mark from North Carolina made a comment to my blog today on CPI: " I take the view on inflation that perhaps inflation is a reduction in the value of money because of excess money supply creation ("fiat" or paper money -- picture stacks of worthless paper bills in historical hyper-inflated economies). Therefore, higher prices that are a result of supply/demand realities do not spell inflation. When oil prices rise because demand outstrips supply, this does not reduce the value of money (inflation) -- it increases the value of oil. The value of money may stay the same or increase." /Mark
Here is my response:
Hi Mark,
Thanks for participating by commenting to the blog. I really appreciate that.
I think you have the words "value" and "price" mixed up, in terms of the way I see it, which is in terms that are important to trading capital markets. That's not to say you are wrong, and I'm right.
According to wiki, which is a marvellous tool:
"In neoclassical economics, the value of an object or service is often seen as nothing but the price it would bring in an open and competitive market. This is determined primarily by the demand for the object relative to supply. Other economists often simply equate the value of a commodity with its price, whether or not the market is competitive.
In classical economics, price and value were not seen as equal. In this tradition, to Steve Keen "value" refers to "the innate worth of a commodity, which determines the normal ('equilibrium') ratio at which two commodities exchange." (Debunking Economics, p. 271, ISBN 1-86403-070-4.) To Keen and the tradition of David Ricardo, this corresponds to the classical concept of long-run cost-determined prices, what Adam Smith called "natural prices" and Karl Marx called "prices of production." It is part of a cost-of-production theory of value and price. Ricardo, but not Keen, used a "labor theory of price" in which a commodity's "innate worth" was the amount of labor needed to produce it.
In another classical tradition, Marx distinguished between the "value in use" (use-value, what a commodity provides to its buyer), "value" (the socially-necessary labour time it embodies), and "exchange value" (how much labor-time the sale of the commodity can claim, Smith's "labor commanded" value). By most interpretations of his labor theory of value, Marx, like Ricardo, developed a "labor theory of price" where the point of analyzing value was to allow the calculation of relative prices. Others see values as part of his sociopolitical interpretation and critique of capitalism and other societies, and deny that it was intended to serve as a category of economics.
Economists such as Ludwig von Mises asserted that "value" was always a subjective quality. That there was no value implicit in objects or things and that value derived entirely from the psychology of market participants."
I happen to go along with the Karl Marx definition of "value in use" to generally describe value (as opposed to price) in capital markets. I also accept the words of von Mises related to the importance of psychology in determining value (and price).
Best regards,
/Bill
Posted by Posted by Bill Cara on May 18, 2005 12:19:39 PM | Category: Economics
Discourse
Thanks for posting my comment. I have read some economics and know a little about some of the theories you mentioned. I tend toward the Austrian school as well.
I made up a little thought experiment to try to separate supply/demand and inflation. Imagine an economy with $100 of currency and a steady supply of around 100 clams. $ are only used to buy clams, clams cannot be stored, and $ cannot be hoarded. The economy uses all the clams it can get. The implications of supply variations are interesting and say something about "inflation", which I think is a catch-all term that is used to describe a complex set of interactions. Regards, Mark Ellington
Posted by: Mark at May 18, 2005 1:00 PM [link]
The bond market appears to be focused on the longer term here (12 months?). What happens after the two collateral assets are deflated? Best template... Japan. If the fed is concerned about risks rising in the banking system due to aggressive real estate lending http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050516/ and they have observed that the 'savings crisis' is linked to irrational expectations of real estate appreciation http://www.federalreserve.gov/boarddocs/speeches/2005/20050422/default.htm ... they're likely to continue on their path until the risk of aggressive lending is recognized and the irrational expectations are corrected- regardless of inflation numbers.
So they deflate expectations in the stock and real estate markets. And in so doing we solve the spend thrift consumer problem! Might be some side effects.
12 months out I think our concern will be deflation. Our stock (SPX) and bond (TNX) markets are tracking with Japan's from point of market (SPX)peak. Chart available by email.
Regards-
John
Long STRIPS, TLT, Cash, Staples, Drugs, Utilities
Posted by: John at May 18, 2005 12:37 PM [link]