Reconsidering Value

Here is something of a Socratic question: Does advertising something increase its value? I'll come back to it in a moment.

Some economists like to distinguish between market price and market value. The former is simply how much you could get for something, selling it today, no matter how inefficient, ill-informed or plain scared the market actually is. Market value on the other hand is what someone would pay for it if they were acting "knowledgeably, prudently, and without compulsion". When the two coincide you are said to have an efficient market. The fact that the two are, supposedly, not coinciding at the moment is what is leading to calls for the suspension of mark-to-market accountancy rules, which after all rather depend on a certain amount of market efficiency.

Back to the original question. Assuming that advertising is not making fraudulent claims about a product, so that potential buyers remain able to act knowledgeably and prudently, can it increase market value? We'll assume that there is no compulsion involved either although let's caveat this depends on your assumptions about the psychological efficacy of advertising in persuading people to buy. Let's say, in fact, that all advertising does is associate a product with a certain sort of lifestyle, giving it a certain cachet, a certain desirability. Classic branding stuff. Well the answer is that if advertising is successful in making a product more desirable then, yes, there is more demand, people are knowledgeably, prudently and without compulsion prepared a higher price, the market value increases.

Or let's take another example: I spend a lot of money on a house. A good part of the money I spend is discounting the supposed future value of the house. What does this mean? House prices are going up, they've been going up for a while, the prevalent assumption is that they will keep going up. I am prepared to pay a lot now because I will be able to make more selling later. And of course, one effect of this assumption is that it will keep driving prices up.

Arguably, the problem here is that the market is not knowledgeable. It assumes that prices will keep going up, whereas in fact they cannot. But this is a strained definition of 'knowledgeable'; in fact what is demanded at this point is omniscience. Even then, even if I realise that house prices cannot keep going up, the fact that the view is prevalent means that the seller of the house would not knowledgeably, prudently and without compulsion sell the house to me. He'd get better money from someone else.

What's the point here? Well in recent years a lot of economic and political discourse has been haunted by a belief that markets determine value. For instance, the advocates of globalisation point to increased growth which is attributed to the removal of trade barriers and tariffs, and developing countries opening up to markets and investment. But growth here means a growth in GDP, which is the market price (not even the market value) of what the country does. There is also a wider discussion to be had about whether that growth is really attributable to reducing barriers to trade but I don't want to address that here.

So here's the anti-thesis: The market doesn't determine value, it discovers it. Sometimes it distorts it. I suspect this is not controversial position to adopt and that even free market ideologues would agree. The market is a field into which our values - personal, cultural, ethical - are projected. It is a mechanism for realising those values efficiently. It is a way of achieving consensus and collaboration towards achieving and attaining what we place value on. But it does not enact valuation.

A sidenote - I'll confess that my usage here is a little muddy. Things have value, people have values, and we are talking about possibly very different things. To try to clarify, one's values in this context are the motives - be they personal, cultural, ethical, spiritual - that inform a process of valuation when determining the value of a product. As a corollary, it is precisely the fact that people have different values, leading them to assign a different value to that same product, that means we have to invoke market value in order to make value objective and measurable.

Market forces then, like those that drove the speculative property/credit bubble of recent years, are not a pure, reified, inevitable energy. They are the abstracted agenda of profit-seeking individuals and organisations. When we found ourselves in a situation where people were forced to take on more debt than they would be able to ever pay off, it was not the market that determined that, but the irresolve of our own values. If we had been prepared to place a higher value on social housing, more equitable distribution of wealth, reduction of personal debt then the market would have responded with ever more efficient ways to realise those values instead.

Instead we went with what the advertisements told us we should value.