Value: a paradox

Tim expresses consternation that the Guardian missed the neoclassical revolution, which tells us that “value” is purely subjective.
It’s tempting - and I think Tim invites this inference - to see this as a left-right issue.  Some leftists cleave to the labour theory of value, as a basis for the belief that workers are exploited, whilst the right is more sophisticated.
This, though, is pish. For one thing, both the fundamental Marxian theorem and Roemer’s property relations approach tell us that the concept of exploitation need not rest upon the labour theory of value.
Conversely, there’s one area where very many rightists - including lots of libertarians - do believe in objective value.
I refer to the stock market. It is still common to speak of the “value” of a share as being a measurable entity separate from its price, which is a function of more or less objective factors such as earnings and cash flows. Such thought flies in the face of the fact that the same marginal utility theory that neoclassicals use to price goods also applies to financial assets. As John Cochrane says at the start of Asset Pricing, asset prices should be determined by a process in which:

The marginal utility loss of consuming a little less today and buying a little more of the asset should equal the marginal utility gain of consuming a little more of the asset’s payoff in the future

This raises the question: why do so many people dismiss the notion of objective value in goods markets whilst believing in it in financial markets?
One possibility, of course, is a simple factual matter. Maybe marginal utility theory works better than objective value theory in explaining goods prices, whilst the opposite is true for financial assets.
Granted, the empirical performance (pdf) of consumption-based asset pricing theories seems poor (pdf) - though this might reflect the difficulties of testing it. But then, attempts to beat the market by valuing shares “objectively” also very often fail: Warren Buffett’s successful experiment has rarely been replicated. And what’s more, there’s some evidence that the labour theory of value actually works quite well (pdf). Empiricially speaking, the labour theory of value is one of the more successful theories in economics.
It’s not obvious, then, that mere empiricism justifies the inconsistent attitude to value in goods and asset markets. So what does?
One possibility is simple ignorant political partisanship. People who haven’t read any economics for forty years might think it sufficient to sneer at Marxists for ignoring the marginal revolution whilst being oblivious to the facts: that  marginal revolution also happened in asset pricing; that the labour theory of value isn’t necessary to Marx; and that it’s not a bad empirical theory anyhow.
Another possibility is the desire for certainty. A belief in objective value helps to distract people from the inconvenient fact that asset prices are very volatile. It offers an illusion of knowledge.
And illusory knowledge is often the basis of hostility to Marxism.

Comments

[Tim Worstall]

"Conversely, there’s one area where very many rightists - including lots of libertarians - do believe in objective value.
I refer to the stock market. It is still common to speak of the “value”"

Not me: the value of a share is what you can get for it. Which isn't subjective in itself: although what people will offer you for it most certainly is.

[Andrew]

I would think the last paragraph is the obvious answer.

Of course there can't be an objective measure of value when there is no objective model of future price movements.

Is this seriously a subject of debate?

[Luis Enrique]

I don't understand. If you arrive at a money value for an asset, isn't the subjective bit how you value money? Separately, it may or may not make sense to talk of objective money values for assets as distinct from what somebody is currently willing to pay for it.

[ian]

Value works best in relative terms, and this has more applicability wrt financial assets than most because they are more often more reliably comparable (being claims on future cashflows) .

So we can come to an estimate for how one bond should price relative to another. But as to absolute value? No chance. Discount rates represent a relation between money now and money later, which is surely subjective. And then there's the question of the uncertainty in all the variables.

On my phone, so sorry for incomprehensiblity/garbledness

[Seanster]

Hhmmm... interesting stuff.
I think Buffett would argue that something like DCF calculations provide the true value of an asset - but require assumptions regarding the future cash flows, etc., - and the true value may never be realised anyway.
Whereas the "free-market value" of, say, my weekly groceries could potentially be worked out in a similar way but the inputs are just too complicated to work out.
Isn't this the point though - the free-market price system does all the heavy lifting for us and works the price out for us.
When Buffett or some other value investor says that some asset is undervalued they're really sayibg that they believe the growth rate will be higher than the average market participant believes - end of.
The rubber meets the road with things like housing - do you value it like a financial asset, or by some sort of subjective means.
Anyway, what I really want to know more about is alternative methods of "arranging our economic affairs" (CD Quote!). Such as worker ownership or customer ownership - like Bayern Munich say, or maybe Railway lines.
Anyone know of any good value (i.e. free) sources for this stuff (not 6th former rants)
Cheers

[bunbury]

Rightish economic views that do conform to the Guardian's stereotype are the efficient market theory and much of what gets called law and economics by, for example, Posner and Bainbridge.

Isn't marginalism not a theory of value but a theory of what you can deduce about other peoples theories of value from market prices?

Mr. Worstall comes across a bit like John Gummer talking to Chris Morris -- the Guardian is drawing a conclusion about the behaviour of consumers that he appears to agree with and getting called stupid for its troubles. Imagine the fury if it had disagreed with him. Not that the article is really about economics