The worth—or value—of any good is always unknown and unknowable. Consider this reality to trigger useful questions regarding market behavior.
If you have followed my posts to this point, you realize this question—” What’s It Worth?”—has only one answer: “The worth—or value—of any good is always unknown and unknowable.” Even an individual cannot quantify the worth of things he values. He can only know based on his own actions. So, should this question always become a conversation-ender?
No. Frequently pondering questions to which we have no answers plays a more important role in understanding than having a ready answer. I will examine reflections on this unanswerable question at three levels:
What do you really mean when you pose the question “What’s it worth?” to an individual? Since he cannot answer the question as phrased, you probably want to know what price he would pay for the item. What would he give up that he values less (usually in terms of money) to gain the item in question, which he values more? The answer always depends on his personal assessment. It may not work for you, but that does not make the answer wrong or right.
At the enterprise level, the” What’s it worth?” question, again, generally refers to price—not value. In this case, the” asking price” of an item usually results from a price discovery process in which a number of individuals, through individual acts of buying or not buying, signal how much they will voluntarily give up in order to acquire the item.
The price discovery process does not amount to a collective decision. Nor does it mean that the individual buyers have reached a consensus on a precise price for the item. It means that the asking price falls within a range in which the buyers willingly give up something—usually money—they value less than the item they buy.
When you hear the phrase “market value,” you should think in terms of market price. The market price of the price level at which the market for a particular good has recently cleared. In some markets, that would consist of transactions within the last few minutes. In other markets, it might refer to transactions over the last week or month.
The “What’s it worth?” question becomes more complex when discussing an economy. People use the Gross Domestic Product (GDP) as a common metric for the “value” of an economy. But does GDP provide any real indicator of value or even a measure of price? No.
It cannot indicate value because the diverse value judgments of millions of people regarding millions of items cannot represent a measure at any level.
GDP cannot provide useful information regarding prices. The varied prices of multiple goods cannot be aggregated. Just try to add the prices of hamburgers, autos, and cameras. You can’t do it.
So, is GDP a useless statistic? No. But, you must understand what it does measure. It simply measures the number of dollars exchanged for defined categories of goods. (GDP also suffers from logical flaws, which I will discuss in another post.) We should consider GDP and index not a measure. We should call it the GDPI (Gross Domestic Product Index).
Next time someone asks you,” What’s it worth?” stop and think. (You may not want to take the questioner through all your thought processes, but the pause might clarify your own reasoning.) What does this question really mean?
Individually does this really refer to price?
For an enterprise, what range of value does the discovered price indicate? Can prices move up or down within a range?
In an economy, does the” value” metric provide useful information? Or does it provide misinformation?
Consider the value of an unanswerable question.