Thanks. You can see the results of this graphically demonstrated here when the fed launched its quantitative easing policy and excess reserves went from essentially zero to nearly 2 trillion (places pinky to lips) . . . that’s trillion dollars.
Out of curiosity are there economists who eschew the concept of value altogether? It seems to be a source of disputes that smell merely-verbal to me at least in many instances.
If you’re asking me, I wouldn’t know. I’m pretty far removed from academia at this point. If it doesn’t relate in some way to investment decisions, at least indirectly, then I’m probably not going to hear about it unless I go looking for it.
However you never know. For example there was the Jackson Hole conference this past weekend and some controversial stuff was presented there which got some coverage. But things that are purely academic like more philosophical issues - not so much.
I was just asking the thread in general but thanks for the link in any case.
I’d be very interested to see how any economist would eschew the concept of value. The very nature of the discipline is to study how choices are made. It’s to justify why people take one course of action rather than other. That at least implies, if not outright demands a system where some things are more desired than others and the difference thereof can be estimated systemically. Otherwise, the choice process would essentially be random.
Even behavioral economics doesn’t eschew value but rather points out inconsistencies with traditional conceptions of value (you’re more attached to something you already own than an identical, though random one, vice versa, etc).
The idea of externalities challenges the idea that values are wholly represented in dollars and cents, but the concept of value is still there (the joy something brings you vs the actual dollar amount of the object).
That’s correct, and they measure perceptions of value rather than assuming value as assigned by a rational actor. But value is definitely part of the vocabulary.
Isn’t value completely fungible? I mean if I want a pair of jeans, I can pay between 40 bucks at Wally world (and probably a lot less) and a few hundred for not much difference in actual quality. The difference is really all in the marketing which goes to the perception it creates.
Same with services. I need to get a hair cut for example. I can either go to Super cut for around 20 bucks, which is exactly what I’ll do or spend a few times that to go to a pricey salon. The odds that there will be a huge difference worth the price are pretty small. It’s mostly a matter of perception.
Even so, couldn’t it turn out that “value” only has useful predictive value for individual transactions, and that when you start doing things statistically, in the aggregate, no variable sensibly corresponding to “value” turns out to be relevant?
It’d be like molecular momentum as it relates to the behavior of gasses… We can formulate laws of gas behavior which make no reference at all to molecular momentum, even though the study of gas behavior is in a sense fundamentally the study of the effects of molecular momentum.
Perhaps not directly, but having a market where shares trade freely based on market pressures can provide indirect benefits:
- A company with a high market capitalization (# of shares times the market price per share) may be considered more stable and more creditworthy and may be able to borrow money at a better rate.
- Employees, managers, directors, etc. with stock options or that already own company stock may be more motivated to improve productivity and revenue if they can work harder now to sell their shares for a greater profit later.
I guess it depends on what you mean by “create wealth”.
If you’re talking about capital gains (people buying at a lower price and selling at a higher one) there’s no wealth created. Money changes hands - it goes from one account (Mr. Jones) to another (Mr. Smith). The same is true when prices fall. Money changes hands, but there’s no more or less money in the world then there was before.
If you’re talking about rising stock prices, a certain kind of wealth is being created - financial wealth. It’s the same kind of wealth that gets created when people trade a pebble back and forth at higher and higher prices. Or a Van Gogh, or a fake Van Gogh, or anything else that’s traded in a market, and valued at market prices. People feel richer, (and maybe they spend more, which helps the economy) but nothing new has been made. No real wealth has been created.
Now, as you rightly point out, companies do make real wealth. They build houses and cars and fix computers and do other useful things.
Well then I think my previous post erred on the wrong side between micro and macro economics. I guess I should have said that microeconomics is how/why people make choices and has a wide and diverse world of application outside of strictly money.
Macroeconomics, in retrospect, is what I should have assumed you meant.
I’m not an economist but in my conversations with (macro)economists they treat nations as players just the same as it would be an individual in miro. The “value” that nations aspire for are even more concrete and less up for interpretation. High growth, low/manageable inflation, low/manageable unemployment, etc.
Some nations seemingly act “irrationally” like North Korea but as it has been pointed out to me by a poli-sci/economics grad student, North Korea is bad at a lot of things but it’s really good at keeping those in power very rich. So their value system on a macro scale is different than other nations, but there are still goals and metrics for achieving those goals. It’s a very loose definition of “value” though, I suppose.
What you don’t seem to understand are 2 very basic and obvious points.
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companies create wealth by producing goods and services, i.e., economic growth. IOW, every quarter and every year, each share of stock represents a greater share of equity in the company and therefore has a higher value which accordingly much must be reflected in it’s market price.
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the stock market is prospective not retrospective. IOW, it is anticipating what earnings will be 6-18 months in the future and pricing shares accordingly.
Unfortunately, I don’t think I was really thinking clearly in terms of that distinction, which of course I should have been.
Here’s another way to ask the question: Could we study prices without thinking about value?
To be embarrassingly honest, I am not sure whether that is a micro- or macro-economic question.
I honestly don’t understand your point. I think what you’re saying is that without a stock market, the original investors wouldn’t want to invest. I’m sure there’s some truth to that.
But I wasn’t arguing there shouldn’t be a stock market - I was arguing some people think there’s money “in” the stock market, the same way there’s money in a bank, or a drawer. You hear the same kind of thing when people talk about money moving from (say) the stock market to the bond market, or the gold market. I know it is a metaphor (a poor and misleading metaphor) but one some people seem to take literally,
When the price of the Mastiff increases, the total, collective financial wealth of the two of you increases by the amount of the increase in the market value of the Mastiff.
It is exactly the same as the stock market. When the market goes up, the collective financial wealth of the country increases by the equivalent amount.
No. The amount of money flowing “into” stocks is exactly the same as the money flowing out. For every buyer there must be a seller, and vice versa. There is no other way it could be. In fact, the idea there could be more money flowing into stocks than flowing out is just a variant of the idea that there’s money “in” the stock market to begin with, which you claim not to believe.
I agree there’s a difference between income-producing investments, and the other kind.
I don’t think we’re talking about the same thing. Say today there are a billion shares of various stocks circulating, with a combined market value of $100 billion. Over the next month, demand for stocks increases as optimism about future growth spreads. By the end of the month, many owners of stock have sold them to new owners, who’ve sold them on for a higher price. There’s still a billion shares circulating, but their market value is now $150 billion. That could be characterized as money flowing into stocks, relative to other investments. It doesn’t mean anyone is depositing money in some sort of account, or that money is coming in but not out, it means more money than before is tied up in that particular investment vehicle.
This is a perceptive question that cuts right to the heart of how academic macro has been done for the last thirty years. But I’m not sure how much detail you’d want. It could fill volumes.
Basically, there are all sorts of cheats involved to try to derive macro conclusions from the individual micro agent who’s making an abstract calculus-based optimization to get to the best possible decision given their constraints. Since the 1980s, macro has been about developing “microfoundations” for macro models, and although there’s a lots of useful, insightful stuff that has come from that, I’m basically convinced that the modern methodology tends to obscure more than it clarifies for most people who try to study it. It’s a long, screwed up story. The gist is that micro is about individual decision-making, and macroeconomists try to get their models to be based on this micro decision-making, but in doing so, they lose an enormous amount of important stuff that’s left out of the model.
Having said that, I’m pretty conventional in my own thinking. I don’t think that any of the critics of modern macro have anything remotely robust enough to replace it.
Micro.
Micro is also called price theory. It’s about the mathematical agent with subjective preferences who engages in “rational” decision-making, and prices fall rather elegantly out of this (given the proper assumptions, natch).
If we agree that as economic activity increases that represents an increase in the amount of goods and services produced, then we also have to agree that the economy has expanded and has produced greater greater wealth - yes?
To the extent that’s true, either one of two things also has to be true. Either the number of dollars has remained fixed and each one is worth more (deflation) or the central bank and the banking system has done it’s job and expanded the money supply to accommodate the change in activity and there are now more dollars around.
In the latter case, one of two situations will be true. Either the expansion in the money supply has exactly matched the increase in activity (and wealth) such that there is no change in the net value of each dollar (unlikely) or more dollars have been created than necessary (inflation).
edit: note however that the mere creation of dollars is not the relevant factor as we have seen since 2008. We currently have a huge overhang of liquidity to the tune of around 2 trillion dollars and there is no inflation. That is because that money is still largely secreted away in excess bank reserves.
It’s not that I’m forcing value on something and claiming it’s determined by the market; I’m simply giving examples of market values you or I might think ridiculous. The pebble example was made up, of course, but real life examples abound. At one time a few acres in Tokyo were worth more than the state of California. The market value of US stocks plunged by trillions of dollars in the course of a few days. There was (supposedly) an app for sale at one time the only purpose of which was to show you could afford a several thousand dollar app. (It did nothing else, except show how much it cost.)
Anyway, the point is it’s the market that determines the prices of things, not whether you or I anybody else thinks its fair, or rational.