These recent weeks I’ve become interested in economy for some reason. After I saw A Beautiful Mind I became intrigued with John Nash and his supposed (according to the filmatization) critique against Adam Smith; but this vague and dormant fascination with economics has suddenly flared up. As a technical person I’ve always held economists in a slight contempt (just as they with all certainity feel the same about me) because I figured that the area of economics isn’t scientific enough. Wow, how’s that for vague? Since I haven’t studied economics I’ve had a hard time putting my finger on exactly what’s lacking, but I’ve assumed that they just borrow a little from statistics, a little from social sciences, a little from psychology and put it all together into something I view as sort of pseudo-scientific.

I won’t say that my recent delve into this area has left me convinced that this isn’t the case, but at least now I feel that economics is full of brilliant ideas and brilliant people. Not in the least, aforementioned Adam Smith himself. Imagine this absent-minded Scottish scholar walking around muttering to himself; liked by all, studious and thorough, producing theories that – basically – hit the spot over 300 years ago and still hold up rather well today. I have a very warped sense of what’s cool, but Mr. Smith is definitely what I would call cool. Total icebox.

However, one thing struck me about his comments about value and price. First of all, I’d better paraphrase (with the risk of misinterpreting or omitting something important) the argument:

An observation: things don’t cost what they are worth. It’s a common complaint; athletes earn too much, teachers earn too little, and so on. Likewise, the same could be said for objects. In Adam Smith’s time diamonds had no practical use in the industry, so their only redeeming quality was that they were pretty – they were essentially worthless. On the other hand, water is immensely valuable; without it you’ll die. Now, that’s pretty freakin’ valuable.

So, what we have is something that’s enormously valuable – water - that doesn’t cost anything at all, while diamonds which have no practical worth at all cost a mint. The usefulness, or value of an object is not reflected by its price; the price is a separate thing that is governed by supply and demand rather than value. Water is commonly available, but diamonds are rare.

(I know that worth and value aren’t really synonymous, but please consider them so for the span of this blog post. My vocabulary wanders.)

Professor Timothy Taylor quotes the old saying that a cynic is a person who knows the price of everything but the value of nothing, but changes it to be about economists instead. The argument is that economics deals with objective things like supply and demand and prices, but cannot judge values since they are incredibly hard to quantify due to their subjectivity.

When I heard this I instinctively felt like objecting. Okay. I admit that value is nigh on impossible to determine. You can’t set a numerical value on water’s worth. It would be an exercise in futility. Here’s a subjective list for me, for example:

• Water: 1 GWth
• Diamond: 134 Wth
• Nintendo Wii: 1024 Wth
• 100 Mbit Internet connection: 2 TWth

The units are of course Worth (Wth), MegaWorth and GigaWorth. If you receive the urge to comment that a diamond could get you many Wiis and thus should be worth more, remember that that’s the price you’re talking about now – not the worth of the object itself. And yes, the list is a joke in case you’re wondering.

But despite the intangibility of value, you can’t omit it completely from the calculations and pretend that you’ve made a functional model of supply and demand without it; it’s like approximating a function of [insert a natural phenomenon] and pretend that you have the whole story. Sure, you can reach results; and sure, this might be the practical way of approaching it all. But to my layman mind it seems like value is a bigger piece of the puzzle than the lecture pretends that it is. If you have something that’s slightly less plentiful than another item, but you think that its value is greater than the other, you’re bound to purchase it despite supply and demand models.

What we have here is a status quo of sorts. Value is needed for complete calculations, but it cannot be quantified. Are the economists correct in skipping this parameter then? Approximations might work anyway. I say nay! (Only because I like the word nay.)

I may roll over like a dog most of the time, but not this time. Why not try to quantify value? Here’s a spontaneous thought: Maslow has presented a hierarchy of needs in which needs have various levels of importance. First come the physiological needs such as breathing and eating, and then comes safety needs and so on. I may be grasping at straws here, but it seems to me that water could easily be fitted into the physiological need, while diamonds fit into the aesthetic needs far later. Hey, what do we have then? We have quantified the values of water and diamonds, respectively. Sure, there are no MegaWorth values attached to the items, but we have a relative value against each other. That ought to suffice to include value into some calculations.

One obvious objection to this is subjectivity. For a kid a Nintendo Wii will be very useful and valuable for recreation, while an elderly gentleman might view it as a piece of junk that gets placed on the shelf next to the DVD and the transmogrifier, never to be used. But couldn’t we apply some statistics here? No, I’m not being hypocritical – I’m just suggesting that we make the approximations as late as possible, and don’t hide important variables.

But hey, considering the brilliant people everywhere this must have been considered and discarded already. Or possibly, it comes into play in more advanced economics - I’m just on Economy 001, also known as bullshit and spare time speculation.

This entry was posted on Monday, January 22nd, 2007 at 3:08 pm and is filed under Observations. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.