Wednesday, January 7, 2009

How do you define value?

Found this article and really enjoyed it. An interesting take on the word "value" and what it really means in our current economy...

Declining prices, values not the same


These days, it’s hard to avoid seeing articles that proclaim something like, “The stocks that compose the Dow-Jones Industrial Average lost $6.7 trillion of their value in 2008,” or “Metro-area median house values drop 5.2 percent from last year.”

But when we read “value” in this context, what are we really reading about?

Let’s take something simple, like firewood. Let’s assume I paid $140 a cord for it last fall. (A cord is a stack 4 feet by 4 feet by 8 feet, or 128 cubic feet, except that there’s space between the logs, so it’s actually more like 96 cubic feet.)

And let us assume that, for some reason, the price of firewood has dropped to $100 a cord.

In financial terms, the wood has less “value” than it did a few months ago. But from another perspective, it’s just as valuable. It burns just as well in January as it did in October. It has the same BTU content. It’s just as easy or difficult to split and haul. In other words, nothing has affected its utility for the reason I got the wood in the first place: to help heat our house.

From that vantage, what changed was not the value of the wood, but its price. Yet if we go from simple firewood to the stock exchange, “value” somehow enters the discussion.

To take another example, my computer is certainly worth less than it was when I built it a year ago. It’s a relatively tiny 80 gigabyte hard drive (but only 21 percent full), single-core CPU with a 64-bit processor and a mere 2 gigs of RAM. I’m not sure there’s any new desktop machine that wimpy for sale anywhere.

But it does the work the way I want it to do. It boots up every morning and doesn’t lock up or crash (one reason why GNU/Linux, which is free, is more valuable than Microsoft Windows, which isn’t).

I’m familiar with its quirks and workarounds. Its value to me grows over time, whereas its market price is likely down near the negative “you’ll have to pay somebody to haul this away.”

Or let us ponder real estate. I don’t follow the local market that closely, but it’s entirely possible that our house’s market price dropped by $50,000 or even $100,000 last year.

But it still shelters us. It hasn’t lost any square footage; all the rooms are still here. The lot is the same size, and it remains within convenient walking distance of most of our daily needs, thereby reducing our transportation expenses. Its value to us is basically the same as it was when we bought it for $52,000 almost 20 years ago, even if the market price moves up and down.

So unless we plan to sell the house or borrow a lot of money against it, the fluctuations in its price don’t have much relevance to our daily lives.

That may explain why, even though we keep reading that “this is the greatest financial collapse since the Great Depression,” mundane life seems to go on about the same. Prices have fallen for paperwork based on leveraging other paperwork, but a cord of dry ponderosa pine still has the same heating value, no matter what its price.

We hear a lot about “family values” and those “values voters” who put moral considerations ahead of economic considerations. Yet when we read about the economy, we keep seeing the misleading word “values” instead of the honest word “prices.”

Oscar Wilde, the 19th century British wit and playwright, once defined a cynic as “A man who knows the price of everything and the value of nothing.”

Wilde knew the difference. But since he wrote that in 1892, we seem to have confused the two, and thus equate declining prices with declining values, when they’re not the same.

Ed Quillen (ed@cozine.com) is a freelance writer, history buff, publisher of Colorado Central Magazine in Salida and frequent contributor to The Post.