The Price is Right?
On Shirts, Shakespeare, Da Vinci, Victor Hartmann, and Homo Economicus
I recently bought a shirt for Rs. 2,000 (~$11). Now, what does that tell you?
A few things, at least: I had Rs. 2,000 to spare. I needed the shirt. The shirt was more valuable to me than the Rs. 2,000, and anything else that I needed, and was available for Rs. 2000 or less.
It also tells you: The shirt-seller had the shirt in stock. They needed Rs. 2,000. The Rs. 2,000 was more valuable to them than the shirt.
But now for something completely stupid.
Parenthesis: Homo Economicus
Economics “is the social science that studies the production, distribution, and consumption of goods and services” [Wikipedia]. Almost all of Classical Economics is stupid because it studies, not Homo Sapiens (as all social sciences must), but Homo Economicus.
Homo Economicus is a mythical being which is rational, innately self-interested, and makes optimal decisions, given the information it has. Homo Sapiens (like you and I), on the other hand, is irrational, not always self-interested, and often makes sub-optimal decisions.
Back to the real world.
“A horse! A horse! My kingdom for a horse!”
The act of buying involves two acts: an act of buying and an act of selling.
“Obviously!”, you might say. “You are buying a shirt, and the shirt-seller is selling it”.
Yes and No. I am, indeed, buying the shirt. But I am also selling Rs. 2,000. The difference of this exchange is profit. A rational being would not exchange anything without a positive profit. In our example, I exchanged Rs. 2,000 for a shirt because the shirt was more valuable to me, relative to the money. Conversely, the Rs. 2,000 was more valuable, relative to the shirt, to the shirt seller.
Hence, profit depends on value, and what “more valuable” means.
But what does “more valuable” mean?
“Everything connects to everything else”
In theory, one could take a microscopic view, and assign absolute value to everything — where everything has an absolute value, independent of everything else.
However, in practice, no one knowns how valuable anything is. The reason I bought the shirt was because it was relatively more valuable (to me) than the Rs. 2,000. And if I considered a pair of trousers, or a few days worth of groceries, or a book more valuable, I would not have bought the shirt. Hence, the value of the shirt was relative; not just to the Rs. 2,000, but countless other things that I might have needed.
The concept of need is also complex. Like value, it involves multiple factors and entities. It might also involve price. For example, the price of something might influence our need for it. Paradoxically, often the more expensive a good is, the more we feel we need them (either from wanting to spend on luxury, to believing a more expensive good is a better good).
Hence, when you consider the broader picture (the shirt-seller, other people that sell things to me, and the vast supply chains surrounding them), the value of my shirt is connected to the value of an almost infinity of things.
The value of anything in the the mind of anyone, is connected to the value of everything in the minds of everyone.
A stupid idea — Revisited
Given the nature of value and its connectedness to everything, it is impossible to act like Homo Economicus, and make optimal buying and selling decisions, because we don’t really know what the value of anything is.
The guardians of Homo Economicus (i.e. Classical Economists) usually give two rebuttals to this argument:
- While, in theory, the value of a thing is connected to the value of everything, in practice a small set of these everything, have a disproportionately big influence on value. While, in theory, this is true, in practice, Economists are, at best, vague, and at worst, horribly wrong, on how big the small set of things is. Almost every economic disaster has been a result of Economists “mis-underestimating” the bigness of the small set.
- The other argument is that, there are, indeed, things with “absolute” value: like money or gold. An Economist would tell you, “Rs. 1 has a value of exactly Rs. 1”. Again, true, in theory, but false in practice. We know that inflation, and devaluation affect the value of all money. But even if we discount effects like inflation, we know from experience that Rs. 1,000 that we worked hard for, or was a gift from a close relative, has a lot more value to us than Rs. 1,000 we won in a lottery, or randomly picked-up on a street. Hence, even money has no absolute value.
Samuel Goldenberg and Schmuÿle
There are two types of person to whom this article is irrelevant.
- The first type is the Rich Person. And by rich person, I don’t mean Dhammika Perera or Victor Hartmann’s Samuel Goldenberg, or even Bill Gates. I mean someone so rich that they could buy out Bill Gates, the entire United States of America (People, Resources, Finances and all), and the entire Peoples’ Republic of China, with their spare change. For this person, nothing has price. There is no difference between a $1 bill and a $100 bill.
- The second type is the hermit, who has renounced worldly things and comforts. Just as for the Rich Person nothing has price, for the hermit, nothing has value.
We all (including you, me, Perera and Gates) sit on a vast spectrum between the Rich Person and the hermit. And there is some consolation that if we are pressured in one direction, we can always go in the other. If we are short of money, then we can be a little more like a hermit. And if our lives are too hermit-like, we can splurge a little like a Rich Person.
Bonus Consolation
But there is an assumption behind the value of different things. That different things have different values. But what happens when this assumption is broken? What happens if, to us, everything has the same value?
Shirts, Trousers, gold, money, or the view of a sunset over a valley?
Might we be both Rich Person and a hermit at the same time?
