"Price is nearly equal to value except in rare edge cases of market failure"
What does this even mean?
I'll give two thought examples.
1)Let's say I have a severe peanut allergy and peanuts are selling at $5.00/lb. Does the price meet the value? I.e. would I have a tricky time deciding if I would rather have the $5.00 or the pound of peanuts? Is this even true across society as an "average"? Do we believe markets are that rational, efficient and smooth?
2) over the course of the last year the price of gasoline in California has fluctuated by nearly 40%. Is this variance truly reflective of the relative value of gasoline to dollars over this time period, or is the "catastrophic market failure". How Scotsman must such a failure be?
Meaning the market self-adjusts relatively quickly to match a price to the market's demand, and the ability to supply that product.
Answer to 1) - Don't confuse one person's valuation to the market. Market being plural buyers/sellers, so if you as one person with peanut allergies do not buy peanuts because they are not worth $5 to you due to risk of health issues, it will not change the valuation, especially if the majority of people do not have allergies and enjoy or value peanuts. However, 5 million people going to the hospital with peanut allergies, and a media fear campaign, will send prices plummeting. Markets do not have to be rational, they are not individual rational entities. Just as society is a concept, not an entity. Money is not bad or good; people are, or can be. I like to see market forces like a centrifugal governor on a steam engine [1]. If the pressure goes too high for the system, the weights rotate faster, and centrifugal force lifts the valve, and releases the excess pressure.
Answer to 2) - Sure there are spikes, but like my analogy in #1 above, but the system rapidly compensates and settles on a price that implies a number of people value it at that price.
In general, value is also subjective. A retiree, and a young person starting a family place different values on different things. If they trade something, they both may feel like they gained value in a trade, say, nice golf clubs sold by the older person for extra cash, because they can no longer golf, and a young person who admires classic golf clubs.
> the system rapidly compensates and settles on a price that implies a number of people value it at that price.
I think this is not true. The system tries to settle on a price that implies a sufficient number of people value it at more than that price. Yet, the system ejects players (business failure) which means that the price/market was not accurately gauged (either too high or too low). And this process of ejection is very slow. Price discovery is not an efficient process, and I think Hayek's information problem applies to free markets "only slightly less than" it applies to governments.
In short, markets are not efficient, nor is there really much good evidence that they should be, just a belief.
> value is also subjective
Yes, it is. And that is exactly the reason why even your weak statement "a number of people value it at least that price" - is far far weaker than the OP's statement that markets approximate some representation of social value.
I'm personally a staunch defender of free markets, but my defense is not based on effectiveness of markets in organizing society, rather that centralized clearance of value backed by a state entity is an unacceptable and discriminatory marginalization of dissenting value opinions backed by the rod of state enforcement.
Incorrect, value for the seller almost always is less than price and for the buyer almost always in excess of price thus creating the mutual benefit that underlies most transactions.
A sadly little understood point, and true of all voluntary trade. If A has a chicken and B has a pig and they decide to trade then for A, value[pig] > value[chicken], while for B value[chicken] > value[pig]. By exchanging both profit. Trade is a positive sum game.
But this also illustrates that value is entirely subjective.
AIUI prices are generally determined by market clearing - matching supply with demand. This is not at all the same as there being some objective notion of value. At best you could get 'in general prices are slightly lower than the value sufficient consumers place upon a good to clear the market for that good', but that's a much less general statement.
This. Of value to whom, for what purpose they might have, for a given time.... and given the "value" of currency at any given moment. The price at which a market clears is a reasonable fixing of the value, given all of the variables. Even then the assessment of value isn't the same for either side of a trade: the consumer considers the product to be worth more than the money paid and the producer considers the money worth more than the product: they don't agree on the value of the product. If they do... one or the other is an idiot for making the trade.
A Picasso can sell at a lot of money because not because of the labor put into it, the materials it's made of, etc. It sells for a lot of money because to someone believes it's worth it.
I'm sure that's correct, but it's not quantifiable. All we can really know is how much people are actually willing to pay for a thing. I agree that only puts a lower bound on the real value of that thing to them, but it's the only objective signal we have to work from.
The first example is clearly a case of trying to insert a player into a market where they don't belong. Market failure of a sort. Square peg in a round hole and all that.
The second is - the difference in value of gasoline - as compared to the value of dollars - to different market players - over this time period. The variance is reflective of the changes in the difference in value between the 2 commodities to different people, over the time period.
In abstract yes. In practice, the reasons you value it less than $5 and they value it more than $5 are not arbitrary, but based on factual concerns and real-world conditions.
Even if a crazy/fetishist/more-money-than-sense random person is OK to pay $20,000 for a bag of peanuts, the statistically important majority will not (and in fact, you'd be hard pressed to find even 1 such crazy person for such a thing).
So, yes, valuations vary, but not that much. In fact the reality is closer to products having an inherent value -- only it's not based on themselves, but on the conditions (e.g. a bottle of water is worth $1 now, $1000 in a dessert, $10,000 if Marilyn Monroe once drank from it, etc).
And while conditions change, they don't change that fast, or that much.
That bag of peanuts may have an intrinsic _cost_. But it most certainly does not have an intrinsic value.
"value" may be a confusing word here. Starting from "This has a $5 value". Compare to "I value this at $5". People have moral "values" too. It's confusing.
The point is that how much we value things is contextual.
Warren Buffett built his entire BRK empire around this concept.
The word "value" in some academic settings is used as a thing that is contextual and subjective, but in daily conversation, if I said the value of a bag of peanuts was a billion dollars people will think I'm crazy.
Due to that fact alone, one can assume that in typical conversation, employment of the word "value" refers to "intrinsic value" rather than the "subjective value"
What does this even mean?
I'll give two thought examples.
1)Let's say I have a severe peanut allergy and peanuts are selling at $5.00/lb. Does the price meet the value? I.e. would I have a tricky time deciding if I would rather have the $5.00 or the pound of peanuts? Is this even true across society as an "average"? Do we believe markets are that rational, efficient and smooth?
2) over the course of the last year the price of gasoline in California has fluctuated by nearly 40%. Is this variance truly reflective of the relative value of gasoline to dollars over this time period, or is the "catastrophic market failure". How Scotsman must such a failure be?