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Author Topic:   Economics: How much is something worth?
Jon
Inactive Member


Message 256 of 330 (663999)
05-28-2012 10:58 AM
Reply to: Message 243 by Percy
05-28-2012 4:03 AM


Re: The Value of Air in Trade
Here's an example of a possible way to obtain an aggregate measure of value for a region that I described to Crash in Message 210. In a small community of 3 supermarkets that don't use promotions the price of a bag of peas is $.90, $1.00 and $1.10. During a given week the supermarket sales are represented in this table:
Supermarket #1Supermarket #2Supermarket #3
Price of a bag of peas$.90$1.00$1.10
Number of bags of peas sold300200100
Total paid$270$200$110
Value of a bag of peas($270+$200+$110)/(300+200+100) = $.97
Price/value ratio.9281.031.13
The lower the price relative to value (the price/value ratio) the more likely it is someone will buy a good, or the more of it they will buy. Conversely, the higher the price relative to value the less likely it is someone will buy a good, or the less of it they will buy.
But this example only looks cool because you've got three different places selling the same item at different prices. When you actually try applying the concept, though, it just results in stupid.
Imagine a small town of 400 people. There's only one grocery store in town. Good? They sell a bag of peas for $1.50 (small-town markup). Everyone who pays $1.50 for the bag of peas gets $1.50 worth of peas, so there is a price/value ratio of 1. On Tuesday the grocer sells ten bags of peas for $1.50/bag. Feeling greedy, he raises his price for Wednesday, and successfully sells ten more bags at $3.00/bag. Wondering just how high he can push it, he raises his price one more time for Thursday, on which day he sells ten bags of peas at $4.50/bag (3 the price they went for on Tuesday).
Using your formula, we calculate the value of a bag of peas as $3.00 (total price paid over three days/# bags sold = $90/30 = $3.00). So the people who bought peas on Tuesday got a great deal, a price/value ratio of 0.5. The people who bought peas on Thursday got a pretty foul deal with a price/value ratio of 3. While the people who bought peas on Wednesday got a fair deal with a price/value ratio of 1even though when they bought the peas on Wednesday they were getting ripped off because the price/value ratio on that day would have been 2.25 (after the sale of the tenth bag).
So our grocer has a pretty nice trick running for himself here. Whenever any of his customers come to his store and complain about getting ripped off, he merely has to raise his prices, sell a few more units, and show them that their price/value ratio is actually lower than they thought. Right?
Of course not! Because real people in the real world don't fall for such malarkey. Real people in the real world who talk about 'value' don't care about 'value in trade'which they call 'price'but just 'value in use'which they just call 'value'. And that is the value that determines how much they are willing to pay for something, which means that is the value that sellers care about when trying to set their prices.
The pricing clerk at the grocery store doesn't determine the value of a bag of peas by putting up a sign. The consumer determines the value of a bag of peas and that's how the pricing clerk decides what number to put on that sign. That's how the real world works, and if whatever model of economics you are using cannot describe things in this way, then that model is useless.
Jon

Love your enemies!

This message is a reply to:
 Message 243 by Percy, posted 05-28-2012 4:03 AM Percy has replied

Replies to this message:
 Message 260 by Percy, posted 05-28-2012 2:55 PM Jon has replied

  
Jon
Inactive Member


Message 257 of 330 (664001)
05-28-2012 11:02 AM
Reply to: Message 251 by Percy
05-28-2012 9:20 AM


Re: The Value of Air in Trade
and your perceived value of TGI Friday's rises.
You mean... even though the restaurant kept all of its prices the same?
Shocker that is!

Love your enemies!

This message is a reply to:
 Message 251 by Percy, posted 05-28-2012 9:20 AM Percy has seen this message but not replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 258 of 330 (664002)
05-28-2012 11:25 AM
Reply to: Message 253 by Straggler
05-28-2012 10:09 AM


Re: Price And Value
Straggler writes:
Percy writes:
The methods of accounting cannot be anything but what they are because of the requirements that the plus and minus sides of the ledger have to balance.
Have I said differently?
If you agree that accounting cannot be any different than it is, that's it's just the toting up of numbers plus and minus, how do you explain this comment? Sure looks like you're accusing accounting of painting a very biased picture:
Stragger in Message 244 writes:
Because the methods of accounting put the emphasis on ownership to the exclusion of near all else.
Even worse, this comment is dead wrong. The number of shares outstanding takes up only a line or two on income statements, and only a couple lines on the balance sheet unless there are employee stock plans, in which case you need lines for those, too, because they have to be carried as liabilities.
The confusion here is yours and it pertains to who is creating wealth.
No, the confusion is all yours. You're using the hard numbers of GDP and productivity figures to argue about contributions they don't measure and that you have no numbers for. You're also operating under the false premise that capital all by itself can't create wealth.
I have by now provided a large number of examples in this thread, but here's another. A hard working native of Brazil arrives on our shores and gets a job cleaning office buildings at night. She'd like to start her own cleaning business but lacks the money, so she works hard and tries to save but just can't get ahead. After 10 years she's still working for someone else and has still saved virtually nothing.
Now let's modify the scenario slightly. A hard working native of Brazil arrives on our shores with capital borrowed from family on which she's agreed to pay 10% interest. Part of the money goes to getting settled and acclimated and just figuring things out, but she soon buys a cleaning business. After 10 years she has paid back the loan and is worth a million dollars.
10 years and no loan yields nothing, 10 years and a loan yields a million dollars. That's how capital creates wealth. Until you understand that capital can create wealth you're doomed to misunderstand some of the most important aspects of economics.
But the idea that the use of microchip technology hasn't boosted productivity and added value to the economy simply because it isn't listed as an item in this way is absurd.
You're incredibly persistent at misunderstanding some things. The contribution to the world economy of innovations like the integrated circuit isn't something we can measure, but that doesn't mean it has had no effect, and no one has raised this argument that you're attempting to rebut.
The point you should actually be trying to make is that Noyce and Kilby's invention has contributed far more to the world economy than they ever received in compensation in the form of salary and the Nobel Prize. I agree the contribution is invaluable, but you must agree that it is unquantifiable. Noyce must have made a lot of quantifiable money because as co-founder of both Fairchild and Intel he would have had a great deal of equity in the form of stock in both companies. Kilby appears to have been a salaried employee all his life and so probably made much less.
Can you make a numerical argument for your position about who creates wealth? I think if you start trying to plug some numbers in that the problems will become much more apparent to you.
--Percy

This message is a reply to:
 Message 253 by Straggler, posted 05-28-2012 10:09 AM Straggler has replied

Replies to this message:
 Message 259 by Straggler, posted 05-28-2012 12:15 PM Percy has replied
 Message 261 by Jon, posted 05-28-2012 3:05 PM Percy has replied

  
Straggler
Member (Idle past 314 days)
Posts: 10333
From: London England
Joined: 09-30-2006


Message 259 of 330 (664004)
05-28-2012 12:15 PM
Reply to: Message 258 by Percy
05-28-2012 11:25 AM


Re: Price And Value
Percy writes:
If you agree that accounting cannot be any different than it is, that's it's just the toting up of numbers plus and minus, how do you explain this comment?
You are the one who all along has said that the proceeds of increased productivity go to shareholders. I am agreeing with you.
Percy writes:
You're also operating under the false premise that capital all by itself can't create wealth.
Capital doesn't create wealth on it's own. You have to invest in something. An activity. An idea.
Percy writes:
A hard working native of Brazil arrives on our shores with capital borrowed from family on which she's agreed to pay 10% interest. Part of the money goes to getting settled and acclimated and just figuring things out, but she soon buys a cleaning business.
An excellent example of capital facilitating wealth creation. Who do you think disagrees with you on this?
Percy writes:
10 years and no loan yields nothing, 10 years and a loan yields a million dollars. That's how capital creates wealth. Until you understand that capital can create wealth you're doomed to misunderstand some of the most important aspects of economics.
I haven't once said that capital doesn't have a role in wealth creation. What I am objecting to is the idea that this is the only significant factor that needs to be recognised when determining who is creating wealth and who is receiving it.
Percy writes:
The more money you take from those best at wealth creation to give to those worst at wealth creation, the less wealth you'll have. Message 63
So who are the "best at wealth creation" in your view? What numerical argument are you basing this answer upon?
Percy writes:
If the worker wants to participate in his company's contribution to wealth creation then he should buy stock. Message 352
Why that rather than work in R&D on a productivity boosting technology?
Percy writes:
The contribution to the world economy of innovations like the integrated circuit isn't something we can measure, but that doesn't mean it has had no effect...
That is my point. It has added huge economic value but isn't balance-sheet quantifiable in the way you keep insisting upon in order to assign something value. Percy - What is the economic value of the invention of the microchip?
Percy writes:
You're claiming that the wealth of the rich, which is quantifiable, comes from "unquantifiable factors". Yet every dollar as it entered their bank accounts was quantifiable and had an identifiable source.
So tell me how much wealth have the wealthiest 5% of the population accumulated as result of the invention of the micro-chip?
You can't can you?
Percy on the micro-chip writes:
I agree the contribution is invaluable, but you must agree that it is unquantifiable.
I do agree that it is unquantifiable. It is you who has been telling me that all the wealth everybody owns can be perfectly accounted for in terms of who has created it. Now we know you are talking out of your arse.
Percy writes:
Can you make a numerical argument for your position about who creates wealth?
I already gave you the example of a publicly funded research scientist whose work resulted in a tenfold increase in national productivity. You said that his contribution to wealth creation consisted solely of his salary.
Go figure......
Percy writes:
Question: To whom do these increased profits belong?
Answer: The shareholders.
The fruits of increased productivity go to shareholders regardless of who is responsible for increasing productivity or creating wealth. Shareholders do not create all new wealth. Therefore they must be receiving more than they are creating. Thus we can conclude that wealth is trickling up rather than down.
Edited by Straggler, : No reason given.
Edited by Straggler, : No reason given.
Edited by Straggler, : No reason given.

This message is a reply to:
 Message 258 by Percy, posted 05-28-2012 11:25 AM Percy has replied

Replies to this message:
 Message 262 by Percy, posted 05-28-2012 3:19 PM Straggler has replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 260 of 330 (664009)
05-28-2012 2:55 PM
Reply to: Message 256 by Jon
05-28-2012 10:58 AM


Re: The Value of Air in Trade
Jon writes:
Of course not! Because real people in the real world don't fall for such malarkey. Real people in the real world who talk about 'value' don't care about 'value in trade'which they call 'price'but just 'value in use'which they just call 'value'. And that is the value that determines how much they are willing to pay for something, which means that is the value that sellers care about when trying to set their prices.
You're still confusing value in use with value in trade. Remember, value in use causes you to assign an infinite value to air when in reality no one would ever pay money for air. I'm talking about value in trade, which is the amount people would be willing to pay for a good.
Different people assign different values, and the aggregate measure of value I proposed was for deriving a single value for a good in a local area. If a grocer knew the aggregate value for peas in his area was $.90 while he was charging $1.10 then he would know his price was too high and that to sell more peas he would have to find some way of lowering his prices.
If the grocer had this aggregate value information for many goods then combined with sales volume information he could make decisions about how much profit he wanted to make on each one and balance his overall pricing so as to maintain satisfactory overall profit levels while maximizing the draw to customers.
About your modification to the grocery store example, in the real world sales decline as prices increase. People would start switching from peas to some other vegetable. If there being only a single grocery store in a small town was an important part of your scenario then it isn't very useful in this discussion. We already know monopolies can be abusive. You applied the aggregate measure incorrectly since it's meant to be applied over a region for a time period, not on a daily basis in a single store, which is not useful and makes no sense. The rest of your scenario of the grocer telling people they should be happy because the price they got yesterday was better than the price today is a bit far fetched.
--Percy

This message is a reply to:
 Message 256 by Jon, posted 05-28-2012 10:58 AM Jon has replied

Replies to this message:
 Message 264 by Jon, posted 05-28-2012 5:30 PM Percy has replied

  
Jon
Inactive Member


Message 261 of 330 (664011)
05-28-2012 3:05 PM
Reply to: Message 258 by Percy
05-28-2012 11:25 AM


Re: Price And Value
10 years and no loan yields nothing, 10 years and a loan yields a million dollars.
But if the inputs were simply freely available for all to take, then no loan would be necessary.
So what value does ownership actually add to a resource? To a finished product?
Two farmers. One has to buy a plot of landsay 50 acresfrom a wealthy real-estate mogul at $5,000/acre, for which he takes out a loan. The other finds a 50-acre piece of land with a big sign on it that says 'Unowned. Finders Keepers'. The plots of land are the same in terms of their quality for use as farmland. Both farmers produce equal yields (because they are hard workers and have identically-yielding land) and sell for an equal price (which will be national market pricethe highest price either can get). Thus, every year, they generate identical incomes.
Which scenario involves the creation of more wealth? And who, in each instance, is actually creating that wealth?
You're also operating under the false premise that capital all by itself can't create wealth.
And it can't. Unless you redefine 'capital' in the broadest of ways to include almost anything and everything/one involved in the production process of goods and services.
so she works hard and tries to save but just can't get ahead. After 10 years she's still working for someone else and has still saved virtually nothing.
A product of the current capitalist system you so greatly revere.
The contribution to the world economy of innovations like the integrated circuit isn't something we can measure, but that doesn't mean it has had no effect, and no one has raised this argument that you're attempting to rebut.
Of course we can measure it. We can look at productivity before the circuit and after; or we can compare economies that make use of such technology to economies that don't. We can even look at individual businesses where one firm employs a technology while another does not. That many if not all companies fail to measure the impact of the integrated circuit on their business doesn't mean it is unmeasurable.

Love your enemies!

This message is a reply to:
 Message 258 by Percy, posted 05-28-2012 11:25 AM Percy has replied

Replies to this message:
 Message 263 by Percy, posted 05-28-2012 4:08 PM Jon has replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 262 of 330 (664012)
05-28-2012 3:19 PM
Reply to: Message 259 by Straggler
05-28-2012 12:15 PM


Re: Price And Value
Straggler writes:
Percy writes:
If you agree that accounting cannot be any different than it is, that's it's just the toting up of numbers plus and minus, how do you explain this comment?
You are the one who all along has said that the proceeds of increased productivity go to shareholders. I am agreeing with you.
And I'm glad we finally agree on this, but if you'd bother to read what you responded to and actually took the trouble to quote, I was referring to your characterization of accounting as biased. You said it overemphasized the contributions of ownership to wealth creation when the reality is that ownership gets only a few lines on the accounting sheets.
Percy writes:
You're also operating under the false premise that capital all by itself can't create wealth.
Capital doesn't create wealth on it's own. You have to invest in something. An activity. An idea.
Leave it to you to pick a stupid interpretation and go with that. Do I have to say everything from scratch in every message? As I said earlier in this thread, unless someone keeps their money in a mattress, money gets invested.
What I am objecting to is the idea that this is the only significant factor that needs to be recognised when determining who is creating wealth and who is receiving it.
And who in this thread is arguing that only capital has a role in wealth creation? You pulled this once before, and in reply I declared that both labor and capital have a role in wealth creation. I've provided examples in this very thread of labor creating wealth, like the man building a chair. So tell us just who, exactly, you're arguing with who is claiming that only capital has a role in wealth creation? And if he really does exist, could you please keep your replies to him out of your replies to me.
Percy writes:
The more money you take from those best at wealth creation to give to those worst at wealth creation, the less wealth you'll have. Message 63
So who are the "best at wealth creation" in your view? What numerical argument are you basing this answer upon?
You pulled this one once before, too, back in Message 141, so I'm going to call you on it this time. What I actually said was this:
Percy in Message 63 of another thread writes:
The public sector is not better at wealth creation than the private sector. It isn't even a close comparison. The more money you take from those best at wealth creation to give to those worst at wealth creation, the less wealth you'll have.
Oh, gee, look at that, I was comparing the public and private sectors, not the rich versus the rest of us. Quite a difference, what?
Percy writes:
If the worker wants to participate in his company's contribution to wealth creation then he should buy stock. Message 352
Why that rather than work in R&D on a productivity boosting technology?
Why not both? Many companies have employee stock plans.
So if you work on a productivity boosting technology that is successful then you get your salary and maybe a nice bonus. And if you also buy stock (thereby risking your capital) and the stock increases in value because of your work, it's like a double bonus.
Of course, if the productivity boosting technology doesn't pan out then at least you still have your salary, but if you also bought stock and the stock tanks then, well, too bad. You risked your capital and you lost.
Percy writes:
Can you make a numerical argument for your position about who creates wealth?
I already gave you the example of a publicly funded research scientist whose work resulted in a tenfold increase in national productivity. You said that his contribution to wealth creation consisted solely of his salary.
I meant at the income statement level. Try to find a place on an income statement for this scientist's contribution to national productivity.
If you want to have a discussion about trickle-down economics, propose a new thread. This thread already has a topic.
--Percy

This message is a reply to:
 Message 259 by Straggler, posted 05-28-2012 12:15 PM Straggler has replied

Replies to this message:
 Message 271 by Straggler, posted 05-29-2012 2:36 PM Percy has replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 263 of 330 (664016)
05-28-2012 4:08 PM
Reply to: Message 261 by Jon
05-28-2012 3:05 PM


Re: Price And Value
Jon writes:
10 years and no loan yields nothing, 10 years and a loan yields a million dollars.
But if the inputs were simply freely available for all to take, then no loan would be necessary.
Uh, okay. Do you live on this planet?
Two farmers. One has to buy a plot of landsay 50 acresfrom a wealthy real-estate mogul at $5,000/acre, for which he takes out a loan. The other finds a 50-acre piece of land with a big sign on it that says 'Unowned. Finders Keepers'. The plots of land are the same in terms of their quality for use as farmland. Both farmers produce equal yields (because they are hard workers and have identically-yielding land) and sell for an equal price (which will be national market pricethe highest price either can get). Thus, every year, they generate identical incomes.
Which scenario involves the creation of more wealth? And who, in each instance, is actually creating that wealth?
The "free land" part of this is highly unrealistic, so let's change this a little bit. One farmer owns his land free and clear because his uncle left it to him in his will, the other had to buy his land. I'll fill in a few real values to help make the comparison.
First of all recognize that all other things being equal the farmer with the loan cannot compete in terms of profit with the farmer with no loan. He has to deduct his loan payments from his revenue which will always reduce his profits.
So let's say the farmer who bought his land puts 10% down ($25,000) and borrows the rest ($225,000) at 5% per annum to be paid over 10 years. Let's say that proceeds for each from the sale of their crops each year is $1,000,000, and that the cost for each to run their farm each year is $900,000. Here's the comparison:
Farmer With LoanFarmer Without Loan
Annual Revenue$1,000,000$1,000,000
Annual Expenses$900,000$900,000
Total Annual Loan Payments$28,638$0
Profits$71,362$100,000
Interest Deduction (approx)$10,000$0
Net Profits$61,362$100,000
Tax Rate (I made these up)15%20%
Taxes Paid$9204$20,000
Net Income$52,157$80,000
That loan makes quite a difference. The farmer without the loan nets almost $30,000 more that first year. If he decides to put that extra money back into the farm, next year he'll make more than the farmer with the loan.
Now, what about the investor who loaned the farmer the money? He made roughly $10,000 in interest on his $225,000 investment. Over the course of the 10 years of the loan he'll earn a total of around $61,000 in interest. Instead of just $225,000 he'll have $286,000, just for sitting there doing nothing except deciding where to invest his money.
Was it a good deal for the farmer who needed the loan? In monetary terms (in other words, we'll ignore how much he likes being a farmer and all that) it depends somewhat on what he could have earned elsewhere and what his other opportunities were for investing his $25,000 stake, but look at it this way. He started with $25,000, and in 10 years he'll own a 50 acre farm that is worth $250,000 today but that if it appreciates at 3% a year in 10 years will be worth $336,000. He's leveraged his $25,000 into $336,000 in only 10 years, which is a return in the neighborhood of 30% per year, while drawing an income all at the same time.
We can't compare it to what would have happened had the farmer been unable to get the loan because we don't know what other job opportunities he had or what investments he could have put his $25,000 into, but by any standards you'd have to say the loan worked out very well for him, and it worked out pretty good for the investor, too, who only made a little money but since land is pretty safe also didn't risk much.
A product of the current capitalist system you so greatly revere.
Well, like I said once before, if I'm talking to communists then please let me know so I can stop wasting my time.
Of course we can measure it. We can look at productivity before the circuit and after; or we can compare economies that make use of such technology to economies that don't. We can even look at individual businesses where one firm employs a technology while another does not. That many if not all companies fail to measure the impact of the integrated circuit on their business doesn't mean it is unmeasurable.
You might to be able to reach some approximations, but you can't really measure it because the specific contributions of various technologies to a company's bottom line do not appear on their income statements.
--Percy

This message is a reply to:
 Message 261 by Jon, posted 05-28-2012 3:05 PM Jon has replied

Replies to this message:
 Message 265 by Jon, posted 05-28-2012 5:53 PM Percy has replied

  
Jon
Inactive Member


Message 264 of 330 (664028)
05-28-2012 5:30 PM
Reply to: Message 260 by Percy
05-28-2012 2:55 PM


Re: The Value of Air in Trade
when in reality no one would ever pay money for air.
Of course they would if they had to. The reason no one pays money for air is because no one has to pay money for air.
That doesn't mean no one would pay money for air.
You're still confusing value in use with value in trade.
No. I'm claiming that 'value in trade' is a pointless synonym for 'price' and that 'value in use' is what actually determines a consumer's willingness to pay, which in turn sets the demand curve and is thus behind an entire one half of the puzzle in determining market price of a good or service.
You applied the aggregate measure incorrectly since it's meant to be applied over a region for a time period, not on a daily basis in a single store, which is not useful and makes no sense.
Then your model is even more useless since it effectively renders sale prices meaningless and fails to accurately predict consumer response to sale prices. Consider a situation in which each store decides to advertise a lower price for their bags of peas. It's their 'Twelve Days of Christmas 12% Off' sale. So the new price for a bag of peas in each store is 80 in Store 1, 88 in Store 2, and 97 in Store 3. Naturally, people buy more (I'm sure you'll agree with this but fail to realize that such behavior is a product of 'value in use' and has nothing to do with 'value in trade'a pointless synonym for 'price'). So we watch the sales for the same amount of time as we did when the prices were higher and we see people buy 400 bags of peas from Store 1, 300 bags of peas from Store 2, and 200 bags of peas from Store 3. The income generated by this for each store is shown in the table below (this is your chart using your math and model):
Supermarket #1Supermarket #2Supermarket #3
Price of a bag of peas808897
Number of bags of peas sold400300200
Total paid$320$264$194
Using your formula for calculating value we see that the value of a bag of peas during the Twelve Days of Christmas sale dropped to 86. This is no surprise for you, of course, since you view price as a determiner of value; a lower price will naturally yield a lower value. But what of the price value ratio? Were people getting a better value for their money? You'd certainly think so; after all, that's why people like to shop when stores have sales. So what of that ratio?
Supermarket #1Supermarket #2Supermarket #3
Price of a bag of peas808897
Number of bags of peas sold400300200
Total paid$320$264$194
Value of a bag of peas($320+$264+$194)/(400+300+200) = 86
Price/value ratio.931.021.13
No significant change! In fact, the sale for Supermarket #1 turned out to be bad for consumers since they ended up getting less value for their money than before the sale. Under your system, they were better off paying 90/bag than they were paying 80/bag. Strange that.
Under your model, a sale could very well fail to give consumers a better value for their money. But does this make sense? If a sale-priced item doesn't necessarily reflect a better price/value ratio than it did before the sale, shouldn't this be reflected in how people behave regarding sales, namely that they should not respond positively to sale prices since they may or may not be getting better value for their money? But that's not how people actually respond to sales in the real world. People actually respond to sales positively in every instanceall other things being equal. Your model should have predicted people not buying as many items from Supermarket #1 as they did (had they bought only 300 bags of peas, they would have improved their price/value ratio from 0.928 to 0.92, a definite improvement over the 0.93 they ended up at).
So your model predicts that at sale price, people should consume the same amount as at regular price to maximize their price/value ratio. Yet that's not what people do. And since the predictions of your model fail in the real world (people actually do buy more peas when peas are on sale), your model is, by all scientific standards, falsified. The only thing that could salvage your model is if people didn't take value for money into consideration when making purchases; but since they do (and they usually try to maximize their value for the money), there isn't much left for your model to stand on.
So where does your model ultimately go wrong? Well, in about a thousand places, but here are a few of the big ones, and they relate to the way you understand value and the role you give it in your economic system:
  • First, value determines willingness to pay (WTP), willingness to pay determines how much a firm can charge for its goods or services. If people are only willing to pay $X, then the firm cannot charge $X+1. Value sets price. Not the other way around.
  • Second, price gives us an at least figure for WTP; if people pay $X for an item then their WTP is at least $X, though they may be willing to pay more. Thus price can serve to help measure value, but it is not the same thing as value and it does not determine value. It indicates minimum value, but that's about it.
  • Third, price/value ratio cannot be calculated for more than a single consumer. No one going to the supermarket bases their decision on whether something is a good value for the money on how many other people bought the same thing and on what affect that might have had on the price/value ratio. People know the value when they walk into the supermarket, the price is on the sign, and they do the math in their heads. It's an individual problem, not an aggregate one.
  • Finally, there is no 'value' anywhere in your model; you've just inserted the word 'value' in place of the word 'average price'. 'Value of a bag of peas' really means 'Average price of a bag of peas'. 'Price/value ratio' is just 'Price/average price ratio'. You're not talking about or even dealing with 'price' and 'value'; you're just talking about 'price' and 'price'.
All these factors demonstrate why your conception of value is useless in terms of studying economic behavior. It provides no additional information for us to consider. It doesn't offer an explanation for consumer behaviors. It doesn't even explain its own problems: how goods selling for less money one day can actually end up creating a worse price/value ratio. And perhaps worst of all is that your conception of value makes it the same as 'average price', for which the English language already has a term ('average price', in case it was missed) and for which it needn't another.
On the other hand, the conception of value others have been arguing for is extremely useful. It provides additional informationnot just selling price can be known, but we can also figure out willingness to pay. It offers an explanation for consumer behaviors: people buy more at sale price because it always gives them a better value for the money because the value doesn't whimsically change every time the clerk scans an item at the checkout. It presents no problems that need to be explained away. And perhaps best of all, it isn't a concept for which the English language already has another term.
So why on Earth should anyone prefer your conception of value over the other one being argued for in this thread when it is so painfully clear that the latter is substantially more useful and supported in real-world applications?
Jon

Love your enemies!

This message is a reply to:
 Message 260 by Percy, posted 05-28-2012 2:55 PM Percy has replied

Replies to this message:
 Message 266 by Dr Adequate, posted 05-28-2012 6:38 PM Jon has seen this message but not replied
 Message 276 by Percy, posted 05-30-2012 8:13 PM Jon has replied

  
Jon
Inactive Member


Message 265 of 330 (664031)
05-28-2012 5:53 PM
Reply to: Message 263 by Percy
05-28-2012 4:08 PM


Re: Price And Value
Jon writes:
10 years and no loan yields nothing, 10 years and a loan yields a million dollars.
But if the inputs were simply freely available for all to take, then no loan would be necessary.
Uh, okay. Do you live on this planet?
Of course I do. What's your point?
The "free land" part of this is highly unrealistic, so let's change this a little bit. One farmer owns his land free and clear because his uncle left it to him in his will, the other had to buy his land. I'll fill in a few real values to help make the comparison.
First of all recognize that all other things being equal the farmer with the loan cannot compete in terms of profit with the farmer with no loan. He has to deduct his loan payments from his revenue which will always reduce his profits.
So let's say the farmer who bought his land puts 10% down ($25,000) and borrows the rest ($225,000) at 5% per annum to be paid over 10 years. Let's say that proceeds for each from the sale of their crops each year is $1,000,000, and that the cost for each to run their farm each year is $900,000. Here's the comparison:
Farmer With LoanFarmer Without Loan
Annual Revenue$1,000,000$1,000,000
Annual Expenses$900,000$900,000
Total Annual Loan Payments$28,638$0
Profits$71,362$100,000
Interest Deduction (approx)$10,000$0
Net Profits$61,362$100,000
Tax Rate (I made these up)15%20%
Taxes Paid$9204$20,000
Net Income$52,157$80,000
That loan makes quite a difference. The farmer without the loan nets almost $30,000 more that first year. If he decides to put that extra money back into the farm, next year he'll make more than the farmer with the loan.
Now, what about the investor who loaned the farmer the money? He made roughly $10,000 in interest on his $225,000 investment. Over the course of the 10 years of the loan he'll earn a total of around $61,000 in interest. Instead of just $225,000 he'll have $286,000, just for sitting there doing nothing except deciding where to invest his money.
Was it a good deal for the farmer who needed the loan? In monetary terms (in other words, we'll ignore how much he likes being a farmer and all that) it depends somewhat on what he could have earned elsewhere and what his other opportunities were for investing his $25,000 stake, but look at it this way. He started with $25,000, and in 10 years he'll own a 50 acre farm that is worth $250,000 today but that if it appreciates at 3% a year in 10 years will be worth $336,000. He's leveraged his $25,000 into $336,000 in only 10 years, which is a return in the neighborhood of 30% per year, while drawing an income all at the same time.
We can't compare it to what would have happened had the farmer been unable to get the loan because we don't know what other job opportunities he had or what investments he could have put his $25,000 into, but by any standards you'd have to say the loan worked out very well for him, and it worked out pretty good for the investor, too, who only made a little money but since land is pretty safe also didn't risk much.
What does any of this have to do with the value that ownership adds to the value of a finished product? No one will pay more for the first farmer's corn than for the second farmer's corn because their willingness to pay for corn has nothing to do with whether the land it was grown on was free or purchased with a loan.
That someone first owned the land, and that someone next extended a loan, created no additional economic value whatsoever. It simply enriched the people who owned the land and extended the loan at the expense of the person who did the actual work producing something of real value (corn). All the money paid back by the first farmer comes from what he earns selling his corn, and that amount doesn't increase just because he owes a debt to the investor. The investor didn't create wealth; he just set up a situation where he could siphon off wealth created by someone else.
The simple act of owning something doesn't create wealth. In fact, completely contrary, it was only when the investor temporarily relinquished ownership of his money that wealth could begin being created. Our second farmer began creating wealth with no obstacles or problems because the land he wanted was not already owned and he didn't need to get someone else's money in order to purchase it. But the ownership of the land by the real estate mogul and the ownership of the money to buy that land by the investor were nothing but obstacles to wealth creation for the first farmer. Had he gotten the same deal as the second farmer, he would have created the same amount of wealth but kept it for himself instead of having to give part of it to someone else who clearly played no role in the creation of that wealth (as evidenced by the fact that the amount of wealth created is identical whether the owner and investor exist or notso long as the wealth creators can overcome the obstacles they set).
Thus the only role filled by owners and investors is that of hijacker: they hold hostage the resources that real wealth creators use to create wealth. And it's obvious why they do this: because they don't actually want to do the work of creating wealth themselves and by holding the means of production hostage they can guarantee a favorable cut for themselves in exchange for releasing those means to the people who actually create wealth.
A product of the current capitalist system you so greatly revere.
Well, like I said once before, if I'm talking to communists then please let me know so I can stop wasting my time.
You're talking to people about economics. And if your theories about economic value truly are about economic value then they should be applicable to any economic system imaginablenot just Capitalism.
You might to be able to reach some approximations, but you can't really measure it because the specific contributions of various technologies to a company's bottom line do not appear on their income statements.
And that's their failure, not mine, and not economics.
Jon
Edited by Jon, : No reason given.

Love your enemies!

This message is a reply to:
 Message 263 by Percy, posted 05-28-2012 4:08 PM Percy has replied

Replies to this message:
 Message 274 by Percy, posted 05-30-2012 7:07 PM Jon has replied

  
Dr Adequate
Member
Posts: 16113
Joined: 07-20-2006


(1)
Message 266 of 330 (664035)
05-28-2012 6:38 PM
Reply to: Message 264 by Jon
05-28-2012 5:30 PM


Not Worth A Hill Of Beans
No significant change! In fact, the sale for Supermarket #1 turned out to be bad for consumers since they ended up getting less value for their money than before the sale.
Well then, naturally they'd shift their purchasing behavior to other goods that were better value for money. For example, suppose that due to a failure of this year's bean harvest, the prices and sales of beans were as follows:
Supermarket #1Supermarket #2Supermarket #3
Price of a bag of beans270300330
Number of bags of beans sold403020
We can see that the value of a bag of beans is 293. If therefore, a customer switches from buying a bag of peas on sale at 80 to buying a bag of beans at 270, he is getting better value for money. However, when the price of peas goes back up after the Christmas sale, the value/price ratio of peas and beans will be the same again, and beans will no longer be the better buy --- they're only better value for money than cut-price peas.
This shows the importance of a good education in economics. A naive customer might blunder into a supermarket and think that just because peas are over three times cheaper than beans, they're better value for money. How wrong he would be.
Unfortunately, a lot of customers are naive. Perhaps we should come up with some economic concept that allows us to explain and model the behavior of those customers who sedulously insist on wasting their money on the low-value peas rather than thriftily spending it on the high-value beans. Alas, we can't call it "value for money", because Percy has dibs on the word "value".

This message is a reply to:
 Message 264 by Jon, posted 05-28-2012 5:30 PM Jon has seen this message but not replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 267 of 330 (664124)
05-29-2012 8:24 AM


Time to Call It?
We seem to be arguing in circles, cycling through the same sequence of arguments over and over again. Would anyone object if I threw this thread into summation mode? Keeping it open is fine, too, I'm not trying to force anything, but we could come back to this another time, maybe next year, and see if we can make better progress.
--Percy

Replies to this message:
 Message 268 by New Cat's Eye, posted 05-29-2012 9:38 AM Percy has seen this message but not replied
 Message 269 by Jon, posted 05-29-2012 9:41 AM Percy has replied

  
New Cat's Eye
Inactive Member


Message 268 of 330 (664136)
05-29-2012 9:38 AM
Reply to: Message 267 by Percy
05-29-2012 8:24 AM


Re: Time to Call It?
I still have replies I'd like to get to when I have more time.

This message is a reply to:
 Message 267 by Percy, posted 05-29-2012 8:24 AM Percy has seen this message but not replied

  
Jon
Inactive Member


Message 269 of 330 (664137)
05-29-2012 9:41 AM
Reply to: Message 267 by Percy
05-29-2012 8:24 AM


Re: Time to Call It?
We seem to be arguing in circles, cycling through the same sequence of arguments over and over again. Would anyone object if I threw this thread into summation mode? Keeping it open is fine, too, I'm not trying to force anything, but we could come back to this another time, maybe next year, and see if we can make better progress.
Since most of the discussion in this thread revolves around you, if you no longer feel like the thread is going anywhere, what choices are there?
If you leave the thread open but no longer participate, it is as good as dead. Or, put it in summation mode for everyone's final say.
The outlook for the thread is bleak either way.

Love your enemies!

This message is a reply to:
 Message 267 by Percy, posted 05-29-2012 8:24 AM Percy has replied

Replies to this message:
 Message 270 by Percy, posted 05-29-2012 10:08 AM Jon has not replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 270 of 330 (664138)
05-29-2012 10:08 AM
Reply to: Message 269 by Jon
05-29-2012 9:41 AM


Re: Time to Call It?
Jon writes:
If you leave the thread open but no longer participate, it is as good as dead.
I think several of us have made a considerable investment in this thread - abandoning it wouldn't be good form. And in any case, CS says he's been looking for a chance to post some responses, so the thread should stay open.
But 300 messages is the normal closing time, and we're only 30 messages away from that. I haven't set the limit yet - how many more messages do people think we need? In answering this question I think people should consider whether they believe any minds are going to be changed at this point. Is there any important information that still needs to get out there? I wouldn't mind coming back to this another time, it just seems we've exhausted the topic this time around.
--Percy

This message is a reply to:
 Message 269 by Jon, posted 05-29-2012 9:41 AM Jon has not replied

  
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