## Value is hard to measure

on Saturday, February 25, 2012

The value of an object is not static; it cannot be objective, and it can only be measured at a single distinct moment in time, for two individuals. If an apple trades for a dollar between Fred and Bob, we can only now say that we know the value of an apple (and a dollar) for Fred and Bob, at 1:02PM, Feb 25th, 2012. It would be inappropriate to now claim that we know anything more about the value of apples. Assets don’t have fixed market values; they vary relative to what each man holds.

To see why, let's imagine that a man with two cows and three horses values them in order from most to least valuable. He may order them as follows:

1. cow
2. horse
3. horse
4. horse
5. cow

If this man has to choose to trade away one animal he will chose the cow, but if he is asked to trade away four of his animals he will keep a cow. In one trade he appears to value horses more than cows, but in the second trade he appears to value cows over horses.

Thus we can see that value can only be determined relative to specific trades. The value of the horse cannot be said to be more than the value of the cow. We can only say that he values a cow most if he must keep only one animal, and values it least if he must give up only one animal. It has no value independent of his other assets. Everyone values their things based on their own specific needs. He values the milk that the cow provides, but is willing to give up some milk in order to keep his transportation. He is not willing to give up all of his milk in order to keep his transportation, and so he values the cows differently depending on which other assets he holds. The order in which he places them is more important than the value of a specific trade.

Viewed another way, if both barns are on fire and he can only save his cows or his horses, he will choose his cows. On the other hand, if a predator threatens a horse and a cow and the same time and he can only save one animal, he will choose to save the horse. The result is the paradoxical valuation of a horse above a cow in one instance, but the valuation of two cows above three horses in another. If assets have fixed, independent values, this could never be the case. Value is always relative to our other holdings, and we can never say “a cow is worth more than a horse,” just as we cannot determine if light is a particle or a wave. When we look closely at a specific measurement of light to determine its nature, we get only a reading of it in that instant, with that instrument, in that specific situation. In the same way, we cannot determine the value of a horse by looking at one specific trade and extrapolate that to all valuations, its value is relative to what is held and what is offered in exchange.   Value can only be spoken of relative to specific acts of appraisal, just as light can only be spoken of regarding specific tests of its nature. To further complicate matters, people rearrange their scales of value depending on what is available in the market. Imagine a man with this scale of values: 1, wine; 2, cow; 3, cheese. If he sees that cheese is trading in the market for wine at an even exchange, he will reorder his scale of values to place the cheese above the cow, even if his personal opinion of the cheese’s value is less than the cow.