Level 3, 276 Pitt St., Sydney NSW 2000 (02) 9264 9267 0414 292 368

AJML Accountants Update – January 2016

To create value, you must understand value

Value is not like any other measurement. I could look at an old glass jar and easily determine its weight. To do so, all I would need is an accurate scale. With a ruler, I could tell you its height, and it wouldn’t take very advanced mathematics for me to calculate its volume. The figures that I would arrive at are true regardless of where I would move that jar, and they remain true regardless of where on earth (or even in space, as long as I speak of its mass rather than its weight) I place it.

The value of that glass jar, however, is quite different. There is no instrument to measure its value other than a very special human construct called a “marketplace.” Even if the jar happened to be created by an innovative Pacific Northwest glass artist, the famous Dale Chihuly, its value would be rather low were it in the hands of someone ignorant of its artistic value and to whom it only had utilitarian value as a water carrier. Such a person might even toss it away when he or she finds a larger or more robust jar. However, to an art collector, it might have significant value; and to art

collector who received it as a token of affection from a loved one, it might have still more value. Unlike an object’s physical parameters such as length, height, or volume, its value is more of an intangible or spiritual parameter, which can only be determined in the context of other human beings.

What is often mystifying is how an object’s value can increase without any corresponding increase in its physically observable measurements. If a barge of grain increased in value because another 50 tons of wheat was loaded onto the now topped-up barge, you would understand that it now is worth more. No mystery there. However, when the barge of wheat seems to increase in value simply because the trader who purchased it happens to have knowledge about a certain place where grain is badly needed, the transaction reels of sorcery or cheating.

This may be partially why the trader is viewed so often with a mixture of envy and loathing. For example, in England, right up to World War II, describing someone as a “merchant” was to dismiss him with disdain and contempt. Somehow, this upstart was presuming to hobnob with the aristocracy on the basis of having amassed vast quantities of money in a mystical fashion that nobody understood. Friedrich Hayek, the twentieth-century Austrian economist who was a professor at the London School of Economics, put it this way: “Value is not an attribute or physical property possessed by things themselves, irrespective of their relations to men, but solely an aspect of these relations that enables men to take account, in their decisions about the use of such things, of the better opportunities others might have for their use.”

You only know the value of that thing you own after finding out what other people would give you in exchange for it. That is why there is profit to be made by roaming the isolated countryside and purchasing old furniture for resale in your antique store in the city. The farmer would rather sell it to you than truck all his pieces into the city himself without even knowing what he will succeed in selling and what he will have to transport back home again.

A hundred years before Hayek, an economics professor at the University of Vienna, Carl Menger, said that value “is a judgement economizing men make about the importance of goods at their disposal for the maintenance of their lives and well being.”