There is, however, another sense of price-value mismatch in the world of Robinson Crusoe economics - much of what passes for empirical economics is little more than value-laden theorising. Worse still, the value of human persons, communities and relationships takes a very secondary seat to the price of the 'factors of production' and the market-clearing solution based on implicit values that need to be challenged again and again. Economics needs to be cleaned up - this time on the basis that people really do matter.
Thursday 12 March 2009
Values, Prices and Economics
Oscar Wilde once complained that 'economists know the price of everything but the value of nothing'. Well, the same could be said about current day markets and their over-pricing of risks (and under-pricing formerly). We are now in the era of dictatorship by the markets - let's bow down and offer sacrifices at the shrines of Moody's, Standard and Poor, IMF etc - because if you don't swallow the bitter cup of wage cuts, reductions in social welfare and cut-backs in frontline public services - you will get worse from the real and ultimate masters of economic fortune.
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There is no problem with overpricing of risks nowadays. The face is that the underlying assets, the CDOs and so on, are already in default. The low bank shares are a result of clear headed examination of current incomes from these assets (basically, mortgage repayments are already in arrears). The low prices are not the result of panicky worries about future incomes.
So bank shares are still possibly overvalued, not undervalued, by the market.
The Republic of Ireland as a whole is in a similar position. Our personal, business and state finances are in an horrendous position and we cannot blame external factors. This is the first time in our history that we have been subject to proper external standards and we have been found wanting; the ruling elite in Southern Ireland has been accustomed to solving internal problems with a bit of corruption. Fianna Fáil can't bribe the rest of the world so easily.
Strangely though, even though the assumption in your first paragraph is probably false, it doesn't take away from your point in the second paragraph. This is because there is no real link between your first and second paragraphs.
Your own value-laden theorising will not put food on the tables of the human persons you value. If we want health and happiness and prosperity, including expensive medical drugs and equipment for our health service, we are going to need to do real work, good work, smart work, hard work in a real economy.
The economy exists. Economics is a valiant effort to understand this incredibly complex system. That knowledge can be used for different purposes, good or evil. But if we're going to actually tackle poverty, instead of engaging in political posturing as in Soviet Russia, then we are still going to have to analyze factors of production and prices and markets. Tearing up everything that has been learned so far about economics would be crazy.
If we have 10 years of 10% unemployment, only politicians (and their voters?) are to blame. We cannot blame the whole of economics. Today in the US, the economists are telling the politicians that the stimulus is too small and that the stimulus should fund employment, not tax cuts. Does that sound like the doings of 'evil' economists? We need better politicians, not better economists.
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