April 2, 2008
A few years ago, a friend of mine wrote a book that demonstrated, by citing conflicting accounts of the same events, not only that the Bible was not inerrant, but that it could not be inerrant. Now I’d like him to do the same for the market.
Somehow, over the past few years, the judgment of the market has transubstantiated from a figure on a price tag, good only until changed, into something like the revealed word, a definitive judgment on worth. The true value of an item or a person’s labor is deemed to be whatever someone is willing to pay for it. New York Yankees third-baseman Alex Rodriguez is worth $275 million over ten years because the Yankees are willing to pay him that amount. A company’s value is defined not by what it owns and what it could sell it for, or how much it can earn for its investors, much less its ability to improve people’s lives, but by multiplying the price at any given moment of a share of its stock by the number of outstanding shares. When a stock’s price goes down, holders of that stock are said to have lost money, as though dollars had been siphoned out of their bank accounts. To borrow Oscar Wilde’s bon mot, we know the price of everything—but the value of nothing.
The notion that market price equals value has always been sketchy. Is it that clear that a $9.95 2400-calorie Domino’s hand-tossed pepperoni pizza has a greater value than an $11.95 200-calorie tossed salad just because it costs less? By what standard except price is a coal-produced kilowatt-hour of electric power a better value than a solar-generated kilowatt hour? Even the idea that there is a market, a single market with a single price, even for an instant, is little more than a figure of speech. Macy’s sells a man’s dress shirt for $50. Wal-Mart sells the same shirt for $29.95. What’s “the market price”?
What was sketchy now seems untenable. On February 27, the market placed the value of Bear Stearns at over a billion-and-a-half dollars. Three weeks later—less than three weeks later—on March 17, after Bear Stearns’ clients withdrew more than $17 billion in accounts—in other words withdrew more than ten times the company’s supposed total value–the same market placed the value of same company at a little over $5 million. On the same day, Bear Stearns agreed to be sold to JP Morgan Chase for about $2 million, a price that represented just a quarter of the market price of Bear Stearns’ headquarters building alone.
The more alert will object that the foregoing analysis not only compares apples to oranges, but compares apples to baseballs to buckshot—uses different bases for determining value at different times to create the impression of incoherence.
Exactly. The problem is not the validity of any of these prices for any buyer or set of buyers on any given day. The problem is treating a semi-undifferentiated aggregate of buyers and sellers as though it were a single actor, “the market”; attributing to it human emotions—the market is “skittish“ (the New York Times), “nervous” (Forbes), or “serene” (the Pittsburgh Post Gazette)—or animal characteristics like bullishness or bearishness; and then treating “the market’s” quirky and highly perishable assessments of value like holy writ.
It might be more helpful to think of market judgments the way we think of election results. Every election is won by somebody—but not necessarily by the candidate who will do the job best. Winners whose performance in office is not to our liking can be replaced at the next election or, in parliamentary systems, even sooner.
Or think of the market like the humble thermometer. If a thermometer shows the temperature to be 80 degrees, we take its word for it. But no one assumes that because the thermometer says that it is 80 degrees, that 80 degrees is therefore the “right” temperature. We all understand that tomorrow the temperature may be different. And we feel no compunctions about changing the temperature if we can. If it’s too hot for us, we are under no obligation to sweat; we can turn on the air conditioner. If it’s too cold, we don’t have to shiver, we can turn on the heater.
Which is how we should regard market judgments. A market that sets the price of housing too high for working people to afford, or that sets the price of oil too low for the health of the environment, should be vulnerable to having the impact of its judgment undercut or circumvented. We should not scruple to ensure that people have affordable food, health care or education by excessive deference to market decisions. If the market inflicts misery on millions by making a hash of, say, housing and home mortgages, we are free to conclude that adult supervision, or even behavior modification, may be called for.
It is said that into every life, a little rain must fall. But that doesn’t mean we can’t open an umbrella to keep ourselves dry.