Victorian Values

In Oscar Wilde's play Lady Windermere's Fan, Lord Darlington remarks that a cynic is a man who knows the price of everything and the value of nothing. Perhaps we are all to a greater or lesser extent cynical, in that we have difficulty assigning real values to things even though we may be well aware of their prices. We know, in economic terms, that there is a loose correlation between value and price and that the correlation varies in its validity and is hardly ever exact. Our judgements on this help to drive the market. Few of us, I hope, value friends and family in terms of price, but equally, in our day to day lives of getting and spending, we need to measure the value of all sorts of goods and services. Price is generally the way we do it. The sources of economic value, its storage and its relationship to price has long interested me, as it has generations of economists. Since there are different schools of thought on the matter, I assume it's not just a technical question, but one deeply rooted in society and its wider values.

Let's start with something tangible. For older British readers the picture below may well prove evocative.

For those in the dark, I should explain that it is a set of the old UK coinage as it existed prior to "D-Day", 15th February 1971. I am not a coin collector and nor was my father who just had a fancy to purchase this set in the dying days of Lsd. The face-value of the set which comprises (ignoring the medallion at the top) one half-crown, one florin, two shillings, one sixpence, one thru'penny bit, one penny and one ha'penny, was seven shillings and fourpence ha'penny, or 7/4½, as it was usually written. In modern terms, that is 36.875 pence or "new pence", as we used to say back then. The modern face-value is, of course, zero, since all the coins have now been phased out. You could not use any of these coins in a shop. Well, not normal shops anyway, but you could use them in a coin emporium. In this case, you would not be using the coins as money, a medium of exchange, but as goods that you wish to exchange for money.

A cursory surf on the Web tells me that my proof set of 1970 coins now has a value of about £18. That's an increase of 4715% in nominal terms since, in 1970, the nominal value was equal to the face-value. If we adjust for inflation (RPI), we find that the increase in real terms is 314% over 40 years. Not a bad investment, in fact. It compares well with UK house prices over the period which, according to the Nationwide house price index, achieved a value increase of 3715% in nominal terms and 247% in real terms over the same period. By comparison, the values for gold (valued in Sterling) are 4052% and 270% respectively, according to the World Gold Council. So, my set of coins has beaten both gold and property over the period. A pity, then, that Dad didn't buy a thousand sets.

How does this compare with other asset classes? Well, in the same period, crude oil has risen 372% in real terms (a terrific investment), but copper, which is actually the main constituent of all the coins, has only managed a real terms increase of around 20% (had we carried out this exercise 18 months ago there would would have been 10% decrease). So, the transformation of this set of items from useful money to a useless collectible, despite the fact it is actually made out of a material that has been a poor investment, has resulted in a huge increase in value. I find that very, very strange. What is the cause?

The answer in practical economic terms would appear to be our old friend supply and demand. There were 350,000 sets issued, so the supply is limited if not particularly small. Set against this, there is the demand from coin collectors. It's not something I understand, psychologically, but I accept it exists. I surmise that the attraction is largely the self-reinforcing one of anticipated capital gains or, as we might say, increases in "value". Here we touch upon an old conundrum which is probably as old as civilisation but neatly exemplified by Adam Smith.

Smith chose water and diamonds to make his point. Why is it, he asked, that water, which is so necessary to human life, has such a low value; whereas, diamond, a material almost wholly useless (especially in Smith's time), has such high value? The proximate answer contrasts the abundance of water and the scarcity of diamonds. Both substances are in demand but, strangely, the utility value of water cannot compete with the fetish value of diamonds, at least not usually. A modern parallel might be copper and gold. The latter has been continuously in demand for 5,000+ years with little utility value, whereas copper was hugely useful until about 1000 BC and then again from about 1830 AD, with only modest interest in between. Smith just missed out on its unexpected resurgence.

Another example of unexpected non-utility value would be this,

the famous penny black stamp, the world's first adhesive postage stamp issued in 1840. They are not particularly rare and there are an estimated 1 to 2 million extant. These stamps in poor condition can be had for £10 and good ones for £100, while unused mint condition stamps fetch over £1,000, apparently (I know nothing about stamps). Not bad, considering that in face-value terms it would be worth today about 30p.

Many years ago, I considered buying cask whisky as an investment (not that I actually like the stuff hugely), but rejected the idea as not being sufficiently liquid and contented myself with the odd bottle. Ditto wine, which I drink but not with any expertise. Maybe in retrospect I should have taken the plunge, since the supply of the specific underlying assets steadily diminishes worldwide, but I feel there are too many pitfalls for the unwary.

It's hard for me to understand the long term stable or rising values of items like coins and stamps or, for that matter, diamonds and gold. They seem to exist in a microeconomy that sustains itself through the activities of just a tiny proportion of the race, many of whom are just interested in driving up the price. It's a fact, however, that despite various fluctuations their value seems enduring, especially for gold and gems. In times of disaster, however, what use are they? Would I trade my last diamond for your last remaining bottle of water? I don't know. It might depend on how optimistic or pessimistic I was feeling or whether there was a whisky to hand. However, why would you sell it to me? Only because, perhaps, you were sufficiently optimistic to look forward to an imminent resumption of normal times and, thus, values. Sometimes, markets can turn strange and so can values.

Ricardo and Marx considered that labour was virtually the only source of value. Today, I think, we would want to add energy and resources into the mix and I am sure that there must be many more theories of value out there, including a modern academic tendency to regard discussions of value as too subjective anyway. Perhaps also, we should accord some value to the types of societies we have built (I seem to recall Galbraith was keen on this). Certainly, Eloise probably thinks so. I don't really begrudge the woman her benefits and if it's true that her parenting is good, then it's a price worth paying, but many of us might feel that the presented sentiments, if they are truly hers, have gone wrong somewhere.

Although I am hardly a communist, Marxist analysis of value has always appealed to me. In particular, the idea of commodity fetishism which, in conjunction with the complexities of the production and distribution chain, obscures the true value of goods. In some ways, of course, money remains the ultimate, state ordained, fetishised item. The talismanic power of the positive bank balance or net worth appeals to most of us, as does the folding stuff itself. It's a kind of faith we have that sometimes goes wrong. Whenever I go to Scotland I am amused to receive Scottish bank notes. They are not legal tender anywhere in the UK, but people trust them just the same (in Scotland that is  --just try using one out of the King's Cross taxi rank).

In sum, I don't think it's cynicism that prevents us understanding the nature of value, it's the complicated nature of the idea. The quote from Wilde panders to the glib notion that economic values and what, it is implied, are some other kinds of values, ("real/human/deep etc") don't correlate. We can, I think, all "buy" into that one, prima facie. You can't buy friendship, a happy family life or beautiful countryside. That's literally true, but you can buy, directly or through taxes, a good education, a decent home and a sustainable land use policy, all of which help to create the right conditions. Values are interconnected, economic or otherwise. I think Marx and some other Victorians saw that. The base really matters, whatever our feelings. The economic perversions of the C20th, left and right, have masked something here.

Sorry, a bit random, I know, but that's the effect of liquid investments.