Thursday, December 13, 2012

More on Value

I got some interesting (and predictable) reactions from my post on what Westvleteren is worth yesterday.  But I think I wasn't clear enough so here goes another shot.

My main point is that trying to define value is a bit like chasing your tail, you just end up going in circles.  It doesn't matter if a beer is made by 38 monks over a year with hops hand picked by virgins, the finest floor malted heritage barley, water from the melted snow of the peak of K2 and yeast from John Meier's beard: if it tastes bad, it is worthless.  A product's value come from the willingness of consumers to give up the consumption of something else to consume it (which is fancy econo-speak for spend money for it).

Now value comes in two forms: individual and market.  Each individual is idiosyncratic - they have particular tastes, preferences and income.  An individuals value of Westvleteren can come from how much they like the taste, how much they enjoy being one of the in-crowd that has their own bottles, how much they care that their purchase will help the monks stay dry in the rain.  There are no rules, anything that you find worth enough to pay something for is part of its value to you the individual.

Once we sum up all the individuals that have some positive valuation of the good we get the demand curve for the good and this is a measure of its market value.  If there are enough people who are willing to pay more than the producer is willing to accept, transactions will occur, everyone is better off and eventually the market value of the good is found as the equilibrium point between supply and demand. 

I am not trying to tell you how you should value Westvleteren, that totally depends on you, but I am trying to say that the value of this special six-pack of Westvleteren beer has nothing intrinsic to do with the beer or its makers other than the way the quality of the ingredients and the skill of the brewers translates to good tasting beer. 

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