Where is the value?
Value, and in particular differential value, determines much of our behaviour. But it’s a slippery, ethereal concept
A long time ago, when travel was still possible and people still went on holiday, every morning I went to get provisions for the day at the local grocer in the seaside town where we were staying. And every time I could not help noticing his peculiar way of selling soft drinks. For the shopkeeper was selling the exact same drinks for two different prices, one roughly 10p higher than the other. I say “exact” but there was actually one difference: the cheaper one simply stood on a shelf, while the more expensive one was in the chiller.
It illustrates a concept that is not only fundamental to much of economics, but also deeply characteristic of human behaviour, and indeed of all animal life on this planet. I am referring to the concept of preferences. Without it, there would be no such thing as preference for food over non-food, and an organism that did not have that would likely poison itself, or starve to death trying to eat inedible stuff. Only individuals that experienced such preference and acted accordingly would be able reliably to acquire the necessary nutrients for their survival. Likewise for identifying suitable environments in which to live, identifying suitable mates (for those engaging in sexual procreation) and so on.
Acting out preferences
Sophisticated beings as we have evolved to be, we have vastly refined this preference thing over many generations, to cover fashion, means of transport, beer, Netflix shows and lots more. While it is easy to see why an amoeba prefers algae for breakfast over bits of grit, it is less clear why one person prefers sliced cucumber on a sandwich, while others (like your correspondent) abhor it. Some people prefer a car in a loud dayglo colour, while others wouldn’t be seen dead in it. These preferences may be hard to explain, but they are no less real than the amoeba’s preference for nutritious food over mineral debris. We know they are real because, like the amoeba, we behave accordingly: we are prepared to make a bigger effort to obtain things we prefer. Often, we use a proxy — mostly money — to represent that effort, but that is not material. In fact, it is helpful, because it allows us to gauge more objectively the intensity of our preferences. Our willingness to pay for something expresses how much we want it.
And the grocer at the seaside had realized that, on hot summer days, tourists prefer a bottle of chilled pop over one at room temperature, and are willing to pay 10p more for it. Some are not — perhaps because they’re not buying it for immediate consumption, and that is of course cool — but for those who are, the cold drink provides clear extra utility over and above its inherent thirst-quenching characteristics.
In many transactions the utility is clearly visible: we can easily imagine someone prepared to pay more for a car that consumes less fuel (so the extra expense pays for itself), or that a tradesperson buys more expensive but better tools (so their productivity increases). The utility doesn’t even need to be calculable: how about paying more for a car with a badge that confers a sporty or luxury image? Some people care more about how others see them than about what they pay at the petrol pump, and they act according to their preference.
But the further we move away from everyday, tangible and visible preferences and their associated utility, the more unfathomable the concept of preference, and in particular its valuation becomes. A few weeks ago, a TV show following a Yorkshire company specializing in auctioning classic vehicles featured the sale of a car which, frankly, could only be loved by its mum. But the Excalibur was once owned by Roy Orbison. That illustrious previous ownership likely boosted the sale price to £23,500 (€27,000, $31,500). Yet, unlike the badge, there is very little actual signalling value to this fact: the only way anyone can know the unique provenance is by scrutinizing the paperwork that comes with the car. Out on the street, it looks no different from any other model. So, while the extra utility that some people prefer, can be pinpointed in chilled drinks, the fuel consumption or the badge of a car, or the time it saves for a tool, it is not so obvious where it is in this car — other than in the mind of the owner.
With works of art, things are, if possible, weirder still. It is no mystery why the utility (and hence the value) of a painting is larger than that of the canvas and a few tens of grammes of paint. If, in addition, someone has a stronger preference for the painting’s subject, they place a higher value on it than someone who doesn’t care for it. But when it concerns an authentic work by a well-known artist, its value shoots up to a large multiple of the value of a perfect copy. You can get a handmade oil painted reproduction of Vermeer’s Girl with a pearl earring, for just £217.80 (€247, $292). The (unrestored and unauthenticated) original was last auctioned 140 years ago, for two guilders and 30 cents commission or about 30 euros (£25, $35) in today’s money, so that doesn’t tell us much. But for comparison, in 2014, another Vermeer painting was sold at auction in 2014 for over £6 million.
Both the true copy and the original painting provide the same aesthetic value (only an expert would spot any differences), so we can comfortably conclude that the difference in value (a factor 30,000) is the intangible authenticity of the genuine article. The actual Vermeer painting is merely the carrier of that value. What if even that carrier was not needed, and it was possible to isolate (and trade) the authenticity on its own?
This idea is no longer bonkers. For recently, a new kind of object (if we can call it that) has emerged that pushes the boundaries further than ever: the NFT, or non-fungible token. Fungibility is an economic concept that describes the property of a good whereby individual units or quantities are interchangeable and indistinguishable from each other. Money and commodities like oil or gold are fungible — one bank note is worth exactly the same as another one of the same denomination, an ounce of gold is worth the same as any ounce of gold of the same purity, and likewise for a barrel of oil of a particular grade. A house is not fungible: even two houses that are otherwise identical cannot be in the same location, and one can have a preference for one rather than the other. A car that has just rolled of the line can be fungible, one that was owned by Roy Orbison is not.
So, the NFT. It is a piece of data much like the virtual currency bitcoin, stored in a blockchain (an encrypted digital ledger, which provides the necessary security, for instance ensuring it cannot be copied). But unlike bitcoins, which are fungible just like conventional money, NFTs are unique. They are a virtual signature, a token of authenticity associated with an object. And they are happily being traded. The most spectacular example so far is the sale of an NFT associated with a digital collage of 5,000 digital drawings made by the artist since 2007, sold for the sum of $69M. But it is not remotely a one-off: according to Artnet, the 10 most expensive NFTs sold for a total of well over $80 million. In some cases, an actual original artwork is part of the sale, but that is not always the case. What is being traded is, literally, virtual authenticity.
John Cleese, no stranger to absurdity, has got in on the act too with an NFT of a sketch of Brooklyn Bridge. And it is not limited to works of art — the economist Erik Brynjolfsson created an NFT from one of his classic papers, which sold for $1776. Not to be outdone, economists Tyler Cowen and Alex Tabarrok created an NFT from their first ever blogpost (it made $2300). Even tweets are turned into NFTs (with those by famous people like Elon Musk or Twitter founder Jack Dorsey attracting bids of tens of thousands of dollars). An NFTs is not typically accompanied by any rights or any physical object: it is purely virtual. It literally has no use.
And yet, manifestly, people are preferring NFTs over anything else they could buy with the money they pay for them. Is this the strongest evidence ever that value is in the eye of the beholder — even if there isn’t anything to behold?
Originally published at http://koenfucius.wordpress.com on March 26, 2021.
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