“I shall endeavour to explain (exchangable value) as fully and distinctly as I can for which I must very earnestly entreat reader’s patience and attention:
- his patience in order to examine something which might appear unnecessarily tedious;
- his attention to understand what may, perhaps, after the fullest explication which I am capable of giving of it, appear still obscure.
I am always willing to run some hazard of being tedious in order to be sure that I am perspicuous; and after taking the utmost pains that I can to be perspicuous, some obscurity may still appear to remain upon a subject in its own nature extremely abstracted.” Book 1, Chapter 3 of The Wealth of Nations
In a former post, we discussed the metaphysics of value. Useful Value is the value of an object as seen by the individual mind, while Exchangeable Value is value as seen by the mind of society, or the mind of others taken together. Exchangeable value vanishes when one is removed from society and only Useful Value remains:
“To one who was to live alone in a desolate island it might be a matter of doubt, perhaps, whether a palace, or a collection of such small conveniencies as..contained in a tweezer-case, would contribute most to his happiness and enjoyment.” (Theory of Moral Sentiments 4.1.8)
Exchangeable Value is then divided into real and nominal value. Real value is value that can be objectively measured and agreed upon by others, while nominal value is the value that people want others to believe, and is thus subjective. The real value of a thing can be viewed as its real importance to society, ultimately measured in the “toil and trouble toil of acquiring it (or) saved in disposing it”, while nominal value is its pretended importance, which may or may not be real. Both water and diamonds are important to society, but water has less exchangeable value because it is abundant while diamonds are rare. An easy proof is to compare the price of a gallon of water to a kilo of scrap iron, both useful and abundant commodities, to see similarly cheap exchangeable values.
Arbitrage is in taking advantage of the difference between the real and pretended importance of an object, by buying low and selling dear — buying something where it is cheap and unimportant, and selling it where it is more important or dear.
“Half an ounce of silver at Canton in China may command (more) labour than an ounce at London. A commodity, therefore, which sells for half an ounce of silver at Canton, may there be really dearer, of more real importance to the man who possesses it there, than a commodity which sells for an ounce at London is to the man..at London. If a London merchant, however, can buy at Canton, for half an ounce of silver, a commodity which he can..sell at London for an ounce, he gains a hundred per cent by the bargain. It is of no importance to him that half an ounce of silver at Canton would have given him the command of more labour..than an ounce can do at London. An ounce at London will always give him the command of double..all these, which half an ounce could have done there.”
When done naturally, this performs the work of the invisible hand of human dharma as a natural resource allocation tool using profits to “make nearly the same distribution of life’s necessities.. and afford the means to multiply the species,” something that animal dharma is incapable of. However, when monopolized and overtraded, it leads to the ruin of society by imposing a lot of toil and trouble on others: “The great fortunes so suddenly and easily acquired in Bengal..prove that.. profits and interest are very high in those ruined countries.”
Everything is bought and sold more of less according to its real value, which is expressed in varying nominal values of currency. This real value is then viewed from two perspectives during a sale: as natural price for the seller (cost of production with profits) and market price for the buyer, (the price that buyers want). Market prices can be below the natural price (either loss or break even), in line with the natural price (ordinary profits), or above the natural price (high profits). Buyers always move towards the seller who can produce the same thing consistently for the lowest price, to conserve their own toil and trouble. Thus, market prices gravitate towards selling prices at ordinary profits.
“(The natural price) is the lowest..he is likely to sell them for any considerable time.. (It is)..the central price, to which the prices of all commodities are continually gravitating.”
“The market price..is regulated by the proportion between the quantity..actually brought to market, and the demand of those who are willing to pay the natural price”
To achieve high profits, monopolists commonly resort to secrets in trade and manufactures. This prevents competition and allows them to charge high market prices to get high profits as unnatural prices. In other words, it lets them charge unnatural market prices. A good example is Apple, which can charge high prices by enforcing secrets in manufactures and intellectual property, resulting in unnatural prices and huge profits. The falling Android prices below reflect a more natural price due to competition, falling with time as natural market prices, far below the unnaturally high market price of iOS. The market price of the iPad mini, for example, is nearly double the market price of its competitors, despite having similar features.
Unnatural prices are dangerous because they suck the nation’s or the world’s capital towards a specific business or industry. This in turn causes economic development to be imbalanced, while putting the society into great risk if that business or industry suddenly collapses, taking with it the immense capital poured into it, as seen in bubbles and crashes.
Edit 1/2017: added copyright and changed ‘socioeconomics’ to ‘SORAnomics’
Edit 4/2017: added Economics value matrix