[derf_]

Anyone who has lived through a market correction (the tariff announcements in early April this year being a recent example, though there have been far worse) should be able to see that market prices do not always accurately reflect even the consensus view of value (which itself can be wrong). As people are forced to de-lever, everything goes down at once, often by very similar amounts, even though it cannot be possible that everything suddenly lost the same amount of value simultaneously.

To quote Richard Bookstaber, "The principal reason for intraday price movement is the demand for liquidity... the role of the market is to provide immediacy for liquidity demanders. ...market crises... are the times when liquidity and immediacy matter most. ...the defining characteristic is that time is more important than price. ...diversification strategies fail. Assets that are uncorrelated suddenly become highly correlated, and all positions go down together. The reason for the lack of diversification is that in a high-energy market, all assets in fact are the same.... What matters is who holds the assets." (from A Framework for Understanding Market Crises, 1999)

Was the market drop an accurate reflection of the value that would have been destroyed by those tariffs, discounted by the probability that they would have been enacted as drafted? Nobody knew then, and I maintain that nobody even knows now. That was not the calculation that was being made.

[AnthonyMouse]

> As people are forced to de-lever, everything goes down at once, often by very similar amounts, even though it cannot be possible that everything suddenly lost the same amount of value simultaneously.

The price of something and the value of something were never expected to be the same. What's the value of food? If you have none you die, so the value is quite high, but the price is much lower than that because there are many competing suppliers.

And the price of a large class like investment securities can easily change all at once if there is a large shift in supply or demand.

[tennysont]

Put another way: price is determined by need and supply (aka, demand curve meets supply curve).

I would pay anything for air if I needed it, but I will gladly sell air in my yard for $1/m^3 because that air is worthless to me.

Is air priceless or worthless?

That is why price != value as most people think of it.

[teiferer]

Not disagreeing with you, but isn't that already obvious from the fact that economic activity happens in the first place?

If you buy 5 apples from me for $5 then two things must be true: 1. The value that those 5 apples have to you exceeds the value that $5 have to you, at least at this very moment. Otherwise you would hang on to your $5 instead. 2. The value that those 5 apples have to me is less than $5 have to me, otherwise I would hang on to the apples.

The price of those 5 apples at this moment may be $5 but that doesn't reflect the value they have to neither me nor you. It's not the avereage either, necesarily. The only thing we know is that the value of them to you is higher and to me is lower.

[AnthonyMouse]

Not necessarily. You could have a transaction take place where the buyer and the seller both value what's being exchanged in exactly the same amount and then go through with the transaction anyway because they both find trades entertaining or have a cultural preference for doing business with each other or just both place zero value on transaction costs.

That isn't common but that doesn't mean it could never happen.

[JackFr]

> they both find trades entertaining or have a cultural preference for doing business with each other

That is value. It is any benefit they capture which they would not otherwise.

[AnthonyMouse]

That's value from doing any transaction, not value from the thing you bought. They'd get the same value if they were trading seashells or shiny rocks.

[user____name]

> The price of something and the value of something were never expected to be the same.

This is a (un)surprisingly deep rabbit hole.

Human Society and the Global Economy by Kit Sims Taylor, Chapter 6: Theories of Value

https://www.d.umn.edu/cla/faculty/jhamlin/4111/2111-home/val...

[nopassrecover]

> The price of something and the value of something were never expected to be the same

While I agree with you (quite firmly: it’s a great starting point to put on the table to challenge orthodoxy in this space), and think you’re agreeing with the parent comment, it is a fundamental tenet of mainstream economics and the political arguments of neoliberal (aka current mainstream) policy that [price == (market averaged) value], or at the very least [price ~= value].

Another interesting line of argument is to explore things that are valuable that don’t typically get a price: for example household labour, or love and friendship (at least directly: I’m sure a Friedman acolyte would reduce all relationships to exchange and reframe gifts and acts of love as investments).

As an aside for the parent comment: thanks for sharing this, it’s one of the top category of comments/quotes I’ve seen on HN in being useful, insightful, and challenging of conventional understanding in a way that improves understanding and future prediction.

[energy123]

Mainstream economists believe that value >= price. This is where economic surplus comes from. This is why trade is not zero sum, and it's why trade causes societies to get wealthier. Friendship and love fit into this framework just fine, as the price is $0, but the value is greater than $0.

[TheOtherHobbes]

How often is "You should pay me much more, it will make both of us wealthier" a winning argument when asking for a raise?

Trade very much is zero sum, at least some of the time. Prices are set by power disparities, not by abstract concepts of relative value.

One of the many problems with mainstream econ is that gloms together a whole set of unrelated interactions in a single crude concept of "price."

In reality share dealing, corporate wage bargaining, negotiations between farmers and supermarket chains, lemonade stands, and tourists haggling with craft vendors on vacation are all completely different kinds of interactions.

They end up with a price because they're mediated in currency, but their differences are far more interesting and economically revealing than their very superficial similarities.

[energy123]

Prices are set by supply and demand, which you may choose to label as "power" as a matter of a priori definition, and to some extent that will be a suitable label, but you would be throwing a way a whole deal of explanatory power by insisting on such a rhetorically loaded framing.

> How often is "You should pay me much more, it will make both of us wealthier" a winning argument when asking for a raise?

A great deal. If you don't pay me, I will quit, and you will be worse off, so it's a win-win proposition for you to give me a raise. That's what labor market competition is about.

> They end up with a price because they're mediated in currency, but their differences are far more interesting and economically revealing than their very superficial similarities.

Hence microeconomics, labor economics, financial economics, and the various other mainstream economics disciplines that do try to split those hairs.

[user____name]

Other theories of price setting (non-classical and non-marginalist) exist, for example the sample chapter of this book, which describes how the existence and prevalence of markup pricing was discovered independently several times over the past century.

F. Lee, 1998, Post-Keynesian Price Theory

https://assets.cambridge.org/97805213/28708/sample/978052132...

Also see Nicholas Kaldor's Economics Without Equillibrium which can be read in an afternoon.

[nopassrecover]

I think we’re using different terms for value but I agree with your argument about comparative advantage and non zero sum trade, while also noting the other comments here that price is intended to correlate with marginal value in a suitably free market, to the degree that individual measures of value can be mediated through a price mechanism.

This is perhaps the broader point, which is that to the degree economics acknowledges non-priced value it’s a hand wave to “there’s some economic surplus here otherwise these people wouldn’t reach agreement to exchange”.

But to the degree that senses of value are the motivating factor behind economic exchange it’s oddly absent from the discussion. I get the reasons: philosophical inquiries about value and aesthetics are a lot more challenging to work through than concepts of utility reflected by measurable actions, but this goes to the overall point about the limitation and overreduction of current mainstream economics, and the criticism of people like Graeber of its politicised and somewhat arbitrary intellectual grounds.

To the degree mainstream economic reduction is useful to support understanding that’s fine - it absolutely allows reasoning and insight in many scenarios, especially microeconomics - but to the degree that decision-makers double down on it (especially macro) despite it being incomplete or absolutely wrong in certain environments and contexts because it promotes certain power structures and power plays that is highly problematic, especially when people jump to its defence out of misplaced loyalty to a school of expertise.

[deadfoxygrandpa]

is value the same as utility?

[nopassrecover]

A superb question that hits at the heart of the trail above.

[addcommitpush]

Note that in orthodox microeconomic theory, price is equal to the marginal value of the last exchanged unit. To use the above example of food:

> What's the value of food? If you have none you die, so the value is quit of high, but the price is much lower than that because there are many competing suppliers.

The first calories of the day, the ones that prevent you from dying, have a very high subjective value - but you pay them at the value of the 3000th calorie of the day, the extra drop of ketchup on your fries, which has a very little value.

And thus of course average value x volume is very different from (marginal value of last unit) x volume.

[dragonwriter]

> While I agree with you (quite firmly: it’s a great starting point to put on the table to challenge orthodoxy in this space), and think you’re agreeing with the parent comment, it is a fundamental tenet of mainstream economics and the political arguments of neoliberal (aka current mainstream) policy that [price == (market averaged) value], or at the very least [price ~= value].

For mainstream economics, this is true in a very specific technical sense; all averages lose information, and the "market average" is a very particular form of average that doesn't behave the way most people think of an average behaving—particularly, it is not like a mean, the normal "average" that people think of, that is sensitive to changes in any individual values, it is somewhat like a median in that it is insensitive to changes in existing values that do not cross the "average"; e.g., if you take an existing market for a commodity with a given clearing price, and reduce, by any amount, the value of the commodity to any proper subset of sellers who would sell at the current market clearing price, the market clearing price does not change. The assessment of value across the market has decreased, but the output of the particular averaging function performed by the market has not.

[kqr]

It seems like Bookstaber argues not that it's liquidity demand over information change, but that it is both. The tariff announcements are actually a great example, because it was triggered by new information, and diversification still kind of worked (at least some government bonds gained value during the drop in other assets classes).

The main question, I suppose, is why correlations were so high after the tariff announcements:

- In some cases, the high correlations are probably due to the markets being directly affected by the announcements: both commodities and equity are affected, and they got more correlated, which makes sense.

- In some cases, the high correlations are probably due to liquidity demand rather than markets being directly affected by the announcements: we would not expect cryptocurrencies to be directly affected by US tariffs, but they ended up correlated with equity markets anyway. That's probably because people needed to sell off their cryptocurrency to cover equity losses.

Thus in this case, it's again probably a bit of both.

Great paper. Thanks for referencing.

[readthenotes1]

"was triggered by new information,"

Trump had been threatening tariffs for the campaign and mentioning them before. There wasn't that much new information that should have caused the plummet.

Also I will point out that it's more like the avoidance of information that caused some of it Nvidia's stock plunged on an announcement that went something like:

Sentence 1: we are putting tarrifs on Taiwan Sentence 2: except semiconductor related goods

It as if the market participants read sentence 1 and very few of us read sentence 2.

The EMH would assert that a casual observer like me wouldn't see the price gap between the time it took for people to read sentence 2. But it took several business days...

[kqr]

> Trump had been threatening tariffs

Trump made many empty threats his first term, so many didn't believe he would follow through to the degree he's done this term.

> The EMH would assert that a casual observer like me wouldn't see the price gap between the time it took for people to read sentence 2. But it took several business days.

This is a good point and surely sounds like an effect of liquidity demand. The same investors had to dump Nvidia also to pay for other losses and that briefly removed liquidity providers who wanted none or the volatility, until things calmed down a little.

[mikeiz404]

Paper: A Framework for Understanding Market Crises (1999)

https://www.risknet.de/uploads/tx_bxelibrary/Bookstaber-Unde...