As an economist I am often asked to place a value on things. I’m sure you are familiar with the adverts that claim ‘you’re worth it’ or that something is ‘priceless’ (though with an APR). I’m also sure you’re aware of the transfer fees of soccer players (I’m aware they are high – that’s about it). What do we mean by and how do we get to a money value?
I have had the pleasure of teaching environmental scientists economics and when I suggest valuing nature I generally got shrieks of derision. I have worked with social scientists and had similar results. On reflection it may just be me of course. Let’s try a little thought experiment first though before I condemn myself. If I was to suggest valuing a species of bug you may sensibly contend it is priceless. Fair enough, you may find it hard to believe but I share that sentiment. However sentiment is an emotional reflex and whilst I embrace emotions you shouldn’t build policy on them. This idea of priceless implies without price and I assume by that it is not mean it has no value but that its value is infinite or very great. But is it? Would we use all of the Earth’s resources to save this bug, would we divert all our funding toward it? Of course not and this is a silly suggestion on my part but it does prove a point. We are looking for a value between zero and a number less than very big. We’ll come back to this.
How about something more business orientated? Brand value is a nice easy one (to measure – blooming hard to truly create). Brand value is simply the value of a business less its breakup value and any royalties, patents etc. In other words very similar to goodwill. If you do some research on these terms you will see some scholars over complicate it (in my view) but basically if it is not adding value to the assets you own it is just a name (so be careful of these brand building offers – they’re probably just selling you a list of contacts to direct market to). Jumping to company value we have simply share price times the number of shares for listed companies (and didn’t I laugh at the irony when the London Stock Exchange argued its shares were undervalued). Otherwise, or if we adopt a sensible value based investing strategy with listed companies, we simply estimate and discount futures cashflows. Not exactly rocket science.
What makes these two things easy is markets exist for their sale. In the absence of markets we have to start estimating. This is also quite straightforward, if somewhat approximate in outcome. There are two basic methods. First we can simply ask people and use this to build up a demand curve. We call this contingent valuation (expressed preference). Survey a collection of people asking them to estimate what they would be willing to pay to save our bug (or for that matter to prevent construction of a new road) and then extrapolate these costs to the relevant population. Buggy is looking quite safe now – if on average people would pay just £1 as our little bug belongs to the world he gets to be worth about £7billion. Likewise if on average we would pay £10 per year towards UK arts then the Arts Council ought to get about £630,000,000 - or £200,000,000 more than they get now. The other method we called revealed preference. This one we base on observing actions. Two of the methods are travel cost and hedonic. Travel cost can be expanded to include opportunity forgone. Each year thousands of people travel to visit National Parks – add up all that cost. Others live in or near them and forsake higher salaries to do so – add up all of that. As you can guess the results can and will be significant. Hedonic on the other hand is one of the easiest to understand. A house in an estate in a suburb may be worth £150,000 and the same style of house not far away but near the coast £200,000 – clearly the coast adds £50,000 and of course there are many houses near the coast (for example). So we have seen there are a few ways of valuing nature and the priceless that are quite straightforward, open to debate and actually show that these ‘priceless’ things are often grossly undervalued mainly because we avoid putting a cost to them . Add to this the benefits to both physical and mental health, to culture and to country ‘brand value’ and you can see we have often been badly let down.
OK I have skirted around things here and left out some of the maths – let me know if you would like more details. Is anything priceless? Well yes it seems some things are. The poets were correct to value love and friendship above all else, after all we have seen some amazing acts of selflessness in this area. Diamonds may well last forever but they are mere trinkets and baubles next to people.