Friday, March 09, 2012

Value and price are not the same - we should keep it in mind

We often use “price” and “value” as if they had the same meaning. But when you dissect them, there are several areas where it’s important to keep in mind that they are different.

GDP is one. It’s almost banal these days to point out that measuring a society’s wealth in terms of GDP – simply the economic activity – is misleading. There are other factors, which contribute to the true wellbeing of an economy – there are other values than money.

In the industrial age, with its focus on physical objects – atoms – scarcity determined the price. Exclusivity made stuff expensive. These days the economy is increasingly based on information – bits. Bits are different than atoms. Their price may be low, but when bits are shared and widely distributed and used, their value increases.

When you recycle or reuse an object, value is created, but in purely economic terms it’s a loss, compared to simply throwing the old away and buying a new.

Many people can report about the rise in quality of life that comes from getting a job so close to their home that they can bike to work. When you don’t need a car, you spend a lot less, but in this case you experience an increase in utility and pleasure. This illustrates a decoupling between growth in value and growth in revenue.

Finally, price and value do not grow in sync. It’s the old 20/80 rule again: You can often get 80% of the value for 20% of the price. The last 20% of value is much more expensive. The higher you are already, the more expensive it becomes to achieve the next marginal increase in value.

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