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Subjective Value: Best Story Wins.

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A truth that applies to many fields, which can frustrate some as much as it energizes others, is that the person who tells the most compelling story wins. Not who has the best idea, or the right answer. Just whoever tells a story that catches people’s attention and gets them to nod their heads.

C. R. Hallpike is a respected anthropologist who once wrote a review of a young author’s recent book on the history of humans. It states:

It would be fair to say that whenever his facts are broadly correct they are not new, and whenever he tries to strike out on his own he often gets things wrong, sometimes seriously … [It is not] a contribution to knowledge.

Two things are notable here.

One is that the book’s author doesn’t seem to disagree with the assessment.

Another is that the author, Yuval Noah Harari, has sold over 27 million books, making him one of the bestselling contemporary authors in any field, and his book Sapiens – which Hallpike was reviewing – the most successful anthropology book of all time.

Harari recently said about writing Sapiens:

I thought, ‘This is so banal!’ … There is absolutely nothing there that is new. I’m not an archeologist. I’m not a primatologist. I mean, I did zero new research. . . . It was really reading the kind of common knowledge and just presenting it in a new way.

What Sapiens does have is excellent writing. Beautiful writing. The stories are captivating, the flow is effortless. Harari took what was already known and wrote it better than anyone had done before. The result was fame greater than anyone before him could imagine. Best story wins.

It’s nothing to be ashamed of, because so many successes work this way.

The Civil War is probably the most well-documented period in American history. There are thousands of books analyzing every conceivable angle, chronicling every possible detail. But in 1990 Ken Burns’ Civil War documentary became an instant phenomenon, with 39 million viewers and winning 40 major film awards. As many Americans watched Ken Burns’ Civil War in 1990 as watched the Super Bowl that year. And all he did – not to minimize it, because it’s such a feat – is take 130-year-old existing information and wove it into a (very) good story.

Bill Bryson is the same. His books fly off the shelves, which I understand drives the little-known academics who uncovered the things he writes about crazy. His latest work is basically an anatomy textbook. It has no new information, no discoveries. But it’s so well written – he tells such a good story – that it became an instant New York Times bestseller and the Washington Post’s Book of the Year.

Charles Darwin didn’t discover evolution, he just wrote the first and most compelling book about it.

John Burr Williams had more profound insight on the topic of valuing companies than Benjamin Graham. But Graham knew how to write a good paragraph, so he became the legend.

Same with Tesla, isn’t it? The company is worth seven times more than GM and Ford combined, not because it built a good business but because Elon Musk is good at getting people’s attention. Customers. Investors. Twitter followers – he’s told them all a good story, and the best story wins.

This drives you crazy if you assume the world is swayed by facts and objectivity – if you assume best idea wins. There’s a devoted group of Harari critics obsessed with showing how unoriginal his work is; Musk is viewed with the same mix of confusion and contempt.

In a perfect world the importance of information wouldn’t rely on its author’s eloquence. But we live in a world where people are bored, impatient, emotional, and need complicated things distilled into easy-to-grasp scenes.

If you look, I think you’ll find that wherever information is exchanged – wherever there are products, companies, careers, politics, knowledge, education, and culture – you will find that the best story wins. Great ideas explained poorly can go nowhere while old or wrong ideas told compellingly can ignite a revolution. Morgan Freeman can narrate a grocery list and bring people to tears, while an inarticulate scientist might cure disease and go unnoticed.

Novelist Richard Powers put it this way: “The best arguments in the world won’t change a single person’s mind. The only thing that can do that is a good story.”

A few things about good stories worth remembering:

When a topic is complex, stories are like leverage.

Leverage is just something that squeezes the full potential out of something with less effort. Stories can leverage ideas in the same way debt can leverage assets.

Trying to explain something like physics is so hard if you’re just deadlifting facts and formulas. But if you can explain things like how fire works with a story about balls rolling down hills and running into each other – watch Richard Feynman, an astounding storyteller, do that here – you can explain something complex in seconds, without much effort.

This is more than just persuading others. Stories help you just as much. Part of what made Albert Einstein so talented was his imagination and ability to distill complexity into a simple scene in his head. When he was 16 he started imagining what it would be like to ride on a beam of light, holding onto the sides like a flying carpet and thinking through how it would travel and bend. Soon after he began imagining what your body would feel like if you were in an enclosed elevator riding through space. He contemplated gravity by imagining bowling balls and billiard balls competing for space on a trampoline surface. He could process a textbook of information with the effort of a daydream.

Ken Burns once said: “The common stories are 1+1=2. We get it, they make sense. But the good stories are about 1+1=3.” That’s leverage.

Stories get diverse people to focus attention on a single point.

Steven Spielberg pointed this out:

The most amazing thing for me is that every single person who sees a movie brings a whole set of unique experiences. But through careful manipulation and good storytelling, you can get everybody to clap at the same time, to laugh at the same time, and to be afraid at the same time.

The key thing is that stories capture and direct attention, which is so important in a world where people are bored and impatient.

Good stories create so much hidden opportunity among things you assume can’t be improved.

Rory Sutherland writes in his book Alchemy about the idea of psychological moonshots:

Making a train journey 20 per cent faster might cost hundreds of millions, but making it 20 per cent more enjoyable may cost almost nothing.

The Uber map is a psychological moonshot because it does not reduce the waiting time for a taxi but simply makes waiting 90 per cent less frustrating.

It seems likely that the biggest progress in the next 50 years may come not from improvements in technology but in psychology and design thinking. Put simply, it’s easy to achieve massive improvements in perception at a fraction of the cost of equivalent improvements in reality.

This applies to so many things.

How many great ideas have already been discovered but could grow 100x or more if someone just explained them better?

How many products have only found a fraction of their potential market because the company is so bad at describing them to customers?

So, so many.

You’ll get discouraged if you think every new book has to be about an original idea, or that every new company has to sell a brand new invention. There is so much more opportunity if you see the world like Yuval Noah Harari – best story wins.

Economics For Individuals:An Old Banana As Artwork Explains The Economic Concept Of Subjective Value.

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Recently, Miami art gallery Art Basel sold, for $120,000, a piece of art composed of a banana duct taped to a wall. At least one other identical piece sold for a similar amount. A third piece was priced at $150,000. The banana used in the display is a real banana, and on Saturday, a performance artist named David Datuna ate some of it.

Datuna’s stunt merely illustrated what everyone should have already known: the value of the artwork had almost nothing to do with the banana itself. Its value came not from the amount of labor that went into it or from the cost of the physical materials involved. A spokeswoman for the museum summed up the real source of the item’s value, noting, “He [Datuna] did not destroy the artwork. The banana is the idea.”

In other words, the people who purchased the art weren’t actually purchasing a banana and tape. The person who purchased the art was buying the opportunity to communicate to peers that he or she was rich enough to throw around $120,000 on a work of art that would soon cease to exist. This was a transaction that involved purchasing status in exchange for money. The banana was only a tiny part of the exchange.

Moreover, the transaction offered the opportunity for the gallery, the art seller, and the art buyer to all further increase their status by being the topic of discussion in countless news articles and discussions in social media. As was surely anticipated by the artists and everyone else in the banana sale, the media could be counted on to act as if this art was something new, outrageous, or exciting. “Art world gone mad,” the New York Post announced on its front page. Hundreds of thousands of commentators in various social media forums chimed in to comment on the matter.

One wonders, however, how many times this shtick can be repeated over and over until people lose interest. Apparently: many times. After all, this sort of art is not a new thing. For decades, avant-garde artists have been using garbage and other found objects to create art. And people with a lot of disposable income have been willing to pay a lot of money for it. It’s all basically an inside joke among rich people. And regular people have the same reaction over and over again.

But there’s absolutely nothing at all that’s shocking, confusing, or incomprehensible from the point of view of sound economics. Transactions like these should only surprise us if we’re still in the thrall of faulty theories of value, such as the idea that goods and services are valued based on how much labor and materials went into them. That’s not true of any good or service. And it’s certainly not true of art.

Is It Garbage or Is It Art?

In fact, two identical items can be valued in two completely different ways simply if the context and description of the objects changes.

According to the Daily Mail, a 2016 study suggests that people value ordinary objects differently depending on what they are told about the objects: “According to the new research, being told that something is art automatically changes our response to it, both on a neural and a behavioural level.”

In this case, researchers in Rotterdam, the Netherlands, told subjects to rate how they valued objects in photographs. When told that those objects were “art” people valued them differently.

In other words, the perceived value of objects could change without any additional labor being added to them, and without any physical changes at all.

The value, it seems, is determined by the viewer, and we’re reminded of Carl Menger’s trailblazing observations about value:

Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.

One moment the viewer may think he’s looking at garbage, which he has likely learned is of little value. When told that said junk is really “art,” the entire situation changes. (Of course, we would need to see their preferences put into real action via economic exchange to know their preferences for sure.)

The change, as both Menger and Mises understood it, is brought about not by changes to the object itself, but by changes in context and in the subjective valuation of the viewer.

A glass of water’s value in a parched desert is different from that of a glass next to a clean river. Indeed, a glass of water displayed in a museum as art — as in the case of Michael Craig-Martin’s “An Oak Tree” — is different from water found in both deserts and along rivers. Similarly, the value of a urinal displayed in a museum as art — as with Marcel Duchamp’s “Fountain” — is different from a physically identical urinal in a restroom.

The Daily Mail article attempts to tie the researchers’ observations to the theories of Immanuel Kant on aesthetics. But, one need know nothing about aesthetics at all to see how this study simply shows us something about economic value: it is, to paraphrase Menger, found in the “consciousness of men.”

And it is largely due to this fact that centrally planning an economy is so impossible. How can a central planner account for enormous changes in perceived value based on little more than being told something is art?

Is a glass of water best utilized on a shelf in a museum, or is it best used for drinking? Maybe water is best used for hydroelectric power? Exactly how much should be used for each purpose?

When discussing the problems of economic calculation in socialism, Mises observed that without the price system, there simply is no way to say that a specific amount of water is best used for drinking instead of being used for modern-art displays. Nor is the fact that people need water for drinking the key to determining the value of water. (See the diamond-water paradox.)

In a functioning market, consumers will engage in exchanges involving water in a way that reflects how much they prefer each use of water to other uses. At some moments, some consumers may prefer to drink it. At other moments, they may prefer to water plants with it. At still other moments, they may want to contemplate an art display composed of little more than a glass of water. The price of water at each time and place will reflect these activities.

Without these price signals, attempting to create a central plan for how each ounce of water should be used is an impossible task.

Do we need to know why people change their views of an object when told they are art? We do not. Indeed, were he here, Mises would perhaps be among the first to remind us that economics need not tell us the mental processes that lead to people preferring different uses for different objects, although we can certainly hazard a guess. It’s unlikely that the buyer of the taped banana bought it because he or she planned to eat it.

But even if we are wrong about the buyer’s motivation, the fact remains that the buyer valued the banana at $120,000 for some reason — and the value was subjective to the buyer.

Similarly, we can’t know for sure why each individual values water for drinking over “art water” or vice versa. And a government planner or regulator — it should be noted — can’t know this either.

In The Sharing Economy, Workers Own The Capital And Use It To Create New Value.

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There’s a whole lot of buzz about the sharing economy. Many seem to think it is something new, with some calling for a ‘new economics’ to explain it while others deride the ‘gig economy’ as a higher level of exploitation, inequality, and poverty.

Neither is a good analysis.

The Economy Shifts To Services.

First things first: the sharing economy was facilitated by advances in technology alongside consumer preferences changing from goods to services and thus from ownership to lease. These are not separate processes, but mutually constituting changes where each increases the other.

The advances in technology that brought about the sharing economy are those that allow for cheaper, faster, and more accurate communication, verification of factual claims, decentralized corroborated trust/reputation etc. They overall lower transaction costs by making information both available and trustable. The terrifying idea of ‘getting into a car with a stranger’ is no longer a problem if that stranger’s reputation can be tracked, is publicly available, and is backed up by the experiences of many others doing the same thing (as with Uber, Lyft).

Services Thrive On Trust.

The availability of such information also means we don’t need to rely only on first-hand (or second-hand through family and friends) trusted experience, but can, as it were, rely on the experience of unknown others – third-hand trust. This changes our behavior because the cost of making a mistake is much lower: getting into the car of a shady Uber driver is on average much less of a risk than doing the same as a hitchhiker or even taking a regular taxi. This change of behavior in response to ‘outsourced’ trust means the technology can progress further.

Economics becomes the subjectivist social science it was always meant to be.

The sharing economy, as the term implies, also means we can ‘share’ (make available) productive resources in much more effective ways. In a sense, it undermines the materialist view of value creation by dissolving the difference between ‘personal’ property and private ownership of the means of production: your personal car can now be both your personal property and your source of income – and you, as the owner, decide when and how. It doesn’t change the economic categories, but releases the economic analysis from the material goods.

This is all well and proper, since the economy is about the creation and distribution of *value* and not of material things. As value is subjective, so is the distinction between consumer good and production good. Everything can be both, and what is what depends on how you use it.

In other words, the effect of the sharing economy on the study of economics may (and likely is) the liberation of economic analysis from materialist biases. Economics becomes the subjectivist social science it was always meant to be. So in terms of economic theory, the sharing economy can help make the study of economics what it should be and always should have been: the study of the creation and distribution of [subjective] value and the unplanned social orders that emerge in the prosperity-creating process.

Decentralization Of Capital Ownership.

But what about exploitation?

I find the argument that the ‘gig economy’ makes people accept lower wages highly fascinating. Suddenly it is a problem to these critics, mainly on the left, that ‘workers’ own their own capital.

When personal property becomes capital, a source of income, then the obvious implication is a decentralization of capital ownership.

I’m not saying companies like Uber are in any sense perfect. They could certainly go further, by e.g. implementing free pricing between drivers and riders. Why not allow drivers to set their required minimum to provide a ride? Why not allow riders to set their max to get a ride? (This may actually be the next step in the sharing economy – an open-marketization of fares and fees.) The common argument that drivers (which is usually the example used) don’t make a ‘living wage’ is also a bias that remains from the materialist and industrialist view of economy. It assumes that a job is all about the salary, and that what matters is the monetary outcome of it. But many of those who choose to drive for a ride-share company do so because it is a *flexible* type of work, which is itself a value.

Sure, it may not be as high-paying as ‘full-time’ employment, but any choice includes a trade-off of value: to many, flexible work hours make up for the lower pay; for others, it doesn’t – so they instead seek traditional employment. The solution to the low wages in the sharing economy is not regulation, but more competition – and proper market wages. In fact, the reason ride-sharing companies can pay low wages (which, judging from my discussions with many a driver, exceed those earned by taxi drivers!) is the regulations already in place: primarily the barriers to entry in ride-sharing and elsewhere that keep overall wages down by providing employers with artificial influence (power). The expected outcome of the low-transaction cost economy should be the ultimate gig economy, where all or most hierarchies (such as firms) dissolve into market relations – and where those who (choose to) work earn a market wage. What stands in the way for this development is not employers or even capital owners, but those artificial restrictions that produce their privilege.

It is a sad irony, really, that those restrictions – regulations – that are intended to protect workers from employers (in the industrial age) is what stands in the way for worker liberation in the new era.

Per Bylund is Assistant Professor of Entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. This article first appeared at mises.org on Aug 24, 2018

Economic Concepts That Everyone Needs to Understand

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As the new year gets underway, why not make a goal to read more about the essential economic principles. While there are many aspects of free market capitalism that are integral to understanding the field, these are a few concepts that will be most helpful to know as you continue to study free market economics. 

Subjective Value: Only individuals can determine the value of good or service.

Sunk cost fallacy: The misconception that one must continue an endeavor because of the time and resources already invested.

Spontaneous order: The belief that when individuals are left to their own devices without a central authority the will create organic order out of chaos without any coordinated effort. 

Knowledge problem: It is impossible for one person or group to have enough knowledge to plan entire economies. This can never be possible since the information necessary for this to occur is decentralized among individuals.

Broken window fallacy: Is the misconception that destruction stimulates the economy.

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