by Cheryl Rofer
Ezra Klein would like to distinguish between worthless assets and underpriced assets. The two principles of physical science I mentioned earlier, if there were equivalents in economics, could help. Klein quotes Krugman:
Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now.Now, "basic inherent economic value" implies a conservation principle, that value (let's shorten it to that) is conserved. If the price falls below that value (in a monetary unit, let's say dollars), then dollars are obviously not conserved, but I concluded that earlier.
The value of the two principles I mentioned earlier, conservation and system definition, is that if a calculation seems to be coming out wrong, you have something fixed to go back to. If your calculation seems to show that energy is being created, you can go back and look at your definition of the system because you know that the calculation is wrong.
In the economic and financial world, however, we frequently hear that an asset is over- or under-priced, which assumes that some ideal price can be set. That price-setting usually is full of assumptions, and they (or the fact that they exist) becomes painfully obvious in statements that the questionable assets held by the banks are over- or under-priced. One of the problems (not mentioned by Klein) seems to be that we don't know what those assets in fact are. That would have to be solved before we could apply a conservation principle. Maybe Geithner knows what they are.
One problem with conservation of value would be developing the units to measure it. Monetary units set up an immediate circularity and would be no help in this case: we don't know the monetary value of the assets, which is the problem. If value is something other than monetary price, then it needs to be measured in another unit. The Economist's Big Mac index is an attempt at this. There would then be a need to tie the value of a day's labor as a sanitation worker to the value of a day's labor as a derivatives trader to the price of a house to, eventually, these problematic assets.