ECON 101: How much is something worth?
I recently saw an article (and shared on the UA Facebook Page) about how this luxury home in Hawaii called “Water Falling Estate”, (which was loosely designed on the “Fallingwater” home in Mill Run, PA designed by world famous architect, Frank Lloyd Wright) recently sold at auction for $5,750,000. Now by any standards, that’s a pretty penny to pay for any house, just about anywhere in the world. But the bigger story, and the ECON 101 lesson, is in what the house was originally supposedly “worth”. This home was built “on spec” (meaning it wasn’t built for a specific buyer, but in the hopes of attracting a buyer once completed), and was originally put on the market back in August 2013 for $26.5 Million. So STOP and THINK about that for a second, this home was sold for nearly 80% LESS than what the owner/builder felt it was “worth“.
When I read that article, it immediately reminded me of a scene from the 1983 hit film, “TRADING PLACES”, starring Dan Akroyd, and Eddie Murphy. In this scene, a suddenly broke and destitute Louis Winthorpe III (played by Dan Akroyd) is haggling with the pawn shop owner (played by Blues Legend, Bo Diddley), over the “value” of the watch he is desperately trying to pawn, in order to get cash.
After the pawn shop owner tells him he believes the watch is “hot” (stolen), he offers him $50 for the watch, Winthorpe indignantly says,
“This is a Roche Vouceau. The thinnest water-resistant watch in the world. Singularly unique, sculptured in design, hand-crafted in Switzerland, and water resistant to three atmospheres. It tells time simultaneously in Monte Carlo, Beverly Hills, London, Paris, Rome, and Gstaad. This is ‘THE’ sports watch of the ’80s. Six thousand, nine hundred and fifty five dollars retail.”
And the pawn shop owner says to him, “You got a receipt for it?”, and then tells him, “In Philadelphia, it’s worth FIFTY BUCKS!!”
Folks, if no one has ever told you before, or if you’ve ever had anyone tell you differently, let me explain ECON 101 to you. Worth and value are totally subjective, and so prices (which are used to denote worth and value) not only can change from day-to-day, or hour-to-hour, but literally from one second to another. But since I’m just a regular guy, with no advanced degrees in economics, don’t take my word for it…listen to the words of noted economist, THAT DUDE, Thomas Sowell, speaking on the folly of “Price Controls”. He says,
Prices are not just arbitrary numbers plucked out of the air or numbers dependent on whether sellers are “greedy” or not. In the competition of the marketplace, prices are signals that convey underlying realities about relative scarcities and relative costs of production.
So how much is anything worth? Well…It depends!! Ask me again on Tuesday.