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Price vs value: Why markets can’t be trusted
Its one of those timeless questions: what makes one piece of artwork better than another?
Look to the markets, and theyll say Andy Warhol is five times better than Titian.
Its a simple money-based equation – the most expensive piece by the American who revolutionised the 1960s art scene costs 500% more than the Renaissance masters equivalent.
This is absurdly unfair. Of course it is. Price here surely doesnt denote intrinsic value. Or does it?
Economic theory says it can, at least eventually. Price in a free market is determined by supply and demand. The price of a good or service naturally tends towards the equilibrium between how much a seller wants, and how much punters will pay.
When its not in equilibrium, it either wont sell or supply is exhausted too rapidly. Eventually, price will naturally adjust to a fair level. To the economist, this is as close as you get to value.
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