Postage stamp bubbles; WAS: Closed - End Fund Puzzle

["Roger Koppl" <KOPPL@xxxxxxxxxxxxxxx>]

Below is a post by Kevin Quinn and the one by Paul Davidson that Kevin
was responding to.  Paul says used stamps have no fundamental value
except in a beauty contest sense.  Kevin says the fundamental is zero
"since the discounted value of all future `dividends' is zero."  I
think a stamp has a very well-defined fundamental value, at least in
a neoclassical world.  To quote a MS I coauthored, "an asset's
current price will tend toward the discounted sum of its price at the
end of next period and the *value of* any services it renders in the
meanwhile" (emphasis added).  This goes for financial assets, living
room couches, and cancelled postage stamps.  There is a beauty
contest issue and a Ponzi issue.  Some of the utility may come from
ostentation, Veblen's conspicuous consumption.  But even apart from
these matters, the stamps generate a stream of services just as
surely as the hammock in your back yard and the Chivas in your
kitchen cabinet.  The fundamental value is the discounted present
value of the money payments you would make period-by-period to get
hold of those services.

Marina Bianchi of the University of Cassino is working on a theory of
consumption that explains admirably the utility of collections of all
sorts.  I think she's coming out with an edited volume on consumer
theory.  (Routledge??)  Anyway, IMHO she has really put her finger on
something with this issue of collecting.  I think we should view
collecting as a serious anomoly for standard neoclassical theory.  My
impression is that the notion of household production doesn't get you
out of the box.  Neoclassical agents shouldn't be collecting stamps,
rocks, cars, and empty beer cans.  But real people do.  HMMM . . .


Roger

P.S. GAD! three today.


> Paul: the true fundamental of this asset--the postage stamp-- is zero
> (ignoring consumption value)! It's zero whether the world's ergodic or
> nonergodic, since the discounted value of all future "dividends" is zero.
> If it has a positive price, the entire amount is a bubble. I don't see
> this as a counterexample to Barkley's defense of the notion of an asset's
> fundamentals at all. On the contrary, it's a very good illustration!
>
>
>
> On Tue, 26 Sep 1995, Paul Davidson wrote:
> >
> >   My best illustration that liquid securities traded on exchanges
> > have no "true fundamental" such as the "real marginal product of capital"
> > involves postage stamps. A former colleague of mine had a VERY valuable
> > postage stamp collection and he traded stamps on a reasonably organized
> > market. (It was so valuable that he had to keep it in a bank vault and
> > hence it was very in convenient to see -- as a pastime -on rainy Sunday
> > afternoons. Consequently its utility for visual pleasure was very small
> > relative to its carrying costs. )
> >
> > Now what sets the value of a used postage stamp in such a market?
> > The true fundamental is only what people think others will be willing to
> > pay in the near future. (In the case of postage stamps there is no
> > nominal cash flow due to quasi-contractual dividends or contractual
> > interest payments plus principle redemption -- to provide some nominal
> > anchor to the nominal market value of objects of speculation.)  To talk
> > about true fundamentals involving liquid assets that are held primarily
> > for their liquidity (resalability) in markets organized by a market
> > maker who does Not guarantee an unchanged spot resalable price over time
> > -- is really straining both credulity and  language.
> >
> >
> >
>