Re: The fundamentals of postage stamp value

[Dymski@xxxxxxxxxxxx (Gary Dymski)]

I'll add a little to the discussion on fundamentals.  The reference is
Jamie's post in response to Roger's postage-stamp example.  Really just
wanted to make some assertions that appear to follow from the fundamental
uncertainty framework:

1.  Any good or asset that depends for its value on future delivery of
goods, services, or payments cannot have a value rooted in "fundamentals"
that are known, certain, and quantifiable.  The idea of Keynesian or
fundamental (sic) uncertainty does not allow for this.  Projected value,
yes, but fundamental value, no.

2.  Take a close look at the discussion of "present value" in any finance or
money&banking text, and you'll see that the fundamentals entering this
formula are expected future coupon payments discounted by expected discount
rate/interest rate measures.  Nothing impervious to changing perception here!

To answer Jamie directly, no, I don't think we can use a concept like
"fundamental" and be consistent.  Recall Shiller's effort to identify excess
volatility.  He couldn't identify the expectational mechanism and also the
market-value determination.  Our problem is similiar.  The implication is
that it will be difficult to have direct discussions with economists who
believe there ARE fundamentals.  An invitation perhaps to the
econometricians on this list:  is it possible to formulate a test that could
distinguish a fundamental-driven estimate of time-series data from an
estimate based on expectations and history alone, but not on fundamentals?

3.  So identifying or even defining a "bubble" is problematic, if one
approaches it from a "forward-looking" perspective (a deviation from a
projected path based on fundamentals).  For PK economists interested in
operationalizing uncertainty, but also interested in ideas like "bubbles"
(that so well describe how financial markets and instruments can
`malfunction'), why not use a "backward-looking" definition of value.  This
would involve two steps.  First, develop an estimate of the time-trend of
the series in question.  Second, determine whether "news" warrants a shift
in either the intercept or slope of this time-trend.  A deviation then is
defined as a bubble.  Note that noise (varying observations) is one thing,
bubble another.

Note other problems:  as Barkley might remark if he were not under the Cone
of Silence, there is no way to know ex ante what functional form (so to
speak) properly describes the time-trend in my suggested procedure.  OLS
would suggest the world is linear.  I know we've been through this on the
PKT, but you can see the identification problem.  To find the deviation from
trend, you've got to properly describe the trend, and there's no way be sure
what that is or was.  Speaking then with Paul's voice, we might also note
that the idea of a "functional form" connecting time-separated points in
social space is also problematic.  I've suggested elsewhere (see the paper
that will come out in the Intl Rev of Applied Economics sometime soon) that
the mathematics
of nonlinearity, the multiple equilibria of incomplete-information games,
and the PK ideas of fundamental uncertainty all have some deep
kinship/logical compatibilities.  It might be useful to find what those are,
that is, how those metaphors give common images/suggestions about the
implications and movement of economic processes.

4.  Frank Herbert wrote in Dune, "Long range planning is a device that we
use to protect ourselves from the terrors of the future."  Of course, there
aren't giant worms coming out of the ground on OUR planet, are there?  But
wait, what about that other Ross, not our own Barkley Ross(er), but that one
out of Texas ... (sorry Jamie, couldn't resist a little joke).

Gary Dymski

>OK, I'll bite on this one. (About time I posted on something substantive!)
>The word 'fundamental' troubles me here, since it would appear to imply
>something deeper than subjective utility or preference. If not, then
>'fundamental' value differs from person to person, and what kind of value is
>that? I suppose this is Paul's point, and if so, I concur.
>
>But do we need the word 'fundamental'? If we leave it aside, then there is a
>fairly well-specified 'value' of a collectible in Keynes, namely the
>expected yield (any rise in price expected to occur, discounted by the
>interest rate), minus the carrying cost, and plus the liquidity premium.
>The expected yield (at the margin, anyway) and the liquidity premium are
>both social, not individual constructs, since they depend intrinsically on
>the interaction of agents. JG.
>