Last week I wrote about the way in which foreign exchange speculation sets the relative values of currencies. The value of ‘things’ can also be a mystery. Every day items like a bottle of milk or a loaf of bread are pretty easy to value. It’s how much you need to pay for them in a shop, which reflects the cost of production including profit at each stage. We have gone past the point where the government sets the price of milk and bread these days so the price is set by competition. And we are ‘enriched’ (ie fed) by the milk and bread so we do not starve and are able to work.
It is our judgement whether the cost of the milk is reflected in our perception of its value as a food. So we may choose to go to a restaurant instead. While the cost is a lot higher – typical food markup in a restaurant is a factor of 10 – it is again our perception. We may have visitors or it may be a birthday.
Food sometimes is valued in the same way as currencies – rice may be bought and sold speculatively while in transit so that the price may jump if there has been bad weather in the production areas, even though the actual grains of rice were harvested some time ago and the farmers have been paid already.
Think of houses – we hear when they are going up, going down. That is also decided by ‘the market’. An individual house or local area may react differently of course but all the prices are still governed by what someone will pay. In essence these are physical things.
But how do you value what accountants call ‘intangibles’?
Let’s start close to home. We will be going with some friends the weekend after next to see Ibsen’s A Doll’s House at the Royal Exchange Theatre in Manchester. This will cost money – which has to be paid so that the building can be heated, advertising paid for, the actors, stage hands and other staff can be paid so they may eat and hopefully enrich their lives in some way. To us, these are costs but what is the value? How do we measure the amount by which it will enrich our lives? I am sure it will.
This has all become clearer to me since thinking about tax, money and things. The big problem is that money is not conserved. If you buy a new car, the moment you drive it off the forecourt, it loses a substantial amount of value – 25%, 30%, whatever. So that is money ‘wasted’ or destroyed – it cannot be recovered. This is of course why money has always to be created and also why the idea of a fixed amount of money in the economy is wrong. To grow the economy takes management which seems to be severely lacking these days.
Which leads me to the big news this week. No, not anything said by the politicians here or overseas. Nor the awful abduction and imprisonment for 10 years of three poor women in Cleveland, Ohio. Nor the terrible fire in Bangladesh that cost over 500 lives. It is much closer to home – so close in fact it puts Manchester on the world map. It is not 5 miles from where we live.
It is the changes at Manchester United Football Club which has made world-wide news. At 71 years of age, Sir Alex Ferguson is stepping down after 26 years as manager.
Is this big news? It even trumped the State Opening of Parliament here in Britain on the BBC and made headlines all round the world. And to about half of the 1.6 billion football fans around the world who choose Manchester United as their team, you bet it is.
It really is Sir Alex who has crafted this brand because when he took over, the team was floundering at the bottom of the First Division, English football was in the doldrums, the Heysel disaster had not long occurred, there were problems with fans not to mention the Hillsborough tragedy which was shortly to occur.
Ferguson has taken an (admittedly already) iconic but failing football team and made it into one of the world’s greatest sporting brands. Yes he has had money to spend but he hasn’t gone out and spent wildly – he has been very careful while spotting rare talents.
His management style may seem to be abrasive to some but reputedly he knows everyone working for the club, their spouses and children because he has built not just a brand but a family. Manchester United, according Richard Scudamore, Chief Executive of the English Premier League, is the jewel in the crown in the international arena that everyone wants to see. That is power, that is passion and that is what makes the club what it is – not always at the top but certainly close enough always to challenge for the top spot.
In a country not known for world-class management, Ferguson has given a master class. Manchester United alone is ‘worth’ some $3.3 billion, according to Forbes as a franchise and George Soros clearly agrees as he has a sizeable stake in the club. Whichever way you look at it, this is a very large amount of money. The second most valuable is NFL’s Dallas Cowboys at $2.1 billion.
So this brings me to the value of culture. How much is Hollywood worth or the Berlin Philharmonic? How much is the Royal Exchange Theatre worth? Or Shakespeare? How much is the BBC worth (perhaps I shouldn’t ask that one because Cameron may try to sell it)? Because it is the creative arts and sport which really mark us out not as automatons or robots but as people with individual values and most importantly are prepared to spend money not only on bread and milk but also on entertainment and pleasure.
I am a scientist and I love engineering and good design. So in my perfect world, everyone would understand at least some technology, roughly how the body works, some numeracy and why the earth goes round the sun. But they would also understand and appreciate art, music, theatre, film, good TV. They would understand other national cultures mainly by understanding the languages. And they would play or be involved in all sorts of sports because that is where the value is of being a human being. Where is austerity in all that?
Interesting comparison of conservation of money versus the physics principal of conservation of energy. Perhaps if we were to take an even further step back, the investments become indicators of broader fluctuations in the market.
It is a massive problem because we are constantly told that there is no more money yet with proper organisation there is an infinite amount of work that could be carried out. And work makes money. It is relatively easy to change your income but with high fixed costs, there is much more danger from reducing income.
To further the physics comparison, we need work to keep entropy under control!
Following Churchill’s quip about democracy, free market capitalism is the worst system, apart from all the rest. The only way of controlling it is by regulation and taxation. The first can become very bureaucratic and the second really needs legislators to understand exactly how business works and what will be the effect of changes. The general intelligence of some politicians just beggars belief. I suppose on the free market model, if we pay peanuts, we get monkeys so we should pay them rather more. But that would be politically very unpopular!
Entertainment companies in the broad sense seem very overvalued. How do you predict the earning stream? Whether it is movie or music. Sports seem a little easier to predict the income stream considering historical data. I think there are a lot of intangibles to society when you look at the arts as entertainment.
I don’t necessarily think they are overvalued, KC. Entertainment, sports or whatever appeals to peoples interests so they will spend money.
People go to football matches every week sometimes but they don’t buy a washing machine every week. So the football business (either brand) has much more secured income than a washing machine manufacturer because the latter will work for years.
To compare the two industries, there is a much better guarantee of a ‘sticky’ consumer with football than with making white goods. The same with cars. Therefore it is likely that Manchester United’s value will be larger than many manufacturers.
Another comparison is with mobile phones. Making the instrument requires a large investment but the real business is in providing the service. So Nokia have been in trouble but Apple are cash-rich not so much on the phone manufacturing but on the services like iTunes. Entertainment is just another service and it employs a lot of people.