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Counterfactual Theory of Value

perell.com

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Re: Counterfactual Theory of Value

#41

Post by jplr8922 »

The labor theory of value is an old marxist economic theory which is not used by serious social scientists in their field.

The modern approach is called the opportunity cost, and by definition is a counterfactual scenario. It is triggered by a choice you actually have. Otherwise it's called science fiction.

This article does a very average job at explaining the whole thing... Even the Elon Musk example is not accurate. The value of Tesla in the ''without Elon'' scenario is wrong, because in that case Elon would be *replaced* by another overconfident nerd. Just think of Apple without Steve Jobs ; he got replaced by something different, and the firm is still standing strong today...

Good counterfactual thinking is super important, but I do not feel that the author is a master of the art.

Re: Counterfactual Theory of Value

#42

Post by dredmorbius »

This is a restatement of marginalism.

Essentially: what is the marginal contribution of some factor X. Including the case where X is some individual contributor.

The question Dave Perell asks needs to be augmented by one other: What is the cost, and value, of an alternative input factor?

If X provides 100 units of value at 20 units of cost, and Y provides 90 units of value at 9 units of cost, then the net advantage is to utilise Y (net benefit: 81) rather than X (net benefit: 80).

Of course in the real world, neither benefits nor costs are quite so readily assessed, but the principle remains: you want to account for both the productivity* AND the cost of the input or contributor.

Re: Counterfactual Theory of Value

#43

Post by dredmorbius »

Traster wrote: post #23

The problem I have with this is that it presupposes that you can change 1 thing and view the difference. What if the only reason a company is successful is because of a unique idea that 3 people came up with together? Are each of them worth 100% of the company- take any of them away and it’d be worth nothing. Any company or endeavour is made up of complex interactions of many different people it’s impossible to diffe…

Ceteris paribus is actually a central assumption of much economic analysis. The Latin is "all things being equal", and the notion is that a single parameter or input is considered at a time.

https://en.wikipedia.org/wiki/Ceteris_paribus

In practice, regression analysis ("econometrics" to economists) and similar analytic methods allow for evaluating multiple factors.

Re: Counterfactual Theory of Value

#45

Post by derbOac »

MichaelBurge wrote: post #40
MaybeItsMia wrote: post #32

Tesla would exist without Elon Musk. Elon Musk literally simply just bought the company, along with the right to call himself the "founder". Sure without Elon Musk Tesla might be more accurately valued, IE valued significantly less, but it's unclear how much social value is actually created by his showmanship. There's a difference between exchange value and use value.

Exchange value is use value for the company, because it can make stock deals to obtain things for the same nominal(dollar) amount while giving up much less equity. Similarly, if the stock is undervalued, it becomes more costly to raise capital in public markets. So hiring a CEO with poor market perception limits a company's options, even if they're internally very effective.

I dont mean to take a position on Musk per se, but I do think there's a reasonable argument that Tesla might actually do better without him. He does bring a certain amount of risk.

I raise this in part because one of the problems with counterfactuals is evaluating a state of affairs that you dont have access to. In fact, evaluation of that alternate state is necessarily biased by the currrent state.

Re: Counterfactual Theory of Value

#46

Post by marcosdumay »

dredmorbius wrote: post #37
roenxi wrote: post #5

> In startups, why do the founders receive such a disproportionate percentage of equity? There is a really straightforward answer to this - equity isn't distributed according to a theory of value and nobody ever claimed it was. I own some equity in the Australian company CSL. It is unfair to claim I've ever added any value whatsoever to the company at any point, so obviously I don't get that equity because of a value…

Adam Smith's commentary on wages and the considerations in their assignment is interesting. In Book 1, Chapter X, "Of wages and profit in the different employments of labor and stock", "Inequalities Arising from the Nature of the Employments Themselves": The five following are the principal circumstances which, so far as I have been able to observe, make up for a small pecuniary gain in some employments, and counter-…

All of those are very simple consequences of marginalist dynamics.

It has been a long time since I have read it, but it's nice to see Adam Smith was so close to the answer centuries before people started distorting the problem politically and got all those obviously wrong but mainstream answers.

Re: Counterfactual Theory of Value

#47

Post by cassepipe »

cassepipe wrote: post #34

Isn't the first paragraph of this article what every introduction to the labor theory of value says it is not? This is the "mud pie" argument. You may disagree with the theory but please check what it is first .

Here is a somewhat refutation of the mud pie argument https://youtu.be/ccT66pMJPCw

Re: Counterfactual Theory of Value

#48

Post by winnit »

prometheus76 wrote: post #39
VictorPath wrote: post #35

There might be some phenomenon he is pointing out here, but his logic in doing so makes no sense. Even his internal logic makes no sense. He starts out by talking about the value of a product (commodity) determined by the labor theory of value. Then he jumps to how much someone is compensated in salary. Then he jumps to a company's value and the ease at which someone at the helm can raise capital. In terms of compari…

Here's my argument against the labor theory of value: if you spend one hour making mud pies, and I spend one hour making sandwiches, then our products have equal value according to the labor theory of value.

Not really, since you are swapping an easily available commodity ‘mud’ for bread and fillings. You should specify that the value added to the mud would be unequal to the value added to the sandwich ingredients to make the point you want to. Since you begin with different initial conditions you ‘muddy’ the conclusions.

Re: Counterfactual Theory of Value

#49

Post by prometheus76 »

winnit wrote: post #48
prometheus76 wrote: post #39

Earlier quoted context omitted.

Here's my argument against the labor theory of value: if you spend one hour making mud pies, and I spend one hour making sandwiches, then our products have equal value according to the labor theory of value.

Not really, since you are swapping an easily available commodity ‘mud’ for bread and fillings. You should specify that the value added to the mud would be unequal to the value added to the sandwich ingredients to make the point you want to. Since you begin with different initial conditions you ‘muddy’ the conclusions.

OK, here's another refutation of the labor theory of value. A woodworking crafter with twenty years of experience takes five hours to make a bookshelf. A person who just started woodworking today takes twenty hours to make the same bookshelf, but it is out of square, out of plumb, is wobbly and has several nail holes in it. According to the labor theory of value, the noob bookshelf is worth more because the laborer took twenty hours to make said shelf, instead of the five hours of the efficient crafter.

Re: Counterfactual Theory of Value

#50

Post by lifeisstillgood »

sokoloff wrote: post #36
lifeisstillgood wrote: post #26

Earlier quoted context omitted.

Is the implication here that if we had a Black/Scholes/Merton method for salaries we would see a readjustment of salaries across the board as people could identify their value as wins above replacement - probably a huge shock to CEOs. Is it possible that automation provides that arbitrage opportunity?

The gap between the perfect fungibility of two contracts for asset A or B and the hopelessly imperfect fungibility of two employees is too wide for this to hold. (I think.)

But ... Amazon for example redesigns i are ouse picking to make employees fungible. I am pretty sure project management is becoming totally fungible - the reporting and chasing and so forth, can be replaced by automation and is becoming so despite best efforts of millions of "mqnagers"

Something intrigues me about this idea.

The film / book "Moneyball" showed how to re-create great players "in the aggregate".

I think that we will soon enter a phase of "MOOP" - measuring our daily activities on a deep basis, phone calls to colleagues and clients, tonality, agreements and actions etc.

And at this point redesigning an organisation to recreate CFOs or salespeople "in the aggregate" becomes ... possible?

And if you can do that you get close to the ability to create that fungible option - and close to valuing the job.

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