Friday, September 26, 2008

Long after the cost is forgotten

But is Gazelle worth £118,000; that is the question. But actually, it isn't, because to answer that question, first we need to know the answer to this one: what does 'worth' mean?

According to the market theory of value, it's pretty simple. Something is worth whatever someone else is prepared - and able - to pay for it. On that measure, and judging by the length of time it's been for sale, Gazelle probably isn't worth quite that much. On this measure, the value of an object is affected by a range of factors other than its intrinsic qualities: the state of the economy; the right person being around at the right time and having the money; the availability of credit, and what else is available at the time (competition). My guess would be that on this measure, with credit harder to get, people having less disposable income, and upwards of a thousand narrowboats being available to purchase, Gazelle's value is probably falling rapidly.

Yet how - except to the blindest classical economist - can this be the case, when its intrinsic qualities haven't altered one whit? How can the unwillingness of international banks to lend each other money affect the beauty and the workmanship of a boat sitting on the Oxford Canal? Market forces may be a great way of establishing the price of something, but some people would say that there's more than that to value.

There are alternative economic perspectives. I'm not enough of an economist to know them inside out, but they do throw up some interesting ways of looking at the question. When people think about buying a new boat, they are prepared to take into account the cost of the raw materials, and the cost of x hours' labour at £y per hour; they may also accept that there is a premium on this labour cost for the investment the builder has made in training and acquiring the necessary skills. People who think about it a bit more will also realise that there must be an element of covering overheads, and of investing in the facilities and equipment necessary to do the job.

This sets the price for a new boat; which in turn is the largest factor in establishing the price of second hand boats. But there isn't necessarily a direct relationship between the two. For example, the steel required to build a new boat today is vastly more expensive than it was five years ago. This usually serves to drive prices up at the middle and lower ends of the second hand market in relation to their original costs, but the nearer the top end of the market you get, the less the proportion of the cost is represented by the raw materials, and the more by the skill of the builder. It's relatively easy to price the cost of labour, and even the investment that has gone into developing that labour.

Far harder is to put a price on the rarity value of the skill (you might call it talent, or even artistry) of someone like Ian Kemp; there probably aren't many more than half a dozen people in the country who could have built that boat. But does that matter when 99.9% of potential buyers don't appreciate it; either can't see it or don't value it? (And the 0.1% can't afford it.)

In most markets it's considered a point of honour to pay as little you can get away with; to be constantly suspicious that you're being taken for a ride; to seek to shave pennies of every bill even when the marginal cost is insignificant. Which is rather sad.

If I had a hundred grand to spend on a boat, would I really buy this one? Actually, I would probably buy an old boat still, despite knowing in my heart that that would be a load of trouble. But I would be very sorely tempted. Certainly, if it was a choice between Gazelle and another second hand boat in that price range; no competition (assuming that the engine, which I believe is a Gardner, was OK). And between that and commissioning a new boat? Well, that money wouldn't get me near a new boat that good, so seeing as I'd be saying 'I want one exactly like that, please (only maybe a little bit shorter)', I think Gazelle would win all round on price, time and hassle. But sadly I didn't get a £100,000 Boat Token for my birthday, so it must remain academic.

I may be talking absolute rubbish of course - if there are any economists reading this I'd love to hear from you.

1 comment:

Anonymous said...

Insurance valuation is often based on 'replacement cost' which can be higher (or lower) than market value and is therefore a different method of calculating financial worth.
But I suspect the 'value' you are really talking about has a lot of aesthetic judgement wrapped up in it and that's a whole new can of philosopical worms.