This chapter is not about just stock market values, but about an aspect of market prices or values in general. A feature of the stock market, however, will serve as part of the introduction to the issue I want to discuss. In August 2002, as I write this, the stock market has lost some 30% of its value over the last two years. When it was at its peak many of its stocks were said to be overvalued as a result of, in Mr. Greenspan's memorable phrase, "irrational exuberance."

My questions are "where did the money go, if it went anywhere?", "where was the money when the market was at its peak, if it was anywhere?", and "what do these amounts of money mean or represent? Especially, what do they represent in terms of labor and the distribution of benefits and burdens associated with labor?"

Let me give two other related situations before I explain further. A year after getting married, my wife and I moved into a new suburban subdivision because we found a house we liked within our price range and because the suburb was one that seemed well-suited to increase in value because of its location which I thought would be the next popular, high growth area, meaning the homes would increase in price when they were sold. It did increase in value during the ten years we lived there, though not as much as it did ten years after we moved away. But an interesting phenomenon occurred when we went to sell our house.

Some of the home owners had let the cedar exteriors of their homes deteriorate. Of those, most needed cleaning and re-staining, and one or two needed some repair work where some damage had occurred. In the two years preceding our putting our home on the market, there were three or four divorces in the subdivision, which had led to "distress sales" at bargain prices, in most cases in the homes that needed repair or re-staining. The new home owners did the repairs and the re-staining, and the neighborhood once again looked very nice. We had kept our house and yard up very well. We had re-stained the house a few years earlier; we had planted bushes and trees that provided shade and added beauty to the yard.

But when we went to sell, the real estate agents and their clients came around with their market analyses in hand and said we were asking way too much for the house because the previous sales in the neighborhood were for much less. When I pointed out that those were distress sales and that the homes had been somewhat rundown at the time of the sale as well, but now were back in mint condition, as they could clearly see, they did not care. The market determined the value, and in this case, that meant the previous market sale prices determined the price of the next sales as far as they were concerned.

That seemed irrational to me. We held on to our house until we found a buyer interested enough in, and able to see the value of, the house itself to pay much closer to the price we sought than to the previous sales' prices for other homes that were different in quality and that were sold under duress. We found such a buyer.

Second, when I was a child, baseball cards came with bubble gum. The gum and card together cost something like a nickel, and it was a large piece of gum. I think the card was advertised as being free with the gum, though, of course its cost was just figured into the price of the gum in the first place. Now some of those baseball cards are worth hundreds of dollars or more. I do not have mine any more because they were thrown out long ago but if I did have them, they might be worth a lot of money. Where did that amount of money come from? And have I lost it?

Moreover, it is not necessarily what all people are willing to pay, but is only a sign or indication of what people are willing to pay (or sell for) because some person or people actually have bought and sold for that price. The apparent principle is that what one or a few will do -- particularly those who purchased most recently -- others will do also; or to put it another way, if the value or price of something changes, the new price is the value of the item and reflects the price others will pay also. But that is not always the case, particularly as circumstances and/or fashion and popularity change. 

There are even potential circumstances where market prices could not possibly be accurate. If, for some reason, people with means find homes they like in different neighborhoods and purchase them for greater than the previous market value, that will drive up the prices of homes all over town. But if no one else has the means to pay those kinds of prices, the "market value" of the homes right after the rich peoples' purchases will not reflect the actual possible selling prices of homes in all those neighborhoods. So to think of your home as an asset worth the higher amount of money would be a mistake. It would be to count unhatched chickens.

When a stock, such as Amazon.com is worth billions of dollars, but the company had not yet (until this past year) made any profit at all, what does the billions of dollars represent, and where did it come from? And when all that "value" is wiped out by a falling market and a "burst technology bubble", where does the money go, and what does it mean that it disappeared? What, in terms of things of actual value -- labor and products -- does that money mean or represent? Who won or who lost, if anyone? If you bought stock for $30,000 and it shot up to $130,000 on "irrational exuberance" and then went down to $90,000, how much, and what, have you gained or lost? Especially if you do not sell the stock? And what is the value of the company? Or what does it even mean to talk about the value of a company when its stock is going up and down based on speculation?

That is a very different case from that of someone who is "investing" in a home and hopes to make a lot of money when he sells it. While the "use" value will be of some consideration if he is going to be living in the home for a while, it is not the only consideration. Suppose that he would pay $100,000 for the home if he were going to be living there forever. He would not pay more for it because he does not feel it is worth any more than that to him. But since he is not buying it in order to live in it forever; he is buying it to sell it when he can make a desirable profit, he might be induced to pay far more for it, say $125,000, because he thinks he can make a lot more than that when he sells it in a year or two. The price he is willing to pay is now influenced, and might be substantially influenced, by what he thinks will be the future market price of the home -- a future price that may or may not actually come to be. Future prices are typically speculative. (But, of course, the decency of the people who will be your future neighbors is also somewhat speculative, so buying a house to live in forever has some elements of risk as well. In some cases neighborhood "covenants" try to reduce or minimize this risk.)

That future price will depend on supply and demand, but it will also depend on fashion because there might be a great many homes for sale in a city, but the homes that are more popular at the time, for whatever reason, will more likely sell for more even though there is an oversupply of homes for sale in general. The issue in supply and demand is not just how many different objects of a certain sort there are in proportion to the number of people who want them; it is also about the relative popularity/desirability of the different objects within that sort. If there are more homes for sale than buyers seeking them, the market for many of those homes may actually increase their price if many of the other homes are not of a popular type. For example, split level homes were popular at one time, but as of this writing, they are not popular at all. So a plethora of split level homes for sale in a community will not likely drive down the prices of the homes which are in vogue at the time. It is the available supply of the fashionable homes that will determine their market value, not the available general supply of housing in the area.

Notice that fluctuations in price caused by changes in popularity of style or location, are not fluctuations caused by inflation, since it is not all home prices that are going up, nor the price of all goods and services. The fluctuations in price due to changes in popularity is specific to just those things which are moving in or out of fashion. Antiques versus replicas are a particularly good example in that an antique may often have a much higher (market) price than a replica, even though the replica is newer and perhaps even better in many ways, and even though there might be a plentiful supply of replicas available which are in all "practical", tangible, or quality aspects the same as the antique.

Popularity or fashion makes items worth more simply because people are willing to pay more for it because they desire it more, and the price goes up either because of this or because of scarcity where demand exceeds supply. But not all high prices are due to scarcity. As perhaps with antiques, many are due to a prestige or psychological value factor, rather than because of the qualities of the product or service itself. If a celebrity, for example, is seen buying some item, the demand for that item might greatly increase, and its price may as well, but it will not be because the item itself has improved in some way or because it is scarce. The price may go up simply because sellers know people are willing to pay more of their income to purchase it. So something can change in monetary value without changing in quality and without becoming scarce.

Price is also a sign of the portion of the individual's or the society's whole "pie"(total profits and benefits from the economic system and work) at which a given kind of labor is valued by others -- the labor that provides the particular service or product. People will generally give up more of their own labor or their own share of benefits in a society (represented by how much money they are willing to pay), if they have to, for something they really want or think they need than they will for something they don't desire that much or do not think they need. Such valuations can be quite irrational as when people will pay more for clothes or cell phones than they will for their children's education or when collectively we pay more for plane tickets than for the things that might make plane travel safer. In The Affluent Society and sprinkled throughout most of his other writings John Kenneth Galbraith points out, often wryly, many of our apparently more irrational economic tendencies. Some of them, such as the clothes versus education, are just irrational choices, but some of them, such as paying more to athletes or to cosmetic surgeons than to teachers, nurses, medical researchers, or public health doctors, occur because of the formal systematic nature of a given economic system rather than because anyone makes arguably poor choices about what to purchase. (See chapter 13, "Different Earnings" for a more complete explanation of this.)

If we return to stock prices and home prices, the price other people get for their sale will now affect the price or value of your property or holdings, whether you are selling or not, and whether anyone wants to buy your property or not. If no one else is willing to pay what someone else paid for the Jones home, your market value is only ostensibly that last price paid for your neighbors house and it is only that price until someone is forced to sell at a lower price, in which case your market value will decrease even though you have done nothing to improve your home in the first case or to let it fall into disrepair in the second. This not only seems to be something of a bizarre situation but it is not clear on the surface of it what these different money values mean as they rise or fall -- mean in terms of how much, and which, labor and goods, are produced and distributed. This seems particularly problematic when the prices paid for something are not only based on current supply and demand, but on speculation about future supply, demand, and popularity. What does such speculation do in terms of the production and distribution of goods and services in a society? And where "is" the money that such speculation causes goods to have as their price or value?

The typical valuation of business profit is based on current or projected ratio of price to earnings, the p/e ratio, whereby one judges weather one is going to get, or is likely to get, a sufficient return on one's investment by comparing one's share of the profits from dividends with the cost of those shares. Projected future earnings may be more important than current earnings in cases where companies are laying groundwork for significantly increased future sales by developing new processes or capabilities for manufacturing, distribution, advertising, etc. or are developing new products that are expected to be in demand.

Value based on expected resale profit is of at least two sorts: resale of the stock at a higher price later, or resale of (part of) the company or assets of the company, if one is buying controlling ownership of the company and can dispose of it (or if one is able to persuade sufficient owners to do that). In this case one is trying to make a profit on sale of the company or its stock, rather than on profits from the work the company does.

In some cases, of course, the current and/or projected profitability of the company influences its stock price, but there are general market forces that can sometimes influence stock values that have nothing to do with the company's profits. An influential "tip" or rumor may drive a company's value up or down; a large influx of investor money into the market in general may drive up the prices of many different stocks as the demand for stock increases. Oppositely, of course, investor panic in a bear market, or the appearance of a bear market, may drive all stock prices down, regardless of company profitability.

But stock values of given trade transactions also then set the price of the stock until further trades occur to change it. And the latest posted sales price will often influence, whether rationally or not, the next sale price. Insofar as buyers simply follow well-publicized tips or trends, a stock price may rise or fall by a kind of herd mentality rather than by anyone's trying to be rational about p/e ratios, either current or future. And insofar as buyers see market prices pretty much inflating or deflating across the board because of influx of new, bandwagon money in a bull market or the fearful exodus of money in a bear market, stock values will be primarily influenced by speculations on future price valuations of the stock. Such influence is only rational to the extent one can reasonably predict the direction of the market in general.

If we make the distinction between investment in a company's profitability based on its work on the one hand, and speculative purchase of its stock based on its future re-sale price because of general market forces, then there are two different kinds of risks involved, though they are related in those cases where either exceeding or not meeting projected earnings affects the stock price more from image than from a realistic examination of its likely sales profitability; and they are related in those cases, where for no particular reason, a particular earnings announcement suddenly becomes influentially important to people who were previously not concerned about it -- people who suddenly begin to think that this particular company's stock prices may be somehow missed by the tide of general market forces. 

If one invests in a widget company because one thinks they will sell a lot of widgets and make great profits, in either the short or long term, one has to be concerned essentially with the market for this company's widgets. Will there be competition that undercuts the price? Will there be something invented that renders widgets obsolete? Will the economy in general make people unable to afford widgets or less willing to spend money for them? Will there be distribution problems or price increases that might cut into profits? 

But if one invests in the widget company for its speculated re-sale value because of general market forces, or because one wants merely to cannibalize the assets of the company, one may not care much about the sale of widgets at all, except insofar as they affect the stock price, if they do.

Furthermore, diversification within the stock market, by owning stock in different companies or different industries, will spread out the risk of loss due to failed business profitability of individual companies or industries. But it will not spread out risk of across the board (bear) market decline due to general economic disaster (such as recession or depression) or to general market forces.

Until a company sells its stock or until an individual or institution sells stock or other commodities, they do not have the money or the labor money represents in their possession. And insofar as markets are volatile --with commodities subject to rapid and serious change in value-- it is risky to bank on the market value as being the monetary value one actually possesses. 

But changes in value or price are not peculiar to stocks or public investment type of ownership. It is true of even private ownership of any business in an age where technology advances so rapidly that it can render a thriving company obsolete. The standard economic example, of course, is the proverbial buggy whip manufacturers at the turn of the 20^th century. In our current era, the digital age was touted to reduce paper usage and thus the demand for paper, though it may not have done that (yet), or at least not completely, since many people tend to save and print hard copies for safety purposes and for distribution at meetings and for easy access away from the computer, etc. It may seriously reduce, in the next ten years, the need for film or processing labs as digital cameras become more popular and more competitively priced. 

But competition and obsolescence are not the only phenomena that make a company become worthless. As we have seen recently, accounting scandals can reduce a company's value to virtually nothing overnight. As could fire or flooding, theft, mismanagement, embezzlement, low cost competition from overseas, disease in a food product, loss of a huge lawsuit, or any other sort of phenomenon that renders a company powerless to make a sufficient profit from the product or service it has to offer.

Not only is there rapid technological change, but in some cases there is rapid innovation of financing and investment vehicles, some of which, such as some "junk" bonds, will fail, and some of which, such as universal life insurance may not hold their value or be what customers expected. So financial or even legal and accepted accounting practices may be operating on unsustainable principles, not unlike pyramid schemes or other practices that turn out to be built upon a house of cards, even though they may not have seemed that way at the time they were created.

Particularly when market prices, for whatever reason, are inflated past any means of everyone's cashing in at that price or when they are inflated on the basis of p/e expectations that will someday obviously be impossible to meet, the value of that market cannot be what the market prices would seem to indicate. And when the prices are "corrected" or take the likely downward fall, there will be two different kinds of losses, one of which will be real, and one of which will be only apparent. 

If market prices fall below what you paid for the stock and if you sell that stock at the lower price, then you will have lost the value of the labor you used to earn the money to buy that stock (or you will have lost the value of future labor if you bought the stock by taking out a loan you have to repay out of future earnings). It will be the same as if you spent your labor building something or creating something no one else wants or will spend money on. Apart from the joy of creativity of labor, if there was such, you will have essentially labored for nothing in regard to the labor value of the loss you sustained. This is not totally dissimilar from what you lose when there is inflation that devalues your savings or fixed income in a way that makes your previous labor worth less in return for the purchase of other people's labor in trade.

But if market prices first go up and then go back down to what you originally paid (or higher), you have not lost anything but the possible opportunity to have traded the stock for money while you could still find someone willing to buy it at that price. Had you sold it at the higher price, you would have gained other people's labor essentially for far less labor than you were "trading for" (assuming we allow for inflationary rises in labor costs). You would have gained "free labor". You essentially would have turned your previous labor into money, then turned that money into stock, and then turned the stock back into more money than you paid for it, and that money would in turn get you more labor than you would have received in trade for your labor at the time. What you would gain if you sold stock for a price higher than what you paid for it (assuming we factor in inflationary changes) is the ability to get "free labor" -- that is labor worth more than the labor you expended to earn the money to buy the stock in the first place.

The buyer is thus trading his labor for less of your labor at the time, but he either expects or hopes to recoup the difference and more, or he feels that what you have purchased with your labor is now worth more than it was when you purchased it, or it is worth more to him, at least. It is as if you had purchased some item he now wants more, in a sense, than you did or more at least than you do now. He is willing to pay more for it, give up more labor for it than you did.

But if people hold on to stock, or any commodity, while its price falls to the original levels or to above the original levels, from some level it rose to after the purchase, the money people thought they had at the higher prices, or thought they would have when they sold their stock at the higher prices -- the money the higher prices gave to the value of their held stock based on other people's trading -- that money is gone, or to be more accurate it never existed, and it represents no labor. It does not exist but it does not disappear off the face of the earth, because it was never there to begin with. It is no different than finding something you place a sales value of $150 on and then not being able to sell it. You didn't lose the $150; there never was any $150, nor any $150 worth of labor, that price represented. If you had bought the thing for $5 and put a $150 resale price on it, and failed to sell it, you are out $5, not $145. Even if Jones sells an identical thing for $150, and you cannot, you are not out $145 worth of labor. Jones is just fortunate that he gained $150 worth of someone else's labor by essentially doing no labor (or minimal labor involved in making both trades -- his purchase and his sale). What you lost was not labor, but the opportunity to gain other people's labor. In particular you lost the opportunity to do what Jones did, either along with him or perhaps instead of him, by finding his customer before he did and completing the deal he did. You missed out on his deal or a deal just like it.

If you invest X amount of money in anything, and other people's trading that commodity drives the price up, you have only accrued the possibility of making your labor worth more than it otherwise would have been. That is, if you invested X amount of savings into something that becomes worth X plus Y amount of money, then if you sell at that price and reap Y amount of profit, you have profited at no additional labor on your part. Your profit is the result of other people's labor that they have given to you for this commodity. 

If the worth of your investment goes down by Y amount, then, if you sell, you will have lost part of the benefits your labor had earned at one time. You will have simply given your labor away or lost it, or wasted it, in the same way that you waste labor if you make something you cannot sell, and the same way you give labor away if you contract with someone who does not pay you and is ruled not to have to pay you for any services you performed for them. If you borrow the money to make an investment that goes sour, you then will either lose your labor represented by savings you have to dip into to pay back the loan, or you will lose future labor as you work to pay off the loan.

But if you bought something at a fair price, for use, rather than investment, if the price goes down or up, you have lost or gained nothing but the opportunity to have bought it for less or the "opportunity" or penalty to have to pay more for it. All that has happened if the price goes down is that the labor you traded for the item was translated into money that is now worth relatively more to the seller of the item than the labor the house represented when he sold it to you. You, again, lost nothing but an opportunity to have saved some money and to have bought the item for less of your past labor (or future labor, if you borrowed money to buy the item) than you did.

If a company's stock becomes essentially permanently worthless, then all the labor that went into forming that company, investing in it, and even in a sense working in it (except for what one got in immediate return for the work -- one's salary) will have been wasted effort. It would be like building something to sell and then not being able to sell it or to use it. The investors and the workers together will have channeled their labor into making goods or services that have to be thrown away or given away, essentially. Insofar as they were working for building something that would yield a profit or some sort of continuing social benefit and not just for a short term profit, a short term social benefit, or their own enjoyment or personal growth, they have wasted their labor.

But a company that is functioning well and earning profits at a rate it needs for any future continuation or expansion, does not need to have its stock prices become overvalued, and it can ride out any drop in its stock prices that essentially undervalue it (assuming it won't be taken over and ruined or cannibalized, of course).

In short, the vicissitudes of markets have potential significance for the actual meaning and benefits of labor and the quality of life labor can bring. And the vicissitudes of the market have a potential significance for distributive justice of the benefits of shared labor and other burdens. But that significance is not as straightforward as just looking at the dollar value of any given market. This is one more case where the "meaning" of money has to be understood, not just in a numerical sense, but in the sense of what money represents in terms of the distribution of burdens and benefits related to labor and what labor produces.