What should the value of a private sector company tell us?

Question

This question bridges both philosophy and economics. Please see original question on the economics website, it includes extra comments and discussion. Looking for critique and reading suggestions:

https://economics.stackexchange.com/questions/8605/what-should-the-value-of-a-private-sector-company-tell-us

In case I can get some good input from a philosophy standpoint, reposting it here:

At the highest level, would you say that regardless of market/economic environment (free/regulated), a company's value should reflect its ability to efficiently and effectively bring products and services to market that improve the lives of consumers?

Perhaps this is more of a philosophy/ethics question; cant think of any valid argument against this.

For some context, my train of thought is: If the values of all companies do reflect their ability to improve the lives of consumers, then an equity index should therefore be an indication of how good the private sector is at improving life. The value of an equity index allows us to consider the health of a particular market. The financial markets are complex systems in which both physical and mental health are two large constituents. By physical health, I mean the bodies of employees, the buildings in which they work and the technology they use for example. By mental health, I refer to the emotional and psychological well-being of individuals, teams, whole companies and markets.

Thoughts please.

Answer 1

A counter question may be the best answer: does the fact that a teacher makes half as much money as an engineer imply that a teacher is half as effective at improving the lives of others?

This line of reasoning approaches the question of whether currency is a good measure of value. There are many situations where it is a good measure, then there are the situations where a value to an individual does not map easily onto a monetary scale. Teaching is recognized one of those cases.

So, to give you room to explore your question, the next line of questioning I'd consider is whether the concept of a "company" is one which intrinsically seeks niches where monetary value is a good measure of their ability to improve lives as a side effect of them being judged by their company value. If two companies strive towards this niche, then their ability to provide value to others is well modeled by their value.

Answer 2

There are too many "ifs" and "shoulds" for the question to bear much weight. It also evinces a touching faith in the market calculus.

As Keynes noted, judging the equity value of companies is like a beauty contest in which you are not even trying to pick the "most beautiful," but the one everyone else is "most likely" to pick as the "most beautiful." Today, matters are hardly that straightforward. So many variables and layers of financialization impact equity prices that any correlation to consumer wellbeing (if such a thing can be universally defined) could even be less than random.

By less than random, I meant there is arguably a better chance of an inverse relation between equity value and delivery of a generalized "consumer value," as can be seen in the pharmaceuticals, argiculture, insurance, banking, and corporations with monopoly patents or trade deals. The narrowing emphasis on shareholder value has further increased this inverse relationship, especially in respect to the "physical health" you cite, where share values can be boosted by layoffs, gutting plant, and reducing research.

Even where we stick with the company and its direct consumers, in so many obvious areas the whole idea of a "consumer value" may be dubious, as with cigarette or fast-food companies, where rising stock prices may coincide with disastrous health for customers, thus boosting healthcare stock prices. It is hard enough just to logically de-correlate portfolio values, I see almost no hope of correlating equity value with consumer utility. Sad but true. Any study purporting to show such a happy correlation might get "well-funded" but would be looked upon with grave suspicion.

Answer 3

You need to be careful about conflating the concepts of value, price and health.

For example, you ask whether the value of a company should be measured by its ability to make consumers' lives better (I paraphrase). Seems reasonable. Of course, that's not how a company's value is usually measured nor is it the only sensible way you could measure the value of a company.

It wouldn't, in a reasonably free market, indicate the market price of a company for example. Take a tobacco company. I doubt you'd get unilateral agreement that a tobacco company makes all its consumers' lives better. But it still has a market price, often a very high one.

Now we turn to market health. This usually refers to the amount of activity in a market. As such there may well not be a correspondence between the value of the market participants (using your definition) and the health of the market. For example, the market for vegetable soup amongst my children has very high value (in my eyes) but is pretty much moribund.

Answer 4

Peter Thiel has a good lecture on this called "Competition is for Losers" where he explains that value creation and value capture are two independent variables.