Monday, February 16, 2009

Use value and sunk costs

Material wealth -- houses, buildings, roads and skyways, bridges, dams, etc. -- don't lose their use-value even during recession and depression. Only their exchange value or monetary value that suffers decline in prices. In the absence of full factor mobility across countries, or full commodity mobility (ie, free trade), valuation of material wealth across countries suffers from heavy distortion, of bubble or depressed prices. So with the absence of sufficient factor and commodity mobility, bubble burst and financial turmoil are 100 percent sure to occur, in order to correct the price and value distortion of said material wealth. It's just a matter of when and where the bubble burst and financial turmoil will happen. The old and painful reality: capitalism without failure is like religion without sin.

Economic crisis under capitalism or market economy is expected, the same way that economic expansion after a crisis is also expected, because people learn their lessons and resume the old way of doing business -- pure hard work, search for endless innovation and competition.

The foreclosed houses and other material assets cannot be considered as "sunk costs". After the price bubble in those foreclosed properties have been corrected, those assets can still be sold or re-acquired by the original owners, at a much lower value, and the use-value of those assets will be realized once more. Foreclosed assets can be considered as "sunk costs" only if they will not be used anymore even after the downward price adjustment and instead, be demolished and/or the land area where they were built will be used to other land-uses, say to be converted into a golf course or industrial plantation or sprawling commercial area.

Wikipedia defines "sunk costs" as:

"In economics and business decision-making, sunk costs are costs that cannot be recovered once they have been incurred. Sunk costs are sometimes contrasted with variable costs, which are the costs that will change due to the proposed course of action, and prospective costs which are costs that will be incurred if an action is taken....

For example, when one pre-orders a non-refundable and non-transferable movie ticket, the price of the ticket becomes a sunk cost. Even if the ticket-buyer decides that he would rather not go to the movie, there is no way to get back the money he originally paid."

Hence, foreclosed cars, houses and other properties cannot be considered as "sunk costs" because these assets still have recoverable value, both to the original and new owners. Because those assets are still re-sellable and transferable, even at a much lower price than their original price during a bubble economy.

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