AFTER close to six years of marriage, my wife and I have finally merged our CD collections. As we don’t own a CD player, we realised that we didn’t need two copies of many albums we both own. Plus, she assured me that, if we get divorced, I would get to keep them anyway.
I filled a few crates with our off-casts, intending to take them to the dump, but then remembered an annoying TV advert that encouraged you to sell them. I sensed a profit motive.
The technology is very simple – you scan the barcode of each CD with a mobile phone, and it gives you an instant quote of how much it is worth. Once you submit the full list, you receive an addressed cardboard box in the post with which you can drop them off at a Post Office. A few weeks later, you get a cheque. Very simple and very entrepreneurial. And enlightening too – it made me realise two important things.
The first is that markets are genuine democracies. It feels odd to be told that a Beatles album is worth 30p, while some obscure German techno album is valued at £2.20. But prices are based on supply and demand. This isn’t a judgment about the quality of the music, and we don’t need to debate whether it is “good” or “bad” (or why). Markets tell you what other people value, directing you to serve their tastes.
The second point is that it’s not always instinctively obvious when you’re making money and when you’re losing it. Certainly, it is frustrating to sell an album that you paid £12.99 for under £1. It feels like you have made a loss. You add up all the money you spent to build this CD collection, and what it is worth today. Hundreds of pounds wasted. In this instance, £1,798.20 versus £109.80.
But this doesn’t make the purchases a mistake. My CDs were primarily for consumption rather than investment, and some of them provided many years of pleasure. However, some others were barely played and were a source of regret. But the crucial point is that the mistake was made when they were bought, not when they were sold. The exercise of selling off the CDs was somewhat painful, but only because it was revealing errors. It wasn’t the source of errors. Compared to the alternative of keeping them stowed away under the spare bed, I was far better off selling them.
To some extent, liquidating assets that have declined in value is painful, but it is also liberating. It increases your bank balance, reduces your costs, and gives joy to the German techno fan who gets a copy of something he truly loves. This is how markets are supposed to function – resources move from low to high value uses.
In a recession this happens more than usual, but that’s exactly why it’s so important to embrace it.
Anthony J. Evans is Associate Professor of Economics at ESCP Europe Business School. www.anthonyjevans.com Twitter: @anthonyjevans