Valuation without value theory: A North American "appraisal"

Journal of Real Estate Practice and Education, 2003 by Canonne, Jean, Macdonald, Roderick J

Executive Summary: Competence supposes a professional foundation that includes a solid understanding of theory and its historical development. In real estate appraisal, for example, this theory is that of economic value, and its history spans from Xenophon to Ricardo and from Marx to Hobson. This literature review shows that the core of real estate appraisal literature has little place for this theoretical foundation, and allocates even fewer pages to the history of economic value. Appraisers face the challenge of erecting the edifice of basic concepts, laws and principles in appraisal so that the field can advance from art to science, and from trade to profession.

Introduction

Real estate appraisal is an ongoing concern with an ambition for technical excellence and reliability. It is nevertheless disquieting to realize that errors may creep in and become systematic (e.g., Canonne and Macdonald, 2001). A detailed scrutiny of over one hundred major North American real estate handbooks and real estate appraisal manuals, treatises and anthologies, starting with Hurd (1903) and covering one hundred years, reveals that the theory of value-from Xenophon to Ricardo, Marx and Hobson-is systematically neglected.

The literature reviewed here deals insignificantly with the concepts of value, and barely half deal with both economic law and principles of value. Two-thirds do not cover the history of value theory, and others do not touch on any stage of the development of value thought. A parallel survey of academic thesis and dissertations, dictionaries and lexicons revealed a similar neglect.

How did this state of affairs come about? Could it be the fault of unprofessional practitioners? Has the theory been explained well, only to have practitioners water down or set aside essential concepts in order to simplify the practice? Has evaluation practice been broken down to the lowest common denominator?

Or could it be that the researchers and writers in this field have neglected the fundamentals? Could it be the classroom that is to blame and not the students? Do practitioners "simplify" things because that is what they have been taught, or because they have been given no reason to do otherwise?

This review of the literature attempts to answer these questions. All the available publications on economic value were examined-particularly those in the domain of real estate appraisal. These publications were divided into two categories: (1) writings by academics and (2) writings by professional practitioners. Both categories were subdivided into theoretical and historical works. This results in the following backbone for this article:

A. The notion of economic value

1. Works by theorists (economists)

2. Works by practitioners

The history of economic value thought

1. Works by theorists (economists)

2. Works by practitioners

The findings indicate that in each of the four subcategories, the theory of value and its history are by and large neglected. In some cases it is ignored entirely. In others, the notion of value is dealt with, but as if it were a secondary notion.

This is evident in the examination of the writings and teachings of economics in the twentieth century, and as well as in the field of the evaluation. Economists in the twentieth century have turned away from the political economy study of value to concentrate on the econometrical analysis of prices. Among practitioners of appraisal-with few very notable exceptions-there has also been very little interest in the question of value.

No wonder practitioners short circuit the practice of evaluation; the fundamental notion of value did not enter the classroom because it finds little or no foundation in the literature, with blatant errors in the theory of value and the history of value thought. The state of affairs in appraisal practice is simply the result of the way in which evaluation is taught, and of the way in which research is directed.

Works on the Theory of Economic Value

Works by Economists

Economic value was the passion of physiocrats in the eighteenth century and political economists in the nineteenth century. Nevertheless, Hannah R. Sewall, who published the first history of value thought in 1901 (pp. 123-24), observes:

That none of these earlier attempts to explain value are satisfactory is not be wondered at when we consider the complexity of the phenomenon and when we remember that more than a century and a quarter have passed and that there is yet no formulation of the law of value, that has met with general approval. But, on the other hand, so much was done that there is scarcely any proposition of importance in the modern discussion of value which was not stated or suggested by the writers of this first period of economic science already and which has not been discussed before Adam Smith made political economy a world study.

These words would be just as valid today as the curtain has fallen on the twentieth century. There are many factors that have led to this neglect of value of which three merit particular attention: scientific positivism, the "mathematization" of economics and the refractory nature of research on value.