Tom and Joe bought two identical and adjacent plots of land. Tom is a well known mobster. Joe is just your regular…well…Joe. Anyway, Joe starts building a house on the plot. Tom is right behind him. Every time Joe builds something, Tom does the same. After a few months construction is done and the two houses stand side by side, identical in every way - from plumbing to shingles. A couple of years pass and Joe decides to sell the house. He puts up a “For Sale” sign with a price of 2 million dollars. Tom sees it and quickly also puts up a “For Sale” sign, only for 3 million dollars. Joe, confused, politely asks his mobster neighbor: “ Hey Tom, our houses are identical. you’ve copied every little detail from me. And now we’re selling and you are asking 50% more than me. How come?” Tom smiles and says, “yeah the houses are the same, but I don’t have a mobster for a neighbor…”
Real-estate is not fungible. Vehicles are not fungible. But gold is. Or is it? A gold bar that came of a sunken treasure can sell for twice as much as a gold bar with no provenance. Why? I mean gold is gold. The gold atoms don’t care about provenance. Fungibility is more complicated than it may seem.
The Merriam Webster dictionary definition of Fungible is: “being something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account”. The crux is in the words “may be”. For something to be replaceable by an identical quantity of the same kind of something, someone has to have the perception that the two identical quantities are interchangeable [and therefore can have the same value and/or utility]. That is the point. Fungibility is an epistemological question.
Real estate is not fungible not only because a property can be changed, improved, decorated, invested in, etc. It’s not fungible even if all intrinsic properties are identical [same as in the treasure gold bar example]. The reason is that the value of real estate is also a function of our perception of extrinsic properties [and their value / utility or lack thereof], such as the owner(s), the financial state of the seller and buyer, the number of bids, and sometimes even the neighbors…All these things are directly related to the way we perceive reality. It doesn’t mean that they are not empirical. They may very well be measurable and objective. Nevertheless, the value stems from how we perceive these facts. That is the nature of fungibility. Fungibility is what we attribute to things that are interchangeable as well as indifferent to our epistemological state. Gold is fungible as long as the our epistemological state towards the gold in question is not affected by extrinsic properties [either because they do not exist, or because they do not matter]. Same goes to a pound of rice. It is fungible until it is not because for example it was stolen from Bruce Springsteen’s pantry. Two identical hotel rooms may be fungible for all intents and purposes. However, if one is adjacent to a very loud couple it may cease to be fungible. Yes, fungibility can be transient and local/specific.
To sum up:
Fungibility can be transient.
Something that is fungible will stop being fungible the moment its value starts being affected by extrinsic properties [and our attribution of utility and value to these extrinsic properties]
Fungibility is a question of perception of value [epistemological utility].
All of that deal with sources of value and not price. Price, i.e., what the market will bear, is always contingent on both intrinsic value/utility generating properties and extrinsic properties
Everything we wrote so far, we wrote with full confidence. The next bit is conjecture.
We suspect that having only intrinsic sources of value is the necessary condition for something to be fungible. If we were to delineate the two necessary and sufficient conditions for fungibility they would roughly be: something is fungible if and only if:
it can be collected in equal, indistinguishable, quantities, and
it derives its value/utility only from its intrinsic properties.
A note about measurability: As stated above the value stemming from extrinsic properties is epistemological because it depends on the value that we attribute to these properties. The properties themselves can almost always be measured. The implication is that we might be able to better value things if we were able to accurately measure not only their intrinsic properties [such as weight], but also the extrinsic properties that we perceive to be of value. Kindle marks excepts in its book that many readers marked. It is measuring an action and reaction of users to an intrinsic property. That becomes an extrinsic property of those words in that book that affects the value we attribute to these excerpts. That’s an example of direct measurement of an extrinsic property that affects value. If we could extend this example to other stuff-of-value and provide empirical data about the extrinsic properties that are attributed to that stuff, we might be able to better value stuff, and diminish the chances of unfounded, speculation-based valuations and bubbles. More to follow.