What is Value?
What makes a thing valuable.
If you are just joining this series of articles I highly recommend starting from the beginning at The Definitive Guide To ‘Money’ so you don’t miss any of the juicy details.
Let’s dive right in. What is ‘value’?
Fairly simple, right? Value isn’t a thing, it’s a relationship. Things can be valuable but only in the context of a human wanting them. I specify ‘human’ here because animals do not assign value (in the context of money. I’m sure all animals value food, water and shelter). It doesn’t matter how many million dollars you offer to a chicken, it’s not going to persuade it to mow your lawn.
So Value Exists But Also Not? Huh?
Yeh, humans are weird. Like, the weirdest actually. I have this thought experiment I always like to do to show how freaky we all are. Imagine a person doing some everyday thing that people do. It can be anything you can think of. Watching TV, going to a fairground, cooking, working in an office, whatever you like. Now replace the person with a chicken…
...Ridiculous right?! Now replace the chicken with a frog. Also ridiculous. Now replace it with literally any animal you can think of. It’s always ridiculous. There’s a common denominator there, and it’s not the chicken! Humans are seriously bonkers and the reason is that we have the magical ability to believe in things that don’t actually exist, or kind of exist but in this strange exist-not-exist meta thing.
Value is something that only exists in the minds of humans and is therefore subjective, meaning nothing has inherent value. Not water, gold, oil, data, money or anything else. Things have value because people want them, and this ‘want’ we call ‘demand’.
Value is demand for something that can be given (or stolen if you’re an unscrupulous individual). Someone might want to pay for a dream, but it cannot be supplied therefore it has no value. We call things that can be supplied, the ‘supply’ (obviously. duh!).
Supply and demand are the cornerstones of economics. They are economics 101, as people love to say. Supply and demand are the basis for every economic transaction ever made.
The metric for measuring value we call ‘price’. Price occurs when two parties each have something the other party wants. There’s something I should make clear at this point because it is not well understood.
A buy is a sell and a sell is a buy.
Traditionally, we consider a ‘sale’ to be when we have something other than money and we exchange it for money. But for a better understanding, it is important to consider that a purchase could equally be seen as buying money with something other than money. Both a purchase and a sale are simply an exchange. A transaction. The ratio between one side of the exchange to the other side of the exchange we call the ‘price’. A price could be 50 chickens for one cow, or it could be 50 dollars for one bottle of an instagram influencer’s bath water. The concept is the same.
So Where Does This Value Come From?
Value is created when:
Let’s take this series as an example. I write something you want to read using my time, knowledge and energy. If further down the road you decide that this is something you can’t live without, you might decide to pay me to be able to read all the articles (I don’t accept chickens just yet, but who knows what new fintech service will be available next week). In doing so, I will have created something (supply) that you want access to (demand), and if I am willing to provide the articles to you for a quantity of something that I will accept (let’s ignore money for now and say I will accept your old DVD collection as payment) then an exchange can occur. You can send me the DVDs (The Matrix better be in there!) and you get access to the articles.
Now it may seem very mundane what just happened there, but I assure you it is quite magical. Let’s slow things down a bit an summarise what occurred. We went from absolutely nothing to time, knowledge and energy, to demand, to value, and finally to a transaction.
This system is known as the ‘barter’ system and is the earliest known value exchange exchange system for the human species (or any species for that matter). This system goes back as far as 6000BC and provided the stepping stone we needed to invent money, although we certainly took our damn time making the next step!
I don’t want us to divert too far off here, but as a side note, it’s important to point out that the fact value can be created from nothing is the exact reason the economy is not a pie to be divided up, it’s a balloon to be inflated. The economy is not a zero sum game. You can turn words, rocks, data or whatever you like into value without taking anything from anyone.
So, we’ve now discovered exactly what value is and how this sneaky thing appears into our lives. We briefly touched on how this value is then exchanged in a transaction. Now it’s time to see how this all went down in our history to get us to where we are today. So hold onto your hats because we are about to travel back in time!
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NEXT ARTICLE IN THE SERIES: A Short History of Money
PREVIOUS ARTICLE IN THE SERIES: What is Money?
SUMMARY OF ALL ‘What is Money?’ ARTICLES: The Definitive Guide To ‘Money’