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Old 02-15-2020, 11:38 PM
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What Gives Money Its Value?


True story. Back in HS government class, our teacher told us US money is backed with basically nothing. Then she gave us a parable. If someone gave you a thousand dollars, what would you do, burn it or spend it.

Anyway money is definitely not backed with nothing. We give money (for example) to needy nations all the time. If money was just something we printed up at random, that would be pointless.

So what is money backed with? And what gives it value? What is our economy based on?

Just a little more background on what I DO know. Up until the late 60's, 5% of US federal reserve notes were backed with gold. Then we effectively went off the gold standard. Yeah, the world economy couldn't be based on gold. Cause there wouldn't be enough to go around. People would starve.

But it has to be based on something valuable. So what is it based on???

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Old 02-15-2020, 11:53 PM
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Is this a serious question?

https://www.investopedia.com/terms/f/fiatmoney.asp
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Old 02-16-2020, 12:16 AM
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But it has to be based on something valuable.
Does it?

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So what is it based on???
The convenient fact that people are willing to exchange money for goods and services. If they're no longer willing to do that, then it won't be worth anything.
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Old 02-16-2020, 12:56 AM
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To paraphrase John Kenneth Galbraith:
"money is exactly what you think it is."
It is worth exactly what it is worth to you. It you are prepared to offer your time or property in exchange for money, or you have need of services or some tangible, or even intangible, thing, and you have some money to exchange for that, then that is what the money is worth to you.

The entire question of intrinsic worth comes down to trust. Really, what it is that makes you happy to have money in your possession rather than say more stuff? That trust is what people talk about as the backed value of the money. Is there someone who will ensure that your money continues to have some value as a token of exchange of goods or service, even in the face of bad behaviour of people who have a great deal more of that money? Behaviour that might act to weaken trust in the value of that money. In most countries, local currency is in some form guaranteed by the government. Usually by guaranteeing that banks that engage in fractional reserve lending will never run out of money if there is a run on funds. In exchange, the government (hopefully) prevents those same banks engaging in bad behaviour (like really risky lending practices). YMMV. Of course in order to prop up banks, if something does go bad, your government has to issue more currency. And then question then is: just what makes the paper printed (or otherwise created) by your government worth my trust? In the end, you are putting your trust in the value of your country. Strong reliable countries with good robust economies are resistant to the problems of printing money, and if the government borrows money (ie issues bonds) a country with good intrinsic value will have no trouble convincing people to buy those bonds, as they trust that they will get their money back. If the trust in your county's value i erroded (maybe your oil wells are running dry, your government is corrupt, or whatever) things are going to be harder. Trust in your money is going to be eroded. Its value tends to follow.

Last edited by Francis Vaughan; 02-16-2020 at 12:58 AM.
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Old 02-16-2020, 01:28 AM
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Taxes. It's backed by the fact that it can be used to pay taxes. So long as you can use money to avoid getting into trouble with the government - so long as money is the only thing that you can use for paying taxes - money will have value.

For something to have value, it has to have an end consumer. Real estate has value because people need to live in it; food has value because people need to eat it; money has value because governments have to take it.

Last edited by Alessan; 02-16-2020 at 01:30 AM.
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Old 02-16-2020, 03:10 AM
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Of course, one can say much the same thing about gold. Gold has little intrinsic worth; like anything else, it is only "worth" what someone else is willing to exchange for it.

Money has value because people trust it. If I give you a Dollar in exchange for something, you can reasonably expect that Dollar to keep its value, at least in the medium term. You understand that if you keep that Dollar for a long time, inflation will reduce its purchasing power, so you either turn it back into something you need or lend it to someone who will pay interest that counteracts the effect of inflation.
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Old 02-16-2020, 03:14 AM
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Of course, one can say much the same thing about gold. Gold has little intrinsic worth; like anything else, it is only "worth" what someone else is willing to exchange for it.
Gold's value comes from being a raw material for the jewelry industry. If people stopped wanting to wear shiny things, gold would lose most of its value.

If gold looked like lead, it would be nearly worthless.
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Old 02-16-2020, 04:00 AM
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I'd first ask OP what he thinks about Bitcoins. Tell us how you think their value compares with that of U.S. banknotes and we'll have a better idea how to answer OP.

BTW, when the world was still on a gold standard the "money supply" was greater than the amount of reserve gold. That "excess money" loomed as a threat, with depositors wanting private banks to redeem their deposits, and banks sometimes wanting the central bank to fulfill its gold promises. A partial-gold standard persisted all the way until 1971 when France's demand for the U.S. to exchange its paper money for gold forced Nixon to finally abolish the gold standard completely.

Paper money is essentially just IOUs, but now instead of the USG promising to give you gold or silver for your $100 bill, it promises only to give you five $20 bills! (Or a fifty and ten fives.)

Sooner or later you're going to wish you'd spent that $100 while it still had value. There's trillions of dollars worth of wagers on the table right now that that day will come later rather than sooner.
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Old 02-16-2020, 04:23 AM
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Sooner or later you're going to wish you'd spent that $100 while it still had value. There's trillions of dollars worth of wagers on the table right now that that day will come later rather than sooner.
Are you claiming that it's inevitable that the U.S. economy will eventually succumb to hyperinflation? Why? Sure, all past civilizations have eventually collapsed with massive destruction of wealth, but I don't think that gives us good insight in the likely future path of a world economy that will ultimately be drastically transformed by technology - and I'm not talking about iPhones, I'm talking about artificial intelligence increasing productivity by orders of magnitude, post-scarcity, many of the basic principles of economics fundamentally changing. It's unquestionably true that the world economy will look fundamentally different in 100 years, but I don't think the only path from here to there involves massive destruction of wealth.

Last edited by Riemann; 02-16-2020 at 04:26 AM.
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Old 02-16-2020, 04:32 AM
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Taxes. It's backed by the fact that it can be used to pay taxes.
By that standard, the Zimbabwean currency should never have become worthless: People in Zimbabwe still had to pay taxes in it, so it should still have had value, so it shouldn't have hyperinflated away to nothingness.

You were closer to the mark in your statement about gold deriving most of its value from its use as jewelry. Carry that a few steps further: Why is it useful as jewelry? Because people think it looks good. Why do people think it looks good? Because other people think it looks good. Otherwise, it would be the metal equivalent of a mullet, something people used to think looked good but is now unfashionable and worthless. Most people these days wouldn't wear a mullet despite the fact it's objectively not much different from the hairstyles they do wear. That specific hairstyle has lost all value, however, precisely because everyone around you thinks it's lost all value.

If you think that's mind-blowing, meditate on how we know what words mean.
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Old 02-16-2020, 05:22 AM
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... but I don't think the only path from here to there involves massive destruction of wealth.
I wish the ambiguous term "wealth" were avoided altogether in discussions like this.

A devaluation of the dollar would transfer wealth from creditors to debtors. It would be likely to have adverse effects that would reduce total wealth (if we could agree on a measure). But what does "destruction of wealth" even mean in your context?

I don't know whether excessive inflation (suitably defined) or devaluation of the dollar will occur five years from now or fifty years from now. I phrased my comment so "I win" even if it takes 500 years. I'd offer to bet a case of champagne, but I might not be around in 500 years to pay off.
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Old 02-16-2020, 05:38 AM
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True story. Back in HS government class, our teacher told us US money is backed with basically nothing. Then she gave us a parable. If someone gave you a thousand dollars, what would you do, burn it or spend it.
Uh, spend it?
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Old 02-16-2020, 06:16 AM
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I don't know whether excessive inflation (suitably defined) or devaluation of the dollar will occur five years from now or fifty years from now. I phrased my comment so "I win" even if it takes 500 years. I'd offer to bet a case of champagne, but I might not be around in 500 years to pay off.
Well, in the long run we're all dead. Have another drink.

Your statement above is almost recursive. Both 'inflation' and 'devaluation' have the same meaning. In this case, it means that one dollar's worth of value purchases less real wealth.

Remember, money - currency - is in no way wealth. Items, goods are wealth. The phone in my wallet is wealth. The $20 bill in that wallet is simply an accounting measure of potential wealth. A million dollars with nothing to spend it on is valueless.

For the OP's question? Money has value because we agree it has value. No other reason. Any other stated reason is stuff and nonsense. If you went into a shop and offered to by a widget for $20 and the shopkeeper said he wouldn't take your bill because he didn't value it your money would, technically, be worthless there. Your money would no longer have value.

Now, there are some legal issues with that. "Legal tender for all debts, public and private" is written on cash for a reason. It means the government that issued those bills will back up - maybe with force - the value of those bills. But, in truth, any enforcement mechanism is also predicated on a mutual agreement between the people that those bills have value.

Yes, in a really sideways situation a National Guardsman could point a gun at the shopkeeper and force him to take your bill in exchange for what you wish to buy. But that really only works once. Quickly, the shopkeeper and his peers will either shut down or relocate to someplace where such things don't happen.

As for gold and such? Yes, it has some value for jewelry and electronics. Fine. But nowhere near what it's currently valued at on the spot market. Over this weekend it's $1585 per ounce. A ridiculous figure in terms of its basic usefulness.

Because gold is, like the banknote in my wallet, money and not wealth. It's a reserve of value that is recognized as such only because it is agreed to by many parties. It has addition cache because it has been recognized as such for a long time but it has no more real intrinsic value that a linen banknote or bitcoin, really.
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Old 02-16-2020, 06:23 AM
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By that standard, the Zimbabwean currency should never have become worthless: People in Zimbabwe still had to pay taxes in it, so it should still have had value, so it shouldn't have hyperinflated away to nothingness.
It lost almost all of its value because the government printed too many of the damn things, that's all, Supply and demand are still a factor. That said, I wouldn't say that Zimbabwean currency hyperinflated into nothingness; it approached nothingness, but it never quite reached it. I suppose if someone wanted to pay their taxes with a dump truck full of the stuff, they would have taken it. Its value just got so close to zero that the system that relied on it collapsed.

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You were closer to the mark in your statement about gold deriving most of its value from its use as jewelry. Carry that a few steps further: Why is it useful as jewelry? Because people think it looks good. Why do people think it looks good? Because other people think it looks good. Otherwise, it would be the metal equivalent of a mullet, something people used to think looked good but is now unfashionable and worthless. Most people these days wouldn't wear a mullet despite the fact it's objectively not much different from the hairstyles they do wear. That specific hairstyle has lost all value, however, precisely because everyone around you thinks it's lost all value.
Sure, that makes sense. But asking why people want things or don't want things isn't a question of economics, it's a question of psychology and sociology. So sure, people may want gold because they were socially conditioned to believe that it's valuable... or because they actually like them, or because their lizard brains say "shiny=good". My point is that it doesn't matter why people want something, only that they want it for itself, and not as an investment or a means of retaining wealth or transferring value or any other theoretical construct. The vast majority of jewelry buyers and wearers will never sell their jewelry. To them, it's not an "asset", it;s something they wanted.

And that's my point: for something to have value, someone has to want it - not as an investment, but for the thing itself. For some things, like gold, how much people want it is strongly dependent on social constructs. For other things, like petroleum, the desire for it is much more pragmatic (people need to fill their cars!). And for things like currency, the want is artificial - by law, the government has to want money. It has to demand, and accept, taxes. That's what gives it value. What that value actually IS depends on the vast array of economic factors pored over by practitioners of the Dismal Science, but there has to be a core of want at the center.

Last edited by Alessan; 02-16-2020 at 06:24 AM.
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Old 02-16-2020, 06:36 AM
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As for gold and such? Yes, it has some value for jewelry and electronics. Fine. But nowhere near what it's currently valued at on the spot market. Over this weekend it's $1585 per ounce. A ridiculous figure in terms of its basic usefulness.
If gold had no value for jewelry and electronics, would it still sell for the same price? Would it sell for anything at all? And if not, how arbitrary is its value, really?

My point is, there my be an array of multipliers that increase its value, but if you multiply something by zero, its value is still zero. There has to be a number of some sort of number at the center of the equation.
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Old 02-16-2020, 07:20 AM
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Look at it another way, and you can say that fiat money is backed by everything. I can take the money I earn, and spend it on my rent: Therefore, my landlord is backing money with the value of my apartment. I can take my money, and take it to McDonald's to buy a meal: Therefore, my money is backed by Big Macs. I can take my money, and use it to buy a car: Therefore, my money is backed by cars, and so on. Even if one of those vendors decided that money was really worthless and stopped accepting it, it'd still be of use to me, because I could still use it at all the other vendors. And likewise, those vendors themselves can use money at a wide variety of other vendors, so it still has use to them, and because of that, they're very unlikely to stop accepting it.

Alessan, dollar bills have no use in jewelry or electronics, either, nor for nearly any other purpose. And yet, they manifestly do still have value. Being pretty probably helped gold become valuable, and being originally backed by gold probably helped dollar bills become valuable, but once they're valuable, there's no reason they can't remain so. And things can become valuable even with no backing whatsoever ever, like bitcoins.
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Old 02-16-2020, 08:00 AM
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If you went into a shop and offered to by a widget for $20 and the shopkeeper said he wouldn't take your bill because he didn't value it your money would, technically, be worthless there. Your money would no longer have value.

Now, there are some legal issues with that. "Legal tender for all debts, public and private" is written on cash for a reason. It means the government that issued those bills will back up - maybe with force - the value of those bills. But, in truth, any enforcement mechanism is also predicated on a mutual agreement between the people that those bills have value.
That is simply not true. If I, in my American shop, prefer cowrie shells to your Dollars, there is nothing you can do about it. The Feds or the local police will probably point you to the Treasury which says on its website:

Quote:
"All coins and currencies of the United States, regardless of when coined or issued, shall be legal-tender for all debts, public and private, public charges, taxes, duties and dues."
This means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services.

"Legal Tender" is an oft misunderstood term.

Addendum: The same law applies in the UK, but if you turn up with a £20 note that you kept from a visit in the 60s, no shop will accept it. But you can take it to the Bank of England, who will happily swap it for a current £20 note

Last edited by bob++; 02-16-2020 at 08:02 AM.
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Old 02-16-2020, 08:34 AM
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Well, in the long run we're all dead. Have another drink.
Right! I think the 500-year bet would be almost a sure thing ... if there were parties around to collect then. The probability of a major worldwide currency crisis in the next few decades may be small ... but it's much likelier than most of you seem to think.

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Your statement above is almost recursive. Both 'inflation' and 'devaluation' have the same meaning. In this case, it means that one dollar's worth of value purchases less real wealth.
No. The Thai government, for example, would love to devalue its currency. Imports would become more expensive; local prices might not change much; its exports would be much more competitive in dollar terms. It's prevented from devaluing by geopolitical constraints more than economic constraints.
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Old 02-16-2020, 08:58 AM
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The value of money is the value of trust. You trust the U. S. Government to accept your dollars as money. So do a lot of other people. So many of them, in fact that other nations use dollars as a measure of the comparative value of their own currencies. At one time the value of the US dollar was a function of the fact that US manufacturing, farming, and international shipping was the largest and most stable in the world. Now it's based on the fact that American consumers are the largest and most stable market (demand) for the goods and services produced everywhere. (Including inside the US, by the way.) The dollar is highly valued because it is highly valued. It is so huge a market that change is slowed down enough to make plans reasonable, even in the long term. It isn't permanent. Billions of people believe it is reliable. It takes a long time to change billions of opinions. We have a large government infrastructure that really does nothing other than try to keep the opinion from changing.
What is a dollar worth? It's worth what you are willing to do, or sell for it. If your opinion is unrealistic, you lose goods, or time. Then you need more money.
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Old 02-16-2020, 09:21 AM
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Along these lines... a good answer to "What is a litre of milk really worth?" is, what it costs at the supermarket. It is fascinating, but intrinsically complicated, to try to work true worth out from first principles.
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Old 02-16-2020, 09:32 AM
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If money was just something we printed up at random, that would be pointless.

So what is money backed with? And what gives it value? What is our economy based on?
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Taxes. It's backed by the fact that it can be used to pay taxes. So long as you can use money to avoid getting into trouble with the government - so long as money is the only thing that you can use for paying taxes - money will have value.
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By that standard, the Zimbabwean currency should never have become worthless: People in Zimbabwe still had to pay taxes in it, so it should still have had value, so it shouldn't have hyperinflated away to nothingness.
At least in the USA, Federal Reserve Notes are backed by government bonds- debt instruments based on the government's sovereign power of taxation. That's the difference between US dollars and Zimbabwe dollars: the latter isn't raising (anywhere near enough) revenue by taxation, it's simply handing out pieces of paper.
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Old 02-16-2020, 11:31 AM
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What's an IOU for $100 worth to you?

If you trust the person and know they will soon have the money and pay you back it's worth $100. They might even throw in something extra for your trouble.

From some other random slacker it may be worthless.

The issue of trust is the main building block of a healthy economy. And not just the currency. You trust a bank to return your deposits. You trust the local officials to not walk in confiscate your stuff.* Etc.

So we trust that when we get money from someone that someone else will accept the money in payment later on.

Too many people either don't understand the role of trust or have a problem with trust at such a large scale involving so many people. But group trust is apparently an intrinsic aspect of the nature of most people.

* Which is why on-the-spot civil forfeiture is such a concern to so many people.
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Old 02-16-2020, 01:25 PM
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If you went into a shop and offered to by a widget for $20 and the shopkeeper said he wouldn't take your bill because he didn't value it your money would, technically, be worthless there. Your money would no longer have value.

Now, there are some legal issues with that. "Legal tender for all debts, public and private" is written on cash for a reason. It means the government that issued those bills will back up - maybe with force - the value of those bills. But, in truth, any enforcement mechanism is also predicated on a mutual agreement between the people that those bills have value.

Yes, in a really sideways situation a National Guardsman could point a gun at the shopkeeper and force him to take your bill in exchange for what you wish to buy. But that really only works once. Quickly, the shopkeeper and his peers will either shut down or relocate to someplace where such things don't happen.
I think you overcomplicated the example by imagining something with a price tag on it and then the shopkeeper refusing that number of dollars. Yes there are laws about this, because it also ties in to people's ability to settle debts (if you owe me $100, I can't refuse a $100 bill as payment, and take action as if you are still in arrears).

A simpler example might be something like: I have a golden fleece, and I am only willing to hand it over if you answer me my riddles three. The government can't force me to exchange it for currency.
Because, for one thing, what number of dollars would I be told to accept?
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Old 02-16-2020, 02:08 PM
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If you think gold has any intrinsic value, imagine a post nuclear situation and you are in a shelter that has a year's supply of food and someone came by and offered you a pound--or a ton--of gold if you would leave your shelter to him. Would you take it? Food and, to a lesser extent, shelter and clothing have intrinsic value. Very little else.
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Old 02-16-2020, 02:46 PM
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FWIW, some nations or people within those nations have switched their currencies when their national currency lost all value.

https://www.npr.org/sections/money/2...y-saved-brazil

https://www.businessinsider.com/usd-...urrency-2018-5

The people in a nation switching to Euros or USD when their own currency has issues happens too.

https://www.rfa.org/english/news/kor...018162155.html
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Old 02-16-2020, 02:49 PM
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Regarding gold having value because of being worn in jewellery:
It's partly as a display of wealth, so it is acting like a fiat currency even there.
Aluminium is plenty shiny, and was a much-prized jewellery back when it was scarce. So why don't rappers wear big aluminium chains?
It's because a significant point of jewellery is to flaunt excess wealth. Aluminium is too common for that; it's like a hyperinflated currency.

Last edited by Mijin; 02-16-2020 at 02:51 PM.
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Old 02-16-2020, 03:12 PM
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Gold's value comes from being a raw material for the jewelry industry. If people stopped wanting to wear shiny things, gold would lose most of its value.

If gold looked like lead, it would be nearly worthless.
I agree, but gold still has value to a person who doesn't wear jewelry. Maybe I think gold doesn't look all that great, but it still has value to me because I can sell it to others for money which I can then use for things that do have value to me, say a new TV set.

I think the idea that gold has value because it is shiny and pretty, much like the idea that money has value because it can pay taxes is a narrow view of the concept.
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Old 02-16-2020, 03:35 PM
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I agree, but gold still has value to a person who doesn't wear jewellery. Maybe I think gold doesn't look all that great, but it still has value to me because I can sell it to others for money which I can then use for things that do have value to me, say a new TV set.

I think the idea that gold has value because it is shiny and pretty, much like the idea that money has value because it can pay taxes is a narrow view of the concept.
The same reasoning can be applied to diamonds. They are valued because they are a symbol of wealth. In truth, there are so many diamonds existing that they are practically worthless.
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Old 02-16-2020, 04:17 PM
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If you think gold has any intrinsic value, imagine a post nuclear situation and you are in a shelter that has a year's supply of food and someone came by and offered you a pound--or a ton--of gold if you would leave your shelter to him. Would you take it? Food and, to a lesser extent, shelter and clothing have intrinsic value. Very little else.
This may be more that food and shelter are now much more expensive.
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Old 02-16-2020, 04:54 PM
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Your boss pays you $X in wages. You buy $Y worth of groceries. You are trading labor for food. The dollar is just a bookkeeping gimmick.

Your landlord collects $X in rent. He pays $Y for chemotherapy. He is trading lodging for medicine. The dollar is just a bookkeeping gimmick.

You can keep track of the exchange rates between labor and food, or labor and lodging, or lodging and medicine, or medicine and labor, or between any pair of goods or services you want. It's easier just to calculate everything with one yardstick. You and your fellow citizens can pick any yardstick you want. Silver-backed Mexican pesos. Gold-backed Spanish pesos. Gold-backed U.S. dollars. Fiat dollars.

When the government mandates a change from gold-backed currency to fiat currency, it is just changing the yardstick from English to metric. The values of the other commodities relative to each other have not changed, and eventually a new equilibrium will emerge. (Usually not the one the politicians wanted.)

When the government mandates an exchange rate ($35 for an ounce of gold, $15 for an hour of manual labor, $0.00 for an appendectomy, etc.), it is just changing the yardstick from English to metric. Values of other commodities relative to each other have not changed. The new measuring standard will work its way through the economy until a new equilibrium emerges. (Almost never the one the politicians wanted.)
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Old 02-16-2020, 06:16 PM
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Money has value for exactly the same reason that everyone driving on the same side of the road has value.

If you can understand why you, personally, would like to drive on the right side of the road when everyone else drives on the right side -- and likewise drive on the left if everyone else is driving on the left -- then you can and do understand why money is valuable.

It is the same underlying mechanism.




We constantly have need to coordinate our actions with the actions of others. Essentially nothing in your home was produced by you, alone. You work together with others to produce the value you see around you.

The multitude of people who help make your life a little bit better live, quite literally, all across the globe. One of them in one country makes your life a fraction of a penny better here, another in a different country makes your life better a fraction of a penny there. There are billions of us. Those fractions of pennies add up. If the people offering those bits of value had to help you directly, if they had to show up at your doorstep to do you a solid, at exactly the same time that you did them a solid, so that they and you exchanged your valuable work directly, and in person, then that would be ridiculous.

It simply would not work.

So by collective agreement -- a mechanism people can easily understand when we think about the value of driving on one side of the road -- we earn our value indirectly. I teach economics. But I don't teach it to the people at the grocery store in exchange for groceries. I teach it to people who want to learn it, in exchange for tokens of value that I know people will accept, and then I trade those tokens of value to the grocery store. And then the people at the store can use the same tokens they received from many for something they find more valuable than economics instruction.

This works because we all choose to intermediate our value using the same tool. We use a common medium of exchange across large regions. A medium of exchange is valuable precisely because everyone else uses it, just as driving on the right side of the road is useful precisely because everyone else does, too. When I lived in Japan, I used yen for my transactions just as I drove on the left. I used the same tool everyone else used, because coordination is how we help each other build value. We coordinate around a common money because that's useful. Simple as that.

Money can be complicated.

But why money is valuable is not complicated. It's valuable because we all coordinate to make it valuable. The formal name for this is a Nash equilibrium. We could, potentially, coordinate an equilibrium of monetary value around anything, but of course existing governments can and do strongly guide the mechanism of coordination.




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Taxes. It's backed by the fact that it can be used to pay taxes.
This is insufficient.

Bitcoin is closer to digital commodity than digital currency, but it's close enough to demonstrate a few important principles. It obviously has no intrinsic value, since it's just digits on computer drives. But it is clearly valuable: it is bought and sold in exchange for other valuable things. Even so, no government accepts it for taxes. Its value is sustained by some other mechanism.

Government taxation and regulation can and does guide a society toward a particular item around which we coordinate our collective exchange of value. Such coordination is one of the primary purposes of government. But government can't be strictly necessary to sustain it, because we see people negotiating value of otherwise apparently worthless objects even without imposition of that government-sponsored coordination.
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Old 02-16-2020, 07:56 PM
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The only thing that's necessary for currency is the conviction (on the part of a reasonable number of people) that you will eventually be able to trade that currency for something of value.

You don't have to believe the currency has any value in and of itself--you don't have to believe that anyone else believes that, either. Just that there is someone that will take your simoleons in exchange for food or something else.

As noted, cryptocurrencies are the ultimate expression of this. They aren't backed by anything; there's no central authority willing to take them for tax or anything else. Just a bunch of people who think that, if someone gives them Bitcoin for one thing, they'll be able to trade that for some other thing later.

A consequence of this is that a currency has to be scarce. A currency that can be easily duplicated is worthless. So either you have an authority enforcing the scarcity (limited minting, anti-counterfeiting), or it's a natural effect (only so much gold), or it's somehow designed into the currency (cryptocurrency). That's not a sufficient condition, but it is a necessary one.
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Old 02-16-2020, 08:00 PM
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There was a story on the radio about a couple travelling around the world on a yacht. At one remote Pacific island (they say) they wanted to buy some meat for provisions, and offered to pay for it with dollars or Euros. The locals didn't want to deal with it--there wasn't any supermarket on the island where people could easily spend any of that cash to replace the food. They ended up bartering meat for cheese.

ETA: there are islands where getting your hands on some food, or clothes, or even fresh water, is a little more complicated than heading to the bodega around the corner.

Last edited by DPRK; 02-16-2020 at 08:02 PM.
  #34  
Old 02-16-2020, 09:30 PM
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It has addition cache because it has been recognized as such for a long time but it has no more real intrinsic value that a linen banknote or bitcoin, really.
Where is this cache? Fort Knox?
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Old 02-16-2020, 10:01 PM
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I'm pretty sure I've told this story here before, but...

When I was a kid, every Halloween, my extended circle of friends (about 15 of us) would converge on the home of the kid who lived in the best neighborhood. We'd all use that as our home base for trick-or-treating, and then at the end of the night, sit in a big circle in the living room trading our candy. A wonderfully chaotic scene, as I'm sure you can imagine.

Well, it came to pass that everyone was willing to trade other candies for Good-N-Plenty. How did it come to pass? I don't know, because none of us actually liked Good-N-Plenty. But we would all trade other candies for it, because we all knew that someone else would then trade us other candy for it. In short, we turned Good-N-Plenty into a currency, with no fixed backing, no governmental coordination, and no inherent value. And amazingly, it worked.
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Old 02-16-2020, 10:41 PM
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I'm pretty sure I've told this story here before, but...

When I was a kid, every Halloween, my extended circle of friends (about 15 of us) would converge on the home of the kid who lived in the best neighborhood. We'd all use that as our home base for trick-or-treating, and then at the end of the night, sit in a big circle in the living room trading our candy. A wonderfully chaotic scene, as I'm sure you can imagine.

Well, it came to pass that everyone was willing to trade other candies for Good-N-Plenty. How did it come to pass? I don't know, because none of us actually liked Good-N-Plenty. But we would all trade other candies for it, because we all knew that someone else would then trade us other candy for it. In short, we turned Good-N-Plenty into a currency, with no fixed backing, no governmental coordination, and no inherent value. And amazingly, it worked.
I would have been a sticking point in that economy: I like black licorice, so I would have taken a few boxes of Good-N-Plenty out of circulation to eat them, exerting a deflationary pressure. In short, I would have bid up the price of a box of Good-N-Plenty by making it so there were fewer boxes of the stuff chasing all of the rest of the goods. I might have even incentivized others to trade me Good-N-Plentys by offering above-market prices for them, like a fun-sized Snickers or something. If that goes on too long, people can't use them for trade anymore, because too few boxes exist for an economy of them. In longer-term scenarios, the money gets hoarded because hoarding has a better guaranteed rate of return than investment, which is fatal to the economy.

Compare this to Ancient Egypt, which had a gold-based economy and a religion which demanded they bury gold in tombs every so often. Take that to the infinite limit and you have an economy where all the gold is entombed and not, in fact, in the economy. Of course, that doesn't account for grave robbers taking gold out of the tombs and putting it back into the economy.

There's a common lesson here: Don't have money people might want to do other things with, like eating or burying under the ground. Keep your money something which only has exchange value, so it can continue to do its most important job, circulating through the economy.

Last edited by Derleth; 02-16-2020 at 10:42 PM.
  #37  
Old 02-17-2020, 01:12 AM
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There's a common lesson here: Don't have money people might want to do other things with, like eating or burying under the ground. Keep your money something which only has exchange value, so it can continue to do its most important job, circulating through the economy.
This is why we need to outlaw billionaires (or tax them into destitution) because they just want to use their $100 bills for lighting their cigars.
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Old 02-17-2020, 02:21 AM
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As mentioned upthread, money is a bookkeeping trick. I don't want to barter lumber from my wooded property or my obsolete COBOL skills for deli sandwiches or a hooker. Too clumsy. So we set "prices" and finesse the exchange of goods and services. The "value" of any good or service is whatever the parties agree on. Money is thus worth whatever you did to get it and whatever you can swap it for.
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Old 02-17-2020, 04:38 AM
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I would have been a sticking point in that economy: I like black licorice, so I would have taken a few boxes of Good-N-Plenty out of circulation to eat them, exerting a deflationary pressure. In short, I would have bid up the price of a box of Good-N-Plenty ...
Compare this to Ancient Egypt, which had a gold-based economy and a religion which demanded they bury gold in tombs every so often....
These examples of Good-N-Plenty or other specie money increasing in value reminded me of a famous case where specie gold decreased in value in Egypt and its neighbors. I refer of course to Mansa Musa's famous Hajj 700 years ago.
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Musa made his pilgrimage between 1324 and 1325. His procession reportedly included 60,000 men, all wearing brocade and Persian silk, including 12,000 slaves, who each carried 1.8 kg (4 lb) of gold bars, and heralds dressed in silks, who bore gold staffs, organized horses, and handled bags. Musa provided all necessities for the procession, feeding the entire company of men and animals. Those animals included 80 camels which each carried 23Ė136 kg (50Ė300 lb) of gold dust. Musa gave the gold to the poor he met along his route. Musa not only gave to the cities he passed on the way to Mecca, including Cairo and Medina, but also traded gold for souvenirs. It was reported that he built a mosque every Friday.[citation needed]
... However, Musa's generous actions inadvertently devastated the economies of the regions through which he passed. In the cities of Cairo, Medina, and Mecca, the sudden influx of gold devalued the metal for the next decade. Prices of goods and wares became greatly inflated. To rectify the gold market, on his way back from Mecca, Musa borrowed all the gold he could carry from money-lenders in Cairo at high interest. This is the only time recorded in history that one man directly controlled the price of gold in the Mediterranean.
If the numbers are to be believed, I think Musa started with about a million troy ounces of gold in his caravan.

What happened to Spain in the 17th century as galleons brought a flood of gold and silver from the New World? I hope Hellestal or other experts can comment on this.
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Old 02-17-2020, 07:49 AM
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If the numbers are to be believed, I think Musa started with about a million troy ounces of gold in his caravan.

What happened to Spain in the 17th century as galleons brought a flood of gold and silver from the New World? I hope Hellestal or other experts can comment on this.
I think this illustrates very well why money backed by a commodity, although working well for an ancient civilization, does not work well when it becomes more advanced.

Your story would be much the same as the effect on the value of Microsoft stock if Bill Gates decided to sell all of his (or indeed give it away to keep with part of the parallel).

Fiat currency, as long as the fiat part of it is used responsibly and honestly, is much better than currency backed by any commodity. And if you cannot trust the government to be responsible and honest with fiat currency, then why would you trust it to honor its pledge to back its currency with a commodity?

"Money" as a store of value is pretty basic in civilization. In prisons where guys are denied money as a method of trade, they use cigarettes (where still allowed) or items from the commissary such as chips, candy, sodas, or other sundries as a medium of exchange. I might hate Ramen Noodles, but I know I can trade it for toothpaste so I accept Ramen Noodles as payment. To understand money is just to elevate this understanding up a few notches.

ETA: Ask yourself, why would a prisoner who does not smoke accept cigarettes as payment?

Last edited by UltraVires; 02-17-2020 at 07:51 AM.
  #41  
Old 02-17-2020, 08:04 AM
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I wondered here if a couple of short quotes from Adam Smith's Wealth of Nations might be apposite:

Quote:
Ultimately, wealth is not money – it is the amount of other people’s labour that we can command, or purchase.

Labour remains the real price: money prices are just nominal prices. We buy in from others things that it would cost us more toil and trouble to do for ourselves. The real wealth that we obtain from exchanging with others is their labour, not their money
I would add that when comparing prices and costs, the only consistent value is the cost of labour.

Last edited by bob++; 02-17-2020 at 08:05 AM.
  #42  
Old 02-17-2020, 08:27 AM
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I wondered here if a couple of short quotes from Adam Smith's Wealth of Nations might be apposite:
Quote:
The real wealth that we obtain from exchanging with others is their labour, not their money
I would add that when comparing prices and costs, the only consistent value is the cost of labour. [emphasis added by sgs7]
Yes, labor was by far the main component of production, at least in the olden days. Increasingly however, land, capital (incl. physical machinery but also intellectual capital, and entrenched rent-seeking power), and especially highly-skilled labor form a larger and larger component of wealth growth at the expense of ordinary labor. (I think it makes sense to distinguish ordinary labor, often priced at $20/hr or less, from the $2000+/hr "wage" paid to big stars, executives, lawyers and creators, don't you?)

This relates to Andrew Yang's message. The ever-decreasing share of labor toward produced "value" (and the consequent diminishing of labor's share of the economic pie) is a major change to economic paradigm.
  #43  
Old 02-17-2020, 08:48 AM
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I wondered here if a couple of short quotes from Adam Smith's Wealth of Nations might be apposite:



I would add that when comparing prices and costs, the only consistent value is the cost of labour.
Quote:
Originally Posted by septimus View Post
Yes, labor was by far the main component of production, at least in the olden days. Increasingly however, land, capital (incl. physical machinery but also intellectual capital, and entrenched rent-seeking power), and especially highly-skilled labor form a larger and larger component of wealth growth at the expense of ordinary labor. (I think it makes sense to distinguish ordinary labor, often priced at $20/hr or less, from the $2000+/hr "wage" paid to big stars, executives, lawyers and creators, don't you?)

This relates to Andrew Yang's message. The ever-decreasing share of labor toward produced "value" (and the consequent diminishing of labor's share of the economic pie) is a major change to economic paradigm.
Keeping in mind that this is GQ, I don't think there is any dispute that at the bottom of all of the turtles, labor is what produces all value. But that is true whether I pick tomatoes at $5/hr or organize a company to be productive at $2,000/hr.

Further, capital or other assets only improve in value because of labor. My beach house (I don't really have a beach house) that I bought for $850k that is now worth $10 million only increased in value because other people labored which made other people (who probably also labored) wealthy which made them able to afford beach houses which increased the demand for beach houses which made my house rise in value. Labor was at the bottom of it.

In a GD thread, you might argue that the little guy at the bottom is getting screwed, but the obvious point that labor creates value which creates money really doesn't explain anything about money being valuable.
  #44  
Old 02-17-2020, 09:15 AM
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Keeping in mind that this is GQ, I don't think there is any dispute that at the bottom of all of the turtles, labor is what produces all value. But that is true whether I pick tomatoes at $5/hr or organize a company to be productive at $2,000/hr.

Further, capital or other assets only improve in value because of labor. My beach house (I don't really have a beach house) that I bought for $850k that is now worth $10 million only increased in value because other people labored which made other people (who probably also labored) wealthy which made them able to afford beach houses which increased the demand for beach houses which made my house rise in value. Labor was at the bottom of it.

In a GD thread, you might argue that the little guy at the bottom is getting screwed, but the obvious point that labor creates value which creates money really doesn't explain anything about money being valuable.
The Labor Theory of Value is now discredited, in that it's considered a superseded theory much like phlogiston or, perhaps to be more apt, Lysenkoism. Here's one debunking of it among many:
Quote:
According to the labor theory of value, the value of something is determined by the amount of labor used to produce it. So consider the following case. One man goes out panning for gold and at the end of a 10-hour day has enough grains of gold to make an ounce. Another man goes walking along and in 1 minute, trips over a stone. He picks it up and itís a gold nugget. Labor input? Ten hours vs. one minute. Value: the same.
However, modern economists have an even more fundamental debunking in the concept of marginal utility, or how much more value one more of something gives you when you already have a certain amount of that thing. In short, the same amount of work goes into making the twentieth steak as goes into making the first, but unless you have severe problems, you can't eat twenty steaks before some of them begin to get cold and substantially less valuable, so that twentieth steak is worthless to you. A Marxist (at least an (Eastern?) Orthodox one) would bring up the concept of Central Planning about now, I'd quote Hayek and, uh, real life in general, and everything would get Political. So I won't.

My point is, labor does not determine value. Utility determines value.
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  #45  
Old 02-17-2020, 09:30 AM
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The Labor Theory of Value is now discredited, in that it's considered a superseded theory much like phlogiston or, perhaps to be more apt, Lysenkoism. Here's one debunking of it among many:

However, modern economists have an even more fundamental debunking in the concept of marginal utility, or how much more value one more of something gives you when you already have a certain amount of that thing. In short, the same amount of work goes into making the twentieth steak as goes into making the first, but unless you have severe problems, you can't eat twenty steaks before some of them begin to get cold and substantially less valuable, so that twentieth steak is worthless to you. A Marxist (at least an (Eastern?) Orthodox one) would bring up the concept of Central Planning about now, I'd quote Hayek and, uh, real life in general, and everything would get Political. So I won't.

My point is, labor does not determine value. Utility determines value.
I agree. But I won't eat 20 steaks. I (for purposes of discussion) will eat one. Some other 19 people eat the other 19 steaks.

I also agree that Marx's labor theory of value is, not necessarily wrong, but a tautology, as he uses the weasel word of "productive" labor or some other word that I am too lazy too google. Digging a hole and filling it in doesn't count, nor does killing more cows and making more steaks than people want to eat.

But, give me something of value that you (or the hypo you) own that has some value that didn't have labor at the bottom of the turtles. The guy tripping over a gold rock on his path started from someone mining it and dropping it on the road.
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Old 02-17-2020, 12:08 PM
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Keeping in mind that this is GQ, I don't think there is any dispute that at the bottom of all of the turtles, labor is what produces all value.
Why not put "the Planet Earth" in that sentence?
I don't think there is any dispute that at the bottom of all of the turtles, the Planet Earth is what produces all value.
Is it not true that without the dirt on which we stand, not merely the resources we extract from it but the simple fact of its existence, everything we value would not exist? We could even back up another step. Perhaps even more fundamentally, what about "sunlight"? What if we put that word into the sentence?
I don't think there is any dispute that at the bottom of all of the turtles, sunlight is what produces all value.
Is that not any less true? Would not everything we value be gone, if there were no sun? And if we're talking about the turtle on the bottom, did not both sunlight and the Planet Earth precede human beings? How is it, exactly, that labor is the bottom-most turtle when everything we value depends, from the very beginning, on the physical world in which we live? All that the word "capital" means (in economics) is tools. We would not exist if certain of these "tools" had not preceded us in existence. So why not give those things the preeminent turtle position?




A basic fact about the creation of value is that it's multiplicative.

Okay that's a weird sentence. But it's like this:
Production = Sunlight*Air*Stuff*Labor*etc.
In logic and mathematics, we call these things necessary conditions. Multiplicative. If even a single one of these is gone, is zeroed out, then the whole thing is zero. So does everything of value we produce depend on labor? Yes. Yes, it does. But everything we produce ALSO depends on a long slew of other things.

The problem with a flat declaration that "all value depends on labor" is not that the sentence is literally untrue. It's that it's superficial. All value depends on quite a lot of things, certainly including but not limited to labor. They are all necessary conditions, and so in a certain sense every single one of them is "100% responsible" for the creation of all value. One of the more important things modern civilization depends on is proper allocation of our current stuff into tools that will help us make future stuff. Arguably that's not a necessary condition for human existence, but it is a necessary condition for the world in which we've built for ourselves.

For an extreme example: if we burn all of our seed corn in a pretty bonfire instead of planting at least some of it, then our civilization is going to have problems, no matter how hard we work. Allocation of present resources to useful future goals is fundamental to a functioning modern society.

Labor is important. More than that. Essential. A necessary condition. But even so, it is still not a starting point for this kind of analysis.
  #47  
Old 02-17-2020, 12:18 PM
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Marx presents some deliberately simplified toy examples, but I would like to see a rigorous derivation of what, say, a cup of coffee is really worth. Certainly, even to attempt it requires a lot of data crunching.
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Old 02-17-2020, 12:30 PM
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The Labor Theory of Value is now discredited, in that it's considered a superseded theory much like phlogiston or, perhaps to be more apt, Lysenkoism. Here's one debunking of it among many:

...

A Marxist (at least an (Eastern?) Orthodox one) would bring up the concept of Central Planning about now....
They'd bring up "Socially Necessary Labor Time". It speaks directly to your example here.

Marx was just the last big name in a long tradition of the Labor Theory of Value. People had been poking those kinds of holes in the idea for about a century, and Marx created his version in full awareness of all of these weaknesses, so the beginning of his great book contains all sorts of caveats, addendums, clarifications, narrowings of scope, in the attempt to respond to questions exactly like yours, a vain scramble to patch all the holes in the boat.
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Old 02-17-2020, 12:39 PM
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Keeping in mind that this is GQ, I don't think there is any dispute that at the bottom of all of the turtles, labor is what produces all value.
I, for one, am happy to dispute this. Partly because labor on its own is limited in what it can produce, and therefore clearly not the source of *all* value. And the work-around for that, expressing the other resources necessary as a value of labor required to produce them, pretty soon makes a labor a medium of exchange - i.e. a form of money.
Anyway, the value of money is based on our shared delusion that it has value. As long as enough people believe that it does, it does. If not enough do, it doesnít. If tomorrow Dunkin Donuts starts being willing to exchange seashells for coffee, seashells will have some value. If besides DD everyone else is also willing to exchange goods and services for shells, they have become money.
The trick is being reasonably sure you can exchange the money for things you want, and have this be true for most or all people. Thatís why starting a local currency (which some towns etc occasionally try to do) is so hard, and getting harder: most if us want stuff from outside that system, and so needs a currency which is accepted by those who have what we want.
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Old 02-17-2020, 12:46 PM
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Yes, labor was by far the main component of production, at least in the olden days. Increasingly however, land, capital (incl. physical machinery but also intellectual capital, and entrenched rent-seeking power), and especially highly-skilled labor form a larger and larger component of wealth growth at the expense of ordinary labor. (I think it makes sense to distinguish ordinary labor, often priced at $20/hr or less, from the $2000+/hr "wage" paid to big stars, executives, lawyers and creators, don't you?)

This relates to Andrew Yang's message. The ever-decreasing share of labor toward produced "value" (and the consequent diminishing of labor's share of the economic pie) is a major change to economic paradigm.
Yes, and what we need to realize and deal with as a society is the fact that this change is likely to continue and probably accelerate. Ultimately, automation will make unskilled labor obsolete, and AI will make even the value of skilled labor approach zero, perhaps quite quickly if there's a sudden breakthrough in AI. It's a good thing, in the sense that it will be accompanied by huge increases in productivity, and all human need can be satisfied without anyone needing to "work" in the historical sense. But if we approach this state of affairs under our current economic paradigm, those with capital will progressively accumulate a much greater proportion of total wealth. We really need to think carefully about how a post-scarcity society will function, and how we get there from here.
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