There is no such thing as intrinsic value. Or is there?
Have you ever heard the argument that fiat money is bad money because it lacks intrinsic value, and that we should return to something with intrinsic value, such as a gold standard or perhaps silver, and that those are good forms of money because they have intrinsic value, and they're actually worth something? So, in this article, I'll show you why that argument is nonsense because there is no such thing as intrinsic value. For any gold bugs reading this, don't worry, I'm not going to ruin the argument for gold being good money. Rather, we will strengthen the case for sound money by demonstrating that all value is subjective.
All right, first, we need to get our definition straight. When somebody mentions value and says something has objective value or intrinsic value or value is subjective there, they usually talk about one of two things. We need to make sure we're clear on which one we're talking about.
The first thing you might be talking about is the market price. If you buy a pair of Sketchers, you spend $50. That is the objective market price. If you buy a McDonald's BigMac, the objective market price is $4. So that's one thing people are talking about when they're talking about value. They're just talking about the market exchange price.
Now the other thing you might mean by value is the value you assign to something personally. And the personal value you assign to something is often vastly different from the objective market price of a given item. For example, you may have inherited a piece of jewellery from previous generations. Perhaps it's a ring or a necklace passed down from grandparents or great-grandparents. Let's say you brought that jewellery to a pawn shop and got $200. So, let's say the market price for that piece of jewellery is $200.
Assume you have an old iPhone sitting in your closet that you no longer use. And it's currently an old iPhone. So, if you wanted to sell it, you could list it on eBay for $300 and sell it today.
So you have two items. You have a piece of jewellery from your grandmother worth $200 in market value and an old iPhone worth $300.
You now have the decision to make. Assume you're walking down the street with only two items on you for some strange reason. You have an old piece of jewellery as well as an old iPhone. Then someone decides to rob you and tells you that you don't have to give up both items. You only need to give up one of these. Which one will you give to that person? Technically, if there was an intrinsic or objective value, you would give them the jewellery and keep the iPhone because the market price of the iPhone is greater than the market price of the jewellery. However, valuation is subjective. It lacks objectivity. Price is objective, but the value is not. So, even though you're giving up a larger monetary amount by giving up that iPhone, that piece of jewellery is worth more to you personally than the monetary value it can fetch for you.
This example emphasises something about value in that it is ordinal rather than cardinal. This is another way of saying that value is subjective rather than objective. Because anyone can see everything they own, clothes, the money in their bank account, and the items in their home, you could easily make a list of everything that is most valuable to you, all the way down to everything that is least valuable to you. But it is impossible to quantify the worth of the items on that list, especially in relation to one another. You'll value your comfortable mattress that you sleep on every night higher on your list of possessions. Then you'll rank a dusty sock that got caught behind the dryer. However, it's impossible to say how much more valuable your mattress is than that dusty sock. Furthermore, these value rankings are not absolute. They're ordinal because they can change, particularly depending on the quantity of each item.
For example, suppose you are shipwrecked on an island. You're out on the water by yourself. A storm hits, your boat sinks, you put on your life jacket, but you are knocked unconscious and wake up on a beach. You're the only person on this tiny little island. So, very quickly, a list of requirements will begin to form in your mind. You haven't had any water in a long time. You haven't eaten in a long time and only have the clothes on your back. So you begin your search around the island, and lo and behold, you come across something you never expected to see in a million years. On this island, there is a magical vending machine. This vending machine now has a list of items, and all you have to do is press a button, and the item you requested will appear magically. This vending machine now sells gallons of water, sandwiches, ponchos, and gold bars. The issue is that you can only use this vending machine once per day.
If market price and value were the same thing, the value wasn't subjective, and value rankings were cardinal rather than ordinal, you'd look at this vending machine and rationally choose the bar of gold because a bar of gold is far more valuable than any of the other items on the list in terms of the market price. However, value is not objective or determined by the market price. Value is subjective, and ranking value is ordinal.
So you'll choose a gallon of water that first day because a gallon of water is more valuable to you that day than a sandwich, a poncho, or a bar of gold. You've been on this island for a while now, and you know it'll be a while before someone comes to rescue you. So, for the first three days, you choose a gallon of water every day. You're getting hungry but still go for the water because it's a gallon.
However, something has changed for you. On day four, you have leftover water because you've had a gallon of water every day and haven't finished it. And it is at this point that we realise that value lists are ordinal rather than cardinal because water is not inherently more valuable than the sandwich on the island. When you have enough bottles of water, one more bottle becomes no more valuable to you than a sandwich on day four. Because you already have water and are more hungry than thirsty, the sandwich becomes the most valuable thing you can get on that day. Because as the quantity of something you own increases, the relative value of adding one more unit decreases.
Here's another angle to consider. There are still many people on the planet who live on one or two dollars per day. If you walked up to any of these people and said, hey, if you do 100 push-ups, I will give you an extra $1 a day for an entire year. Every single one of these people would do it because doing 100 push-ups would increase their income by 100% or 50% for an entire year. They only have one dollar per day. So an extra dollar per day makes a huge difference. Whereas if you go to the average person in the west, let's say somebody's making $60,000 a year, and you say, if you drop down and do 100 push-ups right now, I'll give you an extra dollar a day for your salary. That will take their total salary from $60,000 a year to $60,365, which they will not notice. And I'm sure there will be plenty of people who will fall to the ground and try, and when they got to about 12 to 15 push-ups, they'd say, "You know what? Nah, it's not worth it because that extra one unit, that extra dollar on top of the 60,000 they already get, is insignificant. They personally value not exercising more than that extra dollar, whereas someone who only has one or two of those greatly values that extra dollar.
This is where people often get confused. Personal preferences for things in life drive subjective values. These valuations drive market prices, which is why they are fundamentally volatile. Market prices do not remain constant because they are driven by non-quantifiable factors such as personal preferences, making measuring prices difficult because prices constantly change. It's like attempting to determine where the water ends on a beach. The precise area where the water stops on a beach varies depending on the second, minute, time of day, time of the month, and time of year. But the thing about market prices is that transactions are profitable for both parties when they are free to move, driven solely by the personal preferences of regular individual actors.
When you go to the "best" burger restaurant in the world, i.e. McDonald's, and order BigMac, you profit because your personal preference list is valuing the BigMac above on your ordinal list of personal preferences at that time. It is more valuable to you than the $4. So, if you have a choice between $4 and a BigMac, the BigMac is more valuable to you. You would not participate in the transaction if they were of equal value. Similarly, when McDonald's makes that BigMac and sells it to you, they also profit because they are receiving something more valuable than what they are giving you. Otherwise, they would not have entered into that transaction. They are more interested in the $4 than in the burger. As a result, in any transaction between two free-choice parties, both parties profit. And it is for this reason that voluntary trade and prices freely moving through the normal auction process of all individual actors, buying and selling anything at any given time, is so important because it means that prices actually have a signal that is worth something.
Another example because it's critical to emphasise that both parties profit in a transaction because you'll only exchange items with someone if you believe that item is worth more to you than what you have, regardless of the market price. Stocks are a great example that Robert Murphy uses. If you own 100 shares of a stock that is currently trading at $10 per share and sell them, it means that $1,000 is more valuable to you than those 100 shares. At the same time, it means that the person who purchased them from you, the person who purchases those shares for that person, those 100 shares of that stock are worth more to them. They are worth more to them than $1,000. You would not engage in that transaction if you valued them equally. You can only buy a stock if you believe it is worth more than the money you are giving up.
Finally, this is why having an accurate price measuring stick is so important. Because value is subjective and unquantifiable, it cannot be measured. However, those valuations, personal preferences, and aggregate preferences of all economic actors result in market prices. That means that prices reflect some of those individual preferences. That is, if you are going to plan for future economic activity, such as saving or investing, you must be able to trust those prices, at least somewhat, that they are indicative of reality. This means that measuring prices with a non-moving ruler is critical because prices are so volatile on their own that, as I previously stated, it's like measuring where the water ends on a beach. It's constantly moving, propelled by celestial forces. So, if you're trying to take measurements of where the water ends on the beach while your ruler or tape measure is constantly fluctuating, growing, or shrinking, any measurements you take are basically worthless. And the units of money that a society employs are how prices are calculated. Obviously, you measure prices in dollars, euros, yen, or pounds. As a result, the more volatile the money supply is, the more meaningless prices become.
Now, if you could press a magical button and declare that the total supply of dollars in existence today could never change and was fixed in place, it would serve as an ideal price measurement tool. It would be preferable to gold because gold has been inflating at 1% per year for thousands of years as they extract more gold from the ground. It would be preferable to bitcoin because bitcoin is currently inflating. And so it has nothing to do with an intrinsic value which is not real because the value is subjective according to personal preferences and ordinal lists of all economic actors coming together to a consensus aggregate market price. It has to do with money being unmanipulatable, and something like gold in the past and potentially bitcoin in the future is inherently difficult, if not impossible, to manipulate the supply of. That is why hard money provides a strong foundation for an economy. It does not rely on the discipline of governments and central banks, which are incentivised to manipulate the money supply. You don't have to rely on them to simply hold back and refuse to do so.
Finally, this is why price controls are so destructive. Because as soon as a price control is imposed on anything, whether it's controlling the price of labour through a minimum wage or controlling the price of energy, oil, or products, or putting price caps on certain items that free market participants can sell, the market becomes unstable. That is why they are so harmful. Because the moment a price control is implemented, it causes market distortions and eliminates the ability of both sides of a transaction to profit from something. You are no longer in a win-win situation. You inadvertently create winners and losers for transactions involving price controls, resulting in wealth destruction over time and other unanticipated consequences.
To summarise, value is subjective. It lacks objectivity. There is no such thing as intrinsic value because individual preferences determine value. And what people prefer cannot be quantified. And it is ordinal rather than cardinal in terms of their ranking, and it is dependent on the quantity that someone has of any given item and is constantly changing.
And the subjective valuations placed on any given item by all economic actors combine to form a consensus, an aggregate that results in market pricing and objective exchange value. And it's critical to have money that doesn't move because money is just a measuring stick for prices.
And, because subjective valuations drive prices, you need a measuring stick that doesn't move so that those prices can give you the most accurate signal about the nature of reality.