April 23, 2008

Intrinsic Value of Money




A bird in the hand is worth two in the bush if that bush is a pricker bush.  And only if people actually want birds, not bushes.

I.

The Economist describes a study in Psychonomic Bulletin and Review which people were given a regular dollar or a Susan B. Anthony dollar, and asked to estimate the cost of napkins, candy, etc. 

People offered the banknote believed, on average, that they could use it to buy 83 paperclips, 72 napkins or 46 sweets. Those offered the coin thought 39 paperclips, 51 napkins or 27 sweets. In other words, the note was believed to be almost twice as valuable as the coin.

Similar results were obtained using two one-dollar bills vs. one two-dollar bill.

This shouldn't be surprising, however, when this exact (reverse) principle explains why casinos use chips, arcades use tokens-- and why credit card debt is so easy to get into.

The authors explain this to be a funcition of familiarity-- familiarity holds more value. 


II. 

But there's a little more to it.

The mistake is to interpret these results as indicating, e.g, the dollar bill above is believed to be able to buy 83 paperclips or 72 napkins, etc-- that the dollar bill is believed by people to have a certain value.  False.

To prove this, ask someone how many paperclips would it take to buy 72 napkins?  The answer should be 83.  But most likely, they'll just look at you blankly.  They have no idea what the exchange rate is.  Notice how with the Susan B dollar, opposite to the paper dollar, paperclips were worth less than the napkins.

There's a difference between use value and exchange value.  Napkins and paperclips have considerable use value that you feel, instinctively, but nearly no exchange value (i.e. you don't trade them for other stuff.)  Money is the exact opposite.  Trying to convert exchange value for use value in a back and forth line is hard enough; trying to do it in a triangle with three objects is nearly impossible.

Marx had hoped that the use value of an object would be the amount of labor embodied in it, but of course that is even intuitively wrong.  The use value of the napkin has absolutely no relationship whatsoever to its labor content; if the labor to make paperclips increased, the napkin holder would have no way of quantifying it to alter the exchange value.  Because he doesn't care how much labor went into it.  Use value is entirely subjective.

Consider the commoditization of money (currency.)  Many people devalue the penny (e.g. throw it in the trash,) even though some argument can be made that the copper alone is worth keeping.  Labor theory would make the intrinsic value of a penny higher than a nickel.  (cost of copper is higher, but labor to make coins is mostly the same.)   But yet, it's tossed.

Or, the reverse case with quarters.   You may have a dollar, but you'd very likely trade that dollar for three quarters if you needed to fill a parking meter.  The quarter itself suddenly has value beyond its denomination, and you may value it anywhere from $.25 to $2.00, depending on the circumstance. The reason is this: the value of not having a quarter is 100x, or $25-- the cost of a parking ticket.

This value is not transitory; to any regular city parker, the quarter almost always carries more value than  $.25, even though-- and this is precisely the point-- the higher value of the quarter cannot be reflected in the economy at all, ever.  Try buying a $1 coffee with the three quarters you just traded for a dollar.

The price of oil, $118, in the face of falling refinery output and comparatively calm international relations, suggests that the price of oil has less to do with demand or supply, and more to do with something else-- in this case, the falling dollar.

If you do not grasp this, if you do not feel this in your bones, you will always be a wage-slave.   It is absolutely no different than picking a spouse, who I am sure you feel is the perfect mate for you, while another person scratches their head and says, "what the hell does that nut see in that other nut?"  The  key to making money is not working harder, or smarter, or investing, or anything else.  The simple, one koan key is to understand that things have different values simultaneously, to different people.

And I hope it is clear that this doesn't apply only to money.

But anyone who understands this has the ability to exploit this.   Ultimately, you get to choose who you are.  Choose.





Comments

Thanks this commentary has ... (Below threshold)

April 24, 2008 12:11 AM | Posted by Diane Abus: | Reply

Thanks this commentary has been helpful in a trouble spot!koans go right to the center of the brain as does artistic imagery,icons

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Oh, I like the tie-in to th... (Below threshold)

April 24, 2008 8:52 PM | Posted by Demodenise: | Reply

Oh, I like the tie-in to the previous post. Very masterfully done.

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This post is a perfect exam... (Below threshold)

April 25, 2008 3:41 AM | Posted by Ronnie: | Reply

This post is a perfect example of what the Doc is trying to say. According to the ratings it got, it isn't as valuable to most readers as some of his other posts, while people like myself feel the doc's posts on money are always 5 star posts. Different strokes for different folks. :)

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The thing that is most trou... (Below threshold)

April 25, 2008 3:01 PM | Posted by XON: | Reply

The thing that is most troubling for me about this post is that I'm a graduate educated, hard-bitten internationalist, and I don't understand WHY this post touches me like it does. . .

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Online commerce stores susp... (Below threshold)

April 28, 2008 10:31 PM | Posted by Chui Tey: | Reply

Online commerce stores suspect people are more likely to spend their PayPal money because it's usually discretionary money (from selling at Ebay auctions).

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"The price of oil, $118, in... (Below threshold)

June 9, 2008 3:17 PM | Posted by jack: | Reply

"The price of oil, $118, in the face of falling refinery output and comparatively calm international relations, suggests that the price of oil has less to do with demand or supply, and more to do with something else-- in this case, the falling dollar."

Forgive me for my ignorance, but I've always wondered. If there is less of something, and the demand is the same, doesn't that make the prices higher? I don't get how you came to the conclusion of the falling dollar.

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If the Dollar was not decli... (Below threshold)

December 28, 2008 3:07 PM | Posted by Jon: | Reply

If the Dollar was not declining in value, I believe the Dr. recognizes "falling refinery output", in this case, is due to a reduction in demand causing the refineries to reduce output, thus increasing production capacity and pressuring prices downward.

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