What is Bitcoin? What are Ripples? Part 3 | Hour Blog

2014/03/16 in Journal

Marx hated capitalists. The bourgeoisie. The ruling class. Whatever their name, he despised the lot. While disliking rich people is hardly unique, the reasons why Marx felt as he did aren’t as generally shared…or even understood.

Marx thought that labor created value–that the value of any good was the sum of the labor used to make it. Intuitively, it makes sense. Things that take more labor to produce tend to sell at higher prices, and the common correlation naturally leads to a connection. But it also leads to frustration. If laborers are responsible for all the value of goods, then why are all the laborers so much poorer than…say…their managers? Is it right that so few should profit so mightily off the broken backs of a multitude?

The answer, of course, is no.

Although Marx’s angst flows quite logically from his fundamental understanding of value, this understanding, however intuitive, suffers from fundamental flaws. Value cannot be objectively calculated from labor. It’s decided by the market.

Value is subjective.

Thought experiment time!

You live in a busy city, a metropolis, and all conveniences of modern life lie at your disposal. One day on the way to the gym, a stranger walks up to you and offers you choice: an ornately crafted Faberge egg or a two-liter of Lipton Ice Tea. Suspend disbelief. The choice is easy. “I’ll take the million-dollar egg please.” Exquisitely fashioned, its million-dollar value seems appropriate…and certainly greater than a jug of unsweetened leaf water.

Now visualize this same choice in a different context. Instead of a bustling city, you find yourself in a broiling, barren wasteland. Dozens of miles from any civilization, your chances of survival are slim to none. But they’d improve by a good margin with some supplies. Necessities. Leaf water is starting to sound awful valuable.

Why did you flip flop? Because value doesn’t have to do with labor. Value is the result of a relationship between supply and demand. In the city, the egg was more valuable because the demand for the unique artifact was so much higher than the amount that could be offered. You can buy tea anywhere. Faberge eggs can only be found in museums, government vaults, and private collections. Along with the egg’s limited supply, there’s substantial demand, the combination of which catapults it into the museum/private collection level.

In the desert, you’d be wishing that egg were actual yoke and white. While the supply remains limited, demand drops to zero. The tea is quite a different story. Like I said, value is subjective.

Value’s subjectivity comes causes real problems when it comes to currency. Especially storing currency. Especially storing fiat currency.

Along with being a means of exchange made of fungible, divisible, scarce units, providing a store of value is vital function of money. Transportable, durable, and dependable, good money makes wealth savable and manageable. But fiat currency’s storage capabilities aren’t exactly the best. In 1912, 10 US dollars could buy you what 243 could buy you today. Which means if you stored away the modern-day equivalent of 243 dollars in 1912, your 243 modern-day dollars worth of work would be do what 10 dollars does now.

Why the dramatic loss of value? Like I said, I’m no economist, and inflation is a complex topic, but one of the most obvious culprits is our monetary policy. Dilution of value is inevitable whenever dollars become less scarce, and dollars become less scarce when, say, the US Federal Reserve introduces billions of dollars into the money supply via Quantitative Easing.

But let’s not digress into politics. The point is fiat currency makes wealth storage risky, especially considering their average life span clocks in at 27 years. Place all your eggs in that basket at your peril.

And this is precisely where Bitcoin comes in.

(This is the end of part 3. Part 4 next week).