Valuation
Value is hard to measure, mostly because as individuals we have different goals and therefore different valuations for different things. Not only that, even our personal valuations change, some over the span of a few hours and some over our lifetimes. Our valuations change according to our moods, the moods of our loved ones, even according to the weather. "I don't feel like it right now" often means "That action does not have sufficient value for me at this time".
But valuations are necessary, because we need to interact with one another. We need to eat, and so unless we grow/hunt our own food, we need to get it from someone else. We need shelter, so unless we build our own houses we need to buy materials and hire engineers. In fact if we tried to be self-sufficient (live as isolated economic units) we wouldn't get a whole lot done. The power of life comes from the exchange of value, or commerce.
Note that I use the word commerce in the broad sense - to mean the exchange of value. The value being exchanged could be goods, ideas, or a music concert.
Also note that value is always exchanged, never transferred in one direction. Perhaps it is like energy is in physics, the thing which is preserved over a reaction. Even when a thief points a knife at you and takes your wallet, you have effectively exchanged your cash for your physical well-being (minus your emotional trauma!).
Money
So we needed a common peg for valuation, and came up with money. Money has been around for a few thousand years (Sumerian coins etc.) and its main purpose is to allow us to create a translation table:
With money, we just need to answer the questions
and then do arithmetic.
What should we use as a proxy for money? We could use gold, and then the table above would have one entry saying "1 piece of gold = 1 money", and all the translations and arithmetic would work. We could also use any other entry e.g. "1 cow = 1 money" for that matter.
The problem with using cows is that as the number of cows in your society (or economic system) changes, or as their uses change (leather replaced by plastic, more or less vegetarians...), the table will need to change as well. Not that the table isn't changing anyway, but it would help if it didn't change due to the choice of money.
For this reason gold is actually a good choice because it doesn't have a whole lot of intrinsic value. Even stones are more valuable - you can build houses with them. If something doesn't have a lot of value, that value isn't going to change, which gives the valuation table more stability.
This wasn't the traditional reason for using gold. People throughout history used gold, silver and gems because they were rare and pretty. And they were small and could fit into your pocket.
Even better than gold is something which doesn't even occur in the table, something entirely made up. In fact we can just call it "money", and we would still be able to do translations and the arithmetic necessary for commerce. This "money" doesn't even have to be a thing, its just a unit of measurement. And because it's not a thing, we need to find proxies to carry in our pockets and purses, and somehow coins and paper fit that just fine. They're not perfect, because they have intrinsic value, but we try to make that intrinsic value very low as compared to the value they represent, and expect for a few examples with low-value coins, we mostly succeed.
Valuation Tables
Whatever be the unit of money, we need to build valuation tables. Individuals have their own valuation tables, and while the entries might change, they move within ranges. Valuations for a group of people are determined by the individual valuation tables along with the transactions which occur: suppose person A wants to buy a bottle of water from person B, and suppose there is no "market" with established prices yet. Person A has a valuation, say 5 money, and person B has a valuation, say 7 money. If people were rigid and adamant no transaction would take place, but in reality people are flexible and person A's valuation is actually "4 to 6" and person B's is "6 to 8", so they settle on 6 as the transaction price.
Throw more people into the mix, and you get market pricing. Buyers are willing to pay something, and sellers are willing to sell for something, and if they can't find common ground no transaction takes place. If the buyers want it badly enough they will raise their valuations to come in line with the sellers', and likewise if the sellers want to sell badly enough they will lower their prices.
In this way, an economic system gets a valuation table. Like the individual tables, it is constantly changing by little bits, but for the most part the entries move within nice small ranges.
Value is hard to measure, mostly because as individuals we have different goals and therefore different valuations for different things. Not only that, even our personal valuations change, some over the span of a few hours and some over our lifetimes. Our valuations change according to our moods, the moods of our loved ones, even according to the weather. "I don't feel like it right now" often means "That action does not have sufficient value for me at this time".
But valuations are necessary, because we need to interact with one another. We need to eat, and so unless we grow/hunt our own food, we need to get it from someone else. We need shelter, so unless we build our own houses we need to buy materials and hire engineers. In fact if we tried to be self-sufficient (live as isolated economic units) we wouldn't get a whole lot done. The power of life comes from the exchange of value, or commerce.
Note that I use the word commerce in the broad sense - to mean the exchange of value. The value being exchanged could be goods, ideas, or a music concert.
Also note that value is always exchanged, never transferred in one direction. Perhaps it is like energy is in physics, the thing which is preserved over a reaction. Even when a thief points a knife at you and takes your wallet, you have effectively exchanged your cash for your physical well-being (minus your emotional trauma!).
Money
So we needed a common peg for valuation, and came up with money. Money has been around for a few thousand years (Sumerian coins etc.) and its main purpose is to allow us to create a translation table:
- 1 cow = ? sheep
- 1 back massage = ? soccer balls
- 1 hamburger = ? lipsticks
With money, we just need to answer the questions
- 1 cow = ? money
- 1 back massage = ? money
- 1 hamburger = ? money
- 1 sheep = ? money
- 1 soccer ball = ? money
- 1 lipstick =? money
and then do arithmetic.
What should we use as a proxy for money? We could use gold, and then the table above would have one entry saying "1 piece of gold = 1 money", and all the translations and arithmetic would work. We could also use any other entry e.g. "1 cow = 1 money" for that matter.
The problem with using cows is that as the number of cows in your society (or economic system) changes, or as their uses change (leather replaced by plastic, more or less vegetarians...), the table will need to change as well. Not that the table isn't changing anyway, but it would help if it didn't change due to the choice of money.
For this reason gold is actually a good choice because it doesn't have a whole lot of intrinsic value. Even stones are more valuable - you can build houses with them. If something doesn't have a lot of value, that value isn't going to change, which gives the valuation table more stability.
This wasn't the traditional reason for using gold. People throughout history used gold, silver and gems because they were rare and pretty. And they were small and could fit into your pocket.
Even better than gold is something which doesn't even occur in the table, something entirely made up. In fact we can just call it "money", and we would still be able to do translations and the arithmetic necessary for commerce. This "money" doesn't even have to be a thing, its just a unit of measurement. And because it's not a thing, we need to find proxies to carry in our pockets and purses, and somehow coins and paper fit that just fine. They're not perfect, because they have intrinsic value, but we try to make that intrinsic value very low as compared to the value they represent, and expect for a few examples with low-value coins, we mostly succeed.
Valuation Tables
Whatever be the unit of money, we need to build valuation tables. Individuals have their own valuation tables, and while the entries might change, they move within ranges. Valuations for a group of people are determined by the individual valuation tables along with the transactions which occur: suppose person A wants to buy a bottle of water from person B, and suppose there is no "market" with established prices yet. Person A has a valuation, say 5 money, and person B has a valuation, say 7 money. If people were rigid and adamant no transaction would take place, but in reality people are flexible and person A's valuation is actually "4 to 6" and person B's is "6 to 8", so they settle on 6 as the transaction price.
Throw more people into the mix, and you get market pricing. Buyers are willing to pay something, and sellers are willing to sell for something, and if they can't find common ground no transaction takes place. If the buyers want it badly enough they will raise their valuations to come in line with the sellers', and likewise if the sellers want to sell badly enough they will lower their prices.
In this way, an economic system gets a valuation table. Like the individual tables, it is constantly changing by little bits, but for the most part the entries move within nice small ranges.