Good start of an exploration, this focuses on the instantaneous (current) exchange value of a currency. Unmentioned, but critical to this, is the consumption value of the goods/services—what’s 50 cups of coffee worth to you? This is often called “utility”. Some additional dimensions to add to your model as you get deeper:
Time-dependent value (both changing prices for coffee/dollar AND changing utility to you)
Multi-step exchange (you could buy the coffee with dollars, or buy dollars with gold and then coffee with those dollars, or buy coffee with barter for some other good, which you acquired though some chain of trades).
Investments (business and future cash flows) and speculation (useless-to-you assets you hope will appreciate). Understanding liquidity and risk factors is just a scratch of kthis topic.
Interaction and relative values of different media of exchange (dollars, euro, various crypto, etc.). These change relative to each other. Your theory is incomplete until you explain why.
Labor valuation is it’s own entire field. It’s very rare that there’s a stable, linear payment for hours worked, and the (dis)utility / unpleasantness of work is very hard to quantify.
Human irrationality—not only do different people have different values for a cup of coffee, but people are BAD at predicting how much they’ll want coffee next week, and downright awful at predicting how much they’ll want to keep unspent just in case they need a car repair (or want to retire).
I suspect the last one ends up confounding the models of the prior topics, in terms of prediction. Fundamentally, there IS NO answer to “what is the value of …”, if you think it needs to be objective and constant (or a function of time). Your starting place is the ending place: it’s worth what someone will trade for it.
Thank you for your comments. Those are all really good points and they inspired me with several new points that I need to think about:
Value of something has objective (but not constant) components and high dimensional.
A new questions is: Can there be a universal/fundamental component for the value notion such that we can use an equation like this: value of something = universal component + objective component to represent value notion?
Regarding your last point, I can’t help but think that when different people have different valuations for the same thing because of the human irrationality, what does that really imply? Does it imply there is a universal value notion for (some) things and people are bad at predicting that or there is no universal notion and people should have different valuations?
I’m not sure I agree that there’s any objective utility to any component of this. For relatively liquid markets, there is an objective exchange value at any given instant, but it’s based on the relative values of the things being traded.
I also oversimplified when I said the individual variance in valuation was irrational. There’s LOTS of rational variance—some people don’t like coffee, and most people don’t need 50 cups of it all at once.
Ain’t nothing here that’s objective nor constant. Differing relative marginal value is it. Without that, there’s no exchange, and no value to think about.
Good start of an exploration, this focuses on the instantaneous (current) exchange value of a currency. Unmentioned, but critical to this, is the consumption value of the goods/services—what’s 50 cups of coffee worth to you? This is often called “utility”. Some additional dimensions to add to your model as you get deeper:
Time-dependent value (both changing prices for coffee/dollar AND changing utility to you)
Multi-step exchange (you could buy the coffee with dollars, or buy dollars with gold and then coffee with those dollars, or buy coffee with barter for some other good, which you acquired though some chain of trades).
Investments (business and future cash flows) and speculation (useless-to-you assets you hope will appreciate). Understanding liquidity and risk factors is just a scratch of kthis topic.
Interaction and relative values of different media of exchange (dollars, euro, various crypto, etc.). These change relative to each other. Your theory is incomplete until you explain why.
Labor valuation is it’s own entire field. It’s very rare that there’s a stable, linear payment for hours worked, and the (dis)utility / unpleasantness of work is very hard to quantify.
Human irrationality—not only do different people have different values for a cup of coffee, but people are BAD at predicting how much they’ll want coffee next week, and downright awful at predicting how much they’ll want to keep unspent just in case they need a car repair (or want to retire).
I suspect the last one ends up confounding the models of the prior topics, in terms of prediction. Fundamentally, there IS NO answer to “what is the value of …”, if you think it needs to be objective and constant (or a function of time). Your starting place is the ending place: it’s worth what someone will trade for it.
Thank you for your comments. Those are all really good points and they inspired me with several new points that I need to think about:
Value of something has objective (but not constant) components and high dimensional.
A new questions is: Can there be a universal/fundamental component for the value notion such that we can use an equation like this: value of something = universal component + objective component to represent value notion?
Regarding your last point, I can’t help but think that when different people have different valuations for the same thing because of the human irrationality, what does that really imply? Does it imply there is a universal value notion for (some) things and people are bad at predicting that or there is no universal notion and people should have different valuations?
I’m not sure I agree that there’s any objective utility to any component of this. For relatively liquid markets, there is an objective exchange value at any given instant, but it’s based on the relative values of the things being traded.
I also oversimplified when I said the individual variance in valuation was irrational. There’s LOTS of rational variance—some people don’t like coffee, and most people don’t need 50 cups of it all at once.
Ain’t nothing here that’s objective nor constant. Differing relative marginal value is it. Without that, there’s no exchange, and no value to think about.