Monday, 2 April 2012

Elixir of Value

So we all know that encouraging people to spend money is one way of stimulating the economy. But that's about as limited a notion as trying to measure the extent of that stimulation via GDP. After all, having a car crash stimulates the economy, and adds to GDP (by virtue of all the medical treatment and car fixing involved), but no one's suggesting we encourage those. The problem here is in measuring output and not outcome (a really nice way of putting it borrowed from Umair Haque).

But this is all covering ground I've discussed before. The point that's important here is that what we spend our money on is crucial. We have lots of choices on that front, and their outcomes are all different, so you'll be glad to learn I am not going to begin analysing them all here. But in putting thought to this a little while ago I stumbled across a particular type of product with a very special property: it generates value from thin air.

Let's just consider the individual cost of buying a normal product. If you spend, say, £500 on a TV, how much has it cost you? £500? Well no, because you now have a TV, which has a value. But it's now secondhand, so scarily enough it's probably already depreciated 50%. So the actual monetary cost to you is about £250. Over time it will depreciate to nothing and will cost you the full £500, but over that time you will value the utility from owning it at far greater than that. So all is good. But not great. We generated some value and then saw it witter away into nothingness.

Now, diamonds are cool (of course) - as are many minerals. They don't depreciate. If you spend £500 on diamonds, then they are still worth £500. And over time they are likely to actually appreciate in value.  Awesome. But, these already exist. All of them. There are only a finite number of diamonds in the world - that's why they hold their value. So there is no generation of value here - just the moving of it about a little.  (Without going into detail, houses can be considered similarly. Because, it's mostly the land that gives a house its value, and that is finite also.)

What if there were a product that could be made from basic materials, such that it has added value over and above those materials (just like a TV), but that then appreciates in value over time? That would be ... really interesting. Why? Because, if person A (Alice) could make these things, and person B (Bob) wanted one, then a rather intriguing scenario ensues. If Alice has £20 and Bob has £500, and Alice can make a product from £20-worth of raw materials that Bob is happy to pay £500 for, then Alice now has £500 and Bob has something which is worth £500 (and will be worth even more in the future). We've generated permanent value from nowhere!

Is this possible?


So what is this magical product? Well, let me know your thoughts...


Rusty Blob said...

Surely that depends upons one definition of 'value'. Each person will assign their own 'value' to an item, dependant upon their circumstances. EG, your diamond might have great value to your average millionaire sitting in his luxury apartment, but no value whatsoever to a person stranded on a desert island with no food and no hope of rescue. And does anything really increase in 'value' over time, or do we just need more bits of paper to aquire those items when the government fires up the money printing presses. Perhaps the only things to increase in value over time are happy memories.

Paul J. Newell said...

You're absolutely right that value is entirely subjective and context-dependent. But at the same time there might be some broadly agreeable common ground. A notional scale of value (to society) might have land mines at one end, anti-malarial drugs at the other, things like shoes and smart-phones somewhere near the top and McDondald's burgers somewhere in the middle. But, yeah, we can talk only very generally here.

I like your memories suggestion :) Indeed, one day we might even be able to upload them to the cloud and ... sell them?

Thanks for your comments.