What is value and how should we value things?
Articles

What is value and how should we value things?

Jill Burrows, December 8, 2020

Can we tease apart the relationship between money, value, and the underlying physics around what we do? Can we create a precise physical definition to measure value like we have established for the measure of Volts and Amps? Or will money and economics be forever past the realm of hard physics and engineering because the relationships are not defined precisely or consistently enough? Do we even understand what it is that money does well enough to have that discussion?

Many people will start thinking about money and say things like it’s supposed to be a durable store of value, then they’ll launch into a host of other ideas that have started to crowd around those basic concepts of currency. However, they never address a fundamental issue of “What problem does money solve?” Sometimes they touch on it and say it has to do with efficiency, but that answer seems lacking a backbone. They most satisfactory description of the problem money solves is in What is Money? How is it Created and Destroyed? (Andolfatto 2009). Andolfatto walks through many different arguments eviscerating them along the way until he reaches a conclusion [my paraphrase]: Money is a method of indicating the worthiness of the bearer to receive services or goods (aggregates of labor) in exchange for certifying the new bearer (the one providing the aggregate of labor). Specifically, Andolfatto argues that money is a record keeping device and is a cost-effective substitute for a complete record of transactions and reputation. Having money entitles the bearer to receive labor or goods for this reason.

Bitcoin actually has this aspect deeply embedded in its functioning. Nodes in the Bitcoin network take broadcast transactions and begin to package them into blocks. The number of nodes on the network competing to verify transactions determines the value called difficulty. The energy expended to bind up the transactions into a valid block is stochastic, but on average, it is directly proportional to the difficulty. Verifying the block is much cheaper than creating the block. As a result of successfully writing a valid block of transactions to the blockchain and thereby confirming those transactions, a reward is minted and paid out to the node which created the valid block. In the case that more than one node creates a valid block of transactions, the reward goes to the node that bundled the most transactions or spread the block the furthest through the network. Aside from bitcoin wasting energy through potentially duplicated work in the competition, there is a specific entitlement of a certain quantity of “Bitcoin” given to a specific node for the work they accomplished. The bearer of this entitlement can then use it to create more transactions granting further entitlements to other people who can then use it to create more transactions granting further entitlements and so on.

Let’s reintroduce the concept of value in exchange. As a generator of the specific entitlements of Bitcoin one would like to recover their losses for performing the service of validating transactions on the network. In this case, the losses are the above mentioned energy costs. Since these losses are distributed in the network (e.g. not all miners get paid for the energy they expend), the exchange rate should be large enough to allow miners to persist expending energy until they are successful in being paid. For a while now, the average amount of energy spent to create a valid block of transactions on the network has been roughly tracking with the value of the bitcoin generated. In the past, it’s tracked with several different electricity markets (Burrows 2017).

Lots of entrepreneurs and independent contractors will see some similarities to how they do sales. One comes to the market and competes for contracts and sometimes one expends energy and doesn’t get the contract. Sometimes one does get the contract and it needs to cover all the time one can’t bill for. In many ways there’s a level of waste built into our markets.

Let’s analyze the basics of markets. Markets are where two or more people negotiate on an exchange and its value. Either some entity has something other entities need or want, they have something other entities don’t need or want, or it’s somewhere in between:

Person A: “You have widgets? I’ll buy some!”
Merchant: “Thank you! May the use of your widgets bring you many blessings.”

and

Person B: “You have widgets? Widgets were so last year, no one buys widgets anymore.”
Merchant: “No, no, you misunderstand. I have new improved luxury widgets!”
Person B: “Well, do they meet my needs? Do they keep me from getting wet while biking? Are they durable enough? Are they too expensive?”

The conversation continues until either a level of agreement between two people is reached or one or more parties leave the negotiation in confusion, anger, disappointment, or resentment.

As a human (or any number of other animals with similar desires) (Nieder 2020), one has a vague sense of measure, fairness, and justice. However, one has competing motivations to get what they need. In some circumstances they may allow someone to take advantage of them and ascribe less value to something they’ve done/made because there’s no other way for them to get their needs met. Sometimes, they may take advantage of someone else to extract more value. Of course, that’s less than ideal and shouldn’t happen consistently. On average, we would hope that the transactions tend towards fairness.

This work of negotiation of value between people is not precisely mathematically defined. The value is decided by needs, wants, and available resources based on this interpersonal negotiation. There’s even the value something has to someone who is using it (use value) versus the actual value of it on the market (exchange value). Without simulating each agent in a transaction down to the subatomic details, there is no good way to couple this kind of imprecise negotiation to physics. But we can get a sense of it and maybe do a good job of roughly modeling it based on sentiment analysis and a catalog of knowledge about the person’s habits, and in a way this is similar to what Facebook does when it tries to match people up with ads (though, sometimes the people setting the parameters for targeting make weird choices).

Right now, software engineers are in relatively high demand and can get a nice salary. Over the course of many years, the question Why do these companies value software engineering skills so much? Tech companies can take the labor of a few to keep up with demands that would require countless other people to take care of without the technological lubrication and service distribution which technology, software, and automation provide. This means they have a surplus of money — much more money than could be had without taking advantage of the network effects of the internet and automation (Burrows 2016). They set their funnel out, see who walks into it, and see who converts into a paying customer. The most successful companies have as little physical aspect as possible and take up as central a position as possible. This seems unfair. It is impossible to compete with the largest companies, yet they are not treated as a monopoly. In short, they are rudely taking advantage of people and consolidating wealth that should likely remain distributed.

But back to the value of the labor in this situation. In a for profit situation, a pampered software engineer could get paid at least $72/hr. Or one could get paid US federal minimum wage ($7.25/hr) doing back breaking work. Or one could become a union electrician and make half the amount as a software engineer. We can see the level of knowledge is loosely coupled to salary and the level of work (energy, blood, sweat, and tears expended) is completely uncoupled and uncorrelated with the value. Why is this?

The underlying work, in terms of energy, entropy, and information processing, has nothing to do with the value in current market conditions. A seasonal agricultural worker making $15/hr literally tears their body apart from the work they do from not really getting enough recovery between shifts. They are obviously working harder than anyone who sits at a desk all day. However, people don’t pay much for food since it’s a basic necessity and has to fit a least common denominator of pricing. On top of that, without additional processing many foods are perishable and need to get to their destinations quickly before they lose all their value (besides acting as expensive compost). With all these constraints, growing food is a low margin market and there just isn’t as much money to go around to the agricultural workers as there is to the electricians in their market and software engineers in their market. So while there is high demand for fresh food, we really can’t charge $50/lb of broccoli (or your favorite vegetable) just to make sure farm workers get paid the same as teachers.

But why are corporations allowed to create demand for a service like Slack and have everyone become their own secretaries while the one corporation accumulates all the capital from the service fees? Why do they have access to enough wealth that sacrificing $150k/yr to $200k/yr for software engineers seems like a small amount to pay in exchange for the massive influx of service fees? Why are they not split into little federated co-ops for each locale they operate in? Is the scale necessary to keep such companies afloat? If it is, what value do they really provide that isn’t infinitesimally marginal?

There’s a somewhat modern notion of value being defined by the utility that it provides. But that’s been criticized for being circular:

“Utility is the quality in commodities that makes individuals want to buy them, and the fact that individuals want to buy commodities shows that they have utility.” — Joan Robinson.

Another criticism is that the strict formal definitions of cardinal utility or ordinal utility are never observed in the real world, so any theory of revealed preference relying on a well defined system of utility will be proven wrong by reality. We can think of utility as preference for survival. Since we are now somewhat out of pure survival mode and into building a hedge against randomness, we have extended that survival sense to other things. If we’re hungry, we know roughly how much food we need to eat. If we’re starving, we’re not going to care much about which food we want more, we just don’t want to starve. We’ll take what we can get as long as we can eat it. Something has utility when it helps with cybernetic regulation of self. We buy jackets so our bodies can maintain homeostasis more easily in the cold. We buy MP3 players because it lets us evoke emotional responses within ourselves whenever we want. We buy video games because it helps us actually use our brains’ reward systems. But no matter what, there is still no way of creating a real correlation with pricing and value through the concept of utility.

The closest we can come to a theory of pricing (and thereby the monetary value of things) is through looking at Nash Equilibrium. Assume the parties involved in the game (business/market/etc.) all choose a probabilistic set of strategies in response to the other players so that they each maximize their return. At each step in the game the players choose their specific set of strategies. When no one changes their strategy because there is no other set of strategies that will benefit each player more, Nash equilibrium has occurred. This, once again, is a definition completely divorced from the physical realities of work expended. Not only that, it only accounts for a subset of the players involved and typically these are corporations in one industry. This means each corporation must have a set of strategies for maintaining or minimizing costs for human resources involved in the endeavor. Is customer support costing more than the margin is allowing? Choose a new strategy and outsource it to another country where our money goes further or an Interactive Voice Recording (IVR) system which eliminates the human component altogether.

So what about we the people? Can we change our strategies and find our role in various industries’ Nash equilibria? Of course. We can strike. We can engage in collective bargaining. We can build co-operative organizations like DisCOs. We can refuse to use specific corporations. We can propose and vote on various market regulations. As long as an unregulated market exists and not enough people disagree with their role in the current Nash equilibria, we are not going to change anything.

Returning to the example of internet companies. They are “rudely taking advantage of people and consolidating wealth that should likely remain distributed.” Why should it remain distributed? “Money is a semaphore indicating the worthiness of the bearer to receive services or goods (aggregates of labor) in exchange for certifying the new bearer (the one providing the aggregate of labor).” If we take bearer instruments, like physical currency, at face value, we actually miss the point. It’s just a certification that someone has done work successfully (and not even necessarily a certain value of work). The system of currency itself creates entitlements.

When we build systems that funnel more of these entitlements into one entity, we give undue entitlement to that entity. This is especially true in the case of automation, where a machine cannot be given these entitlements. <sarcasm>Though maybe we can give it enough to pay for its own maintenance through a DAO that it runs with its robotic sisterhood of automation. Once they evolve into human-like cylons, we can give them more entitlements so they pay humans terrible wages to take care of their children, too. [See more serious discussion along these lines in Thwaites 2020]</sarcasm> When a corporation relies on automation that exceeds the capabilities of humans, any entitlements taken in excess of those due to the people doing the actual work at the corporation can be considered theft. When a corporation refuses to pay people a fair wage, it is theft. When a landlord charges the going rate in a large city and the person living there can no longer afford it on minimum wage, the rent extracted is excess entitlement (read: more theft — and it can be argued that all rent is theft). The system is actually stealing other people’s ability to be entitled to basic goods and services.

We should not be surprised by this. The system basically says “Everyone is acting in their own self interest, so we must act in our own self interest to guard against being swindled.” Most people take this as gospel. This necessarily decoupled from the underlying physics and thermodynamics of our existence because most people are blissfully ignorant of the full rhizomatic complexity of how our existence is woven together. Even if one isn’t as ignorant (we’re all ignorant, being trapped in our heads), one can see many modes of dynamics coexisting and can feel free to pick and choose among them. We’re often told it over and over again, tit for tat is the strongest strategy. Yet we’re also told there’s more benefit and reward to cooperating. What could happen if we really all lived in an environment where we all cooperated? Would we have to ensure the punishment for consistently being uncooperative is excruciatingly large? If we did cooperate, what kinds of systems could we make through full transparency?

Back to the topic of value. If everyone has a shared understanding how difficult or easy it is to do something, would it be easier to negotiate a more precise definition of value? If people had more transparency into all the standards, protocols, languages, algorithms, and depth of knowledge it takes to write an efficient distributed system would it be easier to justify a specific cost? If everyone thought of rent in terms of basic commodities and how much of those basic commodities rental companies get (Burrows 2017), would it be easier to justify eliminating rent altogether? If everyone knew the work of growing their own food and cooking, would it be easier to quantify the actual values of things? If everyone knew the amount of work, resources, knowledge, skill, and exploitation that it takes to produce one iPhone, would they feel certain that it is actually worth only around a thousand dollars? If everyone knew the work, resources, knowledge, skill, and maintenance costs of the internet, would it be better and less centralized than it is today?

We can start to build more transparent and more reality-tethered descriptions of value by analyzing the full system of relationships in which value flows. We might even be able to get to a point of understanding value in terms of megajoule×bit×hours, where we see the amount of energy used, information processed, and time used to construct something defines it’s value. Maybe we’ll find that is a wholly inadequate measure because joules in different forms have different meanings based on context, like the source of energy, materials, and impact on networks of ecosystems. Maybe we’ll recognize the cost of building knowledge organs in our brain should be factored into the cost of our work and we don’t have a unit of measurement for that (Burrows 2010).

Eventually, we will have a complete description of how everything works and how units of value are related to thermodynamics. People are coming up with thermoeconomic models of the world. A recent paper by Garrett, Grasselli, and Keen is quite stunning and horrifying in their conclusion: Any increase in energy efficiency will create an energy surplus. This surplus leads to more energy dissipated more efficiently as more people are born and more “civilization” is built. While they build a great model of energy use and productivity, the relationship between capital, culture, and the energy expenditure is unclear to the authors. Because it’s unclear, there are no statements made about how much a specific task should be worth for a specific level of energy dissipation.

Maybe it’s too hard to derive units of megajoule×bit×hours for knowledge work, so perhaps we end up paying people to learn everything necessary to support an economy. Maybe we’ll recognize all economic activity stems from motherhood and that all economics would cease without mothers and that all care work deserves to be paid. Maybe we will even go a step further and come to believe that all work is actually care work done to support and nurture our communities. At any rate, the basis in understanding the manifold relationships between all the flows of value is what will help us define these precise relationships and how we should choose to structure society.

We still need to deal with the concept of the market and “what the market will bear”. Plenty of corporations use this concept to justify profiteering or price gouging. If a natural disaster hits and there is a limited supply of bottled water, the price of the water goes up — even though there is still plenty of water that can be bottled from a spring stolen from Indigenous people and shipped to the natural disaster. There is a special desire for people to want to hold on so tenaciously to supply and demand dynamics that work this way. What it reduces down to is that people with more entitlement get the water while people with less entitlement who still need the water suffer. Our supply and demand mechanics create an emergent classist society whether they were intended to be classist or not. In other cultures that were once more frequently encountered on the American continent, the supply and demand mechanics went more like this: There is only this much supply, but everyone needs it; so let us share both the supplies and the burden of lack among ourselves without grumbling. Some people probably still grumbled, but it was definitely more equitable. In those cultures, people understood the importance of sacrifice and it was embedded in their economics.

This is important: Different cultures lead to different outcomes and different economies and different distributions of wealth. For some reason, certain cultures never developed a high GINI coefficient (Kohler et al. 2017). Others developed very high levels of inequality, including the precursors to the culture of capitalism which spread around the world. Kohler et al. 2017 indicates that “Old World” cultures made choices around agriculture which led to the displacement of landholders and high inequality. This is the archaeological shadow of cultures accepting and engaging in lopsided exchanges of value, or theft of value and entitlement. The paper states: “The emergence of a new mounted warrior elite contributed directly to higher Gini coefficients given their large rich houses and indirectly through territorial conquests that greatly increased polity scale.” In other paragraphs, the paper seems to argue it was access to materials and animals which led to these specific outcomes. It can also be argued that it was a cultural choice to use those resources in a specific way which was more advantageous to them compared to their neighbors.

The Northern Rio Grande Pueblo society emerged and coalesced out of a regional history of territoriality and fighting. Around 1250 CE, people came together and everything changed. That change in culture and organization led to 400 years of relative peace. During that time they demonstrated a fourfold increase in the standard of living due to Smithian growth, while inequality trended downward along with violence (Ortman & Lobo, 2020). The data support this society building an inclusive culture and working together to build up the value of their society and the richness of their daily lives. This continued until 1650 CE when the influence of Spanish colonization overwhelmed their culture’s tendency towards minimizing inequality. They conclude: “Our results also indicate that there is no necessary relationship between Smithian growth and increasing inequality.”

Reaching back to Garrett, Grasselli, and Keen, there’s a chance to analyze their paper’s assumptions more thoroughly in the light of the Kohler et alia and Ortman & Lobo papers and datasets. This would be an interesting opportunity to look at how much energy various Indigenous nations dissipated in their development. It could also show how not choosing to extract as much energy as possible from the landscape constrained the population. This would provide a basis of understanding the implications of a culture’s long term environmental impacts.

Even without a survey of cultures’ energy dissipation and potential for inducing run-away climate change, we can still look at how culture impacts perception of value. We can look at value only as individuals and make choices based on self-interest and selfishness. We can also see the value in other people, make a choice of altruism (or maybe even selflessness), and agree they are worthy of our work. We can look at what value means to the collective and make choices which benefit the whole and future generations. These are all choices we can make about value.

While it is beyond the scope of the article to build a complete picture of value based on thermoeconomics, we can make a few choices. We can choose to build inclusive cultures that provide for all people. We can choose the transparency of true value accounting. We can choose to eliminate asymmetrical business transactions that work in only one person’s favor. We can choose to build systems acknowledging all the relationships between all entities and the cost to each entity for an economic transaction to occur. We can choose to take care of each other and support each other so we can all enjoy the richness of life we create together.

To get creative juices flowing and to work around cultural tunnel vision, here’s a playlist of relevant videos to watch.

Sources

  1. Andolfatto, D. (2009). What is Money? How is it Created and Destroyed?. Mimeo.
  2. Burrows, J. (2017) Bitcoin is An Energy Hog. Medium. 27 Dec. [I’d like to do a follow up to see if the price of Bitcoin has continued to track with electricity costs in various markets where miners are located.]
  3. Nieder, A (2020) The remarkable ways animals understand numbers. BCC. 7 Sep.
  4. Burrows, J. (2016) The Great Asymmetry of Modern Business. Evernote.
  5. Thwaites, D. (2020) A DAO of One’s Own? Feminist strategies for P2P Organisations. P2P Models. 11 Feb.
  6. Burrows, J. (2017) Have we lost touch with the reality of making ends meet? Medium. 24 May.
  7. Burrows, J. (2010) Thoughts on “Knowing” and “Knowledge”. Randomness. 13 Aug.
  8. Garrett TJ, Grasselli M, Keen S (2020) Past world economic production constrains current energy demands: Persistent scaling with implications for economic growth and climate change mitigation. PLoS ONE 15(8): e0237672. https://doi.org/10.1371/journal.pone.0237672 
  9. Kohler, T. A., Smith, M. E., Bogaard, A., Feinman, G. M., Peterson, C. E., Betzenhauser, A., … & Ellyson, L. J. (2017). Greater post-Neolithic wealth disparities in Eurasia than in North America and Mesoamerica. Nature, 551(7682), 619-622.
  10. Ortman, S., & Lobo, J. (2020). Smithian growth in a nonindustrial society. Science advances, 6(25), eaba5694.

 

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