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On the nature of subjectivity in value

Hello Bitcoin lovers, it’s your resident hater. How’ve you been? I’ve been good, but I’ve been slacking for some time, so I’m back with another article. I’d like to start this one off with a story.

So it’s 2006, and I’m sitting at a bar having a drink with Peter Schiff. We get to talking investments. “You know Peter, I’ve been thinking of getting into this house flipping business. People out there are really making it big.” Peter is flabbergasted and almost falls off his stool. “What, are you nuts? Haven’t you seen me up there on those financial programs with those morons? The whole thing is a scam and a bubble. There’s no way these prices are sustainable.” “But Peter,” I said, taking another sip of my mocha porter, “people keep buying at higher prices. Clearly there’s a demand for them.” Peter responds, “That’s only because people are fooled into thinking that housing prices never fall. There’s nobody out there who actually wants to buy houses to live in at those rates.”

“All you hard money types are so old-fashioned. Look, all value is subjective anyway, right? I thought you read Mises. Isn’t a house useful as a store of value? You can’t declare that value has to take on some specific form.” Peter is unimpressed. “It’s not real value that’s being stored if nobody actually wants to live in one of them for that price some day. Sooner or later it’s going to pop and all come crashing down.” I am defiant. “Hey, who knows? Maybe it’ll go up, maybe it’ll go down.” At which point I throw up my hands, “That’s the nature of the market; it’s unpredictable! There’s always a risk. Everything has to crash some day, right?”

Breaking down value

I think that most libertarians will read this and recognize the folly in my thinking here. To be fair, this is probably an exaggeration of the actual mentality of people involved in the housing bubble (also I’ve never actually met Peter Schiff). However, I think that this the real mentality of many Bitcoin proponents.

When debating the economic merits of bitcoin vs. a traditional commodity such as gold, an argument that often comes out of the proponent’s side is that all value is subjective. Gold may have the appeal of jewelry, or may be useful in electronics, or may be a useful monetary instrument, but there is no inherent property in gold that makes it valuable. All value in gold is purely the value that a person places onto the gold. And the same can apply to bitcoin, as a monetary instrument.

The point about value being subjective, and not inherent to the physical object, is true enough. The problem with this is that the proponents are, as in my allegory, throwing their hands up and saying that since all value is subjective, it is therefore all arbitrary (there’s a difference, as we’ll see below) and not subject to economic forces. I don’t believe that proponents really think this way about everything, or necessarily realize that this is how they view Bitcoin. However I believe that this is the logical basis of this sort of argument.

When examining valuation from the perspective of subjectivity vs objectivity, I think it’s useful to look at three aspects of the situation:

A) The person’s arbitrary desires

B) The person’s assessment of themselves, the properties of the commodity, and the world at large

C) The objective reality that proves their assessment right or wrong

The first two items make up what I would call the person’s subjective point of view. Assessment is subjective inasmuch as one’s assessment can be wrong, however it aims to be as close to objective reality as possible. Arbitrary desires are not so interested in actual reality, only what one might wish reality to be.

In the case of my fictional foray into real estate speculation, the important point I was missing was that, though the arbitrary desires (money) of the people who I want to sell my houses to are undeterred by the market, their assessments (like my assessment) are all wrong. Once confronted with reality, they will change their assessment, and thus their overall subjective valuation very quickly. If I learn about objective reality before they do, I will be smart and not invest.

Gold, Bitcoin, Cowry shells. What’s in a medium?

So let’s look at gold. The value of jewelry is a pretty simple case. The consumer arbitrarily desires jewelry. The assessment is that buying a gold necklace will make them satisfied in some way. The objective reality is that the consumer is actually happy afterwards (or not). This assessment may, in fact, have no influence from economic forces. Thus you could actually say that the valuation, in total, is arbitrary, in this degenerate case.

The value of gold in electronics is one step more involved. It is really the valuation of the producer of electronics, whose arbitrary desire is anything that can be bought with revenues. Their assessment is that revenues can be used to buy the goods they desire, that gold will work better than copper in a certain application, and that consumers exist who want to purchase the product at a certain price. The objective reality confirms or denies these assessments. In this case, economic forces are paramount; if it turns out there is no demand for the product, the producer’s arbitrary desires to buy things will not change. However, their assessment would change, thus their demand for gold will cease.

When it comes to gold as a monetary instrument, again the arbitrary desire is similarly for anything that can be bought with gold. The nature of money is a lot less clear cut than the nature of selling electronics, so there may be many different assessments floating around the marketplace. But we might all guess that at least some are speculators, who have an assessment similar to that of the Bitcoin proponents I describe here. Namely, that gold’s value is just something that’s been universally “agreed on”, that the value is arbitrary, and that this is enough to keep it alive for hundreds of years.

Let’s say these are particularly skittish speculators. If the price of gold were to plummet, these speculators might believe that the show is over. With this new objective reality, they will change their assessment, and their subjective valuation of gold will plummet along with the gold’s price. (A lot of good their subjective valuation did to save the market, yeah?) Now, if people like me happen to be right about the nature of gold, it won’t matter, because the jewelry and electronics consumers will save it. The consumers don’t (necessarily) value the gold products any less because the price plummets. Their assessment isn’t (wholly) tied to the price.

And this is the key takeaway point. Yes, the valuation by the speculators, and the valuation by the consumers, are both subjective. But because their assessments are of totally different natures, they respond to the market in totally different ways. Do they both play unique, vital, roles in the price of gold? That’s a long discussion in itself and I won’t argue that here. What I do argue, however, is that citing the subjective nature of value as a counterargument is a bit shortsighted.

Original content by Dan, CC0 (attribution appreciated), tips welcome