Money Not a Measure of Value

Some people argue that money—or a monetary unit e.g. dollars, pounds, lira—plays the role as a measure of value. A money commodity cannot measure the value of economic goods because money commodities are also economic goods. To say that a dollar is worth a dollar becomes a statement of meaningless circularity. You cannot use the item being measured as a unit of measure.

But, why do we say things like, “that car is worth 23,000 dollars” or “that stock is worth 45 dollars”?

I suspect that the idea that a monetary good could represent a unit of value finds its origin in the mistaken idea that exchanges occur at an equilibrium of value.

I remember in my undergraduate economics classes trying to learn the concept of indifference curves. As I recall, if you calculate and plot the quantities at which persons don’t care (have an indifference) whether they have product A or product B you create an “indifference curve.” The curve expressing the indifference for A vs. B might represent the “supply curve” and the curve expressing the indifference for B vs. A might represent the “demand curve.” At the point where the supply curve intersects the demand curve each party values both goods the same—they have an indifferences at to which good they have. For some reason, according to classical theory, at that those quantities, they will want to make an exchange.

Forgive my somewhat confusing explanation, but it never made sense to me in the first place.

Classical economic theory makes this argument: that exchanges occur when the quantities of two goods reach an equilibrium of value. Thus, since we don’t have a unit of measure for value, it might seem fair to say that, when they are exchanged, A has the value of B, or vice versa. Based on that reasoning it would also make sense, when most exchanges involve a commonly accepted medium of indirect exchange (like a dollar), to replace that unknown unit of measure for value with the quantity of dollars exchanged.

This whole chain of reasoning, however, falls apart when we come to realize that exchanges do not occur at an equilibrium of value. When a person trades a dollar for a pack of gum, he makes that trade because he values the pack of gum more than the dollar. If the buyer valued the dollar exactly the same as the gum, he would have no reason to make the exchange. He will make the exchange only when he sees a greater value—no matter how small—in having the gum over having the dollar. Therefore, a dollar cannot represent the value for an item of less value than a dollar.

We should correct the hypothetical statements I made above: “to the buyer that car is worth more than 23,000 dollars” or “to the buyer that stock is worth more than 45 dollars.”

We also need to correct our understanding of widely publicized economic data. GDP for example: “GDP represents the monetary value of all goods and services produced within a nation’s geographic borders over a specified period of time.*” But, it does not.

More precisely GDP represents the total amount of money (in the local currency) spent for goods and services valued more than that amount of money exchanged by the individuals for those goods and services.

Think about it.


 

Finally, we moved to the only plausible theory of economic value: The Subjective Theory of Value

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* From InvestingAnswers: http://www.investinganswers.com/financial-dictionary/economics/gross-domestic-product-gdp-1223