Value and Money

Value and money. Two things that business can't exist without (especially if you define business as an undertaking for value).

Value is the last major stone of our foundation, and an essential concept.

Money is, obviously, valuable. So are lots of things: gold, platinum, cars. Those all have value, usually quantified by money. But those are quantities of value in their own right. You can trade gold for platinum, or platinum for cars. Once again we are left with the question: if all of those things are quantities of value, what exactly does that mean?

To answer this, we will look for the common denominator in all things of value. If gold, platinum, cars, and money all are quantities of value, then if we find the common element in all of those, we will have isolated value. Before we begin, we need a wider sample set of things that are valuable. So let's use the following categories:

Naturally occurring items such as gold, wood, and oil.

Money/currency – man made items that act as a “store of value”

Consumables such as cars and tools – these are man made items that people want to own, whose value is measured roughly in proportion with their cost to make

Art -- man made items which are not consumed, and which have value well exceeding their cost

These are very rough definitions, and have plenty of cross-over. There are items which are not on the list, which perhaps should be. I know. I could go into a lot more detail, but it would turn into a Master's thesis. What we've covered so far is enough for this thought experiment.

What creates value?

Naturally occurring items – Oil, wood, gold, etc. have their "value" measured in U.S. Dollars, and that value changes constantly. What we're interested in are the different elements or factors that create that value. The best approach is to go in reverse.

The end result of natural items, for example gold, is the nugget. We're not going to talk about the bracelet (that would fit under "consumable"). The nugget is mined by people. People have to put in labor, which is really time. They use picks and machines (consumables). To put in labor, they have to eat food and drink (more consumables). If you think about it, natural items get their value from the effort of removing them from the ground. We will call this a “transformation.” We are transforming the tree into lumber, the gold vein into a gold nugget, the oil field into barrels of oil.

Consumables – Consumables are made with labor and more consumables and money. What is the ultimate source of the tools to make the cars? Labor and money. The resources (gold, oil, etc.) have to be transformed into the tools (consumables). The source of transformation is labor (time) and money. So consumables = time and money and resources. This is also a transformation. We are transforming the resources into the consumables by applying time, labor, and money.

Art – Art is made almost exclusively with labor and time. The artist has to live by eating (consumables), and needs paintbrushes, paint, etc. (consumables, resources), but the major contribution is labor and time. Art derives its value almost exclusively from the transformation of consumables into something else.

Money – Lastly money earns its value from the stability of the country backing it. That stability is because of the time put in to build the country. Money is the grease that allows the transformations above to happen. Money derives its value by allowing one person to transform their resources, consumables, or art into another. For instance, if Bob transforms resources into a car but wants art, he can transform the car into money by selling it, and then transform the money into art by buying the latter.

So, if you look at everything, and trace them back to their root source of value, we see that transformation is ultimately the source of value. It is the transformation of resources into consumables that people want that creates the value of the consumable, it is the transformation of consumables into art that creates the value of the art, and it is the ease and predictability of transformation that creates value for money.

Understanding that the ultimate source of value is transformation, and ultimately the transformation of resources over time, changes the way we look at things.