Network Capitalism
Store of Value
This essay is part of a series titled Network Capitalism. Our goal is to clarify some of the economic topics/concepts that we believe are misunderstood. Network Capitalism uses a first principles approach to examine economics. The theory starts with the smallest economic units and examines their interaction over time and under different circumstances.
Store of Value
The Store of Value concept is commonly used when discussing currency protocols, yet there is confusion as to what it means. The common usage of “store of value” is untrue for all assets.
Capitalism starts with a single person
One of the basic economic units is an agent, a topic that will be discussed in greater detail in a future essay. Agents have wants and needs. The value of those wants and needs is expressed as individual subjective utilities. Individual because value assignments are unique to individuals. Subjective because individuals determine worth at the point of consumption, although these values often change over time. Utility is the measure of subjective value.
A store of value is the relative measure of an object’s future value compared to its current value, expressed as the following ratio:
where the first term in the equation equals an object’s future value, at time t=1, and the second term equals the object’s value today, at time t=0. The ratio will be greater than or equal to 1 when the object’s future value is greater than or equal to its current value, which means that the object was a good store of value.
You can’t eat capital
Individual subjective utility is how agents project economic value onto all things, with value generally a form of “consumption or experience.” However, because agents cannot “consume” capital directly, capital has no subjective utility. Capital is an intermediate good that acts as a placeholder (a form of wealth) representing future potential consumption. It’s value is realized only when exchanged (consumed) for an object or experience that provides (subjective) utility. Consequently, capital’s current “perceived value” reflects expected subjective utility of future “consumptive” value and is measured as expected personal purchasing power (PPP), where PPP is an individual’s subjective utility equivalent.
The store of value equation holds for capital, with its exchange value represented by its PPP:
where the first term equals capital’s exchange value in future PPP, at time t=1, and the second term equals capital’s exchange value today in terms of PPP.
Just like with an object, capital will prove to be a good store of value when its future PPP equals or exceeds its current PPP. However, because of the uncertainty in capital’s future exchange value prior to a transaction being executed, there is no way to determine ahead of time (a priori) if capital will be a good store of value. It is one thing to claim something (an object or capital) “will be a store of value,” it is quite another to claim something “will bea good store of value.” Only time and future exchange value will prove the latter statement true.
Capital supply / demand effect on store of value theory
Because capital’s value is resolved only at the point of exchange for something of consumptive value, increasing the amount (supply) of capital relative to a fixed quantity of exchangeable items decreases the capital’s exchange value per unit item (price ratio), which means that the price of those goods increases (all other things held constant) relative to the value of the capital. Consequently, price (capital) inflation erodes capital’s ability to be a good store of value over time.
What role does “trust” play in store of value?
Trust concerns are often raised in capital discussions, although uncertainty is the real issue affecting capital’s perceived value (we will discuss the difference between “trust” and “belief” in a future post).
Capital’s uncertainty generally falls into three buckets:
- Exchange — uncertainty of the future exchange value (as discussed)
- Legal — uncertainty related to legal rights associated with capital (discussed in a future essay)
- Supply — uncertainty of the capital issuing mechanism/supply (as discussed)
Examples of “Stores of Value” that fail a basic empirical test
Bottom Line
There is no such thing as a predetermined (a priori) good “store of value.” The success of an object or form of capital as a store of value will be determined by its future exchange value, which is inherently uncertain and cannot be determined ahead of time.
Network Capitalism is collaboration between Nick Gogerty and Paul Johnson
A paper on Currency valuation using Network Capital theory can be found here.
