Redefining our Valuation of the World: What institutions, tech and cryptos can tell us about ‘real’ value
It is hard to imagine a world without money given the current influence it enjoys now but the Incan empire was built without the use of money. This was achieved via requiring all Incan males to provide physical labor to the state in exchange for all the basic necessities of life (food, clothing, housing, etc.). Albeit, individual choice was not a really a thing back then given that their purpose in life was settled from the moment they entered the world. Nonetheless, when viewing pictures of Machu Picchu, one cannot help but be in awe of how much a society managed to accomplish in the mid-1400s.
Given such a jarring approach to the world, it is definitely worth it to rethink our conception of money; not because I’m advocating for a money-less world (that would be hell for most, imagine no shopping), but rather because this has everything to do with society and inclusivity. As Jim Benton so succintly puts it:
“Love makes the world go ‘round but I’m pretty sure money has to do with it, too”
Why is a good deed blemished when someone accepts money for it?
The answer to this is what lies at the core of what we really value and how we communicate this to the world around us. Why do we celebrate Bill Gates giving away $4.6bn to charity but fail to mention those who have dedicated their lives to the cause (going by extreme global approximations, that sum is enough to cover 250,000 years of wages). In essence, our need to split everything into buckets results in this dichotomy, while in actual fact one cannot function without the other. In other words, given how our society is structured today, charities can’t survive without money and charitable money can’t function without such workers. The question then is why can’t people dedicate themselves to a cause without requiring money.
Money ≠ Value: “same same but different”
This phrase is common throughout Southeast Asia, and it is usually used in attempts to sell counterfeit items.
Q: “Is that a real Rolex?”
A: “Yes sir, same same but different”
Basically, the usefulness of something depends on what the user is trying to achieve in the first place. Both watches tell the time and more importantly, 70% of people will not be able to spot the fake, so why bother paying a premium when you can just buy another dozen (or hundreds) for the same cost. Herein lies why money and value differ: value is a personal and abstract idea while money is a society’s attempt at quantifying it. This is the reason why that same bottle of water costs five times more at a hot and stuffy carnival when you can be paying a fraction of the price to enjoy it in a air-conditioned mall.
Given that individuals are willing to pay different prices for the exact same thing, how then do we even begin assigning value to the things around us? You might be thirstier than that idiot who just got ripped-off by the carnival but does that mean you were the idiot who didn’t buy that bottle of water even though you ‘valued’ it more? Underlying this dichotomy is that in every trade, we make a decision between the potential value we get for purchasing an item versus the value of the dollar we are letting go (what else can I buy with this money? Opportunity costs for the economic geeks out there). As such, value, like any ego competition, is always relative.
Intrinsic vs assigned value
The fact that value is relative also means that there is no such thing as an ‘intrinsic’ value in the broadest sense of the word. To be clear, we still derive value from the things around us but this value is something we assign to it rather than one which is generated by the item itself. In other words, the world around us exists independently of the value that we attach to it and always wanting to find a ‘value’ puts you at odd with reality. Nonetheless, we still strive to gain an approximation of this as it is the language through which trade is made possible.
By getting individuals to value the world around them in relative terms, society is then able to settle upon an agreed value for each item. At its core, money is then the lubricant for trade as it allows us to roughly quantify the world around us. What makes it really valuable is that it stabilizes primitive bartering systems where items were traded directly.
- Instead of limiting yourself to trade with only people who want cows, you can sell the cow for pieces of paper which you can then use to purchase other things — Fungibility
- Instead of trading one cow for ~350 chickens (going by equivalent monetary value today) at one go, you could spread out your year’s worth of chicken wings — Divisibility
- Instead of having to drag your cow to the market and herd the chickens back to your farm, you could bring along a piece of paper — Portability
As such, money helps with coordinating trade, which is especially important once a society expands as keeping track of all the the relationships and IOUs becomes impossible. Underlying this conception of money as a medium of exchange is the trust people have that the piece of paper which they are holding will be usable in the future (i.e., it continues to be a store of value as society will honor the ‘value’ tied to the piece of paper).
A rather interesting property of money that arises due to this is that money itself must be abstract as the moment that it has a real world use case, individuals will have different valuations for it. This is the reason why money and gold tends to have extremely limited uses outside being a medium of exchange or store of value (and also why charitable money alone is useless without people). An implication of this as we move towards a world that is increasingly digital is that we will need to get used to thinking of value in even more abstract terms. This will be difficult considering that most people tend to overspend when the ‘pain of paying’ becomes less transparent. In other words, they tend to spend more as it is less painful scanning a card then it is removing paper wads from their wallets.
The role of institutions: are centralized authorities inherently corrupting?
In understanding that money is just an approximation of how society values the world, it then stands to question the role of institutions in this as all institutions are essentially mini-societies with their own structures governing individual behavior. All institutions, including not-for-profit ones, are to a large extent structured around their cash flows. Institutions are able to lower coordination costs via standardization of goals and behavior as well as increasing efficiencies of scale and scope.
Money tends to accumulate in such institutions as they tend to maximize dollar effectiveness. This is not to say that institutions are effective at using money but rather given the current incentive and value structures, institutions are able to do more with a dollar relative to individuals in most instances. For example, in order to get the device which you are currently viewing, you would have to bear the full costs of patents, manufacturing and logistics instead of being able to spread such costs across multiple devices. One recurring theme which you might have noticed is that such costs are due to the complexity of how these things come together rather than in the material or parts itself, i.e., value is abstracted and set by the property of organization.
As such, institutions also play a major role in rebalancing our value structures via the real value which they generate versus the value appropriated (actual value to society vs monetary value). This dichotomy is even more pronounced in the modern economy as financial institutions tend to play an increasingly larger role in appropriating value. In some ways, this was unavoidable as people wanted an easy way to quantify the value which they were bringing to society hence all incentives were structured around the most convenient form of value approximation: money. Consequently, who better to provide a measuring stick for such value then a centralized institution whose bread and butter was an essential element of every industry. Banks had a view into all industries and were therefore able to provide relative valuations and determine which institutions survive via limiting access to money streams.
If there is one thing that we can learn from history is that financial industries have been consistently bad at appropriating value. This is not entirely their fault as given that they were involved in every modern industry, the likelihood of a few spectacular failures is almost certain. Moreover, in reality, there is no way to obtain the real value generated until post-fact. This is how investments work as we are speculating on the value that will be realized by certain items or services in the future. Nonetheless, the lack of alternative modes of valuation and the perseverance of incentives structures have led us to the current situation where the large majority of people are unhappy with financial institutions.
Complete decentralization of value chains via cryptocurrencies is also not the ideal answer but it can provide much needed alternatives. There is a reason why institutions still exists because even with the presence of decentralized technologies such as the internet, people will delegate responsibilities because at the end of the day we all just want the simplest way to complete a task. Moreover, keeping track of all the moving pieces is just exhausting and we are lazy (or highly efficient) by nature as I argue here. Critically, there are a few things which cryptocurrencies enable in terms of enriching the value chains:
- Access to capital: ICOs have shown that (for good or bad), value chains are more accessible to both companies and investors from all over the world.
- Reduced transaction costs and settlement times: As all transactions are sent and verified via code, middlemen costs and time-frames are eliminated.
- Enabling microtransactions: Related to the above, this enables transactions which traditionally would have cost more to settle than the transacted amount itself.
- Programmable money: This is not new as it is similar to performance contracts but the increased ease of conducting such transactions will enable a more accurate approximation of real value generated.
So, what next?
It is important to note that the extent of centralization that we have in modern day value chains is also a relatively recent phenomenon enabled by new technologies, improved global logistics and cooperative governments. As such, the backlash against centralization acts as a good counterbalance but we must be careful not take it too far. It is more important for networks to adapt and evolve rather than have a good initial design. In this light, we must be able to better communicate our values and goals in order for society to continue progressing.
New innovations will all have a part to play in optimizing our value chains but each carries their own limitations:
- Cryptocurrencies will be the lubricant for value exchange although it requires people to be responsible for their own security and finances
- Internet of Things will enable better approximation of real value generated although there will be a point when privacy concerns outweigh convenience
- Artificial Intelligence will provide a better understanding of our inclinations and therefore the values we should be working towards although this will be tainted by biases in algorithms
- Machine learning and robotics will free us from doing task based jobs although we will need to provide a Universal Basic Income as real value can only be realized post-fact
- Cloud computing will drive value via Platforms-as-a-Service by facilitating exchanges between people for services, products or information although we need to be aware of centralization risks given the cost and speed advantage of such systems
Ultimately, technology is still a tool created to solve very human problems. We need to get better at having conversations around what exactly is it that we are trying to solve. It is only when the goals are well defined will we be able to come up with a more accurate tool to measure what we value. The idea of money will likely continue as it is after all just an abstract concept that we use to quantify and communicate with the world around us. Cryptocurrencies will help in ensuring that value streams are less easy to be gamed but what is equally important are the incentives and structures that we build around such streams in order to ensure that the system benefits the masses rather than the few.
Thanks for staying till the end. Would love to hear your thought/comments so do drop a comment. I’m active on twitter @AwKaiShin if you would like to receive more digestible tidbits of crypto-related info or visit my personal website if you would like my services :)
