Topic: The Fallacy of "Intrinsic Value" (Read 2101 times)

Zombie thread resurrection...

I think the issue here is that the economics world uses the word "intrinsic" in a way that is different than it's more general definition.

And then proceeds to treat it as if it meant exactly the same.

Which leads to all sorts of fun conclusions and outcomes.

Abraham Lincoln is purported to have asked "How many legs does a dog have if you call a tail a leg?".

An economist would take a dog valued at $100, claim that was $25 per leg, define the tail as a leg and then claim to have increased the value of the dog by 25%.

You're not addressing the core definition of the term "intrinsic value", which refers to its utility in itself as something OTHER than a medium of exchange. Gold use very useful for making jewelry, coating wires, and dozens of other applications in various industries. THESE are the things that give it its intrinsic value, and they are the only things. Being an effective medium of exchange does not give something intrinsic value.

Right on

I don't classify it as money. My central bank does that with its monetary gold.

Btw, the concept that something is as valuable as people are willing to pay for it, is semi-valid, because there's also a production cost which is real and thus rolls over to the value of the produced product/mined mineral etc. A rock may be useless intrinsically but if I traveled to the moon to get it (tremendous expenses to bring it back) the rock itself becomes quite "valuable" for some people who appreciated the effort and money spent and bought it from me with a premium.

Actually, yes it does.  Not seen someone use so many words to come to a conclusion that argues against their own point and even spell out the contradiction at the end.   Well done, i think.

The Fed has a lot of assets on its balance sheet.  Treasuries, bonds, swaps, credits, repos.  Gold is only a small fraction of its assets

I don't see why you would classify gold as money because of this.  The 5B Euros is the money part not the gold

Except in finance and economics "intrinsic value" is not open to interpretation.  Its actually a number because things need to be priced when you trade them.  

Different assets gets priced differently so there is not a blanket formula to estimate intrinsic value.

For options its the in-the-money part of the option.  For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price and the underlying stock's price.  The premium part of options is the extrinsic value.  Price of options = intrinsic + extrinsic

For equities its a little more complex to calculate.  But it's basically the present value of all future net cash flows.  Usually analysts use fundamental analysis to estimate.  For example earnings per share

For real estate its similar to equities but you use a different formula to calculate.  Something like the the net present value of all future net cash flows which are foregone by buying a piece of real estate instead of renting it in perpetuity.

My central bank seems to disagree. It has its gold assets registered as foreign exchange with a balance of around 5 bn euro.

You are right that we are interpreting the definition differently. I agree with what you are saying, but I don't think intrinsic value is the correct term to describe what you are referring to. That's just semantics though.

I believe we are simply interpreting the definition of intrinsic differently (and it is open for interpretation).  This type of definition (or phrasing) is what causes so much confusion.  Just because something fills an intrinsic need now, does not mean it will always fill that need (or at least, always fill that need well).  The object that fills the need is always temporary compared to the need itself.

Stone tablets used to be an object that helped fill the intrinsic need to communicate.  Then we invented paper.  The value of stone tablets was entirely dependent on it's instrumental value.  It's utility.  It is the same way for all objects.

A long time ago, a cave would have been valuable as it has attributes that make it useful for security and shelter.  It is the idea of security that is intrinsically valuable, not the cave.  The cave is only as valuable so long as it can fulfill that need better than something else.

At the end of the day, all these objects values are relative.  The needs remain, which is why I call the underlying concepts apparent in human nature intrinsically valuable.  The objects that fulfill these needs are only as valuable as they are useful.

So I am arguing on a fundamental level that NO PHYSICAL OBJECTS are intrinsically valuable.  Only concepts can claim to be intrinsically valuable.  Everything else has instrumental or utility value, the degree of which depends on how well they fulfill those concepts which are intrinsic to human nature.

So first, let's be clear about the definition of intrinsic value:

"Intrinsic value is an ethical and philosophic property. It is the ethical or philosophic value that an object has "in itself" or "for its own sake", as an intrinsic property. An object with intrinsic value may be regarded as an end or (in Kantian terminology) end-in-itself.
It is contrasted with instrumental value (or extrinsic value), the value of which depends on how much it generates intrinsic value."

This is true. I agree that certain properties make a currency better or worse as a medium of exchange, and that gives it some degree of intrinsic value.


According to the definition of intrinsic value, this is false. I believe you are confusing intrinsic value with instrumental value (as defined above). If something fulfills an "intrinsic need" then it has intrinsic value.


What you are saying about us having certain "intrinsic needs" is true, but it is also true that objects that fulfill these needs do have intrinsic value. The term intrinsic value does not refer to the need itself - it refers to the value of something in fulfilling that need. Your definition of utility seems to be the same as intrinsic value.

I think it would help greatly if people could just agree on exactly what "intrinsic value" is or is not.

I believe that there is no such thing a "intrinsic" value. All value is extrinsic and subjective. Like the quote says, something has value because someone values it.

Utility is a form of value, but the value of utility is subjective and so it is not intrinsic.

If I have a rock, and you value it, then it has value to you. Because it has value to you, it also has value to me because I could trade it to you for something that I value. I believe that people are simply confusing "intrinsic" value with this "indirect" value.

A house has intrinsic value, a house in Detroit has not. Simple as that.

I'm just trying to explain how "intrinsic value" is used in finance & economics lingo

Also, value is not based on utility.  Value is a quantification based on markets

Everything you just said is still all utility value...

Gold has properties that make it unique.  True, and if you want to call those intrinsic properties, fine, but everything has it's own intrinsic properties that makes it unique.  You're just using the word intrinsic in a meaningless way now.  The exact molecular structure that makes you you is intrinsic, as is the BTC protocol, a cow, plutonium, etc.  What's important is how the unique properties of any item give it utility by helping fulfill an intrinsic need.

In the case of gold, it holds utility as both a medium of exchange and as other things (like jewelry) as has been noted.  Hence, if the issuer of a currency "died", gold would still have utility elsewhere while a paper note would not (well technically, the note would still have the utility of a piece of paper).

Nothing about what I said denied that.  In fact, I pointed out that gold has utility for multiple intrinsic concepts.  That is why gold is valuable, because it's properties help fulfill multiple intrinsic needs.

Again though, nothing about gold's value is itself intrinsic.  If we were to discover something tomorrow that fulfilled those needs better than gold did, gold would lose value, period.  It's value is still dependent on utility.

The only thing lasting are the concepts that are intrinsic to humanity.  The need for love, to reproduce, fuel, pleasure, etc.  Those are what have intrinsic value.  Everything else has utility in how well it's attributes fulfill one (or more) of those intrinsic needs.  How well it fills the intrinsic void.

When you use the term "intrinsic value" in finance, it's not merely a concept its a number.

You are both correct in a way.  Nothing has value unless there is a market for it.  In this case you can say nothing has intrinsic value.  But practically speaking you can't separate things from their markets so you can only say "nothing has intrinsic value" when markets cease to exist.

Also you have to think in hierarchies. 

Gold itself has utility value for jewelry, industrial use, etc..  There is a market for gold and the value of gold that can be quantified by market price.  In this case you are treating gold as commodity NOT money.  But gold coins have notational value when used as money.  You need to differentiate between money & commodity

If a king mints gold coins or prints notes.  In essence he is printing money (a number) on a material.  Doesn't matter if that material is gold or paper.

Compare a $10 note to a $10 gold coin.  If the King (issuer) cease to exist.  That notational value is lost and the "intrinsic value" remains.  With the note it's intrinsic value goes to zero.  With the gold coin you can melt that down and sell the raw gold on the gold market.  The next King comes along and replaces $ with Y.  He then prints 10Y notes & 10Y gold coins.  If you held previous held a $10 note & $10 gold coin.  They are both worthless in notional value in the Y economy but the coin still has intrinsic value as long as there a gold market.  The gold market depends demand.  If the next King wants to mint gold coins then there will high demand for gold.  If he uses something else then the demand is relegated to demand from jewelers, electronics firms, etc..

All this is moot since we don't use gold coins or convertible notes any longer in the modern times.

BTC doesn't have any intrinsic value.  If the market of BTC goes away the intrinsic value goes to zero.  Same w USD or any fiat. 

No, you're not addressing the core definition of the term "intrinsic value"  You are conflating it with totally different concepts.  Intrinsic value DOES NOT refer to its utility, utility value does. That is the whole point of the word utility!  They are wholly different concepts that you are confusing as one.

You're right, being a medium of exchange does not give something intrinsic value, and I never said it did.  I said the concept of a medium of exchange itself is what is intrinsically valuable.  Only the concept.  How well something fulfills that concept gives it utility.  And believe it or not, certain attributes are useful when seeking to use as a medium of exchange (it has to be fungible, divisible, non-corrosive, scarce, etc).  That's why cows make a shitty medium of exchange, because they don't have the attributes that fulfill that need.  Cows have value for other reasons.  Because they have utility of fulfilling other intrinsic needs.

All those aspects of gold you just described do give it value.  But not intrinsic value.  There is nothing intrinsically valuable about jewelry.  Just as there is nothing intrinsically valuable about a facebook like.  What these things do is fulfill an intrinsic need(s).

The concept of "status" is intrinsically valuable to humans because we are "pack" animals.  As is something like "love".  These are concepts that are inherent in human nature.

This is why jewelry is valuable, because it fulfills intrinsic needs in human nature.  It fills that intrinsic void.  Jewelry is a way in which we show off our status in society.  That is the utility of jewelry.  Gold then, is valuable because it has many of the properties that we value in jewelry (shiny, malleable, scarce, etc).  There is nothing intrinsically valuable about gold itself, just those traits.  If something comes along and fills the attributes of jewelry better than gold, gold loses its value.  Or worse, if something comes along and fulfills the need of showing off our status better than jewelry does, suddenly jewelry itself loses some of its value, which in turn also hurts gold.

The point being, none of these objects are intrinsically valuable, they are only useful at filling intrinsic needs.  Their value comes from their utility, which is 100000% not the same as those items being intrinsically valuable themselves.  Items, by nature, can never be intrinsically valuable, only the underlying concepts.

Consider meat.  Meat is valuable because it has utility.  Meat itself is not intrinsically valuable.  What is intrinsically valuable is the concept of energy.  We require energy to survive.  Food is how we get that energy, and meat is a useful source of food.  If however, we found a new source of food that was better than meat, we'd consume more of that and meat would lose some of its value.  The further away you go from the original concept, the easier it is to see...

Take meat and break it down further.  Beef, pork, chicken, etc.  We value each of these differently based on how well they fill the void.  What do we value, protein content, taste, scarcity (which effects price and availability), etc.  So each of these types of meat has a different utility to each of us.  If Beef suddenly became incredibly scarce, it's value would go up.  If we discovered a meat that tasted like Pork, only much better, the value of pork would go down.  etc.

Now, back it up.  Food is only valuable because it fills certain intrinsic needs (the need for energy, the need for pleasure, etc.  These are intrinsic to human nature).  If something came along and filled one or all of those intrinsic needs better (say for instance, we figured out a way to convert sun directly into human energy), food would suddenly lose some of its value.  It would have less utility.

Or what if we figured out a way to simulate taste in our brain without having to actually eat.  Oh how food would lose some of its value (especially junk food that is bad for you but tastes good).

In the end, objects are only as valuable as they are useful.  Gold is useful for lots of things because it has qualities that fill the needs of lots of different intrinsic concepts.  That doesn't mean gold itself is intrinsically valuable.  When something comes along and does it better than gold, gold loses a little value.  Same with anything.

But you're not addressing the core definition of the term "intrinsic value", which refers to its utility in itself as something OTHER than a medium of exchange. Gold use very useful for making jewelry, coating wires, and dozens of other applications in various industries. THESE are the things that give it its intrinsic value, and they are the only things. Being an effective medium of exchange does not give something intrinsic value.

I've argued it before and I'll say it again.  No items have intrinsic value.  Concepts have intrinsic value.

The concept of a liquid medium of exchange, aka money/currency, has intrinsic value to humans.  It is a necessary part of the human experience.  These intrinsic concepts (there are many others) create voids that need to be filled.  They create a set of attributes which have utility value (money needs to be fungible, divisible, non-corrosive, scarce, etc).

How an item fulfills these qualities gives said item it's utility, aka value.  Gold, paper money, bitcoin, all have value because they combine certain attributes that make them useful as a medium of exchange.  That is their utility.  There is nothing intrinsically valuable about it.  What is intrinsically valuable is that concept of a medium of exchange.

That intrinsic concept creates a void.  And how items fill that void gives them their utility value.  They are only as valuable as they are useful.  When something comes along and fills the intrinsic void better they lose value.

Yes, it has properties that make it useful as a currency, but that's not what intrinsic value is. For something to have intrinsic value, it has to be useful even if other people don't want it. Bitcoin's usefulness relies 100% on other people wanting bitcoin. Furthermore, it's not used for anything besides exchanging. By definition, something with intrinsic value must be regarded as an "end in itself". Bitcoin is definitely not an end in itself - it is used to obtain other things that are ends in themselves.

To say that bitcoin has intrinsic value because of its properties as a currency would be like to say that the US dollar has intrinsic value because it is small, light, universally recognized, and difficult to replicate.

Only things that give bitcoin proper intrinsic value, are the parts of the ecosystem. Places like the exchanges or Bitpay. They are actually companies that could be used for supporting other cryptos with relatively small technical changes needed. Their support decides the usability options and gives monetary service value.
Some people say that mining also gives bitcoin intrinsic value, but I don't fully agree with that. The problem is that Proof-of-Work mining has long been a fools game that adds no practical value to the system. The security won't get tighter and the network speed won't get faster with the rising hashrate. It will only make more people trade their electricity for bitcoins, but the trade makes no sense in a general way that the bitcoin network will gain something in the exchange. Proof-of-Stake is more advanced in the long term vision of coin creation, but I think that the future will bring even better methods then PoS.

This is demonstrably incorrect: It is the intrinsic qualities of bitcoin which give it value.  Those qualities make it better for exchange purposes than any other commodity.  That is intrinsic value, value deriving directly from the intrinsic qualities of the thing.  In this case it happens to coincide with the properties which make it useful for exchange.  Other commodities have relatively poor intrinsic qualities for exchange.  Their intrinsic qualities relate to other forms of utility.  But exchange is very much a real form of utility.

I think this is an oversimplification... he even mentions in the article himself - gold has value because of its physical properties. It's not valuable only because we give it value. Gold is valuable because it is useful and we need the material for many real-life applications.

If something can be used for a purpose other than exchanging it for something else, then it has intrinsic value. In the case of bitcoin, it doesn't have intrinsic value. I do agree that this doesn't make it less valuable, but it means that its value could potentially fall to zero if people lost trust, whereas this would be impossible with gold or silver because they are needed in various industries. I guess you could still say that gold and silver are valuable only because we give them value, but the reason we give them value is because of their uses as substances, whereas with bitcoin we give value because of trust. Trust can disappear, but intrinsic usefulness can't. I think that this is the most important difference.

I just read the article.   Its good but not complete.

Its true that "value" comes from market demand.   But we are all market participants.   We can't detach ourselves any longer unless we can exist as individuals without need for markets.

The easiest to think about intrinsic value is think separately about coins and metal.

A pre 1982 penny is 95% copper.   The notational value of that coin is 1cent.   However,  the melt value of copper fluctuates w market price.   Therefore instrinsic value of copper pennies are based on market demand of copper.  A post 1982 penny only contain 5% copper so its intrinsic value is less although notational value is same.  This is reason why some people arbitrage pennies

People get confused w gold because we used to have gold coins then gold notes.   But now gold is no longer money but a traded commodity

Great read on the intrinsic value


http://www.fee.org/the_freeman/detail/the-fallacy-of-intrinsic-value