June 11, 2024

Where does value come from? Bitcoin's value explained

"Value" is one of the most used and abused words in business and economics. When you understand what it really means, you understand why bitcoin is worth so much.

Dave Birnbaum
Dave Birnbaum

Director of Product

Where does value come from? Bitcoin's value explained

Table of contents

Where does value come from? Bitcoin's value explained

In the world of economics, the concept of value has been a subject of debate for centuries. Various schools of thought have attempted to explain the nature of value, but the Austrian school of economics, founded by Carl Menger in the late 19th century, proposes that value is subjective. This is of interest to bitcoiners because bitcoin may be viewed as an instantiation of Austrian economic theory in software. If bitcoin works as a system of value mediation, which it does, it serves as real-world validation of the Austrian theory of value being subjective.

Subjective theory of value

The subjective theory of value asserts that the value of a good or service is determined by the individual's perception of its worth, and not by any inherent properties of the good or service itself. Let's delve deeper into the Austrian school's theory of value, compare it with other schools of economics, and explain why it has the most staying power in the current economic landscape.

According to the Austrian school, subjective value is the value that an individual places on a good or service based on their own preferences, desires, and needs. In other words, the value of a good or service is not determined by its intrinsic qualities, but rather by the individual's subjective perception of it. This means that a good or service's value can vary from person to person, and can even change for the same individual over time.

For example, consider a bottle of water. The intrinsic properties of water may be the same for every individual, but the value that each person places on that bottle of water can differ based on their individual circumstances. For someone who is lost in the desert, a bottle of water may be incredibly valuable, while for someone who has easy access to clean water, the same bottle of water may have little to no value.

Intrinsic theory of value

Another concept that is often used in discussions of economic value is intrinsic value. Intrinsic value refers to the inherent value or worth of a good or service, independent of any external factors such as supply and demand or the preferences of individuals. Some investors, for example, believe that gold is a good investment because it has intrinsic value.

Classical theory of value

The Austrian school's theory of subjective value is in contrast to the classical theory of value, which asserts that the value of a good or service is based on the amount of labor that has gone into producing it. This theory, put forth by Adam Smith, suggests that the value of a good or service is objective and can be determined by measuring the amount of labor that has gone into producing it.

Another school of thought that proposes an alternative theory of value is the Marxian school of economics. This school asserts that the value of a good or service is determined by the amount of labor that has gone into producing it, but that this value is often not reflected in the price that is paid for it. According to Marx, this is because the capitalist system exploits the labor of workers and extracts surplus value from them, leading to a disconnection between the value of a good or service and its price.

Bitcoin's high price is explained by subjective value

The Austrian school's theory of subjective value, in contrast to these other theories, places the individual's preferences and needs at the center of economic analysis. This approach allows for a more nuanced understanding of economic behavior and highlights the importance of market forces in determining the value of goods and services. People are complicated, and their true motivations are like a "black box" – in many cases, even to themselves.

The rise of bitcoin cannot be explained by intrinsic, classical, or Marxian theories of value. For those who subscribe to them, bitcoin is baffling at best, and a foolish distraction at worst. And yet, while critics will argue ad nauseam that bitcoin has no intrinsic value, people who understand the subjective theory of value simply accept that that people's willingness to trade other valuable goods to obtain it is proof positive that human subjects are assigning value to it, just like everything else in the economy.

March 18, 2023

Where does value come from? Bitcoin's value explained

"Value" is one of the most used and abused words in business and economics. When you understand what it really means, you understand why bitcoin is worth so much.

Dave Birnbaum
Dave Birnbaum

Director of Product

Where does value come from? Bitcoin's value explained

In the world of economics, the concept of value has been a subject of debate for centuries. Various schools of thought have attempted to explain the nature of value, but the Austrian school of economics, founded by Carl Menger in the late 19th century, proposes that value is subjective. This is of interest to bitcoiners because bitcoin may be viewed as an instantiation of Austrian economic theory in software. If bitcoin works as a system of value mediation, which it does, it serves as real-world validation of the Austrian theory of value being subjective.

Subjective theory of value

The subjective theory of value asserts that the value of a good or service is determined by the individual's perception of its worth, and not by any inherent properties of the good or service itself. Let's delve deeper into the Austrian school's theory of value, compare it with other schools of economics, and explain why it has the most staying power in the current economic landscape.

According to the Austrian school, subjective value is the value that an individual places on a good or service based on their own preferences, desires, and needs. In other words, the value of a good or service is not determined by its intrinsic qualities, but rather by the individual's subjective perception of it. This means that a good or service's value can vary from person to person, and can even change for the same individual over time.

For example, consider a bottle of water. The intrinsic properties of water may be the same for every individual, but the value that each person places on that bottle of water can differ based on their individual circumstances. For someone who is lost in the desert, a bottle of water may be incredibly valuable, while for someone who has easy access to clean water, the same bottle of water may have little to no value.

Intrinsic theory of value

Another concept that is often used in discussions of economic value is intrinsic value. Intrinsic value refers to the inherent value or worth of a good or service, independent of any external factors such as supply and demand or the preferences of individuals. Some investors, for example, believe that gold is a good investment because it has intrinsic value.

Classical theory of value

The Austrian school's theory of subjective value is in contrast to the classical theory of value, which asserts that the value of a good or service is based on the amount of labor that has gone into producing it. This theory, put forth by Adam Smith, suggests that the value of a good or service is objective and can be determined by measuring the amount of labor that has gone into producing it.

Another school of thought that proposes an alternative theory of value is the Marxian school of economics. This school asserts that the value of a good or service is determined by the amount of labor that has gone into producing it, but that this value is often not reflected in the price that is paid for it. According to Marx, this is because the capitalist system exploits the labor of workers and extracts surplus value from them, leading to a disconnection between the value of a good or service and its price.

Bitcoin's high price is explained by subjective value

The Austrian school's theory of subjective value, in contrast to these other theories, places the individual's preferences and needs at the center of economic analysis. This approach allows for a more nuanced understanding of economic behavior and highlights the importance of market forces in determining the value of goods and services. People are complicated, and their true motivations are like a "black box" – in many cases, even to themselves.

The rise of bitcoin cannot be explained by intrinsic, classical, or Marxian theories of value. For those who subscribe to them, bitcoin is baffling at best, and a foolish distraction at worst. And yet, while critics will argue ad nauseam that bitcoin has no intrinsic value, people who understand the subjective theory of value simply accept that that people's willingness to trade other valuable goods to obtain it is proof positive that human subjects are assigning value to it, just like everything else in the economy.

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