(The Truth About Value #2) How we value money

An important fundamental in the study of value is how we value money itself. This is critical because money is the main medium of exchange and our valuation of money will have major implications on our behaviour in buying and selling things. Money is a funny animal because while it is a "storage of value", there is also a premium, on top of the stored value, attached to holding it (see Why we value money below).

Here are two rules of thumb:


- In general, the more money we have, the less we value each unit of money (can be any amount, say $1, $10, $100, etc). In economics, the Law of Diminishing Utility says that the marginal utility from consuming one unit of something is less than that of the previous unit. Applying to the concept of money, it means we value each unit of money less and less as we have more and more.

For sake of illustration, suppose we have a hypothetical universal currency called V (value units) that is an individual's own universal valuation of things and money. When Peter has a wealth of $100,000, he values $10,000 at V100. One year later, when his wealth increases to $1 million due to winning a state lottery, he will value $10,000 much less than V100, say V20 or V10. Similarly, two people with different wealth levels will value one unit of money differently. It has been said that if Bill Gates sees $1,000 on the ground, it will not be worth his time (assuming it take 4 seconds) to pick it up because his opportunity costs is $300 per second (from 1975 to 2000). But for the rest of us, that will be a lot of money for a few seconds work. Because we value money differently.

- In general, the less we value money (per unit of money, can be $1, $10, $100, etc), the more we will exchange it for (i.e. buy) things. When the relative importance of money goes down viz-a-viz things, the relative value of things goes up. Hence, our tendency to buy increases.

Just imagine that money is a the predominant currency (just like US$) and different things are other currencies. So when US$ goes down, the other currencies goes up in relativity. Alternatively, say George originally values $1,000 at V50. He got richer and is valuing the same amount at V40. There are Thing A and Thing B which he values at V45. Earlier he would not have bought it, but now he will rationally exchange that for Thing A and Thing B, since he will be able to gain V5 each now.

In totality, the two rules of thumb combines to explain why when we get richer, we tend to buy more things or more expensive things. Vice versa. When we are more well-to-do, we become more willing to pay for luxury goods and wellness services.

Why we value money

People value money for 3 main reasons:
1) It is a liquid and freely accepted medium of exchange and storage of "things". This is the basic value.
2) By itself, holding money provides mental and spiritual well-being as it means that we can trade it for many things we value in the future. This is the premium value.
3) Money is a good "plant" to farm. Nurture (i.e. invest) it well  and it will grow in abundance. This is the premium value.

For all three reasons, we can easily postulate that the more we have, the less we value each unit of money.