Category: value

A man in a red parka stands on a snow covered hill looking at jagged mountain peak ahead of him

The Visible and Invisible

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May 31, 2026

By Stephen Stofka

One of this summer’s biggest movie releases is Christopher Nolan’s The Odyssey, the story of a military commander returning to his home in Greece after the Trojan war. When he encounters several dangers on the trip, Odysseus prays to the Greek goddess Athena for help. For much of human history, we have tried to leverage invisible powers to help us get what we want. These invisible powers were capable of work. We prayed to invisible beings for love, for rain, for relief from sickness and pain. Roman families prayed to their household gods, the Lares, for protection of their home and other favors. The Jewish people were the chosen people of their god.

Gods were not neutral. They took sides in battle. Gods had to be placated. If our side lost, it was because our sacrifices, our rituals had not pleased our gods. If our side won, it was because our god was more powerful than their god. Catholics and Jews shared the same God, the same Old Testament, but differed on the belief in the divinity of Christ. Jews had to be punished and persecuted. Catholics and Muslims shared the same God, but Muslims had an entirely different text, the Koran, and a prophet that Catholics did not recognize. The Catholics launched several crusades to defeat the Muslims. Protestants and Catholics had the same god and the same sacred texts, but a different hierarchy, and different worship rituals. Each side believed that their way of worship was right and warred against each other throughout Europe.

The Age of Neutrality

The realm of the natural was visible, capable of being perceived by our senses. Phenomenon not accessible to our senses was the realm of the supernatural. In 1644, Evangelista Toricelli showed that the atmosphere had weight. We were like crabs out of water, walking beneath an ocean of air (Source). The invisible was no longer the realm of the supernatural. A few years later Otto von Guericke showed that the weight of the air could be used to lift objects. For the first time in history, an invisible being could do work, and the word force was repurposed to include these “gods” of nature. A few decades later, Newton published his theory of gravity in 1687. These natural gods like gravity were neutral. The god of gravity treated everyone the same. These natural forces were more reliable, more predictable than the supernatural gods. In several more decades, Thomas Newcomen developed an efficient steam engine. People were learning to bring the invisible forces of heaven down to earth, ushering in the First Industrial Revolution (Source).

Social Exchange

As physical scientists explored the exchange of energy in physics, chemistry and biology, social scientists began to investigate exchanges of the invisible among people. In 1776, Adam Smith published The Wealth of Nations, an analysis of the production and exchange of goods among people. Money cannot be consumed yet it has value, an invisible quality. A pound of flour can be consumed but only as an ingredient in bread. It’s value is latent. In Part 1, Chapter 4, he wrote about the diamond water paradox. Water is far more useful to people than diamonds, yet the exchange value of water is much lower than that of diamonds. To help resolve the paradox, Smith developed two notions of value, value in use and value in exchange, and noted how unrelated the two values could be.

Value is a property as invisible as a god, its existence and effectiveness only apparent by its manifestation in the natural world. Value in use was a functional value, the ability of a commodity like corn to satisfy some human want. That function was only possible through transformation by people. The land had to be tilled and sown. The crop had to be weeded, harvested, and stored. Many foods needed a final transformation to make them palatable or digestible. While it was difficult to measure a property, the costs to realize the functional value of a commodity could be measured. In those days when humans or animals did most of the work, the chief cost of a commodity was human labor.

Value in exchange could also be measured by human labor, since this was the most common tradeable value that people had. Smith, David Ricardo and other early 19th century economists developed a labor theory of value as a solution to the riddle of the diamond water paradox. In the latter half of that century, the increasing use of machines in production tested the logic of that theory. Karl Marx was such a fierce adherent of the labor theory of value that he regarded any contribution by machinery or capital as an exploitation of labor.

Marginal Analysis in Economics

Marx introduced an edifice of historical, political and social relations that obscured the fundamental economic principles of exchange. In an effort to concentrate solely on the economic aspects of the marketplace, economists like Jevons, Edgewater and Marshall introduced the idea of marginal usefulness, or the value of one additional unit. Value was situational, determined by supply and demand, and based on individual preference.

How did these economists resolve the diamond water paradox? Water was vital to a human being, but when there is a good supply of it, an additional glass of water has little value. Because diamonds are scarce and convey a prestige highly valued by people, an additional diamond may have high marginal value.

Scarcity and surplus determine the price of a good. The seller of a loaf of bread does not price his product based on the wage or earnings of his customers. Buyers and sellers have a shortage or surplus of a good and want to maximize the usefulness of the next unit of that good or service. These economists, called marginalists, rejected the belief that there was any value infused in a commodity. The only measure of that value was the price.

Political and Social Theory

For more than a century, marginal analysis has been the dominant theory of economic study. Can it be used to understand political and social relationships? Perhaps not. It has some disturbing implications. Despotic governments are governed by marginal thinking, the idea that human value is based on a person’s usefulness to the ruling regime to maintain its power and control. In a liberal ideology, political rights are grounded in the theory of natural law, whose chief proponent was the 17th century philosopher John Locke. People are imbued by their creator with certain inherent or natural rights that are inviolable to a government.

A marginal analysis of personal and social relationships treats people as means to satisfy our ends. The philosopher Emmanuel Kant wrote “So act as to treat humanity, whether in your own person or in another, always as an end and never as only a means.” People had an intrinsic worth in their own right. But this view is not grounded in anything other than an agreement among people that humans have worth. Their suffering has meaning. Yuval Harari, the author of Sapiens, A Brief History of Humankind, laments the fact that people on one side of a conflict struggle to even acknowledge the suffering of people on the other side. We are so invested in the about the righteousness of our actions that we lose sight of the intrinsic worth of those on the other side of a conflict.

The Sacred and Humanist

People of faith claim that the natural world must be connected to the supernatural to have any meaning. Without a belief in a creator God, they claim that morality is ungrounded. Human life has value because we are creatures of God. The Constitution was divinely inspired, a work of the Christian God.

Humanists believe that people have a responsibility and capability to act ethically without a belief in supernatural gods (Source). That responsibility is based on our innate sense of compassion. That capability is born of our rationality. It is up to us, not some invisible gods, to shape the meaning of our lives. I hope to see you next week.

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Photo by Joshua Earle on Unsplash

Keywords: marginal, economics, categorical imperative, value, religion

Blurb: The gods of our ancestors have vacated heaven and now live among us in a myriad of forces and energy.

Prices and Values

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July 23, 2023

by Stephen Stofka

This week’s letter is about prices and two dynamic values, a use value and an exchange value. These two values can help us compare assets if not goods. I’ll review a short history of thinking on price and value. How does the passage of time affect different types of assets? Lastly, how sensitive are some assets to investor temperament?

The insights of prominent thinkers in the past can inform our perspective. Richard Cantillon (1680-1734) was a financier whose keen understanding of human exuberance enabled him to make a fortune in the stock market bubbles of the South Sea and Mississippi System. He argued that there was an intrinsic value to a commodity that was the sum of the inputs, land and labor (capital was included in land). The ratio of supply and demand as well as “humors and fancies” explained the variance between market price and intrinsic price. In a well-organized society, the market price and the intrinsic price tracked each other closely.

Writing a few decades later, Adam Smith would refine the classification of prices further. A market price included the rent of the land, the worker’s wages and a capitalists’ profit. A natural price was the average of market prices and a price that a customer expected to pay when going to market. Finally, there was an exchange price, a measure of purchasing power. Writers of that time distinguished between commodities, or subsistence goods, and goods of an artisanal nature, affordable only to those in the middle and upper classes.

In Book 1, Chapter 4, Smith distinguished the two meanings of the word value. The first was a value in use, the “utility of some particular object,” whose value is consumed. Utility depends on the person, their circumstances and preferences and cannot be measured. The second is a value in exchange, the “power of purchasing other goods.” Commodities like a pound of corn have both a use value and an exchange value but Smith made it clear that the use value of a commodity does not anchor its exchange value. He noted that many goods which have a high use value like water have a low exchange value, and those with a high exchange value like diamonds have little or no use value. Smith spent the following three chapters exploring the connection between exchange value and price.

As he compared standards of living in different ages and countries, from neighboring France to the American colonies, Smith was looking for a yardstick, a standard of measure. Economic institutions today compile extensive price and income indexes to compare prices across time and countries. Smith had limited manpower – himself. He chose a laborer’s toil as “the only standard by which we can compare the values of different commodities at all times, and at all places.” He was careful to note several caveats. It was “difficult to ascertain the proportion between two different quantities of labor” and the “real price of labor is very different upon different occasions” and in more advanced societies. Regardless of prices or the value of gold and silver in England and the American colonies, he could compare the purchasing power of laborers in each country doing similar work.  

Smith’s grand thesis was that greater specialization of labor increased productivity and fostered economic progress. Within this framework, people would more frequently exchange their labor rather than consume the goods their labor produced. For Smith, labor was an “exchangeable value,” not some value inherent in a commodity. He used it to construct a measure of purchasing power. Almost a century later, Karl Marx would distort this yardstick of purchasing power into a qualitative claim that the labor input to a commodity was the intrinsic value of the commodity. Anything above that value was an exploitation of workers by capitalists, according to Marx.

Let’s extend this analysis to asset, which I will divide into two types: those that derive an exchange value based on ongoing operations and those that don’t. Ongoing operations can be likened to a use value because something is consumed in that operation, a depreciation. There is an explicit or imputed flow of income whose discounted value influences the market value of stocks and bonds. Time-sensitive financial instruments like stock options act like insurance and are very much anchored by ongoing activity and the expectations formed from those operations. The market value of real estate may rely on scarcity, like a collectible, but the scarcity aspect contributes to expectations of future income that the real estate can earn. Therefore, its market value is also anchored by operations.

Collectibles are an asset without any ongoing operation. They derive their market value from their scarcity or uniqueness. A painting may bring pleasure in the viewing but the enjoyment of that pleasure does not consume the painting. Time, yellowing and dust may introduce a depreciation expense but time usually increases the market value of the painting.  Money can be a collectible but only if it is rare. Digital currencies behave very much like collectibles but there is nothing to hang on a museum wall. For traders, the chief attraction of crypto is the possibility of future trading gains. Unlike stocks, crypto does not represent ownership in operating profits. Unlike bonds, crypto is not a purchase of someone’s debt. Unlike real estate, crypto does not generate any cash flows from its use value.

Some assets with little ongoing use value have volatile valuations because their chief use value is the hope of future trading profits to the holders of the asset. Their use and trading values can collapse suddenly as though they were a time-sensitive financial asset. Being alert to that imminent collapse helped Richard Cantillon make a fortune. Investors in such assets must remain nimble.

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Photo by Sean Stratton on Unsplash