I’ve always wondered about how we decide the value of things. An example that makes the issue very confusing is the case of black pearls. I think it pretty well shows that goods and services do not have “inherent” value.
Perhaps we can understand this better if we look at a more practical concrete example: the gold standard. If the conversion rate between dollars and black pearls is arbitrary, why should we revert to a system where the exchange rate between dollars and gold is fixed? If I understand the gold standard correctly, this is exactly what we’d be doing. This question is particularly apropos nowadays, since Dr. Ron Paul, a proponent of the gold standard, has been selected to chair the Monetary Policy subcommittee of the House.
I’m not really sure why an odd colored metal is better than paper with peculiar ink stains at keeping track of wealth, value, or whatever. If gold had the same value to all people at all times, I think some proxy for it would be a good medium of exchange; however, I don’t think gold has this property, because there was a time when a pound of gold traded for a pound of salt. Today, an ounce of gold is worth 2,900 times as many dollars as an ounce of salt.
Another problem with gold is that it doesn’t track the growth of the economy. There are various ways we can create more value, and most of those ways do not lead to more gold being stored in government warehouses. The reason economic growth is not linked to the amount of gold we have is simple: value is not a resource that we mine out of the ground.
One cause of economic growth is new technology. For example, if we didn’t know about crop rotation last year, but discovered it this year, we could reduce the number of people who go hungry without increasing the amount of water, fertilizer, or work that we put into the fields. Even though crop rotation would make us better off, it would not have a necessary causal impact on the amount of gold that the governments of the worlds have on hand.
I’m sure there are more sophisticated arguments for the gold standard that I don’t know about, but it seems to make fundamental assumptions that can’t be true. The most fundamental problem is that the value of things varies with time and place, and as in the case of black pearls, it can be manipulated with good marketing.