Foundation of Value

Salviati: Did you hear? It has been discovered that the earth is round and orbits the sun!

Simplicio: Nonsense. The world is a flat plate supported on the back of a giant tortoise.

Sagredo: That doesn’t make sense. If the world needs something to hold it up, why not the tortoise? What is the tortoise standing on?

Simplicio: Another turtle.

Salviati & Sagredo: ??? So what’s that turtle standing on?

Simplicio: Why, it’s turtles all the way down!

Turtles all the way down economics

We have data for the value of about every imaginable asset. Stocks, bonds, commodities … you name it, you can find the price. Oddly, the world’s most widely used security, the US Dollar, is an exception. That’s because of our habit of using the USD as the unit in which we price everything else. If we try and price the dollar in dollars, we get nothing but the trivial value of 1. It’s useless because it’s always the same, even though we see evidence that it changes every time we pay the bills or go shopping.

The problem is really one of currencies in general. We do have forex data purporting to state the value of “the dollar”, but it’s only in terms of other currencies. Given that we have nothing with which to value those other currencies, though, the whole exercise is circular. It’s turtles all the way down.

A indirect measure, the Consumer Price Index (CPI), values a basket of goods and services in terms of the dollar, the implication being that the dollar is a stable unit while the value of goods and services fluctuates its way higher. No plausible justification has been advanced for such an assumption, despite how widely it is implicitly used in pricing just about everything.   

But we can invert the CPI to find the value of the dollar in terms of a basket of goods and services. But that presupposes, without any logical underpinning, that a basket of goods and services itself is a stable datum, unchanging in value. How do we value the goods and services? In dollars! Turtles all the way down. Worse yet, we know it badly lags actual changes in the value of the dollar because the dollar itself lives the asset markets, where it’s changes in value are first registered. It takes time for those changes in value to work their way through to final consumer prices.

And it’s a highly questionable mission creep for the CPI, originally designed as a cost of living index, not a general index of inflation. Other purported measures of inflation, like the Producer Price Index (PPI), the Personal Consumption Expenditures (PCE) deflator, etcetera, are all similar, in that they assume a “things” based standard of value.

They assume things are an unchanging reference.  But not only has there been no serious attempt to defend the assumption, it’s demonstrably false. A buggy whip does not have the same value in 2025 as it did in 1925. And an iPhone certainly did not have the same value in 1925 as it does in 2025!

reductio ad absurdum

What about gold? Classically gold has been used as a unit of market value. It’s an improvement over other currencies, with their political control and manipulation. We could invert the price of gold to express the value of the dollar in terms of gold. But despite the appeal based on gold being a naturally uninflatable money, and its record of holding its value over very long periods of time, it is also a “thing” and over years and decades undergoes changes in market value of its own.

For example, the value was artificially suppressed for decades by being tied to the dollar via a gold standard. The following chart shows its dollar price compared with that of another elementary commodity, copper, which was not subject to the same artificial restraint.

​

That may be questioned as exceptional, yet even in times when gold was not artificially tethered to the dollar, its value has fluctuated widely. The price of gold in dollars declined over the twenty year period from 1980-2000, which inverted would imply an appreciating dollar … quite a stretch given the depreciation of the dollar visible against other assets and consumer goods and services.

When you think about it, it’s remarkable that an entire field with a pretense to science, and that regularly uses units of market value, has defined no reliable such units. No wonder its practice has produced such poor results over the decades.

Contrast that with much more successful science and technology based on reliable units like kilograms, meters, and seconds.

The last turtle

Do we have any alternatives to the widely accepted but deeply flawed “turtles all the way down” economics? I believe we do. I propose human time as the natural unit of value. 

It is the one thing every one of us has the same amount of every day, every year. No matter what. Moreover, that amount has remained unchanged since the dawn of the human race.

I take it as axiomatic that human time is the fundamental invariant of economic value. There is no economic value without it. What for instance would be the economic value of an iron mine, an ounce of gold, a golf course, or an iPhone without humans?

So why might be a consumer goods and services have become the de facto standard in the economics community?

It results in a lower reported rate of inflation. As technology lowers the real cost of producing goods and services, they become less expensive in real terms. So using consumer goods and services as a standard makes inflation appear less than it really is. And the field of economics is dominated by political and financial interests that benefit from inflation.

The Financology Dollar Index

I have been publishing an index of the value of the dollar since Financology’s inception. Longer, really, going at least as far back as 2008 on iTulip. It is unlike all other means of measuring the value of the dollar in that it is not based on “things”, but on human time.  If we accept the premise that human time is the fundamental unit of value, the question remains of how we could use it to track the changes in market value of other things, including the dollar itself.

This is not so simple. How in the world do you measure the value of something in terms of human time?

Wages and salaries present themselves as obvious candidates, since they represent the rate at which people actually exchange their time and dollars. But whose wages? Americans? The rest of the world’s population doesn’t count?And trading one’s time for dollars is more than a statement about the value of dollars and one’s time. There are all the other factors besides the value of the currency that come into play in arriving at wages, such as working conditions, taxes, etc. I for one would demand more dollars for spending an hour as a window washer on the fiftieth floor of a skyscraper than I would in the comfy office on the other side of the glass. Wouldn’t you? It would also fall short of being universal by virtue of excluding some forms of compensation, for instance, benefits, stock options, etc. It also needs to account for time spent in other than formal employment; leisure time has value too, or people would not want it.

Moreover, not every currency-time transaction in the world involves an exchange of dollars. It might involve an exchange of some other currency, through which we could infer a dollar equivalence via exchange rates. If we want our measure to be truly universal, it can’t just be based on domestic goods and services prices, but has to be global in scope.

We have to take an indirect route. We know the total of human value; we can derive it from our definition. It’s the total world population times the time for which it exists. So the total economic value of 2025 for example would be about eight billion human years.

We have estimates of the total world dollar value of GDP, GNI and related statistics. Using this data a conversion factor between total economic value in human hours and the total economic value in dollars can be derived to yield hours per dollar.

For illustration purposes, recent estimates for world population and GDP are 8.23B and $115.49T respectively. This gives us an exchange rate of 1 USD = 0.000,071,26 human years. Converting to hours, 1 USD = 0.62468 hh.

That’s for the year 2025; an average over the course of the year. Obviously it changes (usually drops) from year to year. But that hardly means it doesn’t change more frequently. We would like to have higher frequency data, for instance weekly, and in fact that is the interval I use for the FDI. But that gets still more complicated. So besides the fact that even measuring economic aggregates like world population and GDP is itself an exercise in estimation, we have to take a less direct approach, using data that is available weekly, taking advantage of the fact that the total purchasing power of value storage assets is tautologically equal to the body of stuff available for purchase, as I outlined in The Claw Machine. This means we can use asset market capitalizations – currencies, commodities, stocks, bonds – to infer intrayear values between annual data. The uncertainty factor is however somewhat offset by the greater accuracy of the market data we have for these assets. All told, the FDI is an imperfect measure of the value of the dollar, leaving room for refinement in light of the available data. It is, however, much less so than any other published data I am aware of, conspicuously including the CPI and PCE.