A Solution to the Value Paradox

The value paradox, also known as the diamond-water paradox, asks why is it that diamonds, which are useless, consistently fetch a high price, whereas water, which is most essential to human life, is inexpensive? There have been two prominent answers to this question, one from classical economics and the other from neo-classical economics.

The labor theory of value is associated with the classical economists, who also influenced Karl Marx. In the labor theory of value, the value of a good comes from the amount of work expended to create the thing. Diamonds require more labor to extract them, water does not require a lot of labor, therefore diamonds fetch a higher price.

In the second half of the 19th century, the labor theory of value was considered displaced by the marginal utility theory of value, attributed to Menger, Walras, and Jevons. Marginal utility became the basis of neo-classical economics. In marginal utility, value comes from the subjective attribution of value. Basically, we attribute more financial value to diamonds because they are more rare. Each subsequent unit of diamond beyond the first is still worth a lot. Each subsequent unit of water beyond the first decreases in value, because we only need so much at a time. The marginal utilitarians used the mathematical calculus to demonstrate utility curves.

The split between the labor theory of value and the marginal utility theory of value has significant political consequences. Marxists, socialists, and left leaning people typically rely on the classical labor theory of value. They think that people should be adequately compensated for their labor time because they generate the underlying value of the economy, hence more redistribution of resources and taxation of the wealthy. The marginal utilitarians, usually more libertarian or free market oriented, say that labor fetches the price that it does because of the aggregate market interactions of subjective individual preferences. Each subsequent unit of minimum wage labor is not that much more valuable to the employer. Whatever the market decides will be the fair distribution that ensures that the most people are put to work.

The value paradox arises because there appears to be two senses of the word “value.” There is the financial sense, which is the price signal, and then there is the social sense, which is how essential the thing is to human life. The problem with the value paradox is the that it is framed in terms of rivalrous, materialist scarcity dynamics. The founders of the labor theory and the marginal utility theory were thinking about this problem in the time of industrialization, when the economy was focused on producing material goods. But our contemporary economic situation increasingly involves antirivalrous information dynamics. We do not yet have an adequate theory of value to understand antirivalrous information dynamics.

In rivalrous dynamics, there is a scarce material resource. An apple or a chair is a scarce material resource. If I have it, then someone else cannot have it. There is a limited supply of the good, and it is priced according to the demand. In rivalrous dynamics, there is always a tradeoff between social and financial value. The individual can either keep the scarce good for himself or sell it to someone else. Many market proponents say that acting in financial self interest is not opposed to the collective interest because mutually beneficial exchange brings about the optimal outcomes for all parties. This is theoretically true, but in practice there always seems to be Malthusian, zero sum aspects that prevent all parties from economically thriving, even if the rising tide does lift all boats. Inevitably information asymmetries arise. This is a valid argument against exclusively focusing on financial value to the exclusion of social value. But focusing primarily on social value to the exclusion of financial value also brings out zero sum, materialist scarcity dynamics. This was the outcome of over-centralization in the Soviet Union where there were bread lines and rampant corruption.

In antirivalrous dynamics, information goods can be replicated infinitely. If I learn calculus and share it with someone else, then calculus becomes more valuable to both of us. The more people who learn the underlying skill or platform the more valuable it becomes. We see this with the value of social networks and sharing economy platforms. The more people who use Twitter or Uber the more valuable it becomes and the less practical their competitors become. There is a kind of winner takes all dynamics in the antirivalrous, because it is in everyone’s interest to be synced to the same platform. This is why we see the monopoly accumulation of marketshare in the big tech companies.

Antirivalrous dynamics start to collapse the distinction between financial and social value. This is why we need a new theory of value that accounts for these kind of network effects that we see arising in our contemporary economic environment. We need a more general theory of value that incorporates both social and financial value, as well as the philosophical concept of value itself, understood as meaning, significance, importance, or priority. This would be able to explain much of what we see in the contemporary information economy as well as providing a more solid foundation to understand traditional forms of information dynamics like the spread of religions and belief systems. This would also perhaps provide the foundation for new innovations in the economy based purely on information and knowledge exchange, rather endlessly relying on material technology for growth.

From our contemporary position of relative abundance, we can see that antirivalrous dynamics are primary and causally determine the rivalrous dynamics. The fundamental belief structures that are acquired through information exchanges determine how people assign social or financial value to things rather than vice versa. The neo-classical economists still try to squeeze information dynamics into the antiquated framework of rivalrous, materialist supply and demand. This is what Gary Becker tried to do. But the marginal utility theory of value is increasingly irrelevant with respect to information dynamics like mimetics and social networks.

In order to articulate a new theory of value based in antirivalrous network effects, we have to understand why people would pay for an information good when they can acquire it for free. Why would people pay to learn calculus or a foreign language? Why would they use their scarce time and money to pay for something that they could get for free because there are infinite copies on the internet? People invest in information goods in order to have access to the network of people who already use that platform. They pay money if it will lower their future transaction costs (understood here as translation costs). In other words, I will pay to learn calculus if it gives me access to a network of people who already know calculus and are making money from it. The underlying value of a good does not come from labor value or from marginal utility value, it comes from a more general synchrony. It comes from being synced with a knowledge ecology that already has access to the platform. Being synced gives people a shared basis of knowledge and allows them to have their own personal influence on that knowledge ecology.

The more fundamental synchrony theory of value generalizes from both the labor theory and the marginal utility theory, both the social and financial sense of value. It draws on the labor theory of value in that work is fundamentally learning; learning how to sync to a knowledge ecology, how to use a platform, learning a language. And it draws on the marginal utility theory of value’s emphasis on the differential calculus because network effects dictate that the platform becomes exponentially more valuable the more people who use it. So there is a question of where one should invest their scarce time- what language should I learn? What platform should I spend time on?

These temporal scarcity dynamics lead to convergent media of learning interaction. Remember that antirivalrous dynamics have winner take all effects. Everyone is faced with the same temporal scarcity and is attempting to sync to the most valuable platform,  which is optimally advantageous for all parties. The synchrony theory of value leads inevitably towards pervasive mutual leverage interaction, in which both parties in the exchange gain market advantage as a result of the exchange.

In the synchrony theory of value, there is not a scarcity of material resources, but a scarcity of temporal resources. There is no tradeoff between financial and social value as there is in rivalrous dynamics. Instead the tradeoff is between present and future existence. There is sacrifice in the present for the sake of being synced with a knowledge ecology in the future. Sacrificing for the sake of the future self is the same as sacrificing for the sake of others. The other person is your own future self. When time is sacrificed to learn some new knowledge, it is for the sake of being synced with the ecology of people who already have that knowledge, in order to make a contribution to that ecology. Notice that this is a more general theory of value that contains social and financial value as subsets. Value always comes from the personal harmonization with the collective ecology and making a differential contribution to that ecology, rather than from labor or from utility.

We are constantly sorting information based on what will provide access to the most coherent, mutually beneficial collective intelligence. We are constantly attempting to resolve our state of individualized tensions into a collective regularity. Paradoxically, this leads to the situation in which each individual is the totally unique expression mapping of the total collective intelligence. This operates at the most basic, immediate level. Each person, at each moment, chooses between mutually exclusive options. In other words, they form priorities. Categories signal priorities. Priorities circulate through society via the usage of categories in conversation. The priorities are not at all as clear and distinct as the specific categories that are used to convey them. In fact, the same category may simultaneously signal two conflicting priorities. But the conversation itself is the arbiter of the conflict, in a Habermasian sense. The conversation resolves the individualized tensions into a shared collective synchrony. Even if there is conflict or disagreement, the underlying priorities are revealed or brought to the surface by conversation.

The motivation is that people always want to fulfill their desires. They try to fulfill their desires within social interaction itself rather than in an asocial way, because people are social creatures. This leads to an emergent simultaneity of fulfillments, where people match fulfillments within the conversation. In this way, conversation tends to converge towards unconscious shared assumptions. This happens whether they agree or not, the underlying assumptions get revealed.

If there are low transaction costs, then information propagates through the network of social relations. In other words, if there are shared, unconscious assumptions, then the information cascades costlessly through social networks. If the unconscious assumptions are highly fragmented and multipolar, then it will be hard for any information to travel across the social relations. There is a “market” or distributed self organizing process for determining how these shared unconscious assumptions coalesce and diverge.

When someone discovers a whole new strata of unconscious shared assumptions, everyone realizes that their actions have been oriented in the wrong way, or that their actions have already been unconsciously oriented in this new way the whole time. This shifts incentives toward learning the new platform in order to sync with the rest of the collective. This is what happened with something like the discovery of Christianity. It revealed a whole stratum of unconscious assumptions about the way people implicitly treat each other and organize their behavior. Or something like the discovery of Facebook, which revealed implicit social relations between people and externalized them onto a virtual social graph.

It is clear now why diamonds are more valuable than water. Diamonds give people access to a network of collective intelligence associated with desirable social status. But we can now begin to look at the diamond-water paradox through a different lens, replacing the materialist scarcity with temporal scarcity. Call it the programmer-artist paradox. Why are programmers paid so much in relation to artists? Why are artists paid so little money, when collectively they add such social value to society? Because they have no shared platform, they have no synchrony, no network effects that would lower transaction costs and save people time. Programmers are united by their shared programming languages. Artists share no underlying belief structures that would make their productions more valuable as more people bought into them. In the Renaissance, the artists shared in a religious substructure that allowed ideas to propagate costlessly through social relations and synthesize with other ideas.

The ultimate synchronic value generator would be a metalanguage or ultimate spiritual Revelation which coordinated all of the various existing information sources in a single self organizing process, in a verbal stock market or a spatial Wikipedia. Remember, that antirivalrous dynamics have winner take all effects. So we should expect that sooner or later, a platform will become the dominant information source, simply because it is in everyone’s best interest to be synced to the same platform, for reasons of lower transaction or translation costs.

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