Quote from: benjamindees on June 20, 2011, 10:44:02 PM

Quote from: Mashuri on June 20, 2011, 09:35:40 PM

That's more accurately described as a labor theory of cost. Value is subjective. Labor has nothing to do with it.

Labor theory of value is only useful as a lower bound on cost.

This thread completely left the realm of my consciousness for a day or two. Thanks so much for your great reply.

I actually agree with you for the most part. But to really get into an economics oriented frame of mind regarding the issue let's take a look at the housing market, which The Script mentioned.

The housing market is a great model to work with because, obviously, houses cost so much and are very difficult to build. Now let's imagine a world where there's essentially an infinite amount of houses (and land to put them on, I suppose) available and it costs nothing to make one, you just think of a house and BAM, it appears. The supply and demand graph for houses would look like this:

http://2.bp.blogspot.com/_c-n0myYucLQ/SraRM256cTI/AAAAAAAAAR0/okWzYScoxQU/s400/revenue+curve+perfectly+competitive+market.jpg

With P (price) equal to $0 in this case.

But realistically of course houses don't magically appear when you make one and there are many costs that go into making a house, so the supply and demand graph looks more like this:

http://www.doctorhousingbubble.com/wp-content/uploads/2008/05/basic_supply_demand.png

with P equal to thousands of bitcoins (or dollars, if you must..).

You can see in the above graph that the Supply curve (which.. in this case isn't curved but is a straight line) slopes up. That means that in order to increase Q(quantity), you gotta pay more P (price, money... gotta pay more to get more), so the higher cost of creating a house results in a higher price, in this case. [Notice that I don't use the word 'value' anywhere in my writing; it's a tricky word to use in legit economics.]

Alright, so let's move on from the housing example and see how that relates to the specific topic at hand, which is currency.

The way the US government has been distributing USD lately is much more like the first scenario than the second. In fact, with the Secretary of the Treasury being a Goldman Sach's expatriate and the head of the Fed harboring the belief that liquidity solves everything [you know it's true] it's very much like these guys just fantasize about a 10 foot high stack of sheets of newly printed bills and they just appear as if from nowhere. The current scenario for USD is very similar to the first graph/housing scenario in this post. And what happened to the price of housing in that scenario? That situation resulted in a price of $0 or 0 BTC for housing, and therefore you see the value of USD (in terms of goods or other currencies, like BTC for instance) trending towards 0.

Bitcoin, however.. takes some work to generate. It costs something for each newly minted BTC. I don't mine personally, but I understand you have to have a pretty nice GPU, some good technical know-how, and it takes a little bit of time and attention, as well as electricity. The creation of a bitcoin is more like the second graph, which results in a higher price for bitcoin and is a major reason why bitcoin works as currency.