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03 Utility & Exchange Value

To understand how complex exchange rings might be able to be completed let us return to the three body example again.

How to overcome coincidence of wants problem in the three party exchange of the man needing water who has food, the man needing food who has a tool and the man needing a tool who has water, if they never meet.

If the man needing water gives his food in exchange for the tool, he can subsequently take it to the man needing the tool and exchange it for the water he needs. Thus two exchanges between two parties has enables a three party exchange to take place indirectly.

A trivial step perhaps but a very important one. Notably the man needing water valued the tool not because it was useful to him but because he knew he could exchange it for something else that was useful to him. He saw beyond its utility value to him personally and obtained the tool for its exchange value.

Define these kinds of value as follows;
  • Utility Value - The value attributed to an amount of something by a body, by virtue of its possible use to that body, here or some place else now or in the future.
  • Exchange Value - The value attributed to an amount of something by a body, by virtue of the value of what it may be exchanged for, here or some place else now or in the future.
Utility value is common to many animals but exchange value is not. Few animals acquire anything which has no utility value to them, with the sole purpose of exchanging it for something else that is. In this respect humans are fairly unique. (There are exceptions.)

Sentiment and Exchange Value

Most exchange value is backed ultimately in utility value. However some things are rarely utilised and their exchange value to one individual is primarily based, not on utility value to others, but on the exchange value to others. Such things can maintain significant exchange values well above their utility value to any body. Paper money and also gold both maintain values above their utility value to any body. The utility value of housing has become swamped by a far greater exchange value. How do these elevated exchange values occur and how stable are they?


All value of a thing is based on the prospect of use or exchange at some time now or in the future. Some things change their value with time and so the value attributed to the thing now may be effected by opinions of future utility or exchange value. This often has the effect of making things, it is believed will be more valuable in the future, more valuable now, and things that it is believed will be less valuable in the future, less valuable now.

Naive speculators hear current opinion as to future value and rush to acquire, while skilled speculators hear current opinion, have a good idea how it will develop and change, and they acquire at the right time and dispose of just prior to the collapse of positive opinion and the onset of negative opinion.

Some skilled speculators even start the rumours themselves. This is called "Pump and Dump". This is looked at later under 10 Profit from Failure.


So opinion, and thus value, can be very significant in cases where exchange value is the prime component of value.

Examination of opinions, how they propagate, which will spread, and which will collapse, which will be self fulfilling and which will be self defeating, is paramount in understanding exchange based value.

Opinions may serve to stabilise or drive exchange values up or down. They can propagate through the population like a tide, until their credibility is broken down by opposing opinions propagated from the same or other sources that spread to replace them.

Some will propagate because they are sensational, others will not because they are complex. Whether an opinion is well reasoned or not may not be the prime factor in determining its wider acceptance. Skilled speculators surf on these tides of opinion so as to exchange what is of lower value for what is of higher value at a given time and place.


Where exchange values run away they can still hit upper or lower limits. In UK housing prices reached the upper limit of affordability which was determined by interest rates and so house prices become predictable on the basis of interest rates until other factors were brought in to limit lending to riskier candidates at which point they dropped below the limit determined by interest rates. On the other end of the scale nothing can be of lower value than its utility value.

Preservation of Value

The value of gold is primarily exchange value, though gold is lower limited by its utility value. Some believe that gold is "real money"! This is a mistake, nothing is "real" money.

During the economic collapse of the Weimar Republic in Germany Frau Eisenmenger writes in her diary, "The wife of a doctor whom I know recently exchanged her beautiful piano for a sack of wheat flour. I, too, have exchanged my husband's gold watch for four sacks of potatoes, which will at all events carry us through the winter ... My farmer had hidden the sacks of potatoes under straw on top of which he placed some apples. The apples were duly stolen, but the potatoes reached me safely ... I had to give the porter half a sack as hush-money" quoted from "When Money Dies: The Nightmare of the Weimar Collapse" by Adam Fergusson.

What this shows is that gold did not preserve its value in hard times. Food did.

Exchange value that floats above utility value is inherently unstable as it is value is based on a societies collective sentiment and in hard times utility value must prevail.

(C)2010 Tom de Havas. The information under this section is my own work it may be reproduced without modification but must include this notice.