In the section on the creation of money in a barter economy, one of the examples was that I wanted a haircut, and Sam the haircutter was prepared to accept a set of buttons in exchange. The haircut and the buttons obviously have value to both parties, though Sam thinks the buttons are worth more than the haircut, and I think the reverse.
For the moment, we can assume that the buttons have the same value for each of us. They may not, but assume they do. How, then would I think the haircut worth more than the buttons while Sam thinks it is worth less? It clearly is not the amount of work Sam puts into the haircut—his cost for the job. He can be as energetic or as economical as he wants, but it would make no difference to me provided my hair is cut the way I want. To some degree, is a question of how hard it is for Sam to do the cut. If it is easy for him, being well trained, he will need fewer buttons than if he finds it very difficult. One might ordinarily expect him to want as many buttons as he could get, and how many he can get depends on the value I have for the haircut at that moment.
Why would I think the haircut worth more buttons than Sam thinks it is worth? For one thing, it is harder to cut one’s own hair than to cut someone else’s, even if one is trained. For another, it is often the case that the longer one goes without satisfying a want, the stronger becomes the need to satisfy it (quite apart from the fact that the hair grows longer and more in need of cutting!). My desire to have my hair cut is likely to mecome stronger over time, whereas Sam’s desire for the buttons may not, and his cost to cut my hair is unlikely to change much over time. If Sam wants more buttons than I am prepared to get for him, all he has to do is to wait, and the number of buttons I am willing to pay will probably increase. (Of course, I may get someone else to cut my hair for fewer buttons than Sam wants, and then he will get none).
After the haircut, I have something of value that I did not have before, and I have given something away of lesser value to me. Sam has something of value (the buttons) but has not given anything away. Instead, he has performed some work. He created the value I received. If it were legitimate to add up the total value in the world of Sam and me, we would have to say that it has increased, because both Sam and I have more value after the transaction than before. Every transaction into which the partners enter freely has this characteristic, because each partner winds up (or expects to wind up) with more value after the transaction than before.
Sam created the value that was added in the haircut transaction. But what of the transaction between Sam and Bill the Butcher, in which only tangible items are exchanged: Bill’s steak for Sam’s buttons that he got from me for doing my haircut? It seems that no value has been added to the world of Sam and Bill, even though each perceives a benefit from the trade. But this is not true. If steaks could be had by picking them off any tree that Sam would pass every day, Sam would not have to trade buttons to Bill for them. Bill has, in fact, taken an unfortunate cow to whom he paid nothing (though he may have paid a farmer for it), and has performed skilled work that Sam would not have known how to do.
Sam might have paid the farmer for the cow, but that would not have provided him with a steak, and even if Sam himself could have created the extra value embodied in the work that makes steak out of cow, he would have wound up with too much meat. The value of the extra meat to Sam would have been very small, and he would have had to do work in setting up trades in order to turn it into value for himself. Far better for Sam to let Bill create the extra value, turning cow into steak, and better for Bill, too, since Bill already has the shop, the cold storage, and the like, that enables him to make trades with other people for the extra meat with rather less effort than it would have needed for Sam to do so.
The proposition being developed is that every bit of value in the world is obtained either by selecting something from the natural world for which no trade is made, or by creating structural organization of a kind that is useful to somebody. For example, most people enjoy fruit, at least some of the time. Another way of saying this is to say that most people have a reference value for perceiving themselves to be eating fruit. They may exchange items of value in trades for fruit, so fruit has value. But fruit can sometimes can be picked off trees that grow without human intervention. It has value, but it comes for free to the person that picks it from such a tree. It does not come for free in an orchard. Somebody has created the structure that is the orchard, and has probably continued to maintain that structure by weeding the surrounds, pruning the tree, perhaps applying insecticides, and otherwise working against the tendencies of nature to make the orchard less organized and controlled.
A person may pick a gold nugget out of a stream with very little effort when out for a casual stroll. That nugget has some immediate value, being pretty, but it has a greater imagined future value, in that the person can imagine that someone else will trade items of great value for the nugget. It has a status similar to that of money, in that it facilitates trades, but it does not add much value intrinsically to the economy. Nevertheless, if it facilitates trades by virtue of the imagined value with which people invest it, it really has value. Value is what people perceive it to be.
If value can be created by finding and picking up a gold nugget, it can also be created by creating money, and destroyed by destroying money, so long as the amount of money created is not more than is needed to support the trades people woiuld like to do. How is money destroyed? Paying off a debt is one way, but repudiating a debt or going bankrupt is a much more effective way, since it destroys not only the money that was involved in the debt, but also the trust that other debts may be defaulted, particularly those whose repayment was expected to be based on repayment of the repudiated debt.