In this post, I explore financial value and valuation from a higher level of abstraction. The goal is not to turn you into a valuation expert for any specific good or service, but to challenge how you think about money and value more broadly. These abstract concepts form the foundation for how we decide what things are worth today—and what they might be worth tomorrow. If you can estimate both, you can make better decisions and position yourself more intelligently for the future.
Some of these ideas may feel unintuitive at first. But if you can internalize them, they will significantly improve your financial literacy and deepen your understanding of economics and finance.
Money and Financial Valuations Are Fabrications
The most important thing to understand about financial valuations is that they are made up. They have to be—because the money we use to assign value is also made up. Money is created by governments and banks out of thin air.
Money feels “real” because we collectively agree to treat it as real. It functions as our primary unit of valuation and exchange, and that shared belief gives it power. If enough people believe money has value and behave accordingly, it becomes valuable. If, tomorrow, everyone in the U.S. refused to accept dollars as payment, the U.S. dollar would immediately lose its value domestically. Money, then, is a self-fulfilling prophecy.
The Two Types of Money
Historically, money has taken two primary forms:
1. Commodity money
2. Fiat money
Commodity money is anything with so-called “inherent value.” I use that phrase loosely, because nothing truly has inherent financial value. Examples include seashells, gold, silver, copper, salt, tea, cigarettes, and cocoa beans. Most developed—and many developing—countries have abandoned commodity money due to its inefficiencies: storage costs, volatility, poor divisibility, bandwagon effects, value erosion, counterfeiting, and more.
Fiat money is what most of the world uses today. It doesn’t need to be grown, mined, or harvested. It is simply written into existence by banks. If you apply for a $50,000 loan and the bank approves it, they don’t move that money from someone else’s account or print new bills. They just add $50,000 to your balance. The money is created digitally, from nothing. The U.S. dollar, euro, pound, yen, and yuan are all examples of fiat money.
Where Does Value Come From?
With that foundation in place, let’s talk about value.
Imagine apples. If you come across an apple tree in bloom, you can pick an apple and eat it. In this scenario, the financial value of the apple is zero. If apple trees are abundant where you live, you can consume apples indefinitely at no financial cost. The takeaway: under conditions of abundance, goods and services have zero inherent financial value.
Now imagine the trees are far away. To get apples, you must travel. Even if the apples themselves are still “free,” you now incur costs—time, energy, and labor. You might also store apples to reduce future trips, introducing storage costs. The takeaway: goods and services acquire costs through production, retrieval, and ownership or storage.
Now add private property. Suppose someone fences off the apple trees and claims ownership of the land. You’re told you must pay $1 per apple. Scarcity has been created by restricting access, and money is extracted in exchange for permission to consume what was once abundant. This is a cornerstone of capitalism. The takeaway: capitalism generates financial value by creating and maintaining artificial scarcity or exploiting real scarcity.
Financial value can only exist when scarcity meets demand. Air is essential to human life, yet it costs nothing because it is abundant. Gold, by contrast, is scarce and costly to extract, and therefore sells for roughly $4,000 per troy ounce (as of this writing). Both are in high demand—but only one has a price. This highlights a major limitation of purely economic thinking.
To summarize: goods and services have no inherent financial value. Value is assigned based on relative scarcity and demand, and is shaped by the costs of production, retrieval, and ownership.
A Beach House in Antarctica
How much would you pay for a beach house in Antarctica? Probably nothing. Yet similar houses in Southampton sell for tens of millions of dollars. Why?
Because value depends on location and function within a specific environment at a specific time. When you buy a beach house, you’re not just buying a structure and land—you’re buying into a community. You’re paying for access: to a private beach, to clean air and water, to social networks, and to proximity to wealth and influence. These contextual factors make valuation far more complex than it first appears.
Comparative Pricing and Valuation
To manage this complexity, markets rely on comparative pricing. If four similar homes near yours sell for $1 million, your house is assumed to be worth about the same. If someone pays $1.5 million for it, then that becomes its value.
At its core, something is worth only what someone else is willing to pay for it—and what they’re willing to pay is usually anchored to what similar things have sold for before.
Price Discovery
But what if there are no comparisons? What if the thing being sold is truly unique, like a painting by Salvador Dalí?
In that case, markets perform price discovery, often through an auction. Buyers place bids, and the final price emerges from collective willingness to pay.
That price doesn’t have to reflect anything fundamentally “real.” A painting might sell for $150 million. Compare that to a high school teacher earning $50,000 per year. Did the artist really create value equivalent to 3,000 years of education? That’s one extraordinary painting—or one deeply flawed valuation system. Once again, we run into the limits of our economic framework.
In Conclusion
Despite its flaws, capitalism remains the most effective system we’ve developed for pricing goods and services at scale. It does this by decentralizing decision-making across millions of buyers and sellers, each acting on their own incentives, information, and constraints. Through voluntary exchange, competition, and price signals, markets rapidly aggregate dispersed information about scarcity, demand, risk, and opportunity into a single number: price. That price then feeds back into behavior—guiding production, consumption, investment, and innovation—without requiring centralized coordination.
However, digitization and abundance are steadily eroding both financial values and the mechanisms that support capitalism itself. As this continues, our economic models will need to evolve to better reflect reality and eventually, money may evolve itself out of existence.