Money, according to the experts, is a "means of exchange and a store of value." Less obvious, however, is the relationship between "value" and "utility". Around the time Lehman collapsed, a friend of mine asked "What is capital?", because it seemed to be something the banks needed badly, but we were having a heck of a time defining (yes, we know that in that context it consists of money that can be used to pay for losses). Pie making gives one quite a bit of time to let the fore-brain wander, and it finally came to me that the problem we face today is reconciling the difference between "value" and "utility."
Someone on a radio program, I think it was Talk of the Nation, a while back described the difference between the macro economist's view of capital and the business community's (and most of the country's) view by comparing a clay and Lego dinosaur. In both cases, the "value" of the parts is one dinosaur's worth of stuff, providing the "utility" of play to a dinosaur-loving child. The modeling clay dinosaur is easily reconfigured, providing utility in the event of the loss of small amounts of clay, but it has a nasty habit of staining carpets and you can't make good horns with it because they droop. Thus, the Lego dinosaur is probably more popular with parents who have carpet, and kids who want more realism. However, while the "value" of both is the same (1 dino), the "utility" of the Lego dino is more fragile and more difficult to achieve.
Much like a complicated bond or derivative contract, the Lego dinosaur's utility to the "investor" (young child) depends on the "issuer" (assembling parent) completing several steps and all of the parts being in place. If, however, the "regulator" (cleaning parent) is used to dealing with modeling clay, it is very likely she will expect modeling-clay like utility from the same value of investment (this is fundamental flaw of assuming regulations based on historical data can handle new products). But what if a part is lost? Or, perhaps worse, the "investor" decides that airplanes are more fun than dinosaurs?
In the first case, there is a measurable loss of value. In the clay case, there is less overall dinosaur, but in the Lego case it's hard to say if there is much of a dinosaur left if certain critical pieces go missing. In the second, clay is easily reconfigurable, but specialized Legos, much like a car factory, are not. Thus, the kid with the Lego dinosaur had better keep liking dinosaurs, otherwise the "issuer" and "regulator" are in trouble.
The guest on NPR explained that most economic models tended to assume we were collectively playing with clay models. When suppliers are largely interchangable, barriers to entry are low, and the amount of equipment ("capital" in the microeconomic sense) required is minimal, this is largely true. For example, a good metal shop can be reconfigured from making parts for trailers to making snow shovels pretty quickly. More complicated products, like cars, require far more specialized equipment, and so there is a tendency to do everything possible to keep the dinosaur together, since it has value in terms of jobs in politically sensitive areas that greatly exceeds its utility.
What does this mean? I'm not quite sure. I think this is the gist of George Soros' argument about a in confidence leading to the bursting of "super bubble." The whole point of a market economy is to let people decide how to value the things they use, and while this system is fairly robust to government interventions, laws and subsidies do not create usefulness. Which means, ultimately, they cannot preserve value.
