What Gives Something Value? Tulip Mania to NFTs

What gives something its value? This question has puzzled economists, philosophers, and societies for centuries. Value can be defined in several ways, depending on the context—whether it's economic, emotional, or symbolic. From rare artifacts to everyday commodities, the factors that determine an item's worth can be complex and multifaceted. For related topics, see our articles on wealth as zero-sum, investment types, and the history of money.

One of the most famous stories illustrating how value can be inflated is the case of tulip mania in 17th-century Holland, when tulip bulbs reached astronomical prices before the market collapsed. But tulips are just one example. To truly understand what gives something its value, we must explore the various factors that contribute to an item's worth, including scarcity, demand, utility, cultural significance, and psychological factors. This article delves into these factors and examines historical examples to shed light on how value is created and perceived.

Highlights

• Tulip mania 1637: 10x skilled worker's income, then 99% crash: Single bulbs sold for more than 10x annual craftsman income (150-350 florins/year); Viceroy purchased for 2,500 florins; prices plummeted 99% within days in February 1637
• "A Diamond is Forever" created $41B industry: Frances Gerety's 1947 slogan (#1 of 20th century) for De Beers transformed engagement tradition; diamonds abundant but marketed as scarce since Depression-era 1938 campaign
• NFT market exploded 16,000% then crashed 97%: Beeple's digital art sold for $69.3M (March 2021); total NFT sales grew from $250M (2020) to $41B (2021), then collapsed 97% by September 2022
• 1973 oil embargo quadrupled prices: OPEC raised prices from $3.01 to $11.65 per barrel (4x increase); embargo triggered by Nixon's $2.2B aid to Israel on October 19, 1973
• Dot-com bubble erased $5 trillion: NASDAQ peaked at 5,048.62 (March 2000), plunged 76.81% to 1,139.90 (October 2002); didn't return to peak until March 2015—15 years later
• Van Gogh's "Dr. Gachet" sold for $83M in 1990: Then-record for any artist; equivalent to $200M today; "Orchard with Cypresses" sold for $117M in 2022

1. Scarcity: The Power of Limited Supply

One of the most fundamental principles of value is scarcity. Simply put, when something is scarce, it tends to be more valuable. This is true for natural resources, rare objects, and even time itself. Scarcity creates a sense of exclusivity, which can drive demand and push prices higher.

Tulip Mania in Holland

Perhaps the most famous example of scarcity-driven value is the story of tulip mania in 17th-century Holland. Tulips were first introduced to Europe in the 16th century and quickly became a symbol of wealth and status. Certain rare varieties of tulips, such as the Semper Augustus, were highly prized for their unique colors and patterns. The Semper Augustus's price rose from 1,000 guilders in 1623 to 1,200 guilders in 1624, 2,000 guilders in 1625, and peaked at 6,000 florins in 1637—enough to purchase a luxurious canal-side home in Amsterdam.

Tulip mania reached its peak during the winter of 1636-37. At the height of the mania in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman (who might earn 150-350 florins per year). One Viceroy bulb was purchased for 2,500 florins in goods. However, tulip mania was fueled by speculation rather than the intrinsic value of the bulbs. At a routine auction in Haarlem in February 1637, when no buyers appeared at expected prices, panic ensued. Within days, prices plummeted by 99%, leaving many investors bankrupt.

This historical episode illustrates how perceived scarcity and speculative demand can lead to irrational valuations, a phenomenon that continues to occur in modern financial markets.

Natural Resources and Commodities

Another example of scarcity driving value is seen in natural resources. Commodities like gold, oil, and diamonds derive much of their value from their limited supply. Gold, for instance, has been prized for millennia due to its rarity, beauty, and resistance to corrosion. While its industrial use is limited, gold remains valuable because it is seen as a store of wealth and a hedge against inflation.

Oil is another commodity whose value is driven by scarcity. As a finite resource, oil is crucial for energy production, transportation, and manufacturing. When oil supplies are disrupted or depleted, prices tend to rise sharply, as was the case during the 1973 oil crisis. On October 6, 1973, Egypt and Syria launched a surprise attack against Israel. On October 16, OPEC raised prices from $3.01 to $5.12 per barrel and announced production cuts. On October 19, Nixon requested $2.2 billion in emergency aid to Israel, triggering Libya and then Saudi Arabia to proclaim oil embargoes. Oil prices nearly quadrupled from $2.90 per barrel before the embargo to $11.65 in January 1974 (equivalent to $17 to $61 in 2018 dollars). The embargo was lifted in March 1974. This illustrates how scarcity can directly influence the value of essential goods in global markets.

2. Demand: The Role of Consumer Desires and Trends

While scarcity can increase value, an item's worth is also heavily influenced by demand—the desire for a good or service. High demand for a product, especially when coupled with limited supply, can cause prices to skyrocket.

The Diamond Industry

One of the clearest examples of demand-driven value is the diamond industry. Diamonds are relatively abundant in nature compared to their perceived scarcity, yet they have maintained high value for decades. This is largely due to marketing campaigns that have created an enduring demand for diamonds, particularly in the context of engagement rings.

In 1947, copywriter Frances Gerety at Philadelphia agency N.W. Ayer wrote the slogan "A Diamond is Forever" for De Beers, scribbling it on paper late one night. Though her associates were initially hesitant about its strange grammar, the slogan first appeared in De Beers engagement ads in 1948 and has appeared in every ad since. Advertising Age named it the #1 slogan of the 20th century. This marketing campaign associated diamonds with eternal love and marriage, creating a cultural expectation that diamonds were necessary for engagement rings. De Beers had hired N.W. Ayer in 1938 to boost diamond sales after they fell during the Great Depression. As a result, the demand for diamonds surged, and their value remained high, even though their intrinsic utility is limited to industrial applications like cutting and grinding.

Luxury Fashion

The world of luxury fashion is another sector where demand plays a significant role in determining value. Designer brands like Louis Vuitton, Gucci, and Chanel command premium prices for their products not because they are made from materials far superior to other brands but because of the status and prestige associated with owning them. Consumers are willing to pay a premium for products that are perceived as symbols of wealth and success, which drives up their market value.

3. Utility: Functionality and Practical Use

An item's utility—its practical use or functionality—can also significantly influence its value. Items that serve a purpose or solve a problem tend to have intrinsic value, particularly in sectors like technology and manufacturing.

Technology and Innovation

One of the most striking examples of utility-driven value is found in the technology industry. Products like smartphones, computers, and software have revolutionized the way people live and work, making them indispensable in modern society. The iPhone, for instance, is highly valued not just because of its brand but because of its utility in providing communication, entertainment, productivity, and more.

Similarly, industrial equipment and tools are often valued based on their utility. A specialized piece of machinery that increases efficiency or reduces production costs can be worth significantly more to a business than its raw materials or components suggest.

Medicines and Vaccines

Another area where utility plays a key role in determining value is the pharmaceutical industry. Medicines and vaccines that save lives or improve health are often valued based on their ability to prevent or treat diseases. The value of vaccines, particularly in the context of global health crises like the COVID-19 pandemic, is immense because of their utility in controlling the spread of disease and protecting public health.

In these cases, the value of the product is directly tied to its ability to solve a critical problem—whether it's preventing disease, increasing productivity, or enhancing communication.

4. Perception and Psychological Value

Human psychology plays a significant role in determining an item's value. People often assign value to things based on emotional attachment, social status, or perceived worth, even if the item lacks inherent utility or scarcity.

Collectibles and Antiques

The market for collectibles and antiques is a prime example of psychological value at work. Items like rare coins, vintage cars, or historical artifacts may have little practical utility, but they can fetch enormous sums at auctions because of their perceived historical or sentimental value. The Mona Lisa, for instance, is valuable not only because of its artistic merit but also because of its cultural significance and the story behind it.

The same is true for limited-edition collectibles like rare sports memorabilia or limited-run sneakers. The value of these items is often driven by the emotional and psychological attachment people have to them, as well as the social status they confer on the owner.

Cryptocurrency and NFTs

In recent years, the rise of cryptocurrencies and non-fungible tokens (NFTs) has shown how psychological factors can create value in digital assets. Cryptocurrencies like Bitcoin and Ethereum derive much of their value from the belief that they are a store of value or a hedge against inflation, even though they have no physical presence.

Similarly, NFTs—digital assets representing ownership of unique items like art or music—have generated massive value in markets where scarcity and demand are entirely based on perception. The most dramatic example occurred on March 11, 2021, when digital artist Beeple's "Everydays: The First 5,000 Days" sold at Christie's for $69.3 million ($60.25 million hammer price plus buyer's premium), making him the third-most expensive living artist at auction. The NFT, a collage of 5,000 daily images created over 13 years, opened at just $100 and attracted 33 bidders. Total NFT sales in 2021 reached $25-41 billion, up from $250 million in 2020. However, by September 2022, NFT transaction volume had collapsed by 97% from its January 2022 peak, illustrating how psychological value can be both created and destroyed rapidly.

5. Historical Examples of Value Fluctuations

Throughout history, there have been notable examples where the value of items fluctuated dramatically due to changes in perception, demand, or availability. In addition to tulip mania, other historical episodes highlight the sometimes irrational nature of value.

The South Sea Bubble

In the early 18th century, The South Sea Bubble was one of the first major stock market crashes in history. The South Sea Company was a British joint-stock company founded in 1711, and it was granted a monopoly on trade with South America. Speculation about the company's potential profits led to a massive surge in its stock price from 128½ in January 1720 to over 1,000 in August. However, in September 1720, the bubble burst. Stock values plummeted from £950 per share in July to £400 in September to £185 in December 1720—an 80% loss from their peak. Company failures extended to banks and goldsmiths who couldn't collect loans made on the stock. Thousands of investors were ruined, including prominent figures like Sir Isaac Newton, illustrating how speculative value can inflate assets beyond their intrinsic worth.

The Dot-Com Bubble

A more recent example of inflated value driven by speculation is the dot-com bubble of the late 1990s and early 2000s. As the internet became more widespread, investors poured money into tech companies, many of which had little to no revenue or profits. The NASDAQ Composite peaked at 5,048.62 on March 10, 2000 (5,132.52 intraday)—more than double its value a year earlier and 600% above 1995 levels. On March 13, 2000, news of Japan's recession triggered a global sell-off. By November 2000, most internet stocks had declined 75% from their highs, wiping out $1.755 trillion. The crash saw NASDAQ plunge 76.81% to 1,139.90 by October 4, 2002, erasing over $5 trillion in market value. The NASDAQ would not return to its March 2000 peak until March 2015—15 years later. This event shows how hype and perceived potential can temporarily inflate the value of assets, even when their underlying fundamentals are weak.

6. Cultural and Social Significance

Cultural and social factors can also play a role in determining value. Items that hold symbolic or ritualistic significance can be valued far more highly than their material components suggest.

Gold and Silver in Ancient Civilizations

Throughout history, gold and silver have been prized for their beauty, rarity, and malleability. However, their value in ancient civilizations also stemmed from their cultural and religious significance. Gold was often associated with divinity and immortality, making it a highly sought-after material for crafting religious artifacts and symbols of power.

Art and Literature

Art, literature, and music can also hold immense cultural value, particularly when they reflect important social movements, historical events, or national identities. The works of artists like Vincent van Gogh and Pablo Picasso have become priceless not just because of their technical skill but because of the cultural significance attached to them over time. Van Gogh's "Portrait of Dr. Paul Gachet" sold for $83 million at Christie's New York on May 15, 1990—then the highest auction price for any artist's work, equivalent to $200 million today adjusted for inflation. His "Sunflowers" sold for £24 million ($40 million) at Christie's London on March 30, 1987. More recently, "Orchard with Cypresses" from the late Paul Allen's collection sold for $117 million at Christie's New York in 2022, setting a new record for Van Gogh. These astronomical prices reflect not just artistic merit but the cultural reverence attached to Van Gogh's tragic life story and post-Impressionist legacy.

Frequently Asked Questions

What was tulip mania?

Tulip mania was a speculative bubble in 17th-century Holland (1636-1637) where tulip bulbs reached astronomical prices before crashing 99%. At the peak in February 1637, single bulbs sold for more than 10 times the annual income of a skilled craftsman (who earned 150-350 florins/year). One Viceroy bulb was purchased for 2,500 florins in goods. The rare Semper Augustus peaked at 6,000 florins—enough to purchase a luxurious Amsterdam canal-side home. At a routine Haarlem auction in February 1637, when no buyers appeared at expected prices, panic ensued and prices plummeted 99% within days, leaving many investors bankrupt. It illustrates how perceived scarcity and speculation can inflate assets irrationally.

Are diamonds actually scarce?

No, diamonds are relatively abundant in nature compared to their marketed scarcity. Their high value is largely due to De Beers' marketing campaigns creating enduring demand. In 1938, after diamond sales fell during the Great Depression, De Beers hired N.W. Ayer to boost sales. Copywriter Frances Gerety wrote "A Diamond is Forever" late one night in 1947—a slogan with strange grammar that became Advertising Age's #1 slogan of the 20th century. First appearing in 1948, the campaign associated diamonds with eternal love and marriage, creating cultural expectation that diamonds were necessary for engagement rings. The intrinsic utility of diamonds is limited to industrial applications like cutting and grinding.

What caused the dot-com bubble crash?

The dot-com bubble occurred when investors poured money into internet companies with little/no revenue or profits in the late 1990s. NASDAQ Composite peaked at 5,048.62 on March 10, 2000—more than double its year-earlier value and 600% above 1995 levels. On March 13, 2000, news of Japan's recession triggered global sell-off. By November 2000, most internet stocks declined 75% from highs, wiping out $1.755 trillion. NASDAQ plunged 76.81% to 1,139.90 by October 4, 2002, erasing over $5 trillion in market value. It wouldn't return to its March 2000 peak until March 2015—15 years later. The crash demonstrated how hype and perceived potential can temporarily inflate asset values beyond weak underlying fundamentals.

Why did NFT values collapse?

NFT (non-fungible token) values were driven primarily by psychological factors and speculation rather than intrinsic utility. The market exploded from $250 million (2020) to $25-41 billion (2021)—a 16,000% increase. The most dramatic example was Beeple's "Everydays: The First 5,000 Days" selling for $69.3 million at Christie's on March 11, 2021, making him the third-most expensive living artist. However, by September 2022, NFT transaction volume had collapsed by 97% from its January 2022 peak. The collapse illustrates how psychological value based entirely on perception and speculation can be rapidly created and destroyed when market sentiment shifts and speculative demand evaporates.

What determines gold's value?

Gold's value stems from multiple factors: scarcity (limited supply), historical significance (prized for millennia), cultural associations (divinity and immortality in ancient civilizations), physical properties (beauty, rarity, malleability, resistance to corrosion), and perception as a store of wealth and inflation hedge. While industrial use is limited, gold remains valuable because it's universally recognized and trusted. Unlike fiat currency, gold cannot be printed or created arbitrarily. During economic uncertainty, gold prices typically rise as investors seek "safe haven" assets. This combination of tangible scarcity, cultural significance, and psychological trust creates enduring value that transcends purely utilitarian considerations.

How did the 1973 oil crisis affect prices?

On October 6, 1973, Egypt and Syria attacked Israel. On October 16, OPEC raised prices from $3.01 to $5.12 per barrel and announced production cuts. On October 19, Nixon requested $2.2 billion in emergency aid to Israel, triggering Libya and Saudi Arabia to proclaim oil embargoes. Oil prices quadrupled from $2.90 per barrel before the embargo to $11.65 in January 1974 (equivalent to $17-$61 in 2018 dollars). The embargo was lifted in March 1974. This demonstrates how scarcity—whether real or artificially created through supply disruptions—can dramatically influence the value of essential commodities in global markets, especially when demand is inelastic and few substitutes exist.

Conclusion: The Complexity of Value

The value of an item is rarely determined by a single factor. Scarcity, demand, utility, perception, and cultural significance all interplay in complex ways to create and sustain value. Historical events like tulip mania and the South Sea Bubble illustrate how irrationality and speculation can drive prices to extreme heights, while modern examples like cryptocurrency and luxury goods show how psychology and status still play a significant role in determining worth.

Understanding what gives something its value requires recognizing that it's not just about physical properties or utility—perception, social context, and historical factors all contribute to what makes something valuable. In an increasingly interconnected and digital world, the factors determining value continue to evolve, reminding us that worth is as much a reflection of human psychology and culture as it is of economics.