The Law of Conservation of Value
You can't get something for nothing
The Physics of Value
In physics, the First Law of Thermodynamics states that energy cannot be created or destroyed, only transformed. This isn't just a scientific curiosity; it's a fundamental constraint on reality itself. Every economy operates under the same law: real productive capacity requires work and energy input. It cannot be conjured from nothing.
Money is a claim on human energy and productive output. When you create new money without new production, you're diluting existing claims. The energy hasn't increased. You've just created more tickets to the same show.
The Inflation Illusion
Imagine a farmer who grows 100 bushels of wheat using solar energy, soil, and labor. That wheat represents stored energy — captured sunlight transformed into calories. Now imagine a government that prints 100 new currency units. Have they created new wheat? New energy? No. They've created claims on wheat that doesn't exist. When those claims enter the economy, they compete with existing money for the same limited production. Prices rise, and the purchasing power of every existing unit falls.
You can declare new currency into existence, but you can't declare new energy, food, or productive capacity. Nature doesn't accept IOUs.
Interactive Lab: Energy-to-Value Converter
See what happens when money creation is decoupled from productive work. Adjust the sliders to add real production or print new money, and watch the system respond.
Real Production
Currency Supply
When you add energy/production, purchasing power increases — more goods chase the same money. When you print money without adding production, purchasing power decreases — more money chases the same goods. This is inflation: the inevitable result of violating conservation of value.
What Would It Take to Restore the Law?
To restore the conservation of value in a digital money system, you'd need to reintroduce an energy requirement. Digital scarcity would have to be anchored in physical scarcity. Creating new units would have to cost something real. Something that can't be faked.
How do you make digital information scarce when copying is free? How do you enforce a fixed supply without a central authority to enforce it? These questions seemed impossible to answer. Until they weren't.
Later in this path, you'll discover how this problem was finally solved. For now, understand the physics: value cannot be created from nothing. Any money system that ignores this law will fail.
The Distribution Problem
When new money is created, it doesn't appear in everyone's wallet equally. It enters the economy at specific points. This creates an important question: does the timing of who receives new money first matter?
If you could spend newly created money before prices adjust, you'd gain purchasing power. If you receive it after prices rise, you lose. This isn't just a minor detail. It's a systematic wealth transfer built into the mechanics of money creation itself.
In later stages, you'll discover the exact mechanism of this transfer, who benefits, who loses, and why this violates the conservation of value we established earlier.
Reflect on What You've Learned
Test your understanding with interactive reflections. Get immediate feedback on your thinking.
Drag each group into the correct box. Think about who receives new money first and who receives it last.
📦 Drag to Sort ↓
✅ Benefits (Winners)
❌ Loses (Victims)
What is wealth?
An energy requirement for creating money would: