#63 Why Money?

What is money? Why do we use it?

When faced with the reality of today and our struggles with money, idealists often ask “If money is the ‘root of all evil’, why not just go back to barter?” or maybe “why don’t we evolve beyond money?”

These appear to be reasonable takes on the surface, but it’s obvious why these takes are born of ignorance if we simply explore the history of money and its utility in a society. Money is the evolution away from barter and, when it functions well (due to it’s properties), has propelled human societies into modernity; on the other hand, when societies choose monies with poor qualities, it has spelled economic disaster over and over again.

Functions of Money: Medium of Exchange, Unit of Account, and Store of Value

Money is a medium of exchange, it satisfies the multi-coincidence of wants inherent in barter economies. Exchange is only possible in barter if the coincidence exists.

Money is a unit of account, it solves the need to price everything in terms of everything else. Imagine doing this for every good in an economy, it’s not efficient:

Money is a store of value, with a functioning money value can be stored over long periods of time. On the contrary, I wouldn’t recommend storing multi generational wealth in carrots…

Money is Simply the Most Liquid Good

Consider also that money is an emergent market phenomenon, absent a codified money, monies emerge naturally in free markets as the most trade-able good that satisfies these uses given their characteristics.

One example of an emergent money is the use of cigarettes as money in prison populations. As prisoners aren’t able to hold money directly, but other goods are sometimes allowed, cigarettes are often used as media of exchange, units of accounting, and even stores of value over some time frames. Not all prisoners smoke, but it’s a widespread enough phenomenon that their liquidity, portability, value-density, scarcity, and fungibility best serve these populations in exchange.

Scarcity begets Money, Money begets Abundance

Money is a tool that improves the efficient trade and allocation of scarce resources. In a society with scarce goods, humans utilize monies to aid in economic exchange, capital accumulation, and economic calculation.

There is a (fictitious) functioning society that allegedly exists without the need for money, a particular science fiction universe with technology so advanced they could spontaneously replicate any resource at near zero cost. It may be possible for complex economizing societies that have achieved absolute abundance – being able to produce virtually any resource on a whim – to exist beyond money. But until such a reality comes about, money will always tend to emerge in any advanced free market system.


Book of the Month:

The Road to Serfdom by F A Hayek

-“Our freedom of choice in a competitive society rests on the fact that, if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist we are at his absolute mercy. And an authority directing the whole economic system of the country would be the most powerful monopolist conceivable…it would have complete power to decide what we are to be given and on what terms.”

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