What is money?

Going to take a little time today to discuss something of a foundational issue that doesn’t get talked about a lot, and when it does it generally gets raked over the coals of self-righteousness and fake moral superiority by people who don’t know what they’re talking about.  I was looking over my ever-growing list of topics to post about on the rare days that there isn’t some current event that I want to comment on, and it seems this needs to come before a great many subjects.  Lots of contentious topics, from campaign finance to why communism requires totalitarianism to the asinine belief that Jesus was a socialist trace back to the answer to the title question: what, exactly, is money?

This will probably drag on a long ways and I might even break it into two posts but hang on tight for a crash course in the very elemental basics of economics and human society.

To understand what money is, it is helpful to first conceive of what commerce, exchange, and society would be like without it, or before it existed.  Let’s imagine a pre-money society, and for the sake of simplicity let’s envision a community where there are three people: Bob, who raises chickens; Joe, who grows apples; and Ed, who raises cows.  Let’s assume that each of these men can handle most other basic needs themselves but for whatever reason, be it natural skill or inherited land or what have you, they each excel at producing these specific items while no one else can do it nearly as well or efficiently as they can.  So let’s say Bob wants some apples.  Bob can go to Joe and offer him a chicken and see what Joe thinks that chicken is worth.  Joe can make an offer which Bob can either accept, reject, or counter, and eventually Bob and Joe will arrive at a rate of exchange wherein the value of a chicken is measured in apples.  As most people know, this is called bartering.  The same can take place if Bob decides he wants steak or Ed decides he wants chicken, and the value of any of these items can vary according to things like the crop yield, diseases affecting the animals, the time of year, and so on.  Apples may be at a premium during the breeding season when Ed’s milking cows are bearing calves but not worth quite so much in the fall when they’re starting to turn brown and Ed’s looking to thin his herd in preparation for winter.

This moves beyond barter into economics when you have more than two actors involved.  Say for example that Bob and Joe work out that a chicken is worth five apples.  Bob then goes to Ed to swap chickens for a cow, and they agree that a cow is worth ten chickens.  Bob then learns that Ed and Joe have an agreement that a cow is worth one hundred apples.  Converting apples to chickens, Bob figures out that a cow is worth fifty apples worth of chickens, so instead of going to Joe and directly trading his chickens for apples, he goes to Ed and trades his chickens for a cow, and then goes and trades his cow to Joe for apples.  So Bob makes a profit of fifty apples.  Now, when Joe and Ed figure out that Bob is doing this, they have two possible responses.  The rational response is to modify the price of their goods, either increasing the value of apples or reducing the value of cows relative to Bob’s chickens, or probably doing some of both to bring the economy into equilibrium.  The irrational response is to declare that what Bob has done is unfair–Ed got what he wanted, Joe got what he wanted, “fairness” doesn’t enter into it.  Anyone who doesn’t like the deal can either make a new counteroffer or take his goods and go home.  Ed and Joe can choose to deal with Bob economically, or they can turn hostile and refuse to deal, in which case the value of chickens becomes ridiculously low or drops to zero, not because Ed and Joe don’t want them, but because they are acting irrationally against their own interests.

Let’s take the example one step further and say that, while all three of these men are capable of gathering firewood, Joe has a comparative advantage doing it because Joe accumulates a lot of burn wood by just clearing brush and dead trees from his orchard, and during the wintertime when his trees are dormant he has plenty of time to harvest and split firewood.  Bob and Ed still have to care for their livestock during the winter.  Let’s assume that these guys have worked out the apple-chicken-cow economy and have settled on a rate of one cow is worth ten chickens and one chicken is worth ten apples, and that Bob and Ed would conclude that a cord of wood is worth one cow or its equivalent, while Joe would value it substantially less because he gets it in part as a byproduct of his apples.  Joe goes to Bob and Ed with a proposal: they’ll both buy their firewood from him come wintertime, so instead of spending time and energy cutting firewood, they can instead spend those resources raising their chickens and cows more effectively.  Bob and Ed agree and eventually fall arrives, Joe’s orchards stop producing, and the snow starts to fall.  Now Joe has two options.  He can charge a small premium, which Bob and Ed will probably be willing to pay in light of the fact that they have more cows and chickens than they would otherwise.  Or, he can charge a large premium, which Bob and Ed will still probably be willing to pay but they’ll be resentful, or might consider backing out of or even getting in on the firewood business themselves next time out.  If Joe charges a cow and three chickens for a cord of wood, this is more likely to be seen as reasonable.  If Joe decides to charge four cows, this will prompt Bob and Ed to go get their own firewood, or might prompt Bob to suggest to Ed that Bob will do his logging for him at the rate of two cows per cord.  This is competition and comparative advantage in a nutshell.

What does this all have to do with money?  Money is nothing more than a means of exchange.  It is legal tender, which in itself means nothing, but which has been assigned a value by a much more complex society than our example.  The paper or metal that money is made of is (usually) worth next to nothing but it symbolizes an amount that can be translated easily and universally into goods and services.  Because it is universally understood and easy to grasp, people can determine whether their time is worth the pay they will receive for doing a job or whether the item they are buying is worth the labor and exchange that the price in dollars represents.  Also because of this, it is rarer (but by no means impossible) for someone to achieve an economic advantage like Bob did when he traded his chickens for a cow and ended up with more apples, but the very nature of trade is that one person trades goods and/or services to another person for something that he values more than the goods and/or services he is trading away, and vice versa.  If I buy a hamburger from Hardee’s I am accepting the proposition that I value a hamburger more than I value five dollars, and they accept that they value my five dollars more than that hamburger.

This is how capitalism creates wealth, which is the first definition of what money is.  Wealth is a measure of an individual’s ability to purchase goods and services and money is its yardstick.  Wealth is increased by trade and money is just the simplest way to quantify it.  In the example above about firewood, if Joe gouges the price of his firewood, Bob and Ed still get to make the determination about whether Joe’s firewood is worth the price he’s asking.  They’d prefer to pay one cow or ten chickens but when the cold weather hits they have to decide if it’s worth upping the ante to four cows or forty chickens, but if they decide to make that trade, their wealth is still increased.  It works the same way with money, it’s just a lot simpler than assigning a cord of wood a value in terms of every other commodity.  There comes a point where it’s more worth your while to go out in the snow and cut the firewood you really wish you had cut in the summertime.

Like any other commodity, money itself becomes less precious as you acquire more of it.  That may sound strange or even paradoxical but remember that wealth has no inherent ability on its own, it is just a measure of an individual’s ability to acquire his needs and wants, so the more of it you have, the more you can use and still have enough to get by.  If Bob had a great year for chickens and has far more than he’ll need to get through the winter, forty chickens for a cord of wood might be fine with him.  If Ed had a bad year and lost a lot of calves, paying four cows for firewood might mean that his family either shivers or starves.  It’s no different than having the luxury of buying heating oil and turning the thermostat up to 72 degrees versus keeping it at 68 and bundling up so that the mortgage can get paid.

So we have established and understand that money equals wealth.  The next point to be made is what exactly wealth is, and that is power.  Wealth means you can pay for goods that are necessary to survive, and also enables you to pay for goods and services that are just nice to have.  This is an important form of power in a capitalist system due to the fact that it is non-coercive.  As opposed to physical force, wherein one party imposes his will on another party by threat of violence or death, the power of wealth is in incentivizing behavior.  It has an advantage over emotional manipulation or moral force (things like pity or charity or being a good person) in that wealth is a universal motivator–the saying “everyone has his price” is not entirely negative in this regard.  There’s something that would enrich the life of anyone, whether it’s sticking to his morals or adding to his fortune or whatever you can imagine really.  Wealth is the power to motivate people to do things that will benefit you, or not do things that will harm you, without resorting to force or violence or (usually) lawbreaking.

Which brings us to the final equivalence: money equals wealth, wealth equals power, and power equals freedom.  Human society has spent most of history struggling for freedom from our basic needs and our own mortality.  It is only recently that even part of modern civilization has achieved any degree mastery over basic needs like food and treating sickness, but with every necessity of life conquered, a human being or humanity in general becomes more free.  Think about it.  I am talking about the power to not starve during the winter, the power to escape an impoverished and violence-ravaged country, the power to acquire shelter and clothing and warmth when you didn’t inherit land and can’t sew or farm leather and are not suited for harvesting firewood (much less oil or gas).  Yes, sometimes this power is abused just like freedom is often abused, but much like the answer to abuses of freedom is not to curtail that freedom, the way to correct these imbalances of power is to allow market forces to correct them.  If Joe charges too much for his firewood, eventually he’s going to end up with a big pile of firewood that no one wants to trade chickens or cows for, especially once Steve moves in down the road and starts undercutting him.

Money, therefore, equals freedom.  Freedom from want, freedom from worry, freedom from the constraints of mortality and the basic necessities of life, freedom to improve and dream and learn and progress.  Yes, it can buy happiness, but more than that, it can buy contentment.  All these platitudes about the evils of money are, quite simply, promulgated by people who want to separate you from yours.  I’ll probably get into this point in more detail in future posts, but at its core, money is no more evil than the right to free speech, and like any other form of freedom, it must be earned by someone, even if another form of power is used to give it to someone else.

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