Credit, Monetary Policy, Depressions, and More!

[Carpe Coma]

This is heavy, so one thing at a time.

I was taught that money was a store of wealth, not that it was a promise of work. And I understood coin and banknotes were mere tokens representing wealth, making wealth easily transferrable in return for goods or labour. The exchange of goods and labour according to fluctuating levels of supply and demand (plus fiscal intervention) was what I believed the economy to be.

How does that tie in with your description of Money?

Poorly, because part of it isn't quite right. The idea that money is a store of wealth is much easier to teach and understand, but it falls apart under prodding. This is partially due to the idea assuming that the money can always be redeemed. It also tends to lead to the false idea that the total amount of wealth is a constant. Supply and demand aren't affected, however you do have to ditch the simplifications that are used when they teach intro economics classes.

What is wealth? Wealth is the result of work times a value modifier. All creation of wealth requires work. In the case of captured wealth (like claiming a forest), it is the amount of work it would take to replicate it times the value modifier. How much wealth created through work depends on the value placed on the output. Me throwing a five pound weight up in the air 2,000 times may be a lot of work, but as there is no value to it, doesn't create any wealth. If no amount of work could satisfactorily replicate something, we tend to consider it priceless.

"Value" is entirely an issue of perception, while work is not. Pushing a two ton car for a mile results in the same amount of work done regardless of who is doing the pushing. How much value that work had is determined by the observer. We can measure work directly and objectively, while we can only measure value by how much work someone is willing to do (or give up). Since value is an individual variable, my conception of "wealthy" isn't going to be the same as your conception "wealthy".

Now on to why money isn't a store of wealth. Let's say we take up a collection, gather 1 trillion dollars, give it to you, and then deposit you with the money in the middle of some hunter-gather tribe totally isolated from the rest of the world for the rest of eternity. Has the place we took you from gotten less wealthy (not counting your physical absence)? No. Has the place you have been dropped off at gotten more wealthy? Maybe a smidgen, but definitely nowhere near a trillion dollars more. Does that money mean that you are still wealthy? Sure, you could have a great big bonfire, but it's use, it's value, beyond that is essentially gone (toilet paper, anyone?). So since the moving of money in/out of a system doesn't change the wealth, money can not be a store of wealth. The money became essentially worthless when the social contract could not be fulfilled. What good is money if no one will accept it in trade?

However, what has changed? The value on the money left behind has gone up, while the total wealth has remained constant. So each dollar is buying more of something. So money isn't wealth, that leaves value or work. If it is value, it can only be measured by work someone is willing to do or the given up results of work. As money has essentially no inherent value, the only reason someone would accept money in exchange is because it has the promise of value to someone else, because of the promise that they are willing to do or give up work for it that we might value. So money is the promise of work.

If money *was* a store of wealth, then there could be no such thing as a mutually beneficial trade. All free trade would be neutral at best as the amounts of wealth exchanged would at best be the same (as only a fool would knowingly pay more wealth for something than he received).

Possibly an easier way to look at this would be to start from a barter system. In a barter system, all that gets traded is the result of work (or something that would take work to create) or the promise of more work (any kind of service). It is always work for work. All money is, is a means of standardizing one side of the transaction in order to facilitate trade. In order for that standardization to function, there has to be an expectation, a social contract, a social promise, that other people will accept that money in trade for their work.

The economy is about trade, that is true. However, goods and services are work realized. So you could argue that they are money exercised. Since money is the constant factor, it is conceptually much easier to look at a monetary economy as the flow of money, rather than goods and services. Not to mention that looking at it through the lens of "goods and services" makes it rather complicated to process things like finance and investing, where money is frequently exchanged for... money.

Perhaps I should write a book...