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Yves here. This post is elegant in the way it challenges the standard (sloppy) definitions of money. Even if you don’t agree, it will force you to think and articulate why you don’t agree (hopefully in a rigorous manner).
Many people try to attribute a solidity to money (I suspect German has better words that correspond to “thing-ness” for this sort of ideation) that it lacks. The desire to have money be concrete seems to be linked in many cases to the enthusiasm for gold or gold-currencies. But gold’s value isn’t enduring or fixed in any way; it’s value depends on the structure of social relations. For instance, in Vietnam, women typically get a necklace of gold beads in their youth. It’s a dowry of sorts. When conditions became desperate during the war, some women would try trading these beads for food or medicine, or as a way to buy off a possible rapist. The beads, when they were accepted, went for much less than the metal value.
Originally published at Another Amateur Economist
The standard definition of money is in error.
The standard definition of money is given in terms of its three functions:
1: Money is a medium of exchange.
2: Money is a measure of value.
3: Money is a store of value.
Number 1 is at best misleading. Numbers 2 and 3 are simply wrong, and these things are easy to show. It is also easy to show that this is important.
First, the actual definition of money:
1: Money is a token, or instrument, of demand, which is exchanged for goods or services. Or simply: Money is demand.
2: Money is a measure of demand.
3: Money is a store of demand.
In the standard definition, Number 3 cannot possibly be true. Were Number 3 true, money would have value of itself. The value of money would be independent of what ever else an economy produced. But consider, the best monies are those instruments which have no intrinsic value whatever. How can any amount of something which has no value, be a store of value? Even where commodities have been used for money, (and this may be the origin of the error,) they have tended to be those commodities, precious metals, for instance, which, because of their properties, were of only limited economic use. The reason for this is known and simple: These commodities had to be more valuable as money than they were valuable as commodities. If they were more valuable as commodities, they would be consumed, and so their use as money would disappear. But this implies that the value of these commodities, as money, over their value as a commodity, is not intrinsic, but as with plain fiat money, purely a matter of other factors. That is, the value of the commodity as money is not based on any intrinsic value of the commodity to the economy.
So fiat money has no intrinsic value, and therefore cannot be a store of value. If the economy produced only money, that money would have no value. It does not have value as, say, a refrigerator full of food has value, or a tank filled with gasoline. But, what the third function of money actually is is as a store of demand. If you have $100 in the bank, or in your pocket, you have a store of demand, which you can keep as long as you want, and when you choose to, you can spend it. You can demand something which is offered for sale, to the amount of $100.
Then you can take your $100 of tokens of demand and you can go to the grocery store and with it buy $100 worth of food. This shows that money is also a measure of demand: You have as much demand for food, or anything else, as $100 will purchase. If you have more money, you have more demand. If you have less money, you have less demand. If you have no money, you have no demand.
Money is not a store of value. Can it reliably be a measure of value? Economically worthless things may be in much demand, and therefore command a price beyond their value. Yachts, for instance. Economically valuable things may be in little demand, or supplied at prices below their value. Water, for instance. With money, you have demand for these things, at the prices they are offered. But their prices do not reflect their economic value, only the amount of demand, the amount of money, which must be exchanged for them.
This counters the claim that the only value a thing has is that set and measured by the market: The toys of the wealthy are much in demand, but of little value. The goods needed by the poor are to them of great value, but it may be that those poor are only able to demand a meager portion of them. Markets only measure demand. They need not measure value. This is the primary inadequacy of markets.
So because money is demand, or more exactly a token or instrument of demand, it serves as a ‘medium’ of exchange: Because money is not demand for any particular good or service, but is demand for any offered good or service, it may be exchanged for any offered good or service. Money is a medium not in the sense of being an environment for exchange, but in the sense of being a generalized instrument. It is an abstract good, which is offered in exchange for other goods and services. The individual who exchanges his good or service for money then himself has equal demand on others for different goods or services. Money thus flows opposite to the flow of goods and services, not to the degree of the value of these goods and services, but according to the demand for these goods and services that are offered.
Goods or services are thus exchanged for an equal demand on other goods or services. Money, then, is an instrument for comparing the demand for dissimilar objects. However, we have shown it is not reliable for comparing the value of dissimilar objects.
By mistaking demand for value, the standard definition of money thus implicitly fails to distinguish between the value of an object, and the demand for that object. In an informal sense, this results in the failure to distinguish between the needs of an economy, and its wants.To provide another example, the economy ‘needs’ streetlights in Highland Park, Mi. It ‘wants’ yachts in Newport, RI.
If we regard the economy as like a tree, money cannot distinguish between the fruits of a tree, and its roots.
There is a larger issue. The standard definition of money goes back, essentially unchanged, to 1875. See eg. Wikipedia. It is, implicitly, a key part of the foundations of the entire field of economics. That it is in error calls into question the soundness of the entire economics project.
16 comments
Basically it is a voucher system which has metastasized. With a voucher system it would be obvious that an excess of such notes would be destructive to the system, but now the economy is geared to the function of creating capital as its end goal.
Money and finance function as the blood and circulation system of the economy and as such, using them to store what amounts to fat is extremely unhealthy.
What most people save money for is very predicable; housing, health, child and elder care, education, leisure, activities, etc. We don’t necessarily need an enormous industry, whose primary goal is rent extraction, to allocate voucher functions, if we develop systems within the community and the various parts of the economy to pre-pay these functions, as well as develop strong social bonds, that significant aspects are organically incorporated back into community functions. What would be a greater store of value, than a healthy environment and a strong community?
Much of the history of finance has been to exploit other regions and economic opportunities that have largely been exhausted and we are going to have to find ways to rewrite the rule book and not count on endless growth to maintain stability. “Go forth and multiply” has run its course. Now we have to build on feedback within the system.
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Thank you for drawing attention to the time-related aspect of money. David E. Martin has compared money to a promise of future satisfaction (since the pieces of paper or digitized bits are not of inherent value in the moment in which they are given). IOW if you pay me $8 for a loaf of artisan bread, the $8 is something that I might (!) be able to use in the future. But I can’t eat them or build anything significant using them while they are in their present state. (I’d have to first transform or exchange them into something else–all of which are transactions that would occur in the future, if they occurred at all.)
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It can be for something one used in the past as well as something one will be able to use in the future.
For example, if one’s a food taster, one is paid $8 for something one ate the past 20 minutes.
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The power of money is that it is just such quantified hope. This then leads to the desire to possess it in and of itself, rather than for its function of facilitating exchange.
We need to get back to understanding it is a contract, not a commodity. It is in the interest of banks and government for people to think of it as a commodity to acquire, because it then becomes the medium for any and all exchanges between people and thus making these basic relations taxable. It a bit like when Walmart comes in and displaces local commerce. While it seems easier and more efficient, their intention is draining resources out. So if people begin to understand that it is a form of baiting the trap, they might go back to more informal means of exchange whenever possible.
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My personal take on why certain metals ended up being use for money is their resilience to the elements.
Gold and silver do not easily rust. Thus they can be stored, or even buried, for long durations.
Also, i think the concept of coins evolved from the concept of weights. This in that you start out measuring exchanges by weight (at least for grains etc), then at some point it becomes easier to simply exchange the weights rather than do actual measuring. This likely because some regional military/religious power start putting a brand of certification on the weights, underwriting their accuracy.
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Gold is a crude, expensive way to make counterfeiting difficult since it is rare. Technology* has long made that usage obsolete.
*Such as the English Tally Stick, used successfully for about 800 years, till around 1826 iirc.
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Gold backing fiat currency does not work. The Quantity Theory of Money in equation form proves why. Gold supply experiences extreme stasis. The fact that the supply increases so slowly is exactly what gives it it’s value. But if world economies are growing, and the gold supply does not keep pace, this results in deflation….which is an economy killer.
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How about:
Money is a system for regulating production and consumption.
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“But gold’s value isn’t enduring…”
Actually, when compared with currencies, gold’s value has been remarkably enduring. In fact, is there any form of “money” that has proven to be remotely as enduring in value as gold?
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Also, Yves example of golds’ immediate value, under duress, only highlights how easily its’ value is manipulated for gain.
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“In fact, is there any form of “money” that has proven to be remotely as enduring in value as gold?”
If so then the reason is government privilege for it or the expectation (hopefully false) thereof.
Fiat COULD be enduring in value IF it was not burdened with bailing out banks or ameliorating the damage (eg the Great Depression and its child, World War II) they cause.
The problem is government support for banks, including implicit support such as lack of a Postal Savings Service instead of government deposit insurance, not inexpensive fiat.
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I suggest that money is best defined as a claim on the resources (goods and services) of society. It’s not the only such claim (although neoliberalism would like it to be so), but it’s the most versatile of claims. This definition brings to the fore the social aspect of money, which conventional economics seems to prefer to denigrate or obscure by the use of naturalistic or technocratic definitions that imply a force of nature standing outside of society.
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One entity’s claim is another entity’s promise.
And that claim is limited, not by the monetary amount, but one’s ability to exercise it – ‘no minors can buy liquor here,’ for example.
“This corporation is not for sale to foreigners.”
“Sorry, you have exceeded your quote of water (or gas). We are in a drought (oil crisis).” – here, we run into the problem of the society’s limited resources. And promises can not be unlimited.
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“Money is a symbol representing our values. It is also a means of energizing our values and activities.”
Regarding friends who had a perceived lack of money:
“Perceived lack of money reflects confusion about values.”
This is info I received in 1993.
The input regarding money being a means of energizing our values and activities was particularly eye-opening for me. It has led me to be more conscious with the spending decisions I make on a day-to-day basis.
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i think if you exchange the word ‘value’ for ‘wealth’ in definition 1 then it would be pretty accurate. if the money goes to shit due to hyperinflation, so does your monetary wealth. money’s ‘value’ is proportional to the demand for it but is it fair to say it is demand? in hyperinflation, demand for the money collapses but demand for the goods it normally purchases goes through the roof.
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Money is one among many social levers used to mobilize and direct human energy, attention and time. If human energy is not involved, you don’t have an economy.
Money offsets demand in time, and whenever supply and demand are offset in time, the time gap between them allows for degradation of value, often due to malfeasance. Major example: the famous disappearing American pension plans.
In times when the slippery quality of money becomes extreme, owners of capital will shift it into other forms of leverage. These can include land, commodities, armed or unarmed overthrow of social institutions, public relations initiatives, and more.
Noni