Why there’s no money: the imaginary part of financial systems
vinay.howtolivewiki.com
vinay.howtolivewiki.com
A discussion I'd like to see on HN revolves around a simple scenario. You live in a village, people only barter with each other. The village grows, and someone comes up with the idea that money would make it possible to avoid complex and difficult trades involving real goods. Money is essentially a convenience. But how do you do it? Even assuming that you have a completely trustworthy producer of currency, how, exactly, do you introduce money into the system? It is my belief that a great deal of ignorance is laid bare when you start thinking through the problems of rolling out a new currency like this.
Indeed, if and when we can see through this problem, we can evolve our little society further and faster, and understand how the various types of institutions we have evolved. Think of it as "economic embryology" - and just like real embryology yields some incredible insights into the adult organism, I think the economic embryology gedanken experiment can generate real insights into a mature economy.
In Capital volume 1, Marx paints the following logical progression. Whether it carries any historical truth, I don't know. (Note: there are many more nuances to it, and you perhaps need to wrestle the original source to get it all)
To establish a single unit of measurement:
a. The simple, isolated, or accidental form of value: Commodities are exchangeable with other commodities, e.g. 20 yards of linen = 1 coat.
b. The Total or Expanded Form of Value: a commodity is exchangeable with any other commodity, e.g. 20 yards of linen = 1 coat or = 10 lb tea or = 40 lb coffee or = 1 quarter of corn or = 2 ounces of gold or = etc.
c. The general form of value: Any of said quantities of commodities are exchangeable with the original commodity, e.g. 1 coat, 10 lb tea, 40 lb coffee, 1 quarter of corn, and 2 ounces of gold, are worth 20 yards of linen.
d. The money form: One, or a few, commodities become either the de factor or the legal "universal equivalent" commodity in which exchange-value is measured. This universal requires some properties (I'm sure I have forgotten several):
* It must be uniform. Not all horses are equal, so horses are no good.
* It must be divisible and capable of quantitative differentiation. Half a work horse is less worth than half of a whole, and two halves of work horses does not equal one. Horses are not good for a second reason.
* As trade expands geographically, the value of the universal equivalent needs to be universally recognized. Horses for seamen? More inconvenient than it should be.
* The universal equivalent should not deteriorate. Horses die. They really are no good for this.
Instead, precious metals fulfill these qualities. And just as we use dollars and cents, gold and silver can be used to differentiate between different magnitudes of value. (Note: gold and silver still has values as commodities, which determine the amount of stuff you get for them. See the initial points.)
Still, they do have some problems. They require measurements and tools to divide. It's not really convenient to go into Starbucks with a lump of silver to carve the price for a coffee.
So coins are minted, containing the proper amount of each metal. New problems arise. Cheaters carve metals from the coins to melt and create new. Wear and tear cheapens the coins. So bills and coins are created as symbols of silver and gold, but backed by them. The actual precious metal reside elsewhere, and the bill is just a proof of ownership.
Now, those countries and owners who control precious metals get significant power. They can withhold or flood the marked at their whim. No good, says the other countries. So when currency is sufficiently recognized as a means of payment, one can remove the actual backing and keep the bills and coins only. And while we're on it, why bother with the bills at all? A balance in a computer is just as good, right?
The reasoning is roughly this: When you trade, it is extremely rare for a "double coincidence of wants" to actually happen with real goods at a fixed point in space and time. So people extend credit and remember who owes what to whom. Money then grows out of the increasing formalization of this process. Coins are then created by a state that wants to make lots of uniform payments (i.e. payment to soldiers, hence the name soldi for certain Roman coins).
We can then jump to fiat currency. The key question is: how much real wealth can that pile of fiat money be converted into? The details vary (e.g. you can negotiate a better price) but fundamentally the real-world convertibility of a currency requires a functional, working market: the US dollar is powerful because you can easily and stably convert it into a basket of real goods. Indeed, the sheer size of the US economy means that this basket is unusually independent of demand, and can meet essentially unlimited demand in real goods. I mean, you could probably buy $100M of US corn today and not have any real effect on the supply. (Yes, you could overwhelm almost any single commodity market with $36B. Luckily Bill Gates did not decide to blow it all on bottled Coke, otherwise the world would be totally without Coke for probably a good two weeks!)
It is the physical, political, social, and legal environment that defines the machinery with which money is converted into real goods. Indeed, one could even justify US geopolitical goals (which pretty much boil down to "become invulnerable") as making possible the ultimately stable marketplace, which further strengthens the currency.
The problems arise, of course, when the machinery itself becomes perverted. We can define market perversion as "adversely affecting the machinery that converts money into real goods". There are a wide variety of such perversions, ranging from patent trolling (which perverts the R&D market), to the increase in size and complexity of the legal system to the point where prosecution is itself punishment (which also dampens innovation and reduces risk taking). This is partly why it is important to have a healthy middle class and not have too much concentration of wealth: if wealth is concentrated enough, then the wealthy wed with the machinery, and the perversion becomes systematic. We already see that with telecom and the FCC, banks and the SEC.
You might want to read the relevant chapters of David Graeber's book "Debt: the first 5000 years".
We do get to choose how to spend our money, and rich Americans who accrue millions or billions of dollars of personal wealth especially do.
What do people choose to do with their money?
* Often they invest it, so that their net worth goes up rather than down, while perhaps supporting a company or cause they believe in. It's true that when you put your money into something, it's no longer liquid. If you inherit a few million dollars and immediately buy a few houses as an investment, you don't have the money, you just have the houses.
* They set up philanthropic foundations. This involves allocating money to ongoing aid. Yes, the money is earmarked, because you (the foundation) earmarked it.
* If you want more money going to innovation, that's great, but it is not an axiom that money, where it exists, should be used to fund particular innovative projects that will transform society. For one thing, people disagree on how important it is to spend money on innovation versus other things. If you want to see a manned mission to Jupiter, say, you can either fund it yourself or convince other people it's a good idea and work out where the money will come from. You can't just complain it's not happening, despite all the money everywhere.
* When wealthy individuals decide how to spend/blow/invest/donate a million dollars (say), I don't think they are ruled by social pressure, their hands tied by the ever-present danger of being shamed into oblivion -- so they decide it is safer to just buy a yacht. This sounds like an externalization of the feeling of self-consciousness some people may have.
Now, one thing I'll say is that money is not necessarily being spent on big projects in a way that reflects what people want to see. Kickstarter is helping change this (see http://www.kickstarter.com/projects/559914737/the-veronica-m...) -- by tapping into discretionary money!
No. Capital is power[0]. Not just power to choose, but power to shape the choices of others (through marketing, propaganda, laws, etc.). Not power for the greater good, but power merely for its own sake -- because those in power fear losing their power. So they tend to use the power (capital, money) they have in order to consolidate and amplify their power base, which includes reforming the choices of others (meaning you and me) to their own advantage. In this way society is "creordered" to serve and benefit those at the top of the power pyramid.
ITT: Broke morons who don't understand economics.
"Capital is power" is a metaphor. Capital certainly grants purchasing power. Some things (and people) can be bought and some can't. Laws shouldn't be as purchasable as they are, of course.
Your wealth is no longer liquid - but of course, someone now has that money instead, and it's liquid for them. This seemingly minor confusion happens in the article as well:
But we live in a situation where very nearly all the wealth in the world seems to be tied up in destructive forms. If the money is fluid, why is it not able to simply flow from destructive forms to creative ones?
He just switched from "wealth being tied up" - wealth is often quite illiquid - to money in the second sentence. Money is by definition (we all hope!) liquid.
There are a lot of interesting issues raised in this article and the subsequent discussion, but it's all very muddled to me that I don't really know where to begin to respond.
If you want an amusing parlor game, ask a group of people to write down the definitions of the words 'capital' or 'free market'; and then compare them.