The Zen of Value - Creation Myth of Money
This was originally posted in its own "Zen of Value" blog but has been moved here for sake of integration and connection. It turns out that I don't have much more to say about the "Zen of Value".
Discussions about how money originates often start with the fable that it evolved to facilitate trade and "store value". Otherwise, so the story goes, you and I would simultaneously want something somebody else had (say, you have more fish than you need and I have extra sheep).
There is scant evidence that "cash" arose out of this situation. This can be seen when "cash" is in short supply or in small groups (families, neighbors) who exchange goods and services without cash, even indignantly refusing cash when it would be perfectly sensible when interacting with a stranger. We also have times, such as the "Dirty 30's" where, for technical reasons, nobody had "money" but everybody had more than they need of some things and/or spare time available to "work". Rough standards might emerge (eggs for field work), but the underlying sentiment was "we're all in this together".
Say, you go fishing and catch 5 nice big salmon. It would not be unusual at all for you to show up at my door and offer me a fresh salmon "for free". On the other hand, we would tacitly understand that this establishes a debt. Perhaps at some point, I'd mow your lawn or give you a basket of berries, or jam from my last berry picking trip. The math doesn't need to work out. If I'm in bad shape and have nothing to give in return, it would not be unusual for the fish to keep appearing at my door (perhaps even more frequently).
Such a system is not "communism", where all goods are held in common, no matter how and by whom they were produced. It's based on sharing, generosity and reciprocity between friends and neighbors. It is embedded in a wider set of customs that add up to encouragement of behaviors that tend to bind he community together while discouraging freeloaders and cheaters. All the great apes seem to behave in this way to some degree.
Bringing the discussion into the 21st century, we see that money is just a standardized form of an "IOU". A dollar bill is an IOU from the Government. If I give you a dollar, the Government owes you one more dollar and me one dollar less. Most of my "dollars" are actually numbers in a bank account, which record an IOU from the bank to me. One function of banks is to make it possible for you and me to consider our IOU's as equivalent even though they are owed by different banks or the government. The other important function of banks is to create money by saddling someone with an equal and opposite debt. They don't have a pile of cash in the vault to lend you - the money they lend is created out of thin air, or, if you like, from the skin off your back.
If there were no banks and all cash magically vanished, we could instantly go back to an IOU-based economy. This apparently happened in Ireland during a 6 month strike of bank employees. Magically, the economy boomed without "money". We would see some difficulties in re-inventing money this way that essentially re-play the problems with its introduction in the first place. For example, saving someone's life or finding a suitable husband for a friend's daughter creates a debt but not one that can be repaid in any ways subject to monetary calculation. These are not wild exceptions - in practice, everything is like this. Spend some time in a thrift shop or garage sale if you think the price of something is an intrinsic property like it's weight.
Money based on specie (such as gold) is actually a step backward from the natural system. Gold quickly converts itself back into an IOU system. Gold certificates (IOU gold) replace actual gold for all but the smallest transactions. Banks naturally step in to the void to "do the math" in a complex web of who owes what to whom. Quite naturally, we evolve into a system where most debts directly or indirectly are owed to or from a bank. Nations establish "central" banks and currency that is, in effect, an IOU from the central bank (the Nation).
Of course, "official" money has a serious drawback. The assumption is that all things traded (or "owed") can be measured in money. This flies in the face of both everyday experience and the way our "great ape" minds work. Value is based on what one individual perceives to be needed at a particular time. The system works because any two people will have wildly different valuations of any particular object at any given time. Such needs are not subject to the rules of arithmetic. Failure of money as a proxy for value results in all kinds of distortions, including the illusion that
Violation of rule 3 results in the common situation where person A values the same object less than person B, resulting in his willingness to "sell" the object to B. We sometimes forget that the result of this transaction is an increase in total value, while the amount of money in the system remains constant. The increase is a direct consequence of the fact that money is not a proxy for value. Did I lose you? OK here's an example. I sell you the useless rusty bike that has been hanging in my garage for 10 years. You pay $10. I have more space, you have a bike. $10 IOU moved from you to me. No change in the total amount of "money" in the system. In fact, situations where a transaction results in a decrease of value are usually associated with some kind of crime.
Discussions about how money originates often start with the fable that it evolved to facilitate trade and "store value". Otherwise, so the story goes, you and I would simultaneously want something somebody else had (say, you have more fish than you need and I have extra sheep).
There is scant evidence that "cash" arose out of this situation. This can be seen when "cash" is in short supply or in small groups (families, neighbors) who exchange goods and services without cash, even indignantly refusing cash when it would be perfectly sensible when interacting with a stranger. We also have times, such as the "Dirty 30's" where, for technical reasons, nobody had "money" but everybody had more than they need of some things and/or spare time available to "work". Rough standards might emerge (eggs for field work), but the underlying sentiment was "we're all in this together".
Say, you go fishing and catch 5 nice big salmon. It would not be unusual at all for you to show up at my door and offer me a fresh salmon "for free". On the other hand, we would tacitly understand that this establishes a debt. Perhaps at some point, I'd mow your lawn or give you a basket of berries, or jam from my last berry picking trip. The math doesn't need to work out. If I'm in bad shape and have nothing to give in return, it would not be unusual for the fish to keep appearing at my door (perhaps even more frequently).
Such a system is not "communism", where all goods are held in common, no matter how and by whom they were produced. It's based on sharing, generosity and reciprocity between friends and neighbors. It is embedded in a wider set of customs that add up to encouragement of behaviors that tend to bind he community together while discouraging freeloaders and cheaters. All the great apes seem to behave in this way to some degree.
Bringing the discussion into the 21st century, we see that money is just a standardized form of an "IOU". A dollar bill is an IOU from the Government. If I give you a dollar, the Government owes you one more dollar and me one dollar less. Most of my "dollars" are actually numbers in a bank account, which record an IOU from the bank to me. One function of banks is to make it possible for you and me to consider our IOU's as equivalent even though they are owed by different banks or the government. The other important function of banks is to create money by saddling someone with an equal and opposite debt. They don't have a pile of cash in the vault to lend you - the money they lend is created out of thin air, or, if you like, from the skin off your back.
If there were no banks and all cash magically vanished, we could instantly go back to an IOU-based economy. This apparently happened in Ireland during a 6 month strike of bank employees. Magically, the economy boomed without "money". We would see some difficulties in re-inventing money this way that essentially re-play the problems with its introduction in the first place. For example, saving someone's life or finding a suitable husband for a friend's daughter creates a debt but not one that can be repaid in any ways subject to monetary calculation. These are not wild exceptions - in practice, everything is like this. Spend some time in a thrift shop or garage sale if you think the price of something is an intrinsic property like it's weight.
Money based on specie (such as gold) is actually a step backward from the natural system. Gold quickly converts itself back into an IOU system. Gold certificates (IOU gold) replace actual gold for all but the smallest transactions. Banks naturally step in to the void to "do the math" in a complex web of who owes what to whom. Quite naturally, we evolve into a system where most debts directly or indirectly are owed to or from a bank. Nations establish "central" banks and currency that is, in effect, an IOU from the central bank (the Nation).
Of course, "official" money has a serious drawback. The assumption is that all things traded (or "owed") can be measured in money. This flies in the face of both everyday experience and the way our "great ape" minds work. Value is based on what one individual perceives to be needed at a particular time. The system works because any two people will have wildly different valuations of any particular object at any given time. Such needs are not subject to the rules of arithmetic. Failure of money as a proxy for value results in all kinds of distortions, including the illusion that
- The more money you have, the more goods and services of value you will be able to access.
- If you don't have enough money for food and shelter, you are allowed to die, establishing a rather precise money "value" of a human life (typically poorly estimated as "minimum wage")
- Any given object has the same value to anyone at any time
- Anything of value has a price
There is also a hidden assumption that needs to stay hidden for the whole thing to work:
5. It's all about shuffling debt around -- not the pretty things you buy but how much you borrow
Violation of rule 3 results in the common situation where person A values the same object less than person B, resulting in his willingness to "sell" the object to B. We sometimes forget that the result of this transaction is an increase in total value, while the amount of money in the system remains constant. The increase is a direct consequence of the fact that money is not a proxy for value. Did I lose you? OK here's an example. I sell you the useless rusty bike that has been hanging in my garage for 10 years. You pay $10. I have more space, you have a bike. $10 IOU moved from you to me. No change in the total amount of "money" in the system. In fact, situations where a transaction results in a decrease of value are usually associated with some kind of crime.
Trouble starts to come up when we separate the role of the "social IOU" from the context of community. Modern money is an abstract IOU from an imaginary "person" - a debt that no longer contributes to strengthening the social fabric. Our money transitions that buy and sell, hire and work are conducted with strangers or even completely abstract theoretical "persons" such as banks and governments.
Another symptom of value distortion is the mountain of useless crap that fills the homes of all but the poorest citizen. All this garbage cost money at some point but has somehow lost value over time - in fact, when we consider the cost of storing this junk, its value is negative. That snow blower you never use is just like a hamburger that you paid for but can't flush down the toilet. The money we paid for this stuff is still in circulation (it's immortal unless the debt is repaid) but the value has vanished. How can this be? Debt is handed around like a hot potato until repaid. Somebody, somewhere owes somebody the full price of that rusty bike you have hanging in your garage. A powerful metaphor for this situation is thinking of value as slowly evaporating unless it's replenished with constant inflow of money (new debt) which is retired much more slowly than value evaporates, if ever. This is a problem created by money itself - it's not a law of physics that we must sink further and further into debt.
I am surrounded by obscenely bloated houses and streets full of leased new cars. It is debt that makes all this possible. It's not a sign of "prosperity". Lots of money around is mathematically and absolutely equal to lots of debt - to the penny. For me, real prosperity is symbolized by sensible, paid-off houses and practical old cars in good condition.
The idea that debt will actually be repaid has slowly disappeared from Government policy and the financial plans of most citizens. Thus, money-based theories of economics increasingly float free from any grounding in the actual world we live in. Somewhere along the line, the idea of "balancing the budget" (the conservative mantra but never the conservative policy) has become completely unrealistic. From time to time (such as in 2008), trillions of dollars of debt simply vanishes from the system with catastrophic effects on real people. We really just move from one fairy tale version of reality to another but the consequences are quite real (I lost my job in 2008 and never found another).
Another symptom of value distortion is the mountain of useless crap that fills the homes of all but the poorest citizen. All this garbage cost money at some point but has somehow lost value over time - in fact, when we consider the cost of storing this junk, its value is negative. That snow blower you never use is just like a hamburger that you paid for but can't flush down the toilet. The money we paid for this stuff is still in circulation (it's immortal unless the debt is repaid) but the value has vanished. How can this be? Debt is handed around like a hot potato until repaid. Somebody, somewhere owes somebody the full price of that rusty bike you have hanging in your garage. A powerful metaphor for this situation is thinking of value as slowly evaporating unless it's replenished with constant inflow of money (new debt) which is retired much more slowly than value evaporates, if ever. This is a problem created by money itself - it's not a law of physics that we must sink further and further into debt.
I am surrounded by obscenely bloated houses and streets full of leased new cars. It is debt that makes all this possible. It's not a sign of "prosperity". Lots of money around is mathematically and absolutely equal to lots of debt - to the penny. For me, real prosperity is symbolized by sensible, paid-off houses and practical old cars in good condition.
The idea that debt will actually be repaid has slowly disappeared from Government policy and the financial plans of most citizens. Thus, money-based theories of economics increasingly float free from any grounding in the actual world we live in. Somewhere along the line, the idea of "balancing the budget" (the conservative mantra but never the conservative policy) has become completely unrealistic. From time to time (such as in 2008), trillions of dollars of debt simply vanishes from the system with catastrophic effects on real people. We really just move from one fairy tale version of reality to another but the consequences are quite real (I lost my job in 2008 and never found another).
There is evidence that we are shifting to a new economy that goes under names like "Attention Economy". The idea is that relationships are what's worthwhile - cash transactions are secondary. This can easily take a sinister turn but, as a challenge to "money=value", it's a change in the right direction. But maybe not. If I sit back and listen to marketing efforts with my "man from Mars" hat on, what I hear is "Pay attention: let me sell you more debt".
Later consideration would see money and economics as an example of paradigm - a whole way of speaking about society that "makes sense" to generations. As with many paradigms, challenges are unintelligible. For example, Donald Trump's recent decision to pull out of the Paris Climate Change accords was justified in economic terms. More jobs. Bad trade deals. For conservatives, this makes perfect sense. How else to talk about policy? For those who think that way and subscribe to the economic paradigm (including the idea that they are somehow disadvantaged because of stagnant wages, lack of jobs) asking about other things (such as the long term survival of the human race) makes no sense. In a more narrow sense, in the economic paradigm, money is seen as real like phogiston and luminous aether. It is the real, tangible medium in which human well being "swims".
Later consideration would see money and economics as an example of paradigm - a whole way of speaking about society that "makes sense" to generations. As with many paradigms, challenges are unintelligible. For example, Donald Trump's recent decision to pull out of the Paris Climate Change accords was justified in economic terms. More jobs. Bad trade deals. For conservatives, this makes perfect sense. How else to talk about policy? For those who think that way and subscribe to the economic paradigm (including the idea that they are somehow disadvantaged because of stagnant wages, lack of jobs) asking about other things (such as the long term survival of the human race) makes no sense. In a more narrow sense, in the economic paradigm, money is seen as real like phogiston and luminous aether. It is the real, tangible medium in which human well being "swims".
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