Imagine being an early farmer, working along the Nile. Times are tough, and your plot of land isn’t producing nearly as well as you need it to in order to feed your family. You have a neighbor further up the river, and his land is performing much better. You need to feed your family, but all you have is your poorly producing land. What are you to do?
Your options are limited, so you give your land to your neighbor, and in return, he agrees to let you work the land in return for some of the food. Over time, more neighbors do the same, and the quality land owners acquire more and more land, and more and more workers. Eventually the very few winners end up with extensive wealth, while the rest of the population has little.
This story, while not exact, is likely similar to how events played out in the early pre-dynastic period, as the Egyptian population moved from an egalitarian society to a hierarchical one. And it is in part for this reason that currency is so useful.
Here we can see that wealth accumulation in no way relies on money. Nor does the obsession with wealth accumulation necessarily derive from the existence of money alone. It existed long before money did. But money has helped us, in many ways, and one of the reasons why this kind of story does not play out the same way today is because of money.
Money and currency are often used interchangeably, and in this discussion, I’ll probably use both in similar ways. But there are some distinctions. Money is any unit of exchange within a transaction. A system of commonly accepted money is called “currency.” And in many ways, a currency is simply just a form of barter. Instead of bartering a piece of land for food, one could barter a piece of land for a number of pieces of gold. Then that gold could in turn be bartered for food.
But unlike with other forms of barter, a currency allows us to separate our transactions across time and space. Instead of selling our piece of land for say 26,000 pounds of beef, which is going to go bad over any reasonable amount of time, we can sell our house for $100,000, rent an apartment for $1,000 a month, and buy food for $200 a month. And that land which we sold may have been in New Jersey, while we’ve long since moved to San Diego.
While this example is somewhat contrived, it shows just how much freedom we can obtain from the existence of a system of commonly accepted money. And money has existed for a very long time, in some form or another. Precious metals, shells, even tea have been used as mediums of exchange.
While not as old as money itself, monetary theory dates back a couple of thousand years. Plato and Aristotle were among the first to develop theories of money, and their two viewpoints couldn’t have been any more different. Aristotle thought that, among other qualities, a currency should have intrinsic value. It should be a physical asset that has its own value, outside of being used as a currency. Meanwhile, Plato thought that money should be abstract, and act solely as an intermediary in the exchange process.
In many ways, Plato would be happier with the monetary systems used today, rather than gold standards and other systems of hard assets as currency. Fiat currency is often defined as currency without any intrinsic value. However, intrinsic value can be difficult to define in and of itself. Instead, I prefer to define non-fiat currency as any currency which part of its demand is derived from other means beyond its use as a currency or speculative vehicle. The US dollar, and essentially every government currency, is therefore fiat. The only value that the USD has is the value provided by its acceptance as a currency.
Obscuring Economics with Money
It’s interesting how the existence of money has obscured so much of what we do. It’s also interesting to see how people think about money. It’s fairly different from the way we think about other components of the economic system, including other commodities. But currency is just a universal item of barter. And it’s very important that we have one, or many, systems of currency.
Money, as well as law, separates employees from employers. It separates consumers from providers. And for this reason, economics is overly complicated. Consider the employee. The employee provides labor to the employer. The employer in return pays the employee. If we didn’t have money, we might have a system like the following instead.
Suppose that you were a baker, and you baked a lot of bread for a restaurant. In return, you were able to eat means at that restaurant. In this situation, there is no employee or employer. But suppose that you were tired of eating at that restaurant. Your only option would be to stop trading bread for meals.
With money, on the other hand, you can provide your bread to the restaurant, and in return, the restaurant will give you money. Now we have a division between producer and consumer, and between employee and employer, or at least contractor and contractee.
“Money is the root of all evil” is a misinterpretation of the biblical quote “the love of money is the root of all evil.” But even then, it’s not that liking money and wanting more of it is bad. It’s really part of our own human nature to wish to acquire wealth and be successful. The problem is when the acquisition of money becomes the primary goal, especially when that money is fiat currency, as there is nothing of value to the money, aside from its use as a currency.
But in many ways, money is able to allow more people to accumulate wealth, and be better off. Instead of a few people amassing almost all of the resources in a community, the average person can make a decent living. Again, money helped a lot to get us to where we are. So money does not imprison us. It frees us.
People often complain about how the super rich have so much money. But they don’t realize that people like Bezos, Gates, etc, don’t have anywhere near as much actual wealth as they appear to have. It’s wealth on paper only. These people could never actually utilize all the money that they “own” because it’s in no way liquid. Take Bezos. If Bezos tried to actually tried to sell off his assets, stocks would plummet and he’d be left with a tiny fraction of what he appears to have.
When a portion of the wealth you have has essentially zero liquidity, it’s not really your wealth at all. Instead, these people are more like hubs of resources. Moreover, except when government is involved, these hubs tend to be transient. Within a few generations, completely different groups of people become those hubs.
Originally published at Politicoid on April 11, 2019