Views on economics: Show me the money
"When buying and selling are controlled by legislation, the first things to be bought and sold are legislators," as P.J. O'Rourke
What is money? You will probably hear different things from different people. What it is not is the root of all evil. Not the square root anyway.
Money in itself is a means of simplifying the exchange of goods and services in an economy, of facilitating trade. Trade is absolutely essential to the division of labor, to specialization, which leads to prosperity. This was noted as far back as Aristotle – the bigger a market e.g. Athens vs smaller towns in Greece, the more specialization can occur and the better the quality of goods.
If a family needs to make food, clothes, pottery etc. they cannot specialize on making just one thing but much better and this is where trade comes in. To make a more modern point, a software engineer cannot go to a wine store and offer to write code for wine. The wine store owner does not want code, he wants let’s say shoes. The programmer gets money from a third party – employer or customer – gives it to wine merchant, who goes to the shoe store. I assume everyone knows this obvious fact, but just in case, I repeated it.
The prices in the market are driven by supply and demand. Nothing has an intrinsic or correct price. The prices also show – based on supply and demand of each good – what is the value of one good relative to another, how many apples you need to buy an Apple. I tried to give two pounds of Granny Smith for an iPhone and they laughed at me.
One could try to buy a new Ferrari painting and pay for it in apples – however many truckloads that would mean, or shares of Apple if you prefer. Off course, one risks being thrown out of the dealership. You see, most sellers, and most buyers, prefer currency and money has value because of the things for which we can trade them. We produce so we can consume something else, economic goods paid with other economic goods— i.e., that we write code because we wish to consume wine.
Money is a medium of exchange, and prices are signals in the economy. What they signal is how much people in general value stuff relative to other stuff. This is essential to the economy, it tells what is wanted and in what quantities. It allows billions to communicate their wants and needs to each other indirectly and at the same time. All goods are relative to everything else. Money is a way to measure this relativity. And money not backed by economic goods is just worthless tokens. Money is only good as long as you know you can exchange them for something else.
Money can be a commodity in themselves or not. As much as some disagree, paper money can be money as long as people accept them as such.
One of the most ridiculous things some people who lived under communism say is we had money but nothing to buy – the government decided on certain nominal salaries, but the shops were empty of goods, goods which were priced by the government. This off course means that people did not have money; those were not real money, just pieces of paper. Just like a kid with monopoly money is, in fact, broke. But when you divided the fake, uneconomical wage to the fake, uneconomical price you got that you could buy a certain quantity of goods. But those were all fake wages, fake prices, and fake money. And non existent goods.
Increasing money supply will not increase the amount of goods. Attempts to fix prices beyond the market are doomed to failure. Prices are meaningless unless they accurately show relative value of goods. As long as real prices are the relative value of one thing versus another, as long as the amount of goods stays the same, fixing prices will do nothing. At most it will induce shortage when demand outstrips supply.
„The Marxian definition of value is ridiculous. All the work one cares to add will not turn a mud pie into an apple tart; it remains a mud pie, value zero. By corollary, unskillful work can easily subtract value; an untalented cook can turn wholesome dough and fresh green apples, valuable already, into an inedible mess, value zero. Conversely, a great chef can fashion of those same materials a confection of greater value than a commonplace apple tart, with no more effort than an ordinary cook uses to prepare an ordinary sweet.” - Robert Heinlein
It is often obvious a lot of people do not understand the difference between money and wealth. Wealth can be expressed – sometimes – at a given time in quantities of money. But wealth is so much more – it can include goods like a house or a car but a lot of it is intangible – skills, education, connections, knowledge and experience in general.
Many mistake the ability to express some wealth in money with money being wealth. A central bank can create money, but it cannot create wealth. Wealth cannot be created by government fiat. Everything must be produced in the real economy. You cannot make a country prosperous by passing a law saying everyone is rich. However you can create the legal framework allowing people to produce wealth.