What is money, really?

Discussion in 'Markets & Economies' started by SpacePete, Aug 24, 2014.

  1. Htu08

    Htu08 Member

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    So? People who are worth the most are generally people who invested in themselves and worked hard... They may not be able to lay the fastest bricks or dig the deepest hole or even cook the fastest or largest meals, but they are people who are able to cure the sick, understand and use very complicated models and cause innovation.

    The guy sitting in the chair would be the first to go in a primitive society, but I don't think we are hunter gathers any more.
    Everyone knows human evolution and domination of the food chain is through our superior levels of innovation and ability to create tools to use. Your hammer may not be better than the pen... which can create 10000000000000000 robotic arms that can assemble car parts at 100x the speed in which your hammer and arm does.


    (Not having a go at you, just saying that we as a species have evolved)
     
  2. systematic

    systematic Well-Known Member

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    ^^^ I think you are missing the point of the topic
     
  3. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    I will mix up my response to your response a bit.
    This is simply a definition (but one that is often forgotten). The price of apples is simply the money unit divided by the apple unit (i.e $2/kg or $0.40 each).

    Sorry, I wasn't saying that it doesn't approximate to a unit of productive labour but that is only part of what it is doing. For something that can be produced roughly at will (eg a haircut) then it would seem to represent the embodied value of the use of that person's labour (or a generic person if the good or service is sufficiently replicable across different people).

    However, the price you pay does not necessarily reflect embodied productive labour rather than an expression of the utility value of money versus the non-money good/service. In a free trade, each party is believing they are getting the better end of the bargain. I willingly trade my produce which cost me X hours to make for your money while you trade your money for my produce that took me X hours. In a sufficiently informed and large enough market place my X hours will be priced relative to everyone else's X hours and some information will be given out about what is a "fair" price for my produce.

    In terms of non-labour goods there are various non-labour productivity elements that go into their price. I may, say, buy a large acreage for $50,000 from a farmer simply because I like the view. Ten years later another person offers to pay me $1 million because they believe that it is ideal for growing truffles and, after a decade of careful investment of their time, skill and resources they'll be able to turn the land into a business making them $2 million per year. However, until they actually manage to produce and sell their truffles they are valuing it based on an expected value. After a decade they may find that the price of truffles has tripled or halved compared to their initial expectations. The market price will be the market price. It will simply reflect the utility people get from holding money versus trading their money for your truffles. The price of the truffles reflects your willingness to trade your truffles for their money at the same time as their willingness to trade their money for your truffles. If either party withhold the supply of their half of the transaction they are simply refusing to accept a trade at the exchange prices being offered at this point in time (they may change their minds next week).

    Hence, although an informed/deep enough market place may provide a relatively stable price that approximates the value of your productive effort, it is still a static snapshot of your past productive effort. Innovation and change will constantly be revaluing what is considered "productive" effort. Indeed, business to business transactions are fundamentally about trying to obtain greater productivity. A hammer's value differs dramatically based on whose hands it is in and consequently so too does the value of the person who makes hammers. This is why I think stating it this way is masking the importance of movements in exchange value. (But this concept is difficult for me to put into words for the first time so apologies for the rambling :) )

    I think this is mixing up cause and effect. Trade occurs because of comparative advantage (which itself can occur simply because of economies of scale rather than any absolute advantage). Money is a more efficient way of trading. It is providing a service. Production of goods is a measure of labour productivity but not all goods are of value nor are all goods traded. The money traded goods allows us to see where our efforts can be better placed in order to provide greater value (ie greater productive effort) to others (and simultaneously to ourselves) but it is not measuring all productive labour. Hmm. Complicated :/
     
  4. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    In this hypothetical scenario, PM's would also be worth nothing.
    I suppose we can invent a situation to support any argument?
     
  5. systematic

    systematic Well-Known Member

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    The question was what is money really and i think you nailed it in post #3 and i was just clarifying a point.
     
  6. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    I appreciate a well thought out, logical explanation. :)
    A bit to digest... but generally agreed.
     
  7. hawkeye

    hawkeye New Member Silver Stacker

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    Maybe I think about this on too a low a level, but I tend to start at the matter and energy level. ie. everything in this universe is either matter or energy.

    In order for humans, who are really just machines, to function we need a certain amount of energy, which always needs to be replenished. Money is the way we generally obtain that energy, and so money itself is in fact an abstract form of energy. The intermediate processes, whether it is obtaining land or even to buy a book or anything like that all generally have the goal of increasing or maintaining our energy levels or making our energy consumption more efficient. Sounds a bit weird, but actually start thinking about it and you'll realise that's a part, either directly or indirectly, of virtually everything you do and everything that goes on in the economy.

    Money is a strange concept that is hard to define, and most tend to end up defining it in terms of what it does, and not what it actually is which I think is the topic of this thread and what the OP was driving at. When I think about it at this level, concepts like bitcoin make more sense to me.
     
  8. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    100% agree.
    The first thing I equate money to is oil and gas - the energy that turns the economy, and everything we strive for to make our lives easier.
    Even in terms of PM's - we expend a lot of energy to extract it, but it does little after that but sit around looking shiney. However, it's value is somewhat representative of the effort and energy required to extract it.
     
  9. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    The expenditure of a lot of energy was the market's way of ensuring scarcity (or as best as possible given technology at the time) and trust in a medium that does not rely on third parties. Its value is in the fact that it does require strangers to expend a lot of effort and energy and hence cannot debase it (very much). It's almost circular isn't it? A useful medium of exchange requires trust amongst strangers. How can you help ensure trust at low transaction costs (particularly across large distances)? Choose a medium of exchange that naturally encourages strangers to be trustworthy. How can you ensure strangers are trustworthy? Settle on a medium that requires a lot of their energy to supply.

    Is its value in the fact that it provides a useful service or because it is representative of the effort and energy embodied or (in my opinion) because the effort and energy embodied make it suitable to provide the useful service? Sitting around looking shiny isn't a bad thing and can be providing a service at the same time.
     
  10. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    I understand your view regarding money being a good that provides a service, after pondering your post for a while.
    It is very circular, but IMHO this: "its value in the fact that it ... is representative of the effort and energy embodied"
    This is why money is valued... because it ain't easy to earn a buck.
     
  11. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    But as you said productive effort is different to time and energy [I could spend fifteen thousand man hours making, say, a sky-whale (heaven forbid :p )].

    Thinking about it more, something that is highly demanded and can be supplied by multiple people will trend toward the opportunity cost of your time and energy as supplies increase to match demand (hence "prices" fall toward your embodied time and energy). Innovation and demand shifts, however, constantly disrupt this process and people begin to write-off perfectly good, still usable, machines and invest in new machines in order to keep up with (or preferably slightly ahead of) the competition. It's almost like tracking a saw blade whereby the teeth are periods of excess profit that gradually get eroded until you make the next step change in product design or productivity enhancement.

    Turning back to the old-school definitions and benefits of money in a market economy, the use of money is essentially an accounting tool for understanding how much the embodied "energy" in your inputs is costing you and hence allowing you to calculate profit. Knowing your profit allows entrepreneurs to plan ahead and help convince the capitalists to redirect their investments toward supplying greater value to consumers. Whilst at the top of each "tooth" investors are piling in on the new ideas/methods/demand and are pulling out of old ideas/methods/supplies at the bottom of each "tooth". Hence, one of the great services of money is to enable economic calculation (as Mises used to call it). But again, I'm getting side-tracked away from the original question of what is money.

    Edit: Actually I think it is more accurate to say that prices will trend toward the opportunity cost of the time and energy of the marginal supplier(s).
     
  12. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    True, but the ability of money to provide this service is not due to any unique characteristic that money holds. It is merely convenient. Why? Because of the characteristic of comparable unit measurement, the common factor of which is universal (productive time/effort/energy).
    There are many other "goods" that are able to service these same economic calculations - though the methods would be confusing and very cumbersome.
    While I agree that money exhibits the useful ability to be used as a "tool for account", it does not necessarily embody what "money is" - that of a claim on (or credit of) productive labour/effort/energy.
    It is really a bit of a "chicken or egg" kind of debate. :|
     
  13. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Absolutely. Many things can provide the services of money/economic calculation including simple ledger books.

    One of the things people hope for is for their money to be a future claim on (or more precisely, exchangeable for) other people's productive efforts at some point in the future. It is by no means guaranteed (c.f. hyperinflation). It is (principally) only measuring the productive value of past labour efforts.
     
  14. tolly_67

    tolly_67 Well-Known Member

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    Money is time in more ways than one. We spend our whole lives exchanging one for the other yet in own minds we never have enough of either.
     
  15. Pirocco

    Pirocco Well-Known Member

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    Money is a product that other people accept in return for their labor/service.
    Which product is chosen as money, depends on its quantity/other quantities ratio.
    Because people that offer their labor/service demand a product with a ratio that allows them to buy back their labor/service.
    So if a ratio increases (ex fiatcurrency inflation (="blowing up"), or the extra gold/silver after the discovery of America), they revise to another product.
    Aside of that, is speculation. That's stockpiling and destockpiling, and alters the ratio temporarly. Something to take into account for the labor/service deliverers too. :D
     
  16. Jon Snow

    Jon Snow New Member

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    Conceptually money is 'an idea backed by confidence.'
    And in terms of tangibility it is 'a store of energy.'
    At least that's its simplicity to me.
     

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