What is Money? (Part 2)
Asking yourself "What is Money?" is the 1st step into a philosophical rabbit-hole that could prove to be the most fascinating intellectual journey of your life…
The question “What is Money?” is deceivingly simple. One would expect the answer to be abundantly clear given its prevalence in daily life, but upon further reflection, most find money to be mysterious. Money is an all-pervasive economic ether, an interpenetrating field influencing human perception, thought, and action. Yet despite the “everywhere and nowhere” nature of money, its deepest truths remain hidden in plain sight. Here, we explore yet another answer to this question, money is…
The Most Marketable Good
“Man does not only sell commodities, he sells himself and feels himself to be a commodity.”—Erich Fromm
“The commodities, which under given local and time relations are most liquid, have become money.”—Carl Menger
As market actors work and trade with the aim of profitably satisfying one another’s wants, certain goods become more tradable than others. To visualize this, picture the aggregate trade flows in the global economy as a sphere with a surface of highly liquid goods gradually giving way to less marketable layers of goods deeper down, finally becoming fully solid at its core, representing the world’s least traded goods. Bisecting this imaginary “trade flow sphere” reveals the many gradations of marketability (also called salability), with the most liquid assets at the surface of the sphere and those of decreasing liquidity gradually nearer its core.
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Prices are the manifold exchange ratios among these many traded goods, expressed in money as a means of data compression. Goods with greater liquidity benefit from broader configurations of demand, and thus higher prices, since there is an expectation of exchangeability with future market actors. The demand for every economic good is bifurcated between utility and marketability. Utility-driven demand is based on the productive or consumptive value the market actor expects to render from the good. For instance: the gold in computer circuits is due to demand for utility whereas the gold in coinage is due to demand for marketability. Marketability-driven demand is based on the future exchange value the actor expects the good to have in the marketplace, discounted to the present. The greater the marketability of a good, the more “moneyness” it exhibits by being more exchangeable or liquid in the marketplace.
In their striving toward aims, market actors naturally prefer goods exhibiting greater marketability since this quality offers more degrees of freedom by laying claim to the efforts of others. Once the most marketable good is definitively established, all market actors prefer that particular good as the medium of exchange, as it can be used to trade for anything else in the marketplace with least effort. A self-reinforcing network effect ensues, further elevating the marketability of the most marketable good. Trading along the surface of this imaginary sphere is the good exhibiting the most “moneyness.” In this sense money is the winner in the winner-take-most contest of marketability. As Mises writes of this game-theoretic progression toward one money:
“...an inevitable tendency for the less marketable of a series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.”
Money is the most liquid good in a trade network (or market), the highest layer of marketability in the bisection of the imaginary “trade flow sphere” depicted earlier. Money, then, is the highest expression of the free market: it is the most marketable good. In any place where humans trade, the good that is most tradable is money. This means money is an emergent property of interpersonal exchange, an inexorable outcome of free trade (central bank propaganda notwithstanding). As an economic concept then, money is a constant in the orbit of human interaction although its specific implementation varies according to prevailing technological realities. Market actors across history have attached this concept of money to a diversity of economic goods. Reciprocated favors (debt), seashells, salt, cattle, glass beads, gold, and government paper have all ascended to the role of most tradable good at one or more points throughout history.
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An important distinction, understood by few, arises here: all goods are services. Reading the term “economic good,” probably conjures up a mental image of a tangible tool, an asset, or a consumable item. Economic goods can also be nonmaterial. Commonly called services, nonmaterial economic goods are where humans attach all value. Market actors do not attach value to any physical qualities of a good, but rather to the services it can render. A person’s affinity for a specific electric sports car is not due to its aluminum frame or technical intricacy, but rather because it serves as a means of rapid transportation, environmental friendliness, or a socioeconomic status symbol. For this reason, all goods—material and nonmaterial—are best understood as services. What matters is a good’s fitness to goal achievement, irrespective of its physical qualities (if it has any). In the pursuit of ends by way of means, humans value goods as means according to the affordances they are expected to contribute in the attainment of ends. In other words, humans only value services—the nonmaterial aspects afforded by goods.
Here, the question segues into a perhaps even more fundamental question: “What is Value?” Without detouring too far into the metaphysics of value (I recommend the book Lila by Robert Pirsig for this), we must go deeper in our line of inquiry to understand why market actors attach the concept of value to various goods, which leads us to our next answer: money is...
In Part 3, we will explore money as a device for moving value across spacetime.
Thank you for reading What is Money? (Part 2).
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What is Money? (Part 2)
What a wonderful series. Thank you. Also, just started reading Lila - didn't even know he had another book.