26 August 2012

Money versus 'Resource based economics'

There's still mass confusion ruling in the midst of the Zeitgeist movement and the Venus Project zealots. The Zeitgeist movement thinks we do not need money because a fraction of the monetary system we currently have is fractional reserve banking, while the Venus Project thinks it's easy to do a bit of finely tuned central planning and cater for everyone's subjective evaluation of goods and services. Here are some basic questions about money that I tried to answer:

How is money generated?

Money is a medium of exchange. It is generated by manufacturing it, just like any other product. Unlike any other product, money (as in currency) has the highest marketability and serves as the greatest store of value. Any currency has to have these 2 properties. I'll illustrate this with an egg:  Suggest that you are an egg farmer.

Highest marketability merely means that everyone is happier when you pay them in money than when you pay them in eggs. On your egg farm, your workers will be happier when you pay them in money than when you hand them a tray of eggs for a day's work. In turn, you can get eggs with money, but you can't usually trade eggs for something else in the barter or direct exchange way.

A store of value means you get a bit more time to decide what you'd like to trade. This means you aren't limited by how long your eggs stay fresh in order to make purchases in the direct exchange/barter way, but you can shove all the money under your mattress for a rainy day.

As you can see, our current system separates the basic economic principle of exchange from money entirely. In short, 'let them eat credit'. You don't exchange your eggs on your egg farm for a car with money serving as a convenient medium of exchange. Instead, your car is usually bundled with financial services, guarantees that you won't default, monthly instalments and insurance to the extent that it's more about currency than exchanging goods and services for other goods and services.

For this reason, amongst others, the Rothbards of the world believe we should stick to an objective standard for money. The first known cases of money did this, with measures of silver equal to a certain amount of grain. Which leads us to your next question:

What conditions exist when this money is created?

It varies. Money as in a medium of exchange is usually created whenever you have something that I value and I have something you value, but we don't value them equally and we find something that has a higher marketability and serves as a store of value. This could be anything, from the Roman Empire's silver coins (which served as currency as far as India and existed side-by-side with bartering), to cowrie shells, which was the currency of choice in Africa for hundreds of years. By the way, cowrie shells also cast doubt in the notion that there is no empirical observation of currency taking root, besides the fact that debt is also currency.

The exact material used for money depends on many factors. In history, the most common denominator is usually some precious metal, like gold. This is because it is scarce, its purity can be determined objectively and it can be weighed objectively, so it serves as a standard. I still think we should use beer as our currency. Often, people were not happy with the authorities meddling with the purity of commodity money, which brings us to:

Who owns the 'right' to create money?

Everyone does. At least that's the ideal of people like Friedrich Hayek. This also happens whenever a certain currency is inflated to such an extent that its marketability is no longer more significant than something else, like the Zimbabwean Dollar that was neglected in favour of American Dollars, or mobile phone credit that is used as currency in Iraq. It's also the idea of bitcoin and other newer versions of digital currency. In reality, the authorities keep a tight grip on money creation as it's easy to launder money, in which case they lose out on taxes, or to counterfeit money, in which case we may be defrauded. 

What purpose does interest serve?

Without interest, money lenders have no incentive to lend to those who need money. This is an awkward position for many small businesses and the poorest of the poor, many of whom are women in impoverished communities building businesses with loan shark money. I'd think interest serves everyone's interests.

Without currency there is no economy!!!! So why are we not taught about currency and the creation thereof?

I'd take that one step further: Without currency, there is no civilisation. We live in the information age, where we are quite capable to teach ourselves nearly anything we'd like to know. We do have currency so going back to a stage where we no longer have currency is not progress, it's regression. If anything, we'd have to invent and embrace the next stage of our evolution. In other words, build the future.

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