Money: its invention and history

 

 Lapham’s Quarterly I-2: About Money (2008) Compiled just before the financial collapse of 2008, this collection nevertheless covers all the main points, both as theoretical discussion and as evidence for the theories. Herewith a few stray thoughts prompted by this collection.
     Money is said to be a means of exchange, a measure of value, a standard of deferred payment, and a store of value. Historically, the means of exchange came first, approximately 6000 years ago in Mesopotamia. But a means of exchange is possible only if there is also an agreed measure of value, so those two aspects of money are fundamentally the same. The transition of material specie to abstract money happened via letters of credit and bank notes. Both of these were written promises to pay specie “on presentation” of the letter or note.
     In short, the value of money is what we (more or less unanimously) agree it is. That value is basically what we can buy with it. Unfortunately, money has also been treated as a commodity. In fact, a web search on “money” tosses up several sites that state that money is a commodity.
     The “labour theory of value” claims that money  measures the amount of labour needed to provide some good or service. The problem with that notion is that the price of some types of labour may be well below their value as measured in comparison with other types of labour. What’s more, pretty well everybody believes they are underpaid compared to what many, perhaps most, other people are paid for their labour.
     None of the common definitions of money get to the heart of the matter: Money is a system of universally accepted IOUs. A $10 bill shows that you provided $10 worth of goods or services, and hence are owed $10 worth of goods and services in exchange.
     There is fundamental confusion around the notions of value, cost, and price, terms which are often used interchangeably, and (worse) any one of which is often used to express different meanings in the same discussion. If economists could agree on fixed definitions of these terms, economics might actually become the science it aspires to be. As it is, much economic theory consists of ad hoc formulas used to “prove” that some political notion or other is an objective truth. Thus the claim that prices rise and fall according to “market forces”, while in fact some people ask for more money, and other people agree or refuse to pay more. The Law of Supply and Demand is supposed to explain how this works, but in fact the rise and fall in prices has to do with the psychology of the buyer and seller, which includes many more factors than the awareness of scarcity and abundance. It also has to do with market dominance, a polite phrase for monopoly. It is a commonly overlooked irony of “free market competition” that its aim is to eliminate competitors.
     My working definitions are:
Cost: the sum of materials, energy, and human labour required to produce some good or provide some service.
Price: The amount of money the vendor is willing to sell for.
Value: The amount of money the buyer is willing to pay.
     Cost is objective: it can be measured. Price and value are subjective: they exist only in the minds of seller and buyer. The so-called law of supply and demand begins there.
     One of the first of Lapham’s collections, but already excellent. ****