Saturday, June 9, 2012

What is money

What is money? 

Money is a bearer contract for labour, contract that can be enforced only within the same jurisdiction that governs that pool of labour.

The story so far:

We have been using money for a good few millennia, and we have so far failed to find a good definition of it. Most of us think of money as something with inherent value, and this is a great trap.

I have read somewhere that the greatest failure of humanity is the failure to really understand the exponential curve. Surely the failure to understand money and the way it works must be number two. :)

Yes, I have read Adam Smith, and the Money Illusion, and Benjamin Franklin and Karl Marx.

A. Mitchell Innes is the one that gets closest to it.  ( Although he has not made the jump to the final conclusion and definition, his analysis is spot on. Respect!

Closer to our times, Modern Monetary Theory (MMT) and its similar splinter groups have explained how the money flows around the system very well (
- and they are about the only ones who got it correctly. They understand what money is, in their bones, but without a formal definition.  As a result, MMT has a Public Relations (PR) problem: it talks about money in its own terms, and people at large think about money in their terms.

So here it goes again:

Definition of money:

Money is a bearer contract on a fraction of the pool of human labour available within a jurisdiction, contract that can be enforced only within the same jurisdiction that governs that pool of labour. .

Points to note:

  1. It is a contract, and therefore subject to all contract problems - enforcement, breach etc
  2. The human labour it contracts is not fixed. It diminishes with time - it is called inflation. Nominal value vs Real value. In normal times it is tractable on a weekly/monthly timescale. Longer than that... you just never know... :) 
  3. Its value is governed by two variables: number of contracts/money in circulation and the value of the pool of labour. They both vary simultaneously, so it is difficult to track it down. Also there is a great inertia to a system as big as a whole country economy, so changes take time to propagate. 
  4. Human labour is the source of all value (thank you, Marx and Ben Franklin) - whenever we buy something we essentially buy the human labour that has gone into making it. This applies to 
  5. natural resources (labour to extract it), water (water to pump it and make it potable), land (labour to set up the system of registration and ownership and (military) labour to protect it from invasion) etc.
  6. The jurisdiction limits to its validity and enforceability, as for all contracts. There is of course forex to go outside the jurisdiction, but that is just a mechanism to trade between jurisdictions. 
In short and in conclusion, money is a token representing a futures contract to be drawn on a certain division of the pool of labour and means of production.

Comments welcome.

No comments:

Post a Comment