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ECON 103 - Money as a Social Construct or Shared Hallucination

I will be up front and say I do not have 1,000 words to describe what is wrong with these statements. I summed up my opinions in around 750 words. Let me know if I am too vague and lacking detail in my response.

Of these two statements, the one that is most egregious is describing money as a “shared hallucination”. The statement that it is a hallucination indicates that money comes about without any real reason for the money that was chosen. This obviously is not true, especially if you look at the history of money and the reasons for certain moneys being chosen by a society. Also by looking at history, you can come to conclusions on why certain moneys failed and were replaced by other forms of money. For example, when seashells were used as a currency, they worked for a time because they maintained some scarcity. However, once a foreign country shipped in boat loads of seashells from their country, the seashell quickly was disbanded (After a period of struggle) to another form of currency that was not as easy to debase. This occurred because seashells were no longer scarce and the value of each seashell was diluted and nearly worthless.

Ultimately, what historical research tells us is that humans have landed upon different forms of currency based on which good fulfilled the following characteristics the most sufficiently at that time, these characteristics are: scarcity, durability, divisibility, transportability, groupability, and homogeneity. The good that has fulfilled these traits the best has been gold. What this tells us is that people have not just hallucinated and came across any good that they decided would be the money they used. It was in fact a process that took place naturally on the market based on what good fulfilled the job of indirect exchange the best. Gold fulfilled this job the best because it is scarce, divisible, groupable, durable, and transportable. What makes gold scarce is that its supply is inelastic to the demand at any given time. If the market decides all at once to buy gold, resulting in a rise in the price, the supply will still only go up by around 2% in that year, because it is difficult to mine gold. Precious metals other than gold respond more elastically to a rise in demand, by rising in supply close to or nearly as much as the rise in demand, resulting in the price dropping down once again. This trait of gold is very important because it allows the holder reasonable assurance that the value of gold will maintain its value (Or purchasing power) into the future. This one idea has enormous positive consequences for a society that makes the correct economic decision to adopt the best good as a currency.

This is not to say that you cannot choose any good to be your currency. People and societies are free to choose whatever they would like as their medium of exchange; however, choices have economic and social consequences. These consequences have resulted in most successful societies choosing money based on the characteristics I laid out above. This transitions nicely into why I do not think the statement that money is a social construct is as egregious as saying money is a shared hallucination. Since people and societies have a choice of making any good, money, the good chosen could be a result of social construct. For example, in todays world fiat currency is the form of currency for a majority of societies. Someone that takes time to study the history of fiat money will conclude that fiat has only ever destroyed societies, as the fall of the Roman Empire supports. What makes fiat money a poor form of currency is that it requires no work to create, and as a result the supply gets greatly expanded with no limit. This causes debasement of the currency, and over time it results in a collapse. Therefore, it is reasonable to ask why most societies today are using fiat. The reason for this is that governments have forced upon their citizens, through numerous means, their fiat currency. In other words, it has become a social construct of sorts. Dr. Ammous has said this is a form of slavery and it is the only reason why a society would choose to use fiat (Debt) as money.

Overall, I agree that money that comes naturally upon the market as an economic imperative is not a social construct, but rather it is a choice made based on economic reasoning. However, I believe there are instances where a society chooses money through a means that is not natural, but instead is forced upon them as a result of social construct. This is how our current western society has come upon fiat currency.

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I agree that people and societies are free to choose whatever they would like as their medium of exchange. However, unless the thing that the choose possesses the properties that you mention, that thing will not last as money. It will inevitably fail. In other words, people can choose anything, but not anything can be money. An analogy could be something like this: I’m free to choose a sofa as a mode of transportation, but a sofa will fail as a mode of transportation, because it doesn’t possess the right properties. So it’s not just that there are social and economic consequences of choosing the wrong thing as money. It’s that if society chooses the wrong thing as money, sooner or later, society may not have any money.