ECON103: Unit 6 Essay - Money is Freedom

What does the word “money” mean? According to Wikipedia: “Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context.”

Can we call it “medium of exchange” instead of using the word “money”? Yeah it sounds uglier, but it is less confusing if we use it because money is a medium which is used for final settlement in trades.

Now we are getting closer to answering why this naturally emerged. Then we can answer why do marxists falsely think money is a “social construct” and “shared hallucination”.

If a human wants to trade their product/goods, they need to find a buyer for it. Until we think locally (small village, tribe) this can be done via barter. It will be an exchange of goods between the two parties.

Let’s imagine that one day people thought to trade in much larger distances for stuff they can’t produce locally. There was plenty of stuff which is getting rotten through long travels, which means these items are non-transportable to long distances. Those people first needed to exchange their goods for much durable ones, but not less valuable ones. These new stuff must be sellable at that new distant place for their desired new goods. We arrived at such a high amount of variations, which will make trades on large distances costly and only suitable for a few ones.

That’s why for example people were using salt as a form of payment. Why? Simple it’s durable and easily divisible, groupable. Salt is for everyone’s daily need to consume, so there is a high probability that in distant places people want to exchange their goods for salt.

Were they tagged salt as “money” in the sense we use the word “money” today? No, they just thought it’s a good form of a medium of exchange. That’s how it emerged “from scratch” like other mediums of exchange: cattle, seashells, limestone, iron-, copper-, silver-, gold coins, etc.

People always chose mediums based on just a few criteria: must be durable enough, must be divisible, groupable, transportable and last but not least must be salable.

As time goes by people educate themselves either from other people’s stories or just simply by their own experiences. During this process they always searched for those kinds of mediums of exchange which are better than the previous ones in the categories mentioned above and tried to use the best one. At the end the connection between salability and marginal utility decided for example why not salt was the ultimate winner, but gold coins.

Gold has higher salability and marginal utility than salt or any previously mentioned medium of exchange. That’s why Gold was the ultimate winner for centuries.

If anyone stuck to an old medium of exchange like for example silver coin which for centuries was “second best” medium of exchange, by the law of diminishing marginal utility it began to erode its salability. This meant that as Gold marginal utility was higher than silver (because of higher stock-to-flow ratio), slowly but surely the wealth transferred from silver holders to gold holders. Anyone stuck to silver faced losing buying power compared to those holding Gold.

Let’s examine the ultimate winner, Gold. Was Gold a shared hallucination? I don’t think so because it has some very unique preferences which are not seen by the Marxists. Gold is one of the most durable metals on earth, literally all the ever mined Gold still exists which also means a really high stock-to-flow ratio which gives really good salability through time. It’s good for stacking it for centuries and with this the wealth can be easily and safely inherited. It is divisible, groupable and transportable (like gold bars or gold coins).

Marxist’s where fals with stating that all the medium of exchanges used in the past was a “shared hallucination”, because I showed all the logical way how they emerged purely by human rational actions. But they were partially right with one of them: today’s FIAT currencies.

All the FIAT currencies were once a good medium of exchange, at some point even better than Gold till they were strictly binded to Gold reserves. But as this convertibility from FIAT to Gold was “suspended”, the FIAT currencies became as Marxists say a “shared hallucination”. Why? People still think that the FIAT currencies are binded to the Gold reserve. But this illusion is not true. The virtual and effective printing of it erodes the most important metric, scarcity. Without scarcity it is losing day-by-day its value, but with the help of this “shared hallucination” people still use it. At some point people “wake-up” and that is what will cause hyper-inflation in that currency because people start to ditch it for a scarcer medium of exchange or if that’s not available for any reason, then for goods.

Nowadays Gold (not fake ones) are hard to buy. That’s why in second and third world countries people when they face massive inflation or worst case a hyper-inflation they ditch their own currency and buy USD because it’s a much harder currency than their own.

In the future everywhere based on the categorization of a medium of exchange mentioned previously, the ultimate sound money will be Bitcoin. Why? Because in nearly every category it is the same or better than Gold. It’s durable, which is guaranteed by the ten thousands of nodes in the World. It is divisible, groupable because a wallet can hold any amount of Bitcoin and 1 Bitcoin can be divided into 100 million satoshis. It is way better transportable because in a matter of minutes or hours anyone can make final settlement with anyone in the World. Bitcoin has higher salability and marginal utility than Gold because its built-in algorithm gives a unique property which makes it a deflationary currency.

People in the future will do the same as they did in the past: They will compare mediums of exchange to each other and finally as always they will choose the soundest one. That one will be Bitcoin.

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This was a great read.

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(Please allow me to use your thread again for this assignment :grin: )

I love Sapiens (A Brief History of Humankind) by Yuval Noah Harari… oops, sorry Saifedean! Yes, I do. It was a well-written story in my opinion, on top of it being an educational/history book. In turn, I almost believed the idea that money is a social construct or shared hallucination! It seems to make sense when laid out with the big idea that humans discovered ways to cooperate in large numbers. First, through sophisticated language that allowed us to gossip, and then the shared hallucinations that bonded peoples through religion, imperialism and commerce. It truly is fascinating what our minds can accomplish!

Now that I have been exposed to teachings in Austrian Economics, I’ve been stirred to the right direction. So, how does the concept of money as “a social construct” or “shared hallucination” fall apart?

The flaw in the idea is if we accept that money can be dictated by the government, as is the case today. The fiat currency’s use is mandated by the government, and thus, work on the basis of trust on the “shared hallucination” that is a nation. But before that, people already discovered the idea of money, or invented it.

Money precedes the government. Money stems from the necessity for indirect exchange, demanded by the coincidence of wants problem. It is an indirect invention that overcame the economic challenge large populations faced. But ultimately, it was invented so an individual is able to acquire consumption good, and for the long-term planner: capital good. The medium of exchange should not just be a figment of imagination. It has to be desirable. Many desirable things were used as money, i.e., barley, sea shells and later on metals. Over the years, the most desirable form turned out to be gold. And this was because it resisted over production. It retained a high desirability. And this is another point that opposes the two phrases in question.

Just last century, paper currencies used to be based off gold. So they were promissory notes. That promise was broken. How come? Because of the temptation that is inherent to the paper money system. Printing too much of it, without an actual back up. “What the fuck happened in 1971?” As the popular question (and meme) for bitcoiners goes.

There were many accounts of governments giving in to this temptation of over printing. In China where the concept of paper money was first used (backed by gold or silver), it happened. And look up hyperinflation, you will see many examples of government regimes causing currency collapse.

Paper money wasn’t the only medium of exchange that suffered this. In Africa, European explorers and imperialists exploited the cowry shell currency. Because they had the capacity and technology, they were able to bring lots of cowry shells to the African territories, that caused massive inflation later on. What used to be valuable possessions due to their rarity in the region became worthless. How is this so? Money also got subjected to the law of supply and demand. Some metals like copper were used as money too. But innovations to produce more of it cheaply made it great for industrial use, but not as money.

So, are the two phrases plain wrong? I say mostly, but not totally. The “social construct” part can still be applied to the monetary network. We believe in the rules of exchange well enough to maintain a working system involving as much as billions. However, the good we use as the medium of exchange cannot be hallucinated only. It still has to be based on tangible things that we desire. If not, then a significant portion of the populace should desire it, that we know we can take advantage of, to gain what we desire for ourselves. Money satisfies the subjective valuation by the individual and aids the cooperation of any abstract social structure.