Unit 6 Essay: Why Money is Not a Social Construct

Anything can be used as money, but some goods are more suitable to be used as money than others. The emergence of money is largely a Darwinian process where the most suitable forms of money prevail over the lesser suitable forms, mainly the ones that best the coincidence of wants problem in the areas of durability, divisibility, and transportability.

The natural emergence of money has occurred time and time again in human history. This is a self-reinforcing cycle in both the proliferation and destruction of various forms of money that compete in the market. The more marketable a money, or saleable, the more people choose to use it as money, thus increasing its marketability further, which increases its liquidity in the market. The price of this commodity then increases, thus benefiting those who hold it as their future becomes more certain as a result of their ability to acquire more consumption or capital goods over a longer period of time.

The same self-reinforcing cycle works in the opposite direction. The less saleable a money, the fewer number of people will choose to use it, which decreases its liquidity, lowers the chance of a monetary-premium-price-driven-increase, and results in less people using it as a money.

This self-reinforcing cycle is why people quickly focus on the few most marketable commodities as a suitable form of money. Claiming that money can be a social construct discounts physics and this ruthlessly Darwinian process.

There are physical and economic principles that must be sufficiently satisfied for a good to become a suitable form of money. The concept of money as a social construct completely neglects these realities.

A society that shares the hallucination that bananas can be money will soon cease to be a society as the members of that society will likely perish from starvation over a long enough period. Bananas cannot be suitable money because they aren’t durable or transportable enough, among several other reasons, including their abhorrent stock-to-flow ratio.

It is very easy to produce bananas. If bananas were to ever acquire a monetary premium that caused their price to rise, banana producers would ramp up production and dramatically increase the existing stock, thus debsing the value of the existing stock. Additionally, apple and orange producers may stop producing their fruits and elect to start producing bananas, thus further increasing the supply of bananas and lowering its stock-to-flow ratio.

A society can share monetary hallucinations all the way to starvation and/or return to barbarism.

Money existed long before governments. Governments did not make gold money – they had to use gold in their coins in order to get their coins accepted for trade. It is not some accident that the people settled on gold instead of leaves or salt, for example.

Gold was the hardest precious metal to produce, and therefore why it emerged as money. History shows us that the hardest money wins; not the money agreed upon in some social contract. Physics and chemistry can be counted on more than humans keeping their word.

Money that exists on the basis of a social contract requires large amounts of tyranny and intervention to keep the hallucination afloat. For example, governments mandating that taxes be paid in a social construct currency. This decree and threat of violence is a form of contract, but not one that both parties willingly agree on; it relies on coercion.

The idea that money is a social construct or shared hallucination is propped up by Keynesians because it gives governments the rationale they need to continue printing money. Governments fund the schools and universities that teach economics, so it makes sense that these Keynesian ideas are the ones taught in the traditional economic courses.

As more and more people realize that the printing of money debases the purchasing power of their stock of money, they might begin turning to other forms of money that hold value across time better. Again, human history shows us that the hardest money wins because society seeks out the money that will best satisfy their needs over time. People choose the money that holds onto its value and allows them to acquire more and more goods, both consumption goods and capital goods. As previously mentioned, the commodity or good with the highest stock-to-flow ratio tends to proliferate as money.

Money as a social construct does not factor in the hidden costs of a form of money that is easy to produce. Money that can be produced cheaply, and produced at a cost much lower than its market value has destructive implications on society and ultimately destroys the money in the long term. It also effectively robs from those who choose to save that money, as they had to trade their scarcest resource of all (time) for something that another person in the society created at virtually zero production cost.

“There is nothing more expensive than cheap money.” The cheaper the money is to produce, the less desirable it is as money. Again, these laws of physics are not captured in the statements “money is a social construct” or “money is a shared hallucination”.

Money is needed because of uncertainty; it is a tool we use to tame the uncertainty of the future. The better a money is at holding its value across time, the less uncertain the future is. Therefore, a society that uses a suitable form of money has a higher probability of increasing productivity and human flourishing than a society that uses a bad form of money because the society with the suitable form of money can focus on the future more than the society with the bad money. The ability to focus on the future more because there’s more security in the present moment allows people to come up with better technologies and ways of doing things. Increasing productivity via better technology frees up humans even more, and grants them either more leisure time, or more opportunities to come up with even more improvements to methods of productivity. They can then capture and save the fruits of these productivity gains in a money that stores its value over time (thanks to its high stock-to-flow ratio) and continue thinking about the future. This is another example of a self-reinforcing cycle that is fueled by the choice of using the hardest money possible.

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