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Unit 6: Why money is neither a social construct nor a shared hallucination (ESSAY)

Why money is neither a social construct nor a shared hallucination

If money was a shared hallucination, it would be possible to enlighten people and show them that they hallucinate with the effect that they stop hallucinating. Then no one would have a problem if there was no money at all. But without money as shown in this statement, there would be many problems:

In a society where people trade with each other, money fulfills three important functions and if there was no money, huge problems would appear: People would have to measure each good with each other good. That would make calculations impossible and trade as well as the creation of wealth would be limited. Nobody would have a feeling of value at all: How many apples should you trade for one liter of milk? How many iPhones are worth one car? Without a unit of account no accounting would be possible. Using a good as a tape measure for the value of all other goods brings an enormous benefit for society: it gives everyone orientation on how he or she can act the most productive way so that every member of society can use his time to create the most value.

The second function of money is that people use it as a medium of exchange. Without a medium of exchange no indirect trades would be possible. Our modern society is very advanced, what means that there are countless goods and services available on the market. Every day we buy some of them in exchange for a medium we call “money”. Most exchanges would be impossible in a pure barter economy. People would have to find trading partners who want to exchange one capital or consumer good for another capital or consumer good at the same time and at the same place and of the same value.

The third monetary function is a store of value. In reality as life is uncertain people need to save and transport value in the future in case they need it later to survive. Without money, they have to buy goods they do not want to use for their own sake but for later exchange: they buy them because they want to exchange them later at the same or a higher value. They start speculating. If there was an ultrasound money, nobody would do that as ultrasound money would be the best store of value available and every rational human would save holding ultrasound money. So ultrasound money would in theory be the good which appreciates more in value than every other good as it is scarcer, more secure, more durable, better to divide, better transportable, more fungible, groupable and censorship-resistant.

If money was a social construct, people could use everything as money as long as they believe in it. But that’s not the case: There are special properties which make a good useless for being money:

Missing durability: If we used milk as money, nobody could save for the future as all savings would go bad within a week and people would have to throw it away.

Missing scarcity: If we used leaves from maple trees as money, everybody was incentivized to collect all the leaves lying on the ground and plant maple trees all over the globe to harvest more and more maple leaves. So anybody wo stored some maple leaves would be confronted with huge inflation as the increasing amount of leaves would dilute his purchasing value.

Missing divisibility: If we used cars as money, how could we buy one bread with it? You cannot pay your bread in exchange for a slice of your car.

Missing transportability : If we used houses of our home country as money, how could we pay our meal in a foreign country? International trade would not work if people used houses as money: If a buyer from France imported goods from India, the seller would not want to be paid in parts of houses at the other end of the globe.

Missing homogeneity (fungibility) : If we used diamonds as money we had the problem that not all of them are of the same size, color and flawlessness. People would always have to investigate the diamond they receive as money to check the size of the actual piece.

Missing verifiability : Diamonds used as money would cause another problem: Before every transaction people had to check the quality of the diamonds they get in exchange for their goods under a lens in order to prevent fraud.

Missing groupability: If we used seashells as money like some tribes did in earlier times, we faced a laborious task to pay a big bill, because the counting of thousands and thousands of seashells would take hours.

Missing censorship-resistance: Especially people in authoritarian countries face another trading barrier: If they sell goods for money, they receive it on accounts which can be freezed or closed by their authoritarian government any time. So they can never be sure that the money on their accounts really belong to them.

Missing security: Money which can get lost or stolen is problematic. All physical goods which can be used from anyone without permission of the owner are in danger of getting stolen. Milk, maple leaves, cars, diamonds or gold can be taken away by a thief or get lost.

Missing trust: Trust is the last necessary characteristic to establish a good as money. The more often a good has been used as a medium of exchange in the past, the more people believe in its value and the more they expect that other persons will also exchange it for something else in the future.

Nailed it. Lots of examples of why money is money and highlights how we take these thigns for granted today. Ultra sound being the missing principle, as you stated. Nicely put together

Well written and covered all topics. I like the way you used great detail in your explanations from the start, which will allow someone that has never studied this topic, to become familiar with it.

This is my attempt on the essay for Unit 6 of the ECON103 - Austrian Economics course. All coments and considerations are highly appreciated!

Is money a social construct and a shared hallucination? At first it might seem tempting to agree to the proposition above. However, as this essay intents to discuss, it seems that the concept of money is actually a natural occurring phenomenon, that spontaneously emerges from our interactions as human beings.

Arguably, as our frontal lobes developed, one of the main abilities we acquired as was the capacity to understand the passage of time and plan accordingly. In planning for the future, humanity understood the importance of honing human skills, accumulating tools (capital goods) and developing technologies that allowed the production of more goods than those necessary for consuption. From that point on it became logical to trade the excess production for other types of goods that satisfied different needs. The emergence of trade provided the conditions for the development of money as a new technology that could solve the problem of coincidence of wants across four different dimensions: type of good, time, scale and space.

To solve the coincidence of wants regarding the type of good it was necessary to find a single good that was universally (or at least broadly) accepted by everyone who was involved in trading. If someone produced fish and someone else produced eggs, it might be that the fisherman would not be interested in trading his fish for eggs, and vice-versa. So, the first goods historically adopted as money had the characteristics of being highly marketable goods.

Then, there is the problem of time. It might also happen that the fisherman already has enough eggs and does not want to trade them for fish today, but might consider trading them for eggs next week. So, the second characteristic of a monetary good is the capacity to withstand the passage of time. In other words, it has to be durable. Fresh fish, for example, could not serve this purpose, because it is prone to spoilage. That durability expresses itself not only as the capacity of resisting spoilage, but also as the capacity to retain value over time. Which means that the good chosen as money should not be something that is easily produced. Otherwise the excess production of that good would result in the dilution of the value of that same good for everyone else holding it. Which means that the monetary good also has to be scarce.

The next problem is the one regarding scale. It might be that the fisherman catches a large fish in a given day, and a small one the day after. Or it might be that the big fish could only be traded for too many eggs, and the small fish for half an egg, which would render the trade impractical or impossible. So, whichever is the good chosen as money, it has to be homogenous and divisible, so that different scales of trade can be accommodated.

Finally, a monetary good also has to solve the problem of coincidence of wants across space. In our example, maybe the fisherman wants potatoes instead of eggs, and has to travel to a distant village to get them. That means that the monetary good has to be portable, so that it can be easily moved through different distances.

Cattle, seashells, stones and glass beads were all used as money at some point in history. But as trade intensified, the choice fell on rare metals, such as copper, silver and gold. While copper and silver were used for transactions with lower values, gold was used for settling the higher value ones. But metals were cumbersome, heavy to carry around, and difficult to secure. Eventually, especially with the invention of paper certificates redeemable for a certain amount of gold, the problems of portability, divisibility and safety were solved, largely demonetizing silver and copper and scaling trade even further.

As a larger market for trade developed, the functions of money became more apparent. Being durable and scarce, money could serve as an excellent store of wealth, so that the capital accumulated by one individual could be deployed later in life, or left as heritage. Because it was also portable and universally accepted, money could also serve as a medium of exchange, facilitating trade across space so that people did not have to engage in direct barter. Finally, being divisible and homogenous, money could also be used as a unit of account, allowing for the emergence of ledgers, the accounting of debt and the proliferation of financial services.

These brief considerations reveal that money is not a social construct or a shared hallucination, but a technology that was created and perfected to facilitate the natural propensity of human beings to trade amongst themselves. This proposition also helps to explain the fact that, in every human society where trade flourished, some form of money was adopted. It is also noteworthy that the development of monetary systems also predated the creation of the nation state. And that even in historical periods and places where nation states collapsed, wherever there was trade, there was some form of money in place.

It was only recently, in the last hundred years or so, that the confusion between the role of money and that of the state allowed for the collectivist theories to take hold. These theories were not only convenient, but also necessary to justify the end of the gold standard, that did away with the redeemability of paper money for gold. In the “fiat standard”, where money is backed by nothing, it is easy to appreciate the necessity of a theory that suggests that this has always been the case. However, as a system that is not rooted in the true human nature, the sheer number of anomalies it has generated is an omen of its own demise.

As the “fiat standard” collapses around the world, humanity is bound to face severe economic hardship. On the other hand, this distressing event might also present new opportunities for restoring the role of money as a technology that is inherent to the need of humans to trade and true to the human nature. |