Why Money Is Not A Social Construct

The phrases “money is a social construct” and “money is a shared hallucination” are two very popular ideas currently in Keynesian economic theory. Having been popularized by Yuval Noah Harari in his bestselling book Sapiens. However these statements are not based in reality and are in fact ignoring some key principles of economics and human action. In this essay I will be explaining why these statements are false.
Let us first start by defining the two terms.
A social construct according to Merriam-Webster dictionary is “an idea that has been created and accepted by people in a society”, and shared hallucination as “an collective experience of something non present”.
These ideas are based on the marxist notion that “money is inherently evil” and we only use money in society because we all believe we need it to buy things and that if we got rid of money all humanity’s problems would suddenly disappear overnight and poverty would abruptly end.
By this logic if money is a shared hallucination or social construct then we should be able to just collectively hallucinate that whatever we fathom is money. Let’s say
tomorrow we all just start to hallucinate that tree leaves are money what would happen?.

There would be no way of assigning value to a leaf because there is an almost infinite supply of them. They are easily destroyed and hard to transport over large distances as they rot. The inherent natural properties of leaves make them an ill suited choice as a store of value or as a medium of exchange.

A good money has inherent natural properties that make it well suited for use in a society. Money itself is the only solution to found a civil society that humans invented through reason. What has been used as money throughout history has been things with naturally occurring properties that make it suitable for such.

  1. A money must be portable and easy to transport
  2. Durable so that it is not easily destroyed
  3. Fungible so that 1 unit is recognizable as the same value as another
  4. Verifiable so that it is easy to identify
  5. Divisible so that you can buy things from low to high value easily
  6. Scarce and uneasily replicated so that the money holds its value over time and is more difficult to counterfeit
  7. Established history the longer a money has been used the more widely accepted it will be by society

Throughout history we have used different forms of money based on environment, circumstance and state interference. Humans act using reason to determine what is best to use.

In early societies cattle was used as money because given the environment, the population of the society and the circumstance cattle was best fit as a medium of exchange. This worked in small groups of people but because of the natural qualities of a cow it wouldn’t work in larger economies as you couldn’t use a cow to buy something of low value. Some other examples of primitive money include glass beads and seashells.
Picked at the time because they were the best thing available, possessing to different degrees the 7 qualities of money listed above. Eventually we started using coins minted from rare earth metals as money, eventually almost universally settling on gold and later on paper backed gold as it scored the highest in the 7 properties of money.
One of the attributes giving gold a high value is its stock to flow ratio. Stock being the existing supply and flow being the influx of newly mined gold onto the market.
Because gold is so hard to produce and is scarce in the environment the amount being created annually is low compared to the existing supply making gold immensely scarce and harder for nefarious actors to debase and counterfeit .
Gold wasn’t widely accepted as money because we all hallucinated that it is money. It was accepted as money because it was the best available material fitting all the criteria a money needs to be effective at its purpose. There is no shortage of materials on the earth available for us to choose from to use as money.
We could all individually choose whatever we wanted to use as money but this wouldn’t work due to indirect exchange being far less efficient then direct exchange.
Money is a solution to the coincidence of wants problem. If I grow apples and believe that apples are money and want to trade apples to you for a pair of shoes, but you do not want apples. Then unless I can find someone who wants to trade with me something you want for apples, that I can then trade to you for shoes. Then I am out of luck and will soon only have a basket of rotten apples. This is the exact reason money exists in the first place. We had the problem of coincidence of wants and used human logic and reason to come up with a solution that is money. Over thousands of years we have come to the conclusion that gold was the best means available to serve as money. mostly due to the fact that it is scarce and no amount of hallucination can change this.
For most of history money and the state were separate as money predates the first known governmental structures by thousands of years. Everytime the state did get involved throughout history they would devalue the currency to enrich themselves at the expense of their citizens. Money is of most value to everyone when without the interference of the state. We use logic and reason to make that which has the most suitable innate properties to use as money we will all naturally adopt. Money itself is really a technology. A technology that binds society together and is the basis for which we are able to build almost every other technology we have today in the modern world. Money allows for the diversification of labor, a wider variety of goods and the ability to store the value of time and energy and inherently the best one will be picked based on its intrinsic qualities.