Lesson 1, Topic 1
In Progress

Money Functions

Money is distinct from consumption goods and from capital goods.

Consumption goods: acquired to be consumed for their own sake.

Capital goods: acquired to produce consumption goods to be consumed in the future.

Money: acquired to be exchanged for a consumption or capital good in the future.

Why is money an important invention?

A money will reinforce all three drivers of economic growth and progress, increasing the quantity and value of our time:

1) Increase the extent of the market, increasing the division of labor:

The establishment of a money on the market enormously increases the scope for specialization and division of labor, immensely widens the market for every product, and makes possible a society on a civilized productive level.

2) Allow for complex economic calculation, increasing the time frame and technological sophistication of economic production.

“Not only are the problems of coincidence of wants and indivisibility of goods eliminated, but individuals can now construct an ever-expanding edifice of remote stages of production to arrive at desired goods because money allows for sophisticated calculation.”

Murray Rothbard

Specialization today: Engineer in a factory that sells all over the world, only produces highly specialized input into a very complex production process. His skills are useless for anything else. Relies on the market for everything else. Long chains of production only allowed through specialization and through money.

3) Increase the ability to save for the future, incentivizing capital accumulation and lowering time preference.

Money is needed because of uncertainty. Money is a tool we use to tame the uncertainty of the future. The better a money is at holding its value, the less uncertain the future is.

With money, human labor, capital accumulated, technological innovations, and trade take place in a large extended system of impersonal exchange. People who do not know each other and do not coordinate with one another directly, nonetheless manage to collaborate to produce highly sophisticated products over very complex production structures.

Money is uniquely different from all economics goods in that it is the one good whose absolute quantity does not matter.

Any supply of money is enough for any economy.

“The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power. As the operation of the market tends to determine the final state of money’s purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or a deficiency of money. Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small. changes in money’s purchasing power generate changes in the disposition of wealth among the various members of society. From the point of view of people eager to be enriched by such changes, the supply of money may be called insufficient or excessive, and the appetite for such gains may result in policies designed to bring about cash-induced alterations in purchasing power. However, the services which money renders can be neither improved nor repaired by changing the supply of money. There may appear an excess or a deficiency of money in an individual’s cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment. (Of course, one must not fall prey to the popular confusion between the demand for money for cash holding and the appetite for more wealth.) The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.”

Ludwig von Mises

Money is the good with the least diminishing marginal utility.

Money is also different in that the more expensive it is to produce, the more desirable it is as money.

“The significance of the fact that the gold standard makes the increase in the supply of gold depend upon the profitability of producing gold is, of course, that it limits the government’s power to resort to inflation. The gold standard makes the determination of money’s purchasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard; it is its main excellence. Every method of manipulating purchasing power is by necessity arbitrary. All methods recommended for the discovery of an allegedly objective and “scientific” yardstick for monetary manipulation are based on the illusion that changes in purchasing power can be “measured.” The gold standard removes the determination of cash-induced changes in purchasing power from the political arena. Its general acceptance requires the acknowledgment of the truth that one cannot make all people richer by printing money. The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper.”

Ludwig von Mises

Keynes, Friedman, and many economists objected to gold being used as money because of the high cost. But that cost is far lower than the real costs of a money that is cheap to produce.