Part I surveyed the problems associated with defining money, and offered a working definition – money is the most marketable good.
Part II took a deep dive into marketability, looking at three different ways we can observe and measure it in the real world.
In Part III, we sought to highlight and restore two fundamental but forgotten functions of money.
In Part IV we bring it all home by asking; “Wait a minute…why does this matter again?
Marketability Explains the “Why” of Money
This entire essay could be summarized by the following sentence:
The concept of marketability provides a better analytical framework for understanding what money is, what it does (function), and how an economic good might become a money good.
Marketability is a foundational principle that both undergirds and unites the three standard descriptors of money.
Why is money the most commonly accepted medium of exchange?
Because the most marketable good is the best to use in indirect exchange for other goods. Meaning, it enables us to engage in indirect exchange at the least amount of cost to all parties involved.
Why is money a store of value stable value? 1
Because the most marketable good enjoys the most robust marginal utility and supply/demand dynamics across all dimensions. This creates a powerful market inertia that acts upon market actors even as these same actors reinforce that inertia through their actions. It’s as if the market were speaking and what it’s saying is “this money is a reliable (stable) source of value yesterday, today, and will continue to be tomorrow and many days thereafter.”
Why is money used as the unit of account or numeraire?
Because accounting in terms of a more marketable good is superior to accounting in terms of a less marketable good.
All of economics can be distilled down to the question of capital allocation, i.e. Have we allocated capital well? That is, have we arranged our present capital resources in such a way that we are accumulating or generating additional capital? Or have we allocated our capital poorly? That is, have we arranged our current capital resources in such a way that we are losing capital? Just as a sharper edge gives you a better angle, accounting in the unit of the most marketable good provides a more accurate answer to the question of capital allocation.
In this essay we added a fourth function of money – the ultimate extinguisher of debt.
Why is money able to extinguish debt?
Because money is both the most marketable good and the most marketable good (real and present). Therefore it is the most capable and most fit good with which to extinguish debt. And because debt cannot ultimately extinguish debt, but merely transfer it to another party.
Why is this important again?
This essay is an attempt to better answer the question of what makes money, money. I want to close by asking another question – does this question and proposed answer even matter? Isn’t this kind of an esoteric subject that only concerns academics or policy makers? Are there any practical implications?
The answer is a loud and emphatic YES!!!
Not only does money matter, but it matters a great deal. So much so it that it would be difficult to overstate money’s importance to our modern way of life.
Good money helps, bad money hurts
For one, the way we’ve answered this money question (by defining money in terms of marketability) implies that not all historical monies are created equal.
Furthermore, that money is not an economically or morally neutral phenomenon.
And finally, that there can be (and there is) such a thing as better (more marketable) and worse (less marketable) money.
Therefore, a very good money (the most marketable) will provide a solid foundation for inter-temporal exchange (borrowing and lending), credit and capital markets, interest rate formation. A very bad money (less marketable or worse – not a real and present good at all) will fail in this regard. It will be a weak and fragile foundation, prone to cracks and defaults which will have a deleterious impact on the lives of real human beings.
But it’s not just capital and credit markets. It’s every market!
For money is on the other side of, or connected to, nearly every market exchange. All markets depend on the quality of money in order to function and perform at their best.
A good money therefore is like a strong tailwind that promotes economic peace, prosperity and human flourishing. A bad money does just the opposite. It’s a headwind that frustrates, thwarts and sooner or later wrecks any attempt at peaceful cooperation, economic planning, and capital creation through entrepreneurship. 2
That’s one takeaway for why it matters. There is one other I’d like to highlight before we conclude.
Free the Market for Money
By defining money in terms of its marketability, we are implying that markets,3 as opposed to a centralized authority (whether that be a central bank, central government, bureaucratic committee or individual), are best suited to dynamically determine which economic good is most fit to be a money good or not.
Indeed, we would go further and say that given this definition, markets are the only system capable of determining what is money and what isn’t. This has enormous implications for today’s political structures and discussions around monetary policy.
I’d argue that understanding money is important in any generation, but perhaps never more so than in today’s time as the world finds itself forty plus years sailing upon dangerous and uncharted monetary waters. The consequences of such a drastic and prolonged move away from market based money are being felt now, in greater and greater degree. It doesn’t feel good. The author fears however, that we have yet to see or feel the worst of it.
We hope that through a greater understanding of marketability, new windows of analysis will open for monetary science. We hope and expect such analysis to be more fruitful than much of what passes for monetary science today. Ultimately, it’s my personal hope that we can return to a good money again soon.
Thank you for reading. I hope you have found this essay to be a helpful bit of pondering on the nature and function of money. I am a student of markets, not a master. If you disagree with something you read in this essay, I’d love to hear what and why in the comments below. Thanks again for reading.
Special acknowledgement to Keith Weiner, Antal Fekete and Juan Ramon Rallo for the formation of these ideas. Please see the following sites for each author respectively.
Keith Weiner: https://keithweinereconomics.com/ & https://monetary-metals.com/
Antal Fekete: http://professorfekete.com/
Juan Ramon Rallo: http://blog.juanramonrallo.com/
Footnotes
- We insist that “stable” should replace “source” in this descriptor. Nearly anything with a market value can be a store of value, which makes this phrase unfit to describe money. What matters to the question of money is how stable or reliable that value is communicated over and through time, space, quantity, state, dynamically changing circumstances, actors, environments etc. When viewed in this light the field is narrowed considerably. Greater marketability translates into greater stability. The more stable the value the more accurately one may engage in economic planning and activity. For example, if an entrepreneur wants to build a capital intensive business which requires careful planning over decades, then it’s imperative that the money he or she uses in the calculus for that venture be reliable and dependable for accounting, measuring and ultimately transmuting value across all dimensions. In such a venture many things are ineradicably uncertain, but money should not be one of them.
One additional note here. We must not confuse money’s stable source of value with the money prices of other goods. Stable prices are neither desirable nor realistic. But a stable money is both desirable and attainable. The institution of money serves humanity best when it is the clear, stable, unobstructed lens through which we view and value the economic activity around us in all its dynamic movement and life. But stable prices per se (especially when they are artificially decreed to be so) are not necessarily good. For prices to serve their vital communicative function in markets, they must accurately reflect the supply and demand dynamics of that particular market, whether stable or unstable. This means prices must “react” in a way that money cannot due to its superior marketability. In other words, the prices of goods should dynamically show us the good, the bad and the ugly reality of the underlying market they are reflecting. But we will only be able to see such a reality clearly if we have a solid and sound monetary unit. To carry the analogy further, a dirty lens serves no one and harms many, for we can never be confident of what’s in front of us. But a clear lens is always a good and helpful thing, for at least then we can be sure of what we’re looking at, even if it is, in fact, ugly. - See Genesis 47:15 “So when the money failed in the land of Egypt and in the land of Canaan, all the Egyptians came to Joseph and said, “Give us bread, for why should we die in your presence? For the money has failed.” – Genesis 47:15
- In case someone needs a definition of markets, then use “the trillions of free, voluntary but highly contextualized choices of trillions of individuals which occur trillions of times every day.”