So exactly what is this stuff we call money?

[anthrovolution]

With so much talk about the economy I keep hearing people ask, “What exactly is money, anyway?” To my amazement, even the experts don't seem to know exactly what it is or how it works. Maybe I don't either, but I think I have a clue. Here it is:

When I was in High School I was taught that money was a 'medium of exchange'. It is that, but that is only the first part of the definition. Here is the whole thing, which I will describe as we go along.

Money is a medium for the exchange of labor


Labor? What's that all about?



Labor is a process that expends energy, physical or mental, to add value to some commodity. All value, it turns out, requires labor to create it. Really? Don't some things have an intrinsic value without any work being performed on it. Actually, no. They may have a potential value, but that potential is not realized until someone does something to realize it. Here is an example. Lets say a monkey is sitting on its butt looking at a piece of fruit hanging in a tree. The fruit has many potential values. The monkey can use it for nutrition, or the fun of consuming it, as a present to attract a mate, and maybe many other things of value. None of that potential value is ever going to realized, however, as long as the fruit is hanging in the tree. The monkey has to get off its butt and climb the tree and grab the fruit. Without performing that labor the fruit will never have any value for the monkey. The monkey has to actually do something to realize the value.

Here is another example. Lets say there is a gold nugget laying on the ground. Gold certainly has potential value laying on the ground. It's value will be realized when someone picks it up, takes it to a gold dealer, and trades it or converts it into something that can be of real, not just potential value. That requires some labor. There is some work that must be performed to realize the potential value.

How about a beautiful picture hanging in a frame on the wall. Doesn't that have value just hanging there. Well, no. Not unless someone actually looks at it and engages in the process of appreciating it. That requires labor. It's mental labor, but work nonetheless.

Lets imagine a small community that has a number of laborers but no money. They can exchange the value they create by trading the fruits of their labor. We have a farmer who grows wheat and corn and vegetables. We have a rancher who grows cattle and sheep and goats. We have a candle maker that makes candles to light the dark nights. We have a butcher who processes the meat products. We have a baker who processes the grain products. So we have everything we need to form a little community where the various players can trade the fruits of their labor so that they can all eat and have light. The system they use is called barter. The candle maker can trade candles for bread and meat. The baker can trade bread and cakes for more grains, and meat, and other products. The only problem with a barter system is that is can easily, and usually does, become imbalanced.

A barter system becomes imbalanced when one of the players needs to trade the fruits of his labor to obtain a product and the producer of that product does not need this players commodity. Lets say the candle maker wants to trade for some meat, but the butcher is overstocked with candles and does not need any more. How then is the candle maker going to get the meat? One thing he can do is to trade for a goat from the rancher. Then he can trade the goat to the butcher for some processed meat. The goat then becomes a medium for the exchange of candles for meat. As you can see this can get pretty complicated in even a small village.

As the little community becomes more sophisticated some enterprising person decided to create an artificial medium of exchange. This would be something that has no intrinsic value except as a medium of exchange. Lets say we use pebbles. There would have to be an agreement amongst the people in the village that they would impute a value to the pebbles so that they can be traded for product. The best way to impute this value to the pebble is to trade if for labor. If the baker and the butcher and the farmer all have employees, then they can pay them with pebbles. These workers will then use the pebbles to purchase commodities such as candles and meat and bread. These merchants accept the pebbles as payment and then use them to buy wax and grains and farm animals which they then convert to the products which they sell.

The pebbles have become money.

The pebbles allow the fruits of their labors to be traded in a manner that can be balanced. The butcher will always accept pebbles from the candle maker even when he is currently overstocked with candles. The barter problem has been solved.

So do the pebbles have value? The pebbles have little if any intrinsic value. Their value in an imputed value based on the agreement of the villagers to use it as a medium for exchange. Exchange of what? Exchange of labor, since the value of the commodities they are trading is fundamentally related to the value added to them through labor.

But what if someone drops their pebbles and someone else picks them up? The picker upper expended very little labor picking them up but he can trade them for full value at a merchants store. What labor is he trading. He is trading someone else's labor. That is an interesting aspect of money in that the holder of the money does not have to be the person who gave it value. That is no different, though, than someone picking up a pile of candles he did not create. They still have value because of someone else's labor.

So whats the point? The point is that money has a very simple definition as long as you don't leave out the one fundamental that creates all value whether it be a barter system or a monetary system using an artificial medium of exchange. That fundamental is labor. Without labor, there is no real value.

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