One of my earliest memories is having arguments with my (now sadly departed) Great Grandmother. Not angry arguments, but sort of intellectual ones. I’d argue things like “cows don’t have horns” (- I thought only “bulls” did, but turns out I was wrong.) Or “money isn’t worth anything”.
This last one must have been a strange one for an adult, for whom money is so important, to hear from a pre-schooler. But even then, I think I was right. My point was that money, in and of itself, is pretty worthless; just a piece of paper with ink on. If you were trapped on your own on a desert island, a suitcase full of £1,000,000 in bank notes would be pretty worthless. You’d be much happier if you could magic that into a few sandwiches and a bottle of water. Money has little intrinsic value when considered in isolation.
Of course, money is very valuable because of what you can do with it. Imagine a barter economy, whereby you can only buy things by directly swapping them with other things. If you had to buy a pint of milk, you’d rummage through your house, trying to find something to swap for it. Maybe your television? No that’s far more valuable than a pint of milk. You could cut the TV into a hundreds of little pieces, and swap one little piece for the milk – but a little piece of a TV is worthless, it’s all or nothing. Maybe you could offer a can of coke? But the shopkeeper doesn’t like coke, only lemonade. Your neighbour has lemonade, maybe you could swap your coke for their lemonade, and then this lemonade for the milk? Anyway, you see my point, you could raise a cow and milk it yourself in the time it takes to figure out all these swaps*.
Money is so valuable because it avoids all this haggling and negotiating – it acts as a medium of exchange. It can be exchanged for anything else. Everyone will want money because it can stand in for a pint of milk, or a coke or a television. Also, unlike my television example, it can be split up. A half of £100 is worth £50, whereas a half of a television is worth diddly-squat. And it’s much easier to store and carry around with you.
It is also a measure of value. No one can peer inside your brain and see how happy a purchase makes you. But when buyers and sellers agree to a purchase, the amount of money is a way of saying this thing is worth this much to each of us. But now I’m getting onto the subject of markets, which I will blog about in my next economics post.
*That is you need a ‘double coincident of wants’, in the words of economist William Stanley Jevons. Two people must happen to want exactly what the other has at the same time. This is a huge transaction cost – that could stop many transactions from happening.