The Standard Definition of Money is in Error

Yves here. This post is elegant in the way it challenges the standard (sloppy) definitions of money. Even if you don’t agree, it will force you to think and articulate why you don’t agree (hopefully in a rigorous manner).

Many people try to attribute a solidity to money (I suspect German has better words that correspond to “thing-ness” for this sort of ideation) that it lacks. The desire to have money be concrete seems to be linked in many cases to the enthusiasm for gold or gold-currencies. But gold’s value isn’t enduring or fixed in any way; it’s value depends on the structure of social relations. For instance, in Vietnam, women typically get a necklace of gold beads in their youth. It’s a dowry of sorts. When conditions became desperate during the war, some women would try trading these beads for food or medicine, or as a way to buy off a possible rapist. The beads, when they were accepted, went for much less than the metal value.

Originally published at Another Amateur Economist

The standard definition of money is in error.

The standard definition of money is given in terms of its three functions:

1: Money is a medium of exchange.
2: Money is a measure of value.
3: Money is a store of value.

Number 1 is at best misleading. Numbers 2 and 3 are simply wrong, and these things are easy to show. It is also easy to show that this is important.

First, the actual definition of money:

1: Money is a token, or instrument, of demand, which is exchanged for goods or services. Or simply: Money is demand.
2: Money is a measure of demand.
3: Money is a store of demand.

In the standard definition, Number 3 cannot possibly be true. Were Number 3 true, money would have value of itself. The value of money would be independent of what ever else an economy produced. But consider, the best monies are those instruments which have no intrinsic value whatever. How can any amount of something which has no value, be a store of value? Even where commodities have been used for money, (and this may be the origin of the error,) they have tended to be those commodities, precious metals, for instance, which, because of their properties, were of only limited economic use. The reason for this is known and simple: These commodities had to be more valuable as money than they were valuable as commodities. If they were more valuable as commodities, they would be consumed, and so their use as money would disappear. But this implies that the value of these commodities, as money, over their value as a commodity, is not intrinsic, but as with plain fiat money, purely a matter of other factors. That is, the value of the commodity as money is not based on any intrinsic value of the commodity to the economy.

So fiat money has no intrinsic value, and therefore cannot be a store of value. If the economy produced only money, that money would have no value. It does not have value as, say, a refrigerator full of food has value, or a tank filled with gasoline. But, what the third function of money actually is is as a store of demand. If you have $100 in the bank, or in your pocket, you have a store of demand, which you can keep as long as you want, and when you choose to, you can spend it. You can demand something which is offered for sale, to the amount of $100.

Then you can take your $100 of tokens of demand and you can go to the grocery store and with it buy $100 worth of food. This shows that money is also a measure of demand: You have as much demand for food, or anything else, as $100 will purchase. If you have more money, you have more demand. If you have less money, you have less demand. If you have no money, you have no demand.

Money is not a store of value. Can it reliably be a measure of value? Economically worthless things may be in much demand, and therefore command a price beyond their value. Yachts, for instance. Economically valuable things may be in little demand, or supplied at prices below their value. Water, for instance. With money, you have demand for these things, at the prices they are offered. But their prices do not reflect their economic value, only the amount of demand, the amount of money, which must be exchanged for them.

This counters the claim that the only value a thing has is that set and measured by the market: The toys of the wealthy are much in demand, but of little value. The goods needed by the poor are to them of great value, but it may be that those poor are only able to demand a meager portion of them. Markets only measure demand. They need not measure value. This is the primary inadequacy of markets.

So because money is demand, or more exactly a token or instrument of demand, it serves as a ‘medium’ of exchange: Because money is not demand for any particular good or service, but is demand for any offered good or service, it may be exchanged for any offered good or service. Money is a medium not in the sense of being an environment for exchange, but in the sense of being a generalized instrument. It is an abstract good, which is offered in exchange for other goods and services. The individual who exchanges his good or service for money then himself has equal demand on others for different goods or services. Money thus flows opposite to the flow of goods and services, not to the degree of the value of these goods and services, but according to the demand for these goods and services that are offered.

Goods or services are thus exchanged for an equal demand on other goods or services. Money, then, is an instrument for comparing the demand for dissimilar objects. However, we have shown it is not reliable for comparing the value of dissimilar objects.

By mistaking demand for value, the standard definition of money thus implicitly fails to distinguish between the value of an object, and the demand for that object. In an informal sense, this results in the failure to distinguish between the needs of an economy, and its wants.To provide another example, the economy ‘needs’ streetlights in Highland Park, Mi. It ‘wants’ yachts in Newport, RI.

If we regard the economy as like a tree, money cannot distinguish between the fruits of a tree, and its roots.

There is a larger issue. The standard definition of money goes back, essentially unchanged, to 1875. See eg. Wikipedia. It is, implicitly, a key part of the foundations of the entire field of economics. That it is in error calls into question the soundness of the entire economics project.

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100 comments

  1. John Merryman

    Basically it is a voucher system which has metastasized. With a voucher system it would be obvious that an excess of such notes would be destructive to the system, but now the economy is geared to the function of creating capital as its end goal.
    Money and finance function as the blood and circulation system of the economy and as such, using them to store what amounts to fat is extremely unhealthy.
    What most people save money for is very predicable; housing, health, child and elder care, education, leisure, activities, etc. We don’t necessarily need an enormous industry, whose primary goal is rent extraction, to allocate voucher functions, if we develop systems within the community and the various parts of the economy to pre-pay these functions, as well as develop strong social bonds, that significant aspects are organically incorporated back into community functions. What would be a greater store of value, than a healthy environment and a strong community?
    Much of the history of finance has been to exploit other regions and economic opportunities that have largely been exhausted and we are going to have to find ways to rewrite the rule book and not count on endless growth to maintain stability. “Go forth and multiply” has run its course. Now we have to build on feedback within the system.

    1. TheCatSaid

      Thank you for drawing attention to the time-related aspect of money. David E. Martin has compared money to a promise of future satisfaction (since the pieces of paper or digitized bits are not of inherent value in the moment in which they are given). IOW if you pay me $8 for a loaf of artisan bread, the $8 is something that I might (!) be able to use in the future. But I can’t eat them or build anything significant using them while they are in their present state. (I’d have to first transform or exchange them into something else–all of which are transactions that would occur in the future, if they occurred at all.)

      1. MyLessThanPrimeBeef

        It can be for something one used in the past as well as something one will be able to use in the future.

        For example, if one’s a food taster, one is paid $8 for something one ate the past 20 minutes.

        1. TheCatSaid

          One wouldn’t normally literally eat money. You use it to buy something soon, or save it, or lose it or give it or use it to buy something much later–whatever you choose to do with it, its next use/exchange will be in the future. In any scenario, there’s a time dimension. It represents something that will be honored in the future.

          If I work (as a taster or as anything else) and I get paid with conventional money, the “goodness” or value of the money itself only occurs when I use it in the future.

          Unless perhaps I eat the physical bills, feed them to slugs/snails, compost them, or make origami or artwork with them–but none of these are the “normal” use of “money” in physical form. As for digitized money–it’s harder to think of scenarios where they are of potential immediate inherent value not requiring future use or exchange.

      2. John Merryman

        The power of money is that it is just such quantified hope. This then leads to the desire to possess it in and of itself, rather than for its function of facilitating exchange.
        We need to get back to understanding it is a contract, not a commodity. It is in the interest of banks and government for people to think of it as a commodity to acquire, because it then becomes the medium for any and all exchanges between people and thus making these basic relations taxable. It a bit like when Walmart comes in and displaces local commerce. While it seems easier and more efficient, their intention is draining resources out. So if people begin to understand that it is a form of baiting the trap, they might go back to more informal means of exchange whenever possible.

        1. TheCatSaid

          “So if people begin to understand that it is a form of baiting the trap, they might go back to more informal means of exchange whenever possible.”

          This is probably one of the most important tools we all need to be developing, and scaling even for large exchanges. People in Greece have already begun doing this, and while not the focus of this thread, the Greek people’s ability to do this (or to fail to do it) will be a major determinant of how they fare in coming times, regardless of what political decisions are made.

      3. terrymac7890

        “money now is the nothing you get for something before you can get anything.:
        frederick soddy

    2. Jef

      Standard definition of money; Something which without it you will live an ugly existence and die so we can withhold it in order to get you to do the things we don’t want to do.

  2. Moneta

    Money is a claim on resources and energy. However, the calorific value of the claim is unstable since power groups and societal mores are always impacting it.

    If one sits down and calculates the calorific value of every good and service vs. its importance in maintaining life, one quickly realizes how mispriced everything is.

  3. Andrew

    Money is less demand than command. It has value because it commands labor e.g. goods and services. One question then becomes why and how does it command labor? Why are we willing to work for it? Karl Polanyi suggested that one of the reasons was that money (in addition to its three standard functions) also uniquely served as a means to settle binding obligations, debt and taxes. From Polanyi’s perspective, money’s “value” does not stem from its dubious status as a commodity, but in its social value as a legal instrument. From my understanding (and I’m sure other commenters can correct me) this is where MMT lands on the issue as well.

    1. Justicia

      Correct. The sovereign has decreed greenbacks “legal tender for all debts public and private” and it demands that we tender those greenbacks to pay our taxes. Whatever other currencies we use for exchange (bitcoin, baseball cards) must be converted at some point into legal tender to pay our debts to the sovereign

  4. digi_owl

    My personal take on why certain metals ended up being use for money is their resilience to the elements.

    Gold and silver do not easily rust. Thus they can be stored, or even buried, for long durations.

    Also, i think the concept of coins evolved from the concept of weights. This in that you start out measuring exchanges by weight (at least for grains etc), then at some point it becomes easier to simply exchange the weights rather than do actual measuring. This likely because some regional military/religious power start putting a brand of certification on the weights, underwriting their accuracy.

    1. John Smith

      Gold is a crude, expensive way to make counterfeiting difficult since it is rare. Technology* has long made that usage obsolete.

      *Such as the English Tally Stick, used successfully for about 800 years, till around 1826 iirc.

      1. MyLessThanPrimeBeef

        Gold is hard to counterfeit and, like cash, anonymous.

        Technology is still working on the latter.

  5. DLW

    This argument seems extremely wrong. Suppose there is a single-family home for sale with two interested buyers: a billionaire looking to purchase an investment and a teacher looking to purchase a home. If the billionaire gives an offer of twice as much as the teacher, then the usual economic argument is that the billionaire demands the home for twice as much as the teacher does and hence the market is well functioning. However, the utility of the home to the billionaire is much lower than that to the teacher, and so the sale price is not reflective of the utility of the transaction. The notion of utility seems to be lost in usual economic discussions of the definition of money or inequality. Beyond a certain level, money is used to induce political power in different institutions; this notion is also missing from existing definitions.

    1. greg

      The more money you have, the more demand you have. Yes, the more power you have.

      The powerful, buying trinkets, are less concerned with utility than the poor. But that is the point of defining money as demand. It divorces money from utility, to which the definition of money as value weds it.

      There is still a relationship, of course, but it diverges from that which might ‘maximize’ an economy’s utility, The poor, of course, will continue to spend money to maximize their utility, given their circumstances, and so will the rich, given their circumstances. But the poor, with their money, are decreasingly able to influence the larger economy. And the rich are increasingly insulated from the real economy, and increasingly involved in the financial economy, which seems to them to offer them the greater returns.

    2. peter

      Let’s say for your billionaire argument’s sake that the current trend continues for ever and money and property gets ever more concentrated into fewer hands, the ultimate endgame being that all money and property is in the hands of a single person (or a few). The winner takes it all, like in a good old-fashioned monopoly game and the rest of us end up as indebted slaves. Then what’s the demand for the winner who already owns the universe? Is there any demand left? And what about us slaves? Is ‘negative demand’ even a valid concept in this context? The best definition of money would probably then be a measure or token of enslavement. No services or products are offered at all in exchange for negative money/demand other than prisons, misery and death squads.
      What about money as a measure or store of value? Other than for historians, it is not because there is nothing left of value for our hypothetical ultimate endgame champ to purchase. Not until he is willing to part with some of his money and some of his property or produce that the lucky beneficiary could spend the money on is there any value. Furthermore, being a monopoly, he can set the price of anything all by himself just for giggles. Heck, he may burn it or throw it out of helicopters. It no longer represents a claim on anything of value or wealth. Money doesn’t make sense unless it is exchanged by the community at large, so there’s a social and participative aspect to it too, without which the system is undermined.

      1. greg

        You should check out this article by Karl Widerquist: “A Dilemma for Libertarians,” where he discusses such a thing happening. (In the Libertarian context. Available for download here:) http://works.bepress.com/widerquist/6/

        Really excellent.

        I have thought of this situation, and it seems to me that as demand (money) and real assets both become more concentrated, they are decreasingly available to reward labor. And so increasingly force must be resorted to. In the end, no carrot, all stick.

        An individual with all the money would not have a monopoly on demand. With barter, each object traded has a demand value to the person trading it away that is greater than the use value of that object to that person.

    3. Jack King

      Well the billionaire is not a very smart investor if he buys for twice the market price…..and if he continues with such foolish investing he won’t be a billionaire for long.

  6. Jack King

    Gold backing fiat currency does not work. The Quantity Theory of Money in equation form proves why. Gold supply experiences extreme stasis. The fact that the supply increases so slowly is exactly what gives it it’s value. But if world economies are growing, and the gold supply does not keep pace, this results in deflation….which is an economy killer.

    1. Polonius

      Deflation is only an economy killer in an economy dependent upon inflationary growth. In other words, people who fall for your argument have fallen for a tautology. We have been conditioned to believe the present system in which the banking system siphons rent off the creation of the medium of exchange is the only system. It’s not. In fact, it’s a horrible system. I worked in all parts of the banking system for almost 30 years so I speak from an informed perspective. Deflation is the natural state of an advancing economy. Think about it: what good is an economy that requires higher and higher prices in order to function? On the contrary, such a system is the antithesis of “economy.” The entire banking system is superfluous, unnecessary, dare I say parasitic. The treasury should spend money directly into the economy for the purchase of tangible goods and services which benefit society overall. The whole premise that government needs to tax or borrow money in order to spend is insane. I am a capitalist to the core, and saver of silver and gold, so do not become angry at reading this last statement. Think before you react. We live in a system of creditism, not capitalism, my friends. Our present system is perhaps the biggest lie ever foisted upon man.

  7. Tinky

    “But gold’s value isn’t enduring…”

    Actually, when compared with currencies, gold’s value has been remarkably enduring. In fact, is there any form of “money” that has proven to be remotely as enduring in value as gold?

    1. Greenbacker

      Sorry, your not making any sense. Who is gold valuable to? The Rothschilds as controlling the global money supply in the 19th century?

      Gold is a invention of the intellect. Attempting to create value from something valueless.

      1. Tinky

        What on earth are you talking about?

        Setting aside the obvious fact that gold has industrial value, rendering your summation completely wrong, it quite clearly has had real value for several thousand years.

        1. MyLessThanPrimeBeef

          A lot of things are valuable.

          For example, diamonds, after-shave, makeup or hair bleach.

          Why should gold not be valuable to various individuals?

          I find a piece of Neolithic stone tool or a Song dynasty bowl with gold rim valuable.

          And if my friend likes to collected signed baseballs, what were not valuable to me before suddenly are valuable now. So, I am influenced by others. I am not the sole arbiter of what is valuable, even for myself.

          If someone says to me the gold coin I dug up in the backyard is worth $5,000, and wants to give me his car for it, who am I to argue?

        2. washunate

          You just have to chuckle. Greenbacker apparently has never heard of the Opium Wars. Or Judas selling out Jesus. Or the millions of Amerindians who lost their lives in the Spanish mines. Or Roosevelt dimes.

          Oh wait, sorry, maybe Greenbacker is actually making a really subversive argument. Gold is valueless because [drumroll] silver is what is valuable.

        3. Praedor

          Gold has very little “industrial value”. It is valuable, in small doses, in electronics due to its immunity to oxidation or corrosion, as well as its high conductivity. Gold is useful in very small doses in science: atoms of gold bound to proteins at specific residues can be examined by xray diffraction and its general shape/conformation deduced. It can be formed into nanocages for delivering nanodrugs or chemicals (biology). Beyond these very few VERY specialized uses, gold is useless. It is structurally weak so cannot be used in building/manufacturing. It cannot tolerate high temperatures. It flows under relatively low pressure. Gold is useless in most cases except in science, medicine, and electronics, each in VERY small amounts only.

          1. washunate

            I’m curious about that description. It sounds to be mixing up the cause and effect?

            Gold has tremendous value. It is generally nonreactive and nonallergenic, conducts heat and electricity well, reflects IR radiation, resists tarnish, resists bacterial infection, and so forth.

            That gold is used in such small amounts commercially is a consequence of its general rarity and specific financial usefulness driving up the price to where only very specialized commercial uses are presently profitable. In an alternate universe where the world’s governments and billionaires gave away all their gold, or where gold was as plentiful as other metals like zinc, industrial usage would almost certainly increase dramatically.

    2. human

      Also, Yves example of golds’ immediate value, under duress, only highlights how easily its’ value is manipulated for gain.

      1. Tinky

        I find that example to be worthless (no pun intended). Why? Because the exact same “argument” could be made against anything that is used as currency or money.

        If you are in a desert, dying of thirst, and have a suitcase with $1m, you’d gratefully hand it over to someone offering to sell a glass of water. So, under duress, those dollars were worth far less than they would be in a different context.

        1. frosty zoom

          hahaha!!

          https://en.wikipedia.org/wiki/The_Rip_Van_Winkle_Caper

          Farwell, who is older and heavier, loses his canteen, and DeCruz offers him a sip of water from his canteen, for the price of one gold bar. When the fee goes up to two bars, Farwell strikes DeCruz with the gold bricks, killing him. Farwell then continues to a highway, lugging the gold that he refuses to abandon. Finally, weak and dehydrated, he collapses. Farwell offers his last gold bar to a man from a futuristic car that has driven up, in exchange for water and a ride to the nearest town; but he dies a few moments later.

          As the man, named George, gets back into his car to report Farwell’s death to the police, he quizzically remarks to his wife, “Can you imagine that? He offered this to me as if it was really worth something.” The wife vaguely recalls that gold had indeed been valuable at some time in the distant past. The husband replies, “Sure, about a hundred years or so ago, before they found a way of manufacturing it,” and tosses the gold bar away.

          1. MyLessThanPrimeBeef

            At the end, it’s potable water and clean air that we find valuable.

            Bottled inside secure bitcoin-looking capsules (perhaps gold capsules), capable of being unlocked only by its registered owners, that would be an ideal currency.

    3. John Smith

      “In fact, is there any form of “money” that has proven to be remotely as enduring in value as gold?”

      If so then the reason is government privilege for it or the expectation (hopefully false) thereof.

      Fiat COULD be enduring in value IF it was not burdened with bailing out banks or ameliorating the damage (eg the Great Depression and its child, World War II) they cause.

      The problem is government support for banks, including implicit support such as lack of a Postal Savings Service instead of government deposit insurance, not inexpensive fiat.

  8. Alan

    I suggest that money is best defined as a claim on the resources (goods and services) of society. It’s not the only such claim (although neoliberalism would like it to be so), but it’s the most versatile of claims. This definition brings to the fore the social aspect of money, which conventional economics seems to prefer to denigrate or obscure by the use of naturalistic or technocratic definitions that imply a force of nature standing outside of society.

    1. MyLessThanPrimeBeef

      One entity’s claim is another entity’s promise.

      And that claim is limited, not by the monetary amount, but one’s ability to exercise it – ‘no minors can buy liquor here,’ for example.

      “This corporation is not for sale to foreigners.”

      “Sorry, you have exceeded your quote of water (or gas). We are in a drought (oil crisis).” – here, we run into the problem of the society’s limited resources. And promises can not be unlimited.

  9. TheCatSaid

    “Money is a symbol representing our values. It is also a means of energizing our values and activities.”

    Regarding friends who had a perceived lack of money:
    “Perceived lack of money reflects confusion about values.”

    This is info I received in 1993.

    The input regarding money being a means of energizing our values and activities was particularly eye-opening for me. It has led me to be more conscious with the spending decisions I make on a day-to-day basis.

    1. cnchal

      . . .But consider, the best monies are those instruments, which have no intrinsic value whatever.

      Money measures price. You decide value.

      1. jrs

        Then yea it’s probably why using terms like value is at this point deliberately ambiguous (and only helps the glorification of wealth) so definitions as demand are better. And at a certain level of wealth of course money is power.

        Confusion about values may cause some middle class money problems for sure so I love WhatTheCatSays says (I think there’s a point where your hard up enough it hardly matters – a choice between food or medicine and the like).

  10. vidimi

    i think if you exchange the word ‘value’ for ‘wealth’ in definition 1 then it would be pretty accurate. if the money goes to shit due to hyperinflation, so does your monetary wealth. money’s ‘value’ is proportional to the demand for it but is it fair to say it is demand? in hyperinflation, demand for the money collapses but demand for the goods it normally purchases goes through the roof.

  11. Noni Mausa

    Money is one among many social levers used to mobilize and direct human energy, attention and time. If human energy is not involved, you don’t have an economy.

    Money offsets demand in time, and whenever supply and demand are offset in time, the time gap between them allows for degradation of value, often due to malfeasance. Major example: the famous disappearing American pension plans.

    In times when the slippery quality of money becomes extreme, owners of capital will shift it into other forms of leverage. These can include land, commodities, armed or unarmed overthrow of social institutions, public relations initiatives, and more.

    Noni

  12. cnchal

    Money is not a store of value. Can it reliably be a measure of value? Economically worthless things may be in much demand, and therefore command a price beyond their value. Yachts, for instance. Economically valuable things may be in little demand, or supplied at prices below their value. Water, for instance. With money, you have demand for these things, at the prices they are offered. But their prices do not reflect their economic value, only the amount of demand, the amount of money, which must be exchanged for them.

    This equates to money = morality. The author of the post ascribes a moral definition to things. Yachts are worthless, and water is valuable.

    Yachts would be worthless, if there wasn’t any water. Enough people have a surplus of money to “demand” a yacht, and to them it is economically valuable.

    This counters the claim that the only value a thing has is that set and measured by the market: The toys of the wealthy are much in demand, but of little value. The goods needed by the poor are to them of great value, but it may be that those poor are only able to demand a meager portion of them. Markets only measure demand. They need not measure value. This is the primary inadequacy of markets.

    The instrument that measures price, is blamed for not measuring value. Deciding what has value is up to the individual.

    The fact that the rich have cornered money, and buy politicians with it to skew the system evermore in their favor is a political problem, not a medium of exchange problem.

    1. greg

      Owning a yacht, while people go hungry, is a moral statement, especially when that yacht is obtained through aggravating hunger, rather than ameliorating it. Practical concerns are moral concerns. This is indeed sometimes an argument for economic efficiency. Can economics ever be separated from its moral dimension?

      Where the people who run the economy, say, sacrifice the infrastructure of that economy, and so the ability of that economy to produce goods and services for all its members so they themselves may have more toys, that is their moral choice.

      Where it affects the understanding of an economy, and thus the directions people give (in) that economy, the definition of money has moral implications. For one thing, to ascribe ‘value’ to money suggests, to me, to ascribe to it moral weight, ‘moral value,’ in and of itself. (This does raise a question, though: What are the moral dimensions of QE?) And, thus, more moral weight to those who have more money, and their actions, what ever those may be, however creative or destructive those actions may be.

      To be sure, a yacht does enhance the well being of one, or a few. And a farm enhances the well being of many. Money, and the market, say to us that an equally denominated in money investment in a yacht or a farm are equally valuable to an economy. But they need not be. And that is why money is not a reliable measure of ‘value,’ and why economic calculations based on money as ‘value’ will mislead. And likely be morally incorrect.

      If we instead regard money as demand, the issue becomes how to best distribute demand throughout the economy to best serve the needs of that economy and the needs and wants of the people who depend on it. Clearly, catering to the demands of just the wealthy will fail at this.

    2. Susan the other

      This analysis rings very true to me. If in 1875, when economix was becoming a field of study, money was simply accepted as a store of value and then economix was based on this false assumption, then the whole thing is askew and cannot address the world we live in today. If we were to create a new research field, of demand systems, we’d be better prepared to handle all the irrational problems in our markets today. And if we redefined money as demand, understanding that markets can only measure demand, we’d be able to rationalize providing the money demanded in a flawed market system for those goods and services. For instance, the SCOTUS just ruled against a new EPA requirement on the cleanup of mercury because it imposes economic hardship on the people who did the polluting back when the market in all its lack of wisdom thought pollution had no consequences. Providing sufficient money that this cleanup requires is a political decision now. The intersection of money and politix wherein the value of clean water is never represented. Because markets. So this analysis could be used in a thousand problematic situations to discard old fallacies about the “value of money” – because it has no value aside from the things it accomplishes (satisfaction of needs).

      1. Susan the other

        And also too. It seems to me that the whole frenzy about keeping the dollar strong is just another way of saying keeping money scarce so inflation of value (which doesn’t exist intrinsically) does not erode the store of value accumulated by the rich. Which further hinders using money as it should be used.

    1. greg

      An IOU is a demand on a store of value. Same for money.

      If you are lost in a desert, an IOU in your pocket will not help you, whereas a canteen of water may.
      Were someone who had water with you in the desert, your IOU might not be of sufficient ‘value’ to obtain any water from them.

      Of course, this example shows that even the ‘economic value’ of a thing may depend on the economy it is a part of. A distinguishing feature of money, then, would be that it is completely dependent on the economy it is a part of.

      1. greg

        Also consider: You and a companion are in the desert. He has a bottle of water, and you have his IOU. You have one store of value, and one store of demand.

  13. washunate

    Fascinating read. I appreciate the acknowledgement that there can be differences of opinion. Money is like love and beauty and justice, an idea that has manifestations in the physical world but is distinct conceptually from those specific forms. And like other human ideas, the particulars tend to vary from one human to the next even as we can describe broadly similar themes and practical qualities.

    For my two cents, money is labor. More thoroughly, it is the conceptualization of the value of human labor and how we transport that value across spacetime.

    Are FRNs money in washville? Yep. A hunk of gold? Yessir. Beenie Babies? Mais oui. Promises to babysit the neighbor’s kids if they shovel your driveway? Yeppers. An American Silver Eagle? Of course. Keystrokes in a computer? Mohnayyyyyy.

    ***

    I don’t have any particular attachment to the ‘standard’ definition, I’m not even sure what that really means (if this is a distinction between all chartalists and the very few hardcore socialist hard money advocates, this seems like making a mountain out of a molehill. Virtually no one wants a fixed exchange rate between, say, the USD and a hunk of gold. And at anyrate, I learned medium/unit of account, not medium/measure, so even the specific jargon isn’t central to the story).

    But I don’t see anything particularly inaccurate about the standard view, either. The currency money is for transactions while the wealth money is for consumption and storage apart from the transaction system (or perhaps a better English word is financialization). Categorizing money into medium of exchange, unit of account, and store of value can be a rather useful framework. For example, having more than two variables helps illustrate that specific manifestations of money do not lend themselves neatly to Grand Unified Theories of Everything. Fiat currency is great, for example, as being a unit of account and a medium of exchange. But to try and have it do those things while also linking it to a store of value is not consistent with how political economy works in practice over time. Chasing the unicorn of price stability through the money system looks like a black hole to me; the only way you have price stability over the long term is to ensure a functioning political system that invests resources [ie money ie labor] wisely. Productivity of the currency units in directing labor, not quantity of the currency units, is the key determinate.

    On the other hand, there’s nothing wrong with a definition that defines money only as medium and unit, that says money is fiat and everything else is wealth. That’s the same substance using different letters and words. Which, ironically, are themselves symbols, manifestations of the idea of language in the human brain, a system that can vary from person to person in the particulars even as there are broadly shared themes and practical qualities…

    Indeed, it’s exactly why linguists refer to standards and dialects instead of correct and incorrect. If an audience understands your communication, then it is not incorrect. If someone else is willing to perform human labor for something you give them – whether that something is a verbal promise or a stick of wood or a gold coin or a piece of paper or a signed baseball card – then that something is money. This holds true no matter what a third party thinks of the exchange. Of course, this is a radical view of humanity and hierarchy, the fundamental basis of liberalism, that individuals are the building block of society. Freedom is the ability to make choices that other people think are dumb, especially the judgment of the self-anointed gatekeepers and control freaks and meddlers and peddlers that arise in any society.

    In an informal sense, this results in the failure to distinguish between the needs of an economy, and its wants.

    I would disagree with the specific conclusion, though. That strikes me as a distinction without a difference. It sounds like working backwards from a desired policy outcome instead of exploring a concept to see where it leads. If the author really is willing to go down the rabbit hole of price not equaling value, that leads to a much more chaotic and disruptive rethink than the author seems ready to acknowledge.

    That’s an indictment of fiat currency, not a support of it. The only solution to that problem is communism. Complete elimination of private property to be replaced by equally shared ownership of all of society’s resources.

    1. jrs

      Only communism seldom advocated complete elimination of private property, only the elimination of private ownership of capital goods not personal property.

    2. greg

      “I would disagree with the specific conclusion, though. That strikes me as a distinction without a difference. It sounds like working backwards from a desired policy outcome instead of exploring a concept to see where it leads. If the author really is willing to go down the rabbit hole of price not equaling value, that leads to a much more chaotic and disruptive rethink than the author seems ready to acknowledge.”

      Actually, I am willing to go down that rabbit hole. Although I’ve had the notion that money was demand for awhile, only a week ago did I realize that the idea of money having value of itself was wrong.

      You have to make the distinction between real, or economic, value, and financial value, which the definition of money as a store of value obscures. Money, that is demand, only indirectly, and unreliably, measures economic value.

      The point,(and you can check out Steven just below, is that resources flow towards the money, towards the demand, and not necessarily towards where they are needed in the economy. Now if the people who have the money represent economic need, well and good. But if the people who have the money do not represent economic need, and the economy has unfulfilled needs, then that is not so good.

      Our infrastructure is deteriorating, because we will not provide it with the money, with the demand, it requires. That is because the people who control demand do not ‘value’ the infrastructure at its ‘economic’ value. The price of investing in the infrastructure is, for them, set above its return. Mmm. More precisely, the expected return on the investment in infrastructure, to them, is set at less than the expected return on other investments. And these other investments are largely financial. (Or foreign.) That is, they are often not investments in the real economy at all. That is, they have no value to the real economy at all. They are extraction from that economy. They are demand on that economy. So the distribution of demand, the distribution of money, increasingly drains the economy, or is stored, and decreasingly capitalizes it. (It increasingly diverts demand away from real capital.)

      I think that makes the point. The price of real investment is becoming greater than the price of financial investment, so the latter is preferred, to the detriment of the former. But the latter, while valued by those with the money, those with the demand, has no value without the former. But those with money (who apparently imagine money to have value in itself,) undervalue the real economy, and so under invest in it.

      It is the distribution of money, the distribution of demand, which determines whether or not the nominal value, the price, reflects the real value. The standard definition assumes the equality.

      1. washunate

        Well said. I think this discussion is very valuable. That assumption of equality permeates so much of the discussion of political economy. But once you start seeing policy-entrenched inequality, it’s remarkable how broadly and deeply you see it. That’s why secrecy is the calling card of authoritarianism in its current forms, from compensation practices to job assignments to evaluation of work performance. Imagine if each organization that receives federal support had to report annually the job titles, total hours worked, and total compensation of every employee. That would open some eyes in a hurry.

        You can substitute labor for money and we are right in alignment describing the same phenomenon.

        Our infrastructure is deteriorating, because we will not provide it with the [labor], with the demand, it requires.

        Of course the tricky part is defining a common set of values with which to ‘price’ these things. There are many different ways of getting people to perform labor and many different types of projects – not all of which are worth the cost of the tactics needed to direct such labor.

  14. vteodorescu

    For a much more accurate definition and description of money, read Mitchell-Innes (free on the internet), “The nature of money” by G. Ingham (hat tip to Calgacus), Warren Mosler, L Randall Wray, and anything from the MMT school of thought.

    In short, money is debt. Nothing more, albeit debt is of many kinds.

    Happy reading,!

    1. MyLessThanPrimeBeef

      And what is debt?

      A claim?

      A store of value (for bond mutual funds)?

      Something to be traded, exchanged?

      1. jsn

        it could be considered an obligation, or maybe a “demand” if there is force behind it

      2. vteodorescu

        debt is a relationship between two people

        through the ages there was a transformation of nominal debt between two people to anonymous debt to a country’s productive pool

        The authors recommended above make a much better job at describing the intricacies of the system than I ever could dream of doing! :)

        Happy reading!!

    2. greg

      Money as debt is indeed the origin of most of it. And money is extinguished when debt is repaid. To say money is debt, and then stop, though, does not seem to tell us anything about its function. Does it?

      So while also useful, I do not think this definition affects the usefulness of the functional definition of money as demand. Nor does it mitigate what I think to be the error of the standard definition.

  15. Herman Sniffles

    “…the best monies are those instruments which have no intrinsic value whatever.”

    “If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?”
    ―Lewis Carroll

  16. Johannes

    By far the best definition I’ve seen is the following:

    MONEY IS AN IDEA BACKED BY CONFIDENCE.

  17. JTMcPhee

    “It” apparently governs and intermediates everything (e.g., “black” money used to buy weapons from the global arms bazaar to sneak via CIA routing into Syria and Libya and many other places, to be used to destroy one status of semi-stability and replace it with one more “copacetic” to the looting of other “stores of value” in the form of the “commons” that are consumable or even, like food crops, renewable resources, that happenstances of the cosmos have located in particular geographic areas where the indigens ain’t orgainzed well enough to keep the predators from taking their stuff, inter alia by bribing their rulers with “money” that gets turned into what, luxury goods like solid gold toilet seats, and chained out to other power players who are happy to use guns and propaganda and demagoguery to set the conditions for their own local ascendance as part of the great Concentration of All Things Into the Ownership of the Very Few. Fascinating that “we” are able to use and be abused by whatever “money” is, that somehow facilitates the killing of millions, maybe billions, the sorrows of half the planet’s muppet-and-mope population that just does day to day living while being stripped and whipped by a few who have figured out how to use “money” to create “wealth” that equates to unimaginable excesses of “pleasure” for them and pain for the rest of us.

    A five dollar bill in my wallet: “buys” a loaf of bread, a Starbucks coffee, a light bulb. Five dollars as a tiny drop in the ocean of, e.g., the great sloshing blood-tinted “money” that leads so many to believe that “free trade” is “good,” that it’s ok to “spend” a quarter of the “value” of the global annual “wealth generation” on both the fraudulent and grotesquely wasteful and the violently destructive and destabilizing war machinery, which “we” somehow value as more valuable than keeping ourselves from destroying the habitability of our only planet and our little locales from which our food and shelter and community (such as there is any) originate. Five bucks as a “bit” in the flow of high speed trading? as a “notional value” in the fucjed-up idiocy of “DerivativeLand?”

    How many categories of “money” are there? It ain’t even close to being something unitary, subject to a simple definition.

    Maybe it’s like the citric acid cycle in the biological world– a process, a flow, that can produce beauty and peace, or cancer and violence. And only a few of us are smart enough to share our efforts to study and understand the many arcs and orbits of the Krebs cycle, or keep more than a fraction of it in our little pea-brains at a time.

    What we ain’t got is an organizing principle, as a species, that would keep us going at least until some non-self-induced event like a K-T calamity put an end to us. The horror is being self-aware without being self-aware enough, with such a mean vein of selfishness that we even worship and justify cutting right through us… In the meantime, bring on the dancing girls, and bring out that caviar from the nearly extinct Beluga sturgeon — slurping the last tiny bit of that would be such a “rare” and delicious pleasure… Because after all, says the oiligarch, “I have LOTS OF MONEY, so I CAN AFFORD IT…”

  18. Steven

    I liked this posting because it focuses on what money is used for in the real Main Street economy, not on Wall Street. But Frederick Soddy’s “Wealth, Virtual Wealth and Debt” (2nd edition) remains by far the best discussion of the subject of money and its function I’ve encountered.

    A quick, high level overview:
    • ‘wealth’ is what you exchange for money, either as a buyer or a seller;
    • ‘virtual wealth’ is wealth “in the pipeline”, i.e. either existing or newly produced wealth available in the market place;
    • ‘debt’ – debt is money, i.e. a claim on the community’s wealth. And from the community’s perspective money is debt, an obligation of the community to furnish the bearer of money a quantity of wealth equal to that which (s)he exchanged to get the money.

    Soddy doesn’t attempt an exhaustive definition of wealth. But he does provide at least a first approximation, one based on its energy content (calories). “Natural energy” is one Soddy’s list of the three ingredients of wealth. The other two are “discovery”, (i.e. advances in science and technology) and “diligence” (what we would call ‘mental labor’ and what is increasingly being taken over by computers).

    Unlike this posting, there is nothing ‘metaphysical’ in Soddy’s discussion of money and wealth. His prose may be difficult to follow but his logic in lead-pipe simple. Check him out: Wealth, Virtual Wealth and Debt” (2nd edition)

    1. craazyman

      I have a jar full of European coins from the 1980s.

      Why won’t they work anymore?

      Deep thawts from the mental submarine.

      Why is a 2000 year old penny worth $10,000 but 10,000 Lira is worth less than a penny?
      A 2000 year old penny with a shiny face is worth $20,000!
      Is it the shine?
      A shiny penny today, brand new, is worth a penny.
      What’s up with that? You’d think the newer improved penny should be worth more than an old penny from 2000 years ago. Where can you spend a penny from 2000 years ago?
      None of this make any sense.
      Nobody ever make sense when they write about money. I’ve noticed that, personally. It’s like everybody is lost wandering in a mind cloud of fog bound incoherence. I wonder why that is? I think I know why but it would take a long time to type it out.

      1. MyLessThanPrimeBeef

        Those who can, monetize.

        Those who can’t, write about money.

        With that, we come to the realization concerning the ongoing Greek drama – monetize it.

        Charge people who read or comment on the story.

        Monetize.

        1. craazyman

          That doesn’t sound like a 10-bagger strategy, at least for us.

          I’m surprised people read what we write in the peanut gallery for free!

          You’d sort of think they’d want to be paid for their time.

  19. Dr. Luny

    Money began with mercenaries. Before money, mercenaries were paid with plunder, and if there was no plunder to be had they would either leave or plunder the societies of the people who hired them. Money was a way of stabilizing the relationship of these violent foreign forces to local societies. It was given in place of plunder, and, as with bartering away plunder, could be used by those mercenaries to get what they wanted and needed. After a few centuries of violent warfare, monetary systems of exchange displaced more traditional economic arrangements. Money’s flexibility and universality let it serve as a sort of peaceful proxy for violence between communities, which allowed the large and stable empires of the Iron Age to function and prosper. The role of money descended from the political to the commercial and it wasn’t until the development of industrial societies that money came into widespread use in common individuals’ daily lives.

    So the demand mentioned above was originally a demand at spearpoint, and implicit in its demand, even today, is the cumulative historical process of organized violence. It is no accident that actual violence invariably accompanies the disruption of monetary regimes.

  20. Thure Meyer

    That’s very interesting. Kind of like energy

    – Money is a measure of the demand potential
    – Money is a store of demand (energy)

    I like his definition a lot

    1. MyLessThanPrimeBeef

      Oil is energy.

      Oil can be used to back a currency.

      It seems, then, oil is money and energy is money.

  21. Chauncey Gardiner

    Thank you for a thought-provoking post that added to my understanding of money. However, I disagree with the author that “Money” is simply demand. While demand for “money” is essential, and can be engineered by a monetary sovereign through various mechanisms such as taxation and forced legal acceptance of the fiat for settlement of all debts, the supply side of money (how money is created and distributed) is essential to an understanding of what money is and how a monetary system works IMO.

    An economics professor with whom I once worked in constructing a website told me that money in all its various forms is simply a gigantic accounting system where the input entries on the supply side are made by government through spending money into existence, and through the Federal Reserve and privately owned banks through their creation and extensions of credit. I tend to favor his definition of “money”.

    1. greg

      I was riffing off the definition found in most Economics 101 textbooks: “Most modern textbooks now list only three functions, that of medium of exchange, unit of account, and store of value, not considering a standard of deferred payment as it is a distinguished function, but rather subsuming it in the others.” https://en.wikipedia.org/wiki/Money

      So this is a functional definition, what it is used for, as opposed to a definition including where it comes from. Which is also important, since it is the origination of demand, and therefore demand streams, in an economy, and this must indeed affect its function, in particular its macroeconomic function.

      Your professor seems to favor the MMT point of view, to which I also give considerable credence. But it is the distribution of money, of demand, in an economy, which I consider to be of primary importance. And which I discuss in some of my other comments to this post.

    2. Steven

      Your professor apparently didn’t read Hyman Minsky: “Any unit (i.e. anyone – Steven) can create money. The problem is getting it accepted.” – somewhere in “Stabilizing an Unstable Economy”. He would have been correct in saying that most of the world’s money is created and exists mainly in accounting ledgers. I believe even the Fed has said it effectively controls only somewhere between 20 – 40% of the nation’s money supply. The rest is (or was before 2008) created by the ‘shadow banking system’. Traditional bankers helped you create money by backing your promise to pay with, if necessary, their own capital and legal tender they could get from the Fed – effectively the power of the state. The shadow banking system backs the money it creates with financial engineering, the purpose of which is to blind the recipient of the money it creates to its essential worthlessness.

  22. JTMcPhee

    Interesting, that the discussion has a certain bourgeois cast to it. No discussion of the distinction between “needs” and “wants.” Value? Demand? Price? All kind of frothy on the top of the basic functioning of social creatures, ensuring the survival of the nest, herd, flock, swarm, community, and of the species, and the meeting of basic needs for all… The last being my normative wishfulness, of course.

    1. korual

      Well ultimately there are no needs, only wants, since you don’t need even to be alive. You might think food is a basic need, but the sellers of food desire money in exchange. If they could, they’d sell oxygen, like in that film Total Recall.

      1. JTMcPhee

        Maybe YOU don’t “feel” the need to be alive, but it’s kind of imprinted in every cell and cellular component in your body. You can “need” to override that gasping reflex that activates as the O2 and CO2 levels change when you hold your breath until you turn blue by placing the barrel of a shotgun under your chin and aiming so you blow your brainstem out the back of your head. Apparently an increasing number of Greeks and other desperate people whose “needs” are ignored by the fu__ers who have figured out how to use the mechanisms of “market” and the coercive power of government or simply raw force to accumulate the clout and “stuff” that money can buy. The notion that your fellow humans have no ultimate needs is a moral position, and my bet is that most ordinary people, who might sit in cafes and tavernas to sip espresso or enjoy a little something from the patisserie or find an edible leftover in the dumpster or garbage dump would call bulls_t on that. As for sellers of food,including industrial and fast food, wanting money in exchange, I guess they want it because there’s no other widespread medium of interaction that allows those sellers who don’t even need to be alive to continue to be alive as their cellular necessities tell them they should do.

        Of course it seems to me that our species, or enough of us to accomplish that end for all the rest of us too, has a death wish, and is going about committing murder-suicide in a very compendious manner. And as with the heart muscle fibers that will struggle to keep pumping until the last normal lifespan breath, to stay alive, the ego of the assh__e with the ability to load and point a shotgun can trump the impulse to keep on living, and kill the family and himself to satisfy his “need” for surcease or whatever…

  23. Bobbo

    Another debate about definitions. Sigh. My copy of The New Shorter Oxford defines money as follows:

    [OFr. moneie (mod. monnaie change) f. L moneta mint (in Rome), money, orig. epithet of Juno, in whose temple the mint was housed] 1 A current medium of exchange in the form of coins and (in mod. use) banknotes; coins and banknotes collectively. ME b Any objects of material serving the same purposes as coin LME c One of the four suits in packs of playing cards in Italy, Spain, and Spanish-speaking countries, and in tarot packs. L16 2 Property, wealth possession, resources, etc. viewed as convertible into coin or banknotes or having value expressible in terms of these.

    Now surely the Oxford English Dictionary knows something about definitions of words in the English language, no? For those who think “money” means something else, I suggest you coin a new word.

    1. hunkerdown

      Appeal to authority, and a false one at that. Casual, succinct definitions have no utility in formal analysis.

      1. Bobbo

        Formal analysis goes off the tracks when it starts saying that casual succinct dictionary definitions are wrong. Perhaps they are incomplete, perhaps words can have a different/alternate meaning, perhaps words can have a technical meaning to specialists in a particular field. But please don’t go telling me that the dictionary definition, which comes with etymological references, has everything upside down and completely wrong.

        1. Skippy

          The issue of units to denote exchange is quite varied, focusing on the term money is antiquarian in origin – commodity unit.

          As legal tender laws establish the term currency, its a bit of a difference with out distinction to quibble about the term money – in a sense of narrow closure.

          Skippy…. projection of antiquarian operational realities to this space and time is quite wonky, all sorts of distortions and bias comported to truisms can only muddy the waters in seeking reality.

      2. Mel

        “Mathematics [the most formal of all] is the subject where we have no idea what we are talking about, nor whether what we are saying is true”, according to me and Bertrand Russell. The more stringent the definition, the less sure we can be that the real-world object that we’re looking at is one of those.

  24. EmilianoZ

    How can any amount of something which has no value, be a store of value?

    How can a glass hold water if it isn’t made of water? How can a mirror project my image if it is not already me?

    So many questions, so little time!

  25. Brett

    The definition of money is not in error. It’s the definition. It’s like saying the definition of water is not H2O. Of course it is.

    The real problem is whether fiat currency is money or not. The article makes a strong case that fiat currency does not fit the definition of money….. but that’s a different argument.

    1. greg

      If I thought the moon was a large body of green cheese in orbit around the earth, that is how I would define it. Even if everybody agreed with this definition, it would still be wrong. That is one of the ways science progresses, by replacing definitions of things that poorly correspond to reality, with those that represent reality better. My claim is that the definition of money I presented represents the reality of money better than the standard one. More, that the standard definition is a poor representation of the reality of money. The definition I presented is, as Chauncy Gardiner points out above, and as I conceded, incomplete, but in the same manner as the standard definition is also incomplete.

      Any explanation based on definitions which poorly represent reality, is probably going to poorly represent reality as well.

      As for whether fiat currency is money, anything can stand for money, since anything can be offered up as demand for something else. Implicit in any such offering, however, is the idea that the thing is more valuable to the person offering it as an token of exchange, as demand, than it is valuable in itself to the person.

      With fiat currency, this lesser value is pure opportunity for the person holding it, the other things that could have been demanded with a given amount of currency. These other things were held to be less in demand, yes, less valuable, than the item for which the currency was exchanged. With gold, besides opportunity, it includes all the wonderful things you could have done with that gold, but decided not to.

    1. greg

      No. You are ascribing an intrinsic value to money which it does not have. Money is demand on that ‘concretised’ human energy. This distinction is what the post is all about.

      1. jrbarch

        ‘Value’ is in the eye of the beholder. Demand on concretised human energy is simply to put it to work.

  26. StevenT

    One can never discuss ‘money’ without discussing politics. In essence, ‘money’ be it in whatever form represents the sovereignty of a nation. Money is secured by confidence. Just like how the US Dollar in the current state of the US economy, still has an unlimited put. The put is backed by the 11 aircraft carriers navigating the globe daily. However, due to unequal access, debt resulting from the unlimited(limited) put has to be diligently managed, as graft and excess can create scenarios where the confidence gets shaken, or thrown into the abyss. This is where economists come in. How does a nation managed growth vs inflation; or stability vs deflation? How much a specific currency (money) is worth in retrospect to everything else ie land, food, starbucks, iphone etc is depending upon political leadership. The world’s most advanced nations such as the Nordic states and Singapore has practically nothing except for money itself, but yet their money is worth more, or much more than nations backed by nature or God. Hence, to have money, the citizens must actively take part in the politics of the country. Money is more than just a medium of exchange or demand, it’s an exchange of blood, toil, and tears of the citizens to the government, for the purpose of stability, and peace. Everything else is academic.

  27. al

    please differentiate between use value and exchange value (if you don’t want to refer to Marx you may refer to Adam Smith). Otherwise you don’t get rid of these silly examples of water in the desert.

    Your ‘refrigerator full of food’ surely has use value – but try to buy something with it …

    Also: why doesn’t a really thirsty person have to pay much more for a drink in a restaurant than a modest thirsty one?

    1. greg

      Please see the reply to Rob Lewis below. Marx and Adam Smith both had their insights. And their blind spots.

      The point of the silly examples of water in the desert is that if you count both that IOU of his in your possession, and his water, as assets, you are really counting his water twice.

      As for why the really thirsty person doesn’t have to pay more for a drink in a restaurant than a modestly thirsty one, this is actually a question answered by a supply and demand diagram from Economics 101. The price for all buyers is set at the equilibrium point at the intersection of the supply and demand curves, and so is independent of any individual’s particular consumer surplus.

      Of course, the restaurant could be an effective monopoly, and practice price discrimination, in which case the really thirsty person, were he seen as such, might indeed have to pay more.

  28. Rob Lewis

    While interesting, it seems to me this notion founders on the meaning of “value”. Saying that yachts have no value is, well, a “value” judgment and a matter of opinion that depends at least partly on one’s politics and morals, not to mention your economic station.

    1. greg

      Actually, we can come up with a pretty objective notion of real value. Compare an oil well to a yacht. The oil well produces oil, The oil is valuable to the members of an economy. Its products are used to provide energy and primary factors of production which drive the economy and contribute to the wealth of all the economy’s members. This is the case even if we subtract the costs to the economy, both internalized and externalized, of capitalizing the oil well and producing, processing, and consuming the oil.

      Now consider the yacht. One or a few people derive a moderate increase in utility for what may be as little as a few weeks a year, for the considerable cost of capitalizing and maintaining and operating that yacht. For that yacht produces nothing else of use to the economy. For this small benefit, it is a burden on the economy and that economy, and the other members of that economy are poorer in the lost opportunity of the resources the yacht consumed and consumes. These resources could have gone to infrastructure, or education, for instance. The rest of society pays, and keeps on paying. So one can go further than say the yacht is of no value to the economy, and say that the yacht is of negative value to the rest of the economy. Yet, the distribution of demand, that is the distribution of money, gives us the yacht, instead of the high schools, or the highways.

      So. If we consider money as the measure of value, then the oil well and the yacht may be of equal price, and therefore equal value. But if we consider money as a mere measure of demand, then though they may be of equal price, and therefore equal demand, they need not be of equal value.

      Of course, the wealthy purchaser of the yacht may consider the value to society of that yacht to be equal to the value to society of the several high schools which perhaps could have been built instead. Who would we be to argue?

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