On money and wealth, pt. 1

Economics is something of a voodoo subject with many well educated people using confusing terminology to offset how they're as unable to predict the future as someone lacking their education. But why would we expect economists to be able to predict the future? We don't expect biologists to predict the future adaptations of a species, and their field has a unifying theory unlike economics. Unfortunately, what is lost in the jargon of economics is an opportunity for non-economists such as you and me to gain an understanding into one of the principal methods by which people interact: through money.

In this series of posts I'd like to explain some insights into what money and wealth actually are and some interesting conclusions. These insights are far from original; together they are a mishmash of others' ideas but weave a coherent model of explanation. There are other valid models to explain money and wealth; this one I'm writing about I find useful for thinking about the current state of the economy.

What is money?

It's curious how during inflation goods' and services' prices increase but become cheaper for most people and how during deflation goods' and services' prices decrease but become more expensive for most people. I think that by understanding this unintuitive correlation between prices and affordability one demonstrates a fairly comprehensive understanding of the money supply and what money actually is. But what does it mean for something to become priced higher (or lower) while at the same time becoming more (or less) affordable?

It means that the affordability of a good or a service has less to do with price and more to do with how much a buyer is willing to spend. For example, if the price of bananas doubles and my salary triples then bananas have become cheaper to me. Inversely, if the price of bananas decreases by half and I lose my job then bananas have become more expensive to me. But does there really exist such a correlation between salaries and prices?

I'll describe a model for wealth that answers this question in the affirmative, though it will take some time to do so. But I'm not an economist; I care little for the field's maze of jargon; and so I'll try to outline my ideas as clearly as possible. Here it is, starting with a subtype of wealth: money.

All money is a promise to pay in the future. It could be a promise to pay just about anything at anytime, made from anyone and to anyone, and the specifics of the promise depend upon the form that money takes. In the cases where the form of money is very specific, such as an IOU from my friend, the promise tends toward the concrete; my friend promises to pay me something very specific, such as lunch. In the cases where the form of money is very general, such as the greenbacks in my pocket, the promise tends toward the abstract; many people are promising to pay many others, including themselves and the next generation, a great many unspecified things, such as a banana crop next year or even something ethereal, such as technological advancement. (These abstractions are terribly complex, and in this post I'll attempt to demystify things by focusing on the simple to highlight the conceptual rather than on the complex to detail the exact.) In any case a promise has been made, and that promise is what gives the money its value because money has no value of its own. In the case of the IOU, value derives from the likelihood that my friend will give me something of value in the future, such as a lunch; in the case of the greenbacks, value derives from the likelihood that the world will continue producing things of direct value to me (and others) and that I (and others) will be able to trade the greenbacks for those things of value, such as a lunch, a bicycle, or shelter for a month. In both cases the money's value depends upon the likelihood that something of value is owed.

Money is something of value based on a promise, but is it true that money is anything of value based on a promise?

No, though most such things are. There are some more ethereal types of promises that are of value but do not make sense to consider as money. A good example of such a thing is love. Love has value and is based, among other things, on a promise, but love isn't money because it's nontransferable (at least, not willfully and not controllably). For example, my mother's love for me is valuable to me, but I cannot make it valuable to you except only indirectly, such as if I took you, a stranger, to my parents' house and my mom made lunch for both of us.

This transferable element of money's value is what distinguishes it from other things of value based on a promise. So here's my definition of money: money is anything of transferable value based on a promise.

In the next post I'll philosophize about what wealth is.