Thursday, April 1, 2010

Nature of Money

Money is not wealth, it is only a tool used to exchange wealth between persons. The advantage of money is that it abstract labor to facilitate more complex trading arrangements. Say three people, Alice, Bob and Chuck are neighbors. Alice grows apples, Bob has a still, and Chuck has a chicken farm. Alice doesn't drink, Bob is a vegetarian, and Chuck doesn't like eating raw fruit. Alice loves chicken, Bob needs apples to distill, and Chuck likes to drink hard cider. Without money there is no ability to barter, but with money Bob can buy apples from Alice by selling cider to Chuck. Alice can buy chickens from Chuck by selling Apples to Bob, and Chuck can buy hard cider from Bob by selling chickens to Alice. By free trade, all can gain from each transaction and the total wealth of the community is increased.

Of course the money itself is simply a token with no intrinsic value - since it is not wealth but a means of coordinating wealth and the production of wealth. It is a means of communicating needs of consumers to producers. Perhaps it can be seen as potential wealth, while good and services could be seen as kinetic or "real" wealth.

A market is a means of discovering the relative importance of objects and activities. If left to itself, a market will lead to the most efficient allocation of resources to meet the needs of the community it serves. Coercion (i.e. governmental interference) can only serve to distort the allocation of resources by effectively granting government leaders a larger voice in the market's determinations than reality would grant.

The free market may be the worst means of coordinating the production and fair distribution of wealth, except for every other means of coordination ever tried to date.

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