Money (Part 1 — The Root of Money)

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Disclaimer: Some of the terms and/or definitions used throughout this piece may differ from common economic nomenclature.

Money is an essential part of society.

For some, our whole existence revolves around it.

For others, it is a means to an end.

How many of us actually understand what money is?
What it represents?
What properties an ideal money has?

Beyond the basic understanding of how to use it, do we really understand why we use it, or where it comes from?

In this series we will explore and uncover the fundamentals of money, starting with The Root of Money.

Value

Value is the relative worth, utility, or importance we (humans) place on everything around us.

Everything we value is either tangible or intangible.

Tangible things have a physical form. They are things we can see, smell, taste, touch or hear (e.g. flower, painting, car).

Intangible things have no physical form. They are things like ideas, characteristics or abilities (e.g. the concept for a garden, a positive demeanor, the ability to sing in tune).

Value is subjective. It is an evaluation that occurs on a personal level.

Due to this, the amount of value placed on something may differ between individuals. In other words, two beings, evaluating the same thing, may perceive a different level of value. For example, one may perceive it as incredibly desirable (high value) while the other perceives it as entirely undesirable (low value).

Our perception of value may also change over time. What we perceive as highly valuable today we may value poorly tomorrow, or vice versa.

There are many reasons why we may value things differently (between individuals and over time), including:

  • personal feelings,
  • personal experience,
  • what we own, or
  • our accessibility to the thing.

For our purposes, it is unnecessary to explore all the reasons why our value judgement varies, however it is important to realise that our value judgement does vary.

As value is subjective, it is impossible to make definitive statements about how any individual does (or should) value something.

That being said, all humans have things in common (such as a need for food, water, shelter, etc). These things we have in common often results in us valuing things similarly.¹

The level of value we assign can then be thought of as having two value judgements:

  1. Our personal value judgement.
  2. An average human value judgement (based on each individuals personal value judgement).

Takeaway:

Value (i.e. the relative worth, utility or importance we place on everything around us) varies between individuals and over time. It is impossible to make definitive statements about how any individual does (or should) value something.

Assets

Every single human being owns several things of value.

That is, we own several things that we (or others) see as worthy, useful or important.

These things may be tangible (such as a carrot), or intangible (such as the ability to bake a cake).

We call these tangible and intangible things of value that we own, assets.

Assets are commonly separated into two categories; Goods, and our abilities/skills to perform a Service.

Goods

Goods are assets that are capable of being owned and traded.²

Every tangible (i.e. has a physical form) asset is considered a Good (e.g. a chair).

Any intangible (i.e. has NO physical form) asset, whose ownership can be traded, is also considered a Good (e.g. a software license).

Goods can be:

  • retained
  • used
  • consumed
  • gifted
  • traded

The ownership of a Good can be moved back and forth between individuals.

If a Good is consumed, gifted or traded, we no longer own the asset.

A Good exists until it is consumed.

Services

Services are the result of using abilities/skills that we possess.³

The abilities/skills we possess are assets (e.g. cooking, woodworking, teaching, etc).

These assets are intangible and non transferrable.

It is impossible for us to gift or trade the asset itself (the ability/skill).

However, we can use the asset to provide a Service.

The only way for us to relinquish ownership of the asset is if we lose the ability/skill and are no longer capable of performing the Service.

Services are distinct from Goods in that we retain the asset (our ability/skill to perform the Service) after the Service is rendered.

We are also unable to refund Services.

To undo a Service, a new Service must be provided.

Takeaway:

We all own several things of value, which we refer to as assets. Assets may be tangible and intangible Goods, or, intangible abilities/skills we can use to provide a Service.

Excess

Any asset we own, beyond what is necessary to satisfy our needs, is considered excess.

The number of things we truly need is very small and relative to what is at the core of our being (e.g. adherence to principles, survival).

Everything else we desire is a want.

We will never willingly relinquish anything we need, however, we are amenable to exchanging wants.⁴

We are amenable to exchanging wants provided the item we receive is perceived (by us) as having greater value than the item we give up.

In other words, we will only willingly trade if what we will receive is worth more to us than what we will give up.⁵

In many instances, the more we own of something, the less we value each individual unit.

For example, if we only have one apple, it is likely we will value that solitary apple more than any individual apple if we owned many of them.

Excess often leads to ownership of things that we value lowly.

At some point we will come across a Good or Service that we value greater than an item we own, so much so that we are willing to exchange our item for it. If the item we want is owned by another person, we may begin negotiations with them to try and find an exchange of assets that benefits both of us.⁶

Whether it be tangible or intangible Goods (e.g. food items, software), or abilities/skills we can use to provide a Service (e.g. good sense of humour), we all own excess assets.

Most of us own excess Goods.

All of us have excess in our ability/skill to provide a Service.

Takeaway:

Owning excess assets often leads to lower value judgement. Lower value judgement often leads to us valuing items others possess greater than items we own. Valuing items others possess greater than items we own often leads to trade.

Economy

As a result of excess, we often begin to value items others possess greater than we do our own. This leads to a desire for us to attain assets owned by others, which in turn leads to the formation of an economy.

An economy is a social structure that comprises the production, distribution and consumption of Goods and Services. In other words, an economy is a system defining how Goods and Services are managed.

There are many aspects to an economy.

In this piece we will be considering the distribution aspect, focusing on the approach of trading.⁷

Trade

In economic terms, trade is the transfer of Goods and/or Services between two parties.

A party being any tangible or intangible entity capable of possessing and trading assets (e.g. a human, a company).

Any place where items are traded is referred to as a market.

A market can be physical (e.g. a bazaar) or virtual (e.g. a cryptocurrency exchange).

Trade between humans has the potential to be (and ideally is) a positive-sum game. In other words, both parties in a trade can (and should) perceive a benefit from the trade.

This is possible due to the nature of value being subjective (i.e. judged by each individual).

Since value is subjective, it is possible for both parties to perceive the item they are receiving as being worth more than the item they are handing over.

In a good trade, both parties (subjectively) walk away with more value than they entered with (win-win).

Any economic trade that seems like a zero-sum game (win-lose) or negative-sum game (lose-lose) is a bad deal. Both parties should always feel like they are receiving something of greater value than they are handing over.⁸

Trade occurs in one of two forms; Direct or Indirect.

Direct trade involves exchanging Goods and Services solely based on their personal use.

That is, both parties want each item for use in anything other than facilitating trade.

In other words, both items being traded are ends in themselves.

Indirect trade involves exchanging one item (Good or Service) for personal use, and another item (Good) used to facilitate trade.⁹

That is, one party wants an item for its use in anything other than aiding trade. The other party wants an item solely for its use in aiding trade.

In other words, one item is an end in itself, the other is a means to an end.

Takeaway:

In economic trade (the exchange of Goods and Services between humans) both parties should always perceive a benefit from the exchange. Economic trade can take place in a direct or indirect manner.

Conclusion

Trade represents a big milestone on our journey to understanding money.

Money only exists to facilitate trade.

Without trade, there would be no money.

In Part Two we will continue our quest to discover the fundamentals of money by examining the different Methods of Trade.

Acknowledgements

The concepts shared throughout these pieces were heavily inspired by the works of the following people:

  • Robert Breedlove
  • Michael Saylor
  • Jeff Booth
  • Saifedean Ammous