Saturday, August 20, 2011

Money as a tool

We are so surrounded and accustomed to money defining many of the boundaries and choices of our lives, so used to it being the hard edge of reality, that we forget that money has a history and has changed over time.

Indeed, many of the biggest mistakes in the economy in the last three hundred years have been to do with problems or diseases of money, such as inflation or credit bubbles.

All the same, money is perhaps the most powerful social tool that humanity has ever invented. It is a remarkable social technology, as I discussed here.

It enables transactions. It is a store of value. It coordinates extraordinarily complex webs of production, conveying information in the form of changing prices.

It is an impersonal, dispassionate way to allocate and distribute resources to people, to motivate them to do things, a mechanism to give and take away that seems automatic.

And it is entwined in a hundred ways with our social system. In the modern world, it is usually connected to status -although of course in the past merchant classes were looked down upon by an aristocracy whose wealth was in land.

It loosens or dissolves many social ties and changes values. It represents security or freedom or independence.

James Buchan, a former FT correspondent, wrote an unorthodox but beautifully written and original history of money named Frozen Desire: Meaning of Money. He starts by saying

Money, which we hope to see and hold every day, is diabolically hard to comprehend with words.

For money is incarnate desire. Money takes wishes, however vague or trivial or atrocious,and broadcasts them to the world, like the Mayday of a ship in difficulties.

He quotes Aristotle's Politics on the invention of money. Aristotle believed money came into being to bring into being an international division of labor:

When the inhabitants of one country become more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use.

But Aristotle also hated money as wealth or profit, and that was one of the roots of the centuries-long prohibition of usury. Wealth arising from exchange

Is justly censured;for it is unnatural, and a mode by which men gain from each other. The most hated sort, and with the greatest reason, is interest, and not from that or which money was devised. For money came into being for the sake of exchange, but interest makes the money itself greater.

Right from the beginnning, money has evolved in surprising ways that surprise or worry us. And right from the beginning, money has been tangled with many moral convictions that structure it.

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