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Mar 24

The need for money

  • Hunter gatherers had no money – they specialised in different tasks and shared their goods and services through an economy of favours and obligations

  • A piece of meat given or free would carry with it the assumption of reciprocity – say free medical assistance or sea shells (much valued currency) for flint

  • Local trade specialists met local demand, and no more – so few worked full-time

  • Only when large towns/ cities appeared did their demand increase and full-time work become the norm

  • Villages that had certain advantages over others gained a reputation for better stuff (e.g. wine or wheat) so they concentrated on what they were better at, much because of the luck of better soil. climate, resources under the earth, say

  • But then how could they reciprocate with strangers from foreign parts who they may never see again?

  • And bartering becomes a problem when many goods and services are involved

  • Example:

  • You own an apple orchard that produces the crispest, sweetest apples in the entire province – you work so hard that you wear your shoes out so you harness up your donkey cart and head to the market town down by the river – your neighbour had told you about a shoemaker there who made him a really sturdy pair of boots that’s lasted him five seasons – you find the shop and offer to barter some of your apples in exchange for the shoes you need

  • How many apples should he ask for?

  • Every day he encounters dozens of customers, a few of whom bring along sacks of apples while others carry wheat, goats or cloth, all of varying quality – still others offer expertise in petitioning the king or curing backaches

  • The last time the shoemaker exchanged shoes for apples was three months ago and back then he asked for three sacks of apples – or was it four? But they were also sour – and they were given in exchange for small women’s shoes, not man-size boots

  • Add to that that a disease has decimated the flocks around town and so skins are becoming scarce – the tanners are starting to demand twice as many finished shoes in exchange for the same quantity of leather

  • In a barter economy, every day the shoemaker and the apple grower will have to learn anew the relative prices of dozens of commodities

  • If one hundred different commodities are traded in the market, then buyers and sellers will have to know 4,950 different exchange rates

  • If 1,000 different commodities are traded, this number becomes 499,500!

  • And even if you manage to calculate how many apples equal one pair of shoes, barter is not always possible – a trade requires that each side want what the other has to offer – what happens if the shoemaker doesn’t like apples and, at the moment in question, what he really wants is a divorce

  • True, the farmer could look for a lawyer who likes apples and set up a three way deal – but what if the lawyer is full up on apples but really needs a haircut?

  • Some societies tried to solve the problem by establishing a central bartering system that collected products from specialist growers and manufacturers and distributed them to those that needed them – for example:

    • The Soviet Union – but communism failed miserably

    • The theory was: “Everyone would work according to their abilities, and receive according to their needs”

    • In practice, it turned out to be “Everyone would work as little as they could get away with, and receive as much as they could grab”

  • Money was thus created – a universal means of exchange

  • Money is anything that people are willing to use in order to represent systematically the value of other things for the purpose of exchanging goods and services

  • A farmer can sell his land for a certain amount of money trusting that other people will be willing to sell him a retirement villa in the Caribbean for some if not all that money – everyone needs to believe in a common value of that money – and here in the UK we all trust that the Bank of England will also pay up on presentation of a £20 note, say

  • Money thus enables people to compare quickly and easily the value of different commodities, to easily exchange one thing for another and to store wealth conveniently

  • And money is not all coins and banknotes

  • The sum total of money in the world is over $60 trillion (in 2014) yet the sum total of coins and notes is less than $6 trillion i.e. more than 90% of all money exists only on computer servers – and most transactions are executed simply by moving data from one computer file to another

  • According to Dr Yuval Noah Harari, in his book Sapiens from which most of the above was extracted, ‘money is the most efficient system of mutual trust ever devised’

 

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