Money and the Cycle of Value

There's been a lot of discussion lately about money.  From my wife and I handling our household finances, to people who can't afford to pay their mortgages, to the US government tossing around numbers normally reserved for astronomers, the word "dollar" appears over and over again.  Have you ever stopped to consider just what money is, what it represents, and why it's useful?

Go into your wallet and pull out a dollar bill, go ahead, I'll wait.  What is it?  Well, it's a piece of paper (actually made from cloth) with a picture inked on it, along with a serial number.  True enough, but what IS it?  It's a unit of value.  It represents a unit of value given to you in exchange for something you provided to someone else.  In my case, it's a unit of value given to me by my employer in return for my time and expertise in programming computers.  It's a token of some value I gave my employer.  I, in turn, will give that dollar to someone else in return for something he or she provides and which I value, perhaps a can of soda in the store in the lobby.

This all happens for a number of intertwined reasons.  First, my personal need for computer programming services is rather small.  I rarely do any computer work for myself, but my employer DOES need such services and is willing to pay me to perform them.  Second, it's more important to me to have money to spend than to have the free time I'd have if I were not employed.  This is summed up in a humorous sign I saw once that said "Working here has gotten me accustomed to certain luxuries in life, like eating and living indoors."  Thirdly, I can use the money to purchase some other product or service I need or want.

Money makes a complex economy possible.  Let's explore that for a moment.  The first type of economy was barter, you had a basket of fruit you didn't need but you needed a goat, I had a goat I didn't need but needes some fruit, we trade, and we're both better off than we were.  Or maybe you have a basket of fruit and need a new plow, I have a goat and need some fruit, and a third person has some a plow and needs a goat.  It's easy to see that, the more people you add to the cycle the harder it is to keep track of.  Anyone who's tried to figure out a three or four-way baseball trade can see how quickly it gets difficult, so now enters the concept of money.  Rather than figure out who has to give who fruit, plow or goat to whom, we assign a monetary value to each of those.  If someone wants a goat they give me some token of value for it, I in turn can use that token to buy some apples.  Money actually simplifies the economy.

Money requires the people using it to offer value for value.  I exchange something of value (to someone else) for money, and I in turn use that money to buy something of value.  The person I purchased what I wanted from made the exact same exchange, he exchanged something of value (at least to me) for money.  It's a classic win-win situation at every level.  Theoretically, it IS a cycle.  My employers pays me for my services, which are of value to them.  That money may have come from a bank who paid for work done.  The bank got it as interest on a mortgage.  The mortgage payment was made by an auto mechanic.  That mechanic got the money by fixing someone's car.  The person whose car was fixed works for a company that delivers home heating oil.  That company got the money to pay their employer from me, when I paid for my oil delivery.  At each step money, and value, was exchanged.  Both parties freely entered into an agreement to provide some product or service for a mutually agreed upon sum of money.

However, there is a fly in the ointment.  Money can be stolen.  If someone steals my money, they've taken it from me without returning any value to me.  They have, in fact, broken the cycle of exchange.  They've not only taken from me without providing me any value, they will now use that money to purchase something of value without themselves having provided any value in return.

In an ideal world, running an ideal economy, such a thing would never be allowed to happen.  While we don't live in an ideal world, for much of the history of this type of economy we attempted to discourage such behavior by making the punishment for such transgressions of good order severe.  Only very few people would attempt to steal because the risk of punishment outweighed the possible value to be gained, so the total affect of such behavior was fairly small.  A large economy is robust enough to withstand moderate amounts of thievery, but there's a tipping point.  If too large a percentage of my money is stolen from me, the value of my labor is reduced.  I have less money to buy the things I value, and if things get too bad I may just decide not to bother anymore, why work my tail off when I hardly get anything in return for it.  Once robbery becomes onerous, the entire economic system falters.

I believe this is where we are now, and I believe this is why our economy is in the straits it's in.  I believe that, if we don't reverse this trend, we'll see an economic collapse that will make the Great Depression of the first half of the 20th century look like a mild economic cough.

Don't believe me?  Right now, my wife earns about 2/3 what I do in salary.  Her entire salary goes to pay our tax burden, Federal and State income taxes, Social Security and Medicare taxes, property taxes, sales taxes, right down to the tax on every gallon of gasoline we buy.  Some portion of that money does return value.  The trash is collected, and the presence of carrier battle groups helps me sleep peacefully at night.  Still, how much of my tax money goes to fund bridges to nowhere?  How much went to subsidize the Chevy Volt, which recently ceased production?  How much was paid to farmers NOT to grow wheat?  How much was paid to subsidize ethanol fuel, which when burned releases less energy than was used to make it?  How much went to bail out companies that by all rights should have failed because they didn't produce a product that was of value to anyone?  How much was paid to people who could work but don't, finding it easier to live off the stolen value of others than to provide their own value?

I believe we're very close to the tipping point.  I believe the cycle of value has been broken badly enough that a collapse is a very real danger.  I believe the way to avert that collapse is to repair the cycle of value, to make sure that, as much as possible, people go back to providing value for money and paying money for value.