A SIMPLE EXPLANATION OF MONEY By Isuru Abeysinghe potx

4 227 0
A SIMPLE EXPLANATION OF MONEY By Isuru Abeysinghe potx

Đang tải... (xem toàn văn)

Thông tin tài liệu

A SIMPLE EXPLANATION OF MONEY By Isuru Abeysinghe SMASHWORDS EDITION A Simple Explanation of Money Copyright © 2012 Isuru Abeysinghe The concept of money is something that has been around in human civilization for thousands of years. Yet, to this day, there is a large array of misconceptions, superstitions and outright lies concerning money. Some consider money to be some sort of supernatural phenomenon, like manna from the Gods, which somehow imbues upon each person a quantifiable amount of merit. Other people consider money as the proverbial “root of all evil” – a mechanism of enslavement utilized as the primary tool of either a malicious Devil or the combined society of greedy men. The aim of this document is to succinctly summarize the logical, practical and “real” definition of money and thus provide some insight into how these facts are relevant to the real problems and issues in the financial and social world of today. To first understand what money is, you first need to acknowledge the “why” of money – the very pragmatic and logical underpinnings of why money originated and why is it beneficial to mankind. To do this, consider a world without money. Human beings still need certain things to survive and further things to indulge the special things in life that makes human existence more meaningful than that of an animal. It is given that each human has the ability to create things of value, find things of value, or provide a service of value. However, as an individual, a human being has only so much capacity with regards to the range and variety of what he or she can create and do. They can grow food, or find it in the wild. They can build structures for shelter. They can make weapons to defend themselves. This is all very conducive to survival – but this is cave-man stuff, not the stuff of cars, airplanes and computers. It all becomes very clear that for a person to gain greater standards of living, they need to be able to trade goods and services with other people. This takes us to the first stage of evolution with regard to finance: barter. If two people each possess an excess of something (or the ability to perform a service in lieu of something) that the other person wants, they can come to a mutual understanding to swap those items – thus enriching the lives of both people. Adam has two apples and Jane has a chicken. Adam trades one of his apples for half a chicken. Now, both Adam and Jane have more nutritionally balanced meal. However, consider the following scenario: Adam wants half a chicken, but Jane does not want an apple, she wants an axe. Another person, Peter, wants an apple but wants to exchange for a drinking cup. Jane does not have a drinking cup, but Adam does. Jane wants an axe from Peter (which he has two of to spare), but Peter does not want any chicken. Adam does not know Peter, but Jane knows them both. Because of that, nobody will trade today, because between Adam and Jane (and also between Jane and Peter) there are no items of barter that each party is happy with. Now, we are all thinking the same thing: if Adam could give Jane his cup and an apple, then Jane gave Peter the cup in exchange for an axe then Jane gave Adam half the chicken, the problem would be solved (if, slightly unfairly). Adam would have a half-chicken and an apple, Jane would have an axe and a half-chicken and Peter would have an axe and a cup. It’s getting complicated – and there are only three people involved! Additionally, without having a proper conversation with Adam and Peter, Jane would never think of this system of indirect barter. Image the situation where there is a much higher variety of goods and services, and hundreds if not thousands of people – all wanting and having a different thing! To advance further, which society needs is currency. Currency is something that everybody agrees that they want. They could want it because it is universally useful, universally desirable or because it is well known that it has a very high demand and therefor would be easy to trade on. Two such examples of currency are salt and gold. In Roman days, and in pre-colonial India, salt was used as currency: because it was universally useful. Because salt was the only preservative available, everybody needed it to be able to store meat. This universal need made it the exact definition of currency. Even if you didn’t need salt, there would be a 90% likelihood that the next person you encountered might, so you would easily trade it for anything. Gold is another such example, but more by convention than by practical need. Because everybody wants gold, it is currency. With currency, trade can happen even when the people involved do not have anything directly desired by either party. The usefulness of this system is clear: people can trade much more readily and the flow of goods and services through the economy would increase greatly, along with the respective wealth and standard of living of the human beings in the community. At one point though, people began to realize that the currency they were using was largely arbitrary (especially gold) and was only useful because everybody wanted it, and everybody wanted it only because everybody wanted it! Money is currency that has no intrinsic usefulness. Its value comes from these factors: 1. It can’t be duplicated (or is extremely difficult to duplicate) 2. Everybody accepts that it is currency and can be exchanged for goods and services 3. There is a limited supply of it, which is controlled by the issuing agency (usually government) The third point, the limited supply of money, is an important one. It comes from the core concept: money is only as valuable as the quantity and quality of the goods and services that are available in exchange for it. Having a lot of money, a quantity of money with a lot of zeros behind it, does not intrinsically make a person rich. They are only rich if that amount of money can comparatively get them more goods and services than the respective quantities of money of their peers (other people in society that also have money.) Let’s also say that everybody earns $365 every year, and that apples are the only thing people eat or need. Each person needs 1 apple every day to survive and does not need or desire anything else from life. 365,000 apples are created each year through farming. The population is 1000 people. This is a financial system of complete equilibrium, the exact amount of apples is created that people need, and people are paid enough to afford them. Apples would cost exactly $1! Number of apples created / 365 days in a year = 1000 apples per day. 1000 people need 1 apple per day = all apples are consumed. Each person being paid $365 means that each apple needs to cost $1 for it to be affordable. Now, what happens when we just “print more money” – and pay everybody double their normal wage ($730). The system is now out of equilibrium, now has more money than they need. If you were selling apples, why would you sell an apple for $1 when the guy next to you says, “Hey, serve me first! I’ll give you $1.20 for your apple today?” – Something that he can now afford to do! There will be a bidding war for apples. People might try to stockpile apples for themselves, through fear, causing a shortage of supply of apples and causing other people to starve. Everybody will now be willing to pay more for apples, until the cost of an apple goes to $2. Everybody is being paid double but nobody is wealthier: the supply of apples remained constant. This is why simply printing more money does not make anybody richer. The actual act of making more money has the effect of diluting the value of the money already in existence. The inverse is also true – having less money would increase the value of the money in existence. From the following scenario, instead of doubling people’s income, if we halve it, then apples will eventually cost 50 cents. The only thing that increases wealth is something that should be obvious, I can’t state it more clearly, increased supply. Only by increasing the production of apples can we make it so that people can realistically have more than one apple per day, that is, stockpile. This may all seem obvious to the extreme but as recently as 100 years ago; the leaders of the world did not actually understand this concept. They actually tried to solve the Great Depression in the 1920s by reducing supply! This is after thousands of years of mankind using money, but never understanding it! Obviously, the real world is a lot more complicated than apples. However, the concept of money is not. Add more population, greater variety of goods and services, different levels of income, assets and wealth – the fundamental concept of supply and demand remains the same. There is one thing that makes it more complicated: human psychology. The analogy with the apples shows what happens to a system where inflation and deflation is introduced (that is, the decreased and increased value of money respectively.) If there was only a finite amount of money, then it follows logically that everything would always get cheaper (in the sense that it would cost less money, in numerical amounts) because the population would increase, along with the supply of goods and services. Ostensibly, this is not the case. There can be only one explanation, one which is well known: more money is being printed every day. Why? The proposition of the apples, where everybody was only paid half their normal wage of $365, is an example of benign deflation. Income reduces but demand and supply does not. It can be called benign, harmless, however on closer examination it is not. If you lived in a world where everything cost less money every day, you may be psychologically compelled to simply save your money and defer purchase for a later time when it would cost less. This can lead to a situation where everybody is reluctant to spend, causing a situation where supply is reduced due to lessened demand, causing less wealth (remembering that wealth is the same as supply!) It is generally accepted that in order to work, there must be a small but continuous amount of inflation present in the system, to compel people to purchase things now before the value of their money is degraded. This is why prices and wages will always go up. Too much inflation, however, is another issue. People will be compelled to spend everything as soon as possible, meaning nobody will save. Both these things having nothing to do with the mechanics of money, but rather human being’s psychology. The final thing I will talk about is how money is distributed. We all know that creating more money dilutes the value of money already in existence. We have also seen that money is being printed to maintain a healthy amount of inflation. At the moment, the system works by the government printing the money and giving it away (for free!) to the banks, we will offer the money as loans to the populace. Such a system may seem exceedingly unfair. Why should the banks get free money, increasing their wealth and diluting the wealth of everybody else? Well, my answer to this is that it is unfair: however it is the fairest way that we know of to do what needs to be done. The question is not the fairness of the existing system but: what is the alternative? How will the government distribute the money? If it does so by directly employing people then that will only increase the power of the government and ultimately it will be the government that employs everybody (there will be no free enterprise and private wealth). If it just gives the money away equally to everybody, the system becomes the same as that of the apples – benign inflation. At least with the banks, they will make some consideration on the merit of lending. A business proposal that is deemed more viable than another and therefor incur less risk for the bank will be given priority (a reduced interest rate) than a more risky enterprise asking to borrow money. Banks, although currently unpopular, actually perform a valuable role in the healthy functioning of the economy. In the end, if you are printing money, you need to give it to somebody. The current anti-banking sentiment sweeping the world may be based on true and factual shortcomings in banking policy that have created problems for the world, but to my mind there is still no great solution that will be better than giving those banks “free money” – unfair as it may seem. In conclusion, money is not a God. It is not supernatural or magical. It is a mechanism. It does not have inherent good or evil. However, it needs to be understood. *** . A SIMPLE EXPLANATION OF MONEY By Isuru Abeysinghe SMASHWORDS EDITION A Simple Explanation of Money Copyright © 2012 Isuru Abeysinghe The concept of money is something that has been around. exchange for an axe then Jane gave Adam half the chicken, the problem would be solved (if, slightly unfairly). Adam would have a half-chicken and an apple, Jane would have an axe and a half-chicken. chicken. Adam trades one of his apples for half a chicken. Now, both Adam and Jane have more nutritionally balanced meal. However, consider the following scenario: Adam wants half a chicken, but Jane

Ngày đăng: 27/06/2014, 23:20

Từ khóa liên quan

Tài liệu cùng người dùng

  • Đang cập nhật ...

Tài liệu liên quan