More than one way to skin a cat

In the previous post, I wanted to build a mill. I needed you farmers to give me food to feed my construction workers. The farmers and I worked out a deal where they gave me the 10 units of food I needed, and I gave them tokens worth 10 units of food. (We know that the tokens are worth that much, because I did in fact get 10 units of food in return for them.) We could say that I made an expenditure of 10 units (we don't yet have a name for this money thing).

Before that, the level of expenditure in the economy was zero. There was production and consumption--people were growing food and consuming it--but nobody was buying anything from anybody else. So my action amounted to 10 units of increased expenditure. That's the money side.

On the physical side, in response to my expenditure you farmers:

• Increased output by a total of five units of actual food
• Decreased consumption by a total of five units of actual food
• Handed me a total of 10 units of actual food.

Increased expenditure of 10 has led to increased output--real economic activity--of 5.

There's a term for your decrease in consumption, which is "crowding out."  In addition to causing you to work harder, my expenditure has pushed aside some of your consumption--though note that it was an entirely voluntary action on your part: I had no way of forcing you to accept my offer that I would give you tokens in exchange for you giving me food.

What if you wanted to take my offer but didn't want to cut your consumption below 1.5?  How could you still provide me with the one unit of food that you agreed to?

The money mill

The money mystery
Money is one of the most perplexing, contradictory things around. It’s the subject of contradictory sayings: “Money is the root of all evil.” “Money makes the world go ‘round.” (Wait, maybe those aren’t contradictory …) We use money on a daily basis and take its existence for granted, yet when we stop to think about what it is and how it works, we often find ourselves confused.

I’m going to show you that money is simple, but also that it’s magical. It can be called into being out of thin air. And yet it can bring about changes in the real, physical world.

The first requirement is to get past the story of barter. If you pick up an economics textbook at random, you’ll probably find something like a story about a village where people trade using barter. The people realize that barter is a real nuisance, because you have to lug your goods around with you, and you have to be so lucky as to encounter the famous “double coincidence of wants”: I have eggs and want shoes; you have shoes and want eggs. Hey! we can trade!

But what if I have eggs and want shoes; you have shoes and want milk; another neighbor has milk and wants strawberries …? Most inconvenient. What if there were something … something that stood for stuff in general? Then we could each go around with this … something in our pockets, buy what we need, and then later, sell what we want to sell when somebody else shows up with more of this … something. Voila—money!

Except that, as David Graeber says in his recent book (and in this blog post), there’s no evidence that that’s how money actually started.