For background, let’s take from the Spherical Model definition
of money, and a few other terms. (I also wrote about basic money terms here and
here.)
Wealth
Wealth is the accumulation of the results of work above what
is needed for subsistence. Let’s quickly review the Robinson Crusoe (simple
world) example:
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| Robinson Crusoe illustration from the first edition of Daniel Dafoe's book |
At first, whatever Crusoe has, it’s a matter of what he is
able to obtain for himself. He fishes. He gathers. He hunts. He plants,
irrigates, and harvests. And barring a catastrophic hurricane or some such
disaster, he is free to enjoy the fruits
of his labor. This is his wealth—the results of his capacity to recover
from the shelterless, foodless situation he finds himself in right after a
shipwreck.
But his wealth is limited by his personal time, talents, and
energies. It might be that, once he discovers another person on the island,
Friday, they commiserate about their limitations. And somewhere along the way
they discover differences in abilities. Crusoe is pretty good at farming, but
fishing is tedious and frustrating, so he often goes without that protein
source. Friday, on the other hand, finds fishing easy, but he’d sure like his
garden to yield more veggies and rice to go with it.
Specialization and Exchange
An idea finally dawns on them. How would it be if Crusoe gave
up fishing altogether and spent more of his time farming, expanding his garden
to provide for the entire population of the two of them? And at the same time,
instead of struggling to farm without success, Friday would spend even more
hours fishing. Then he would trade his surplus fish for Crusoe’s surplus
harvest. They try this, and it works so well, they both have more to eat than
they had before, and they both have more spare time for climbing coconut palms
or hunting—necessary tasks which neither one is particularly good at.
But this trade thing is working out so well that, when they
meet a native who has no trouble at all shinnying up those palm trees, they
make exchanges with him. And another native is very handy with a spear and can
easily take down a wild boar, which is much too big to use up by himself before
it spoils, so he’s glad for the exchange, and the others are very glad not to
have to face those wild boars any more.
They specialize. They all work mostly at what they are best
at. The result of their total labor is now considerably greater than the total
would be without specialization. This leaves them all more actual wealth
(results of labor) and even more time to enjoy the wealth.
Money
Money is a more convenient means of exchange than bartering
goods; a unit of money represents a particular value, equivalent to a standard
unit of work. Money is used for convenience,
When it becomes convenient for the laborers making the
exchanges. It’s up to the society. If Crusoe wants more coconuts, but the palm
tree climber doesn’t happen to want more veggies right now, but he would like
more fish—and it turns out Friday wants more veggies, not coconuts, but he
already checked with Crusoe, who didn’t need more fish. They can make a
three-way deal. Bring in more if you want. But it gets more complicated to
barter without some standard of exchange. Money,
to symbolize that standard value, can be useful.
It’s also up to the society to decide what the symbol of
exchange (money) will be. On this island, they might use clam shells, as some
primitive societies have (bringing us the slang term “clams” for money). Some
societies have used salt, which has some intrinsic value to everyone; that’s
where the term salary came from. Early Central American societies used cacao
beans, which were easy to carry, measure, and trade, and also useful for their
own properties. These people also had incremental units based on a measure of
grain; their units of gold and silver could always be exchanged for a measure
of barley, so they had a standard value. More societies have used gold than any
other single commodity as money. It’s usable as a decoration, because of its
luster, and it’s easily malleable, making it easy to form into coins. It’s relatively
rare, beautiful, and fairly heavy, which makes it natural as a representative
of wealth. Silver, with many similar qualities, is next to gold in common use
as money, most often used for smaller monetary units….
If Crusoe saved himself enough rice to last through a famine,
he could safely exchange the rest of his surplus into clam shells, or gold. And
that would even preserve his work, since his produce other than the rice is
quickly perishable. In an ideal economy wealth would be represented by
something that always exactly equals a standard amount of accumulated
work-value.
Price
Price is an agreement from the seller to the buyer regarding
how much money (representing effort put into obtaining the good being sold) he
is willing to exchange for the item/service being sold.
Do Robinson Crusoe and friends need a government bureaucrat
stepping into their little island world and passing edicts about what would be
a fair exchange? No. The price is set by the worker willing to exchange his
labor. If it isn’t worth it to Crusoe to exchange a basket of veggies for a
mended net, he is free not to make the exchange. But if Friday, who needs nets
for fishing, prefers to spend his time fishing without having to stop and mend
his own nets, he can figure out what a fair exchange is and offer it to the net
mender. If his offer of fish is too low, the net mender is free not to make the
exchange with him, until a bargain can be reached with a number of fish that
will satisfy him. The price is set,
then, by the experts on what they value—those willing to make the exchange.
OK, that’s enough background to help you appreciate these
quotes on price that I came across this week.
This first is from Poverty
of Nations:
Nothing conveys information faster than prices.
Prices convey objective information on the subjective
attitudes and feelings of buyers and sellers. As relative prices change,
options are altered and decisions are made. Perceived benefits and costs are
continuously affected by changing circumstances, including many important
variables that are never constant. In other words, not a person in the world
knows how to make a market work or how to make even a simple thing like a pencil.
But it still happens, because enormous complications are simplified when decentralization
and prices take charge. In these ways, prices serve as an amazing, worldwide source
of instant economic information [Kindle location 3495-3500].
So, price is what gives us accurate truth as buyers and
sellers.
This next is from a Mises introduction of a new book by global
investor and blogger Hunter Lewis, called Free
Prices Now! I think the words are from the press release about the book:
The most reliable barometer of economic honesty is to be found
in prices. Honest prices, neither manipulated nor controlled, provide both
investors and consumers with reliable economic signals. They are the foundation
for a successful economy.
A corrupt economic system does not want honest prices, honest
information, or honest results. The truth may be unprofitable for powerful
government leaders, private interests allied with them, or economic “experts”
whose careers have been devoted to price manipulations and controls….
Can it really be this simple, that economic prosperity and
job growth depend on allowing economic prices to tell the truth, free from the
self-dealing and self-interested theories of powerful special interests?
Yes.
What do prices do? Tell the truth, in the most efficient
way, about the value of a commodity to both the seller and the buyer—the experts
involved in the exchange. No interference in price (particularly including
manipulating the value of the monetary unit) can help convey that truth. Truth surrounding these exchanges helps economies prosper.
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