Friday, January 22, 2010

Should money store value - addendum

I want to delve a little deeper into the following quote from my last entry: “Economic activity does not generate value, it rides on value’s coat-tails.” It’s a very strong statement, stronger indeed than occurred to me at time of writing, and even wrong when taken out of context. This entry tries to expand on that sentence and lend it credence.

Economic activity is only possible after a surplus has been created, which is itself only possible after the technologies for recognizing ownership and generating surplus have been “invented,” e.g. farming and domestication of animals. Surplus is only “valuable” if there are others who can benefit from it, with whom one might trade, who themselves have a surplus they want to trade and you want. (From this perspective we can see how important cooperation is to trade!) Economic activity is not value-generation, it “comes into being” upon the generation of multiple, minimum-two-parties-benefitting surpluses which lead to trade. First come the enabling technologies improving yield from existing resources, after which trade can slowly become more complex, until yet further trading complexity is enabled by an agreed medium of exchange – another technology – which gives rise to the study and tuning of this complex trading, which we have called economics.

So value is actually being generated by technological progress, which enables continuing surpluses, which enable trade, while economics is measuring, steering and understanding it. The market (trading) establishes price with the aid of money, price becomes in our imagination a measure of value; money, because it does not rot and has high utility, becomes a “store of value.” This is something of a slight of hand. We have tricked ourselves into seeing value contained within the tool which establishes a price for various traded surpluses, but the true value resides in the surpluses themselves sustaining value, and deeper still in the technology and ecosystem which allow surplus in the first place. What good a store of value like gold or dollars on a planet like Pluto or Mars? There is no “value” stored in money, nor generated by economic activity. Money is an abstraction of value.

This is somewhat of a semantic argument. Trade, also a technology, generates value in that a broad range of people are able to benefit from each other’s surpluses. As technology improves crop yields and other things, leisure time emerges, adding value to people’s lives. The point is philosophical but important in the context of the larger point, which is that surplus must exist before economic activity can, and the technology (and ecosystem) to create and perceive surplus must be securely in place. Value is generated by enabling technologies plus a sufficiently healthy ecosystem. Economic activity is an expression of this, not an instigator. Money, as an enabler of complex trade, expresses the capacity of society to produce a surplus and consume it.

The slippery danger with money being so effective a medium of exchange, is seeing value “stored” within it, above and beyond the underlying ecosystem fundamentals that make money useful in the first place. Money has somehow become more “valuable” to us than the ecosystem. Evidence of this is discernable in the attitude of: “if it doesn’t make financial sense, it’s not worth doing,” which is itself a reflection of the dogmatic belief that the market knows best. The market certainly knows how to value traded goods and services via the price mechanism, but does not trade the health of the ecosystem, nor monitor it, nor maintain it. All in all this is about not putting the cart before the horse. Ecosystem first, then technology, then surplus, then trade, then measuring trade. We need to learn to prioritize things in that order. Money seems to stand squarely between us and that endeavour, for the reasons listed here, and many others.

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