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Ask HN: What is money?
7 points by roymurdock on Mar 20, 2014 | hide | past | web | favorite | 12 comments
How would you explain the concept of money to a 5 year old? How about a 17 year old? A 30 year old?

Do you subscribe to the classical economic theory that money is a "medium of exchange, store of value, and unit of account"?

Do you have any other ways to look at money?




I raise chickens. You make websites.

You want ten of my chickens. We agree that, in exchange, you will make me a website for my chicken farm.

Then, you want ten more chickens. But I don't need any more websites. However, you have a friend who knits llama wool scarves, and needs a website. You make your friend a website; your friend gives you five llama wool scarves; you give me the five llama wool scarves and I give you ten more chickens.

When you want yet ten more chickens, you introduce me to your friend who grows corn. I wouldn't mind some corn, but the harvest hasn't come in yet, and I'd need to wait a few months. You want the chickens now. So you build a website for your corn farmer friend, who gives you an "I owe you" certificate for the corn. You give me the certificate, and I give you ten chickens. A few months later, I present the certificate to your corn farmer friend, who gives me the corn.

Eventually this becomes a pain to keep track of, and it becomes increasingly difficult to arrange personal connections with people who need chickens or llama wool scarves or corn or websites.

Money lets us exchange goods and services in the abstract. I give you ten chickens, and you give me money, which everyone else will also accept in exchange for goods and services. I can go across town and find somebody you don't know at all and buy a camera from them with the money you gave me for the chickens.


What would your response be if I posited that money is memory? That money is a token that represents ("in the abstract") the memory of an exchange for goods and services?

It is this memory that allows me to buy a camera from someone who doesn't know me. She knows that I earned the money somehow by giving something of value away to another member of society.

Would this be harder or easier to explain to a 3rd grader, and do you think this explanation has merits?


That's interesting. I suppose it's true; the money, be it in the form of paper bills or numbers in an account or whatever, is simply a record. If we all had perfect memory and perfect trust in each other, we could operate based solely on recalling the amounts credited to us.

Is that what you're getting at? While perhaps a fine extension of the train of thought, I personally find that hard to think about, I suppose because, in practice, dealing in terms of memory money would be harder than exchanging documents, and the advantages of using money rather than direct bartering and trading become less clear.


I'll try to keep this short. Money is simply a medium of exchange between two parties. This can take the form of paper, precious metals, cigarettes, animals, etc.

Money arises in a society to avoid the problem known as the "double coincidence of wants”. In other words, it's much easier to trade something like gold as a medium instead of hoping that someone will be willing to exchange their chicken, or even half of one, for my butter. They must want my butter and I must want their chicken. Something like gold is more scarce, portable, durable, and divisible along with many other factors.

I use gold simply because it has a long history as money, but it could be anything. It’s determined by the market. The more desirable something is by the market as a whole, or the more commonly it is used by market participants as a medium of exchange because they know others will accept it, will determine how well it will function as money. Multiple currencies could be used within a market at the same time as well.

Feel free to ask follow-up questions. I love this topic :)


Doesn't money have to be symbolic? OR its barter which doesn't use money. Blur these two and the word quits having much meaning.


I don't understand what you're trying to say.


I think he/she trying to say that money must be symbolic, intrinsically worthless, or else you are essentially exchanging two goods i.e. barter.

When you consider cattle as money this argument is somewhat valid but when you look at our current system of paper and electronic money, it's pretty clear that the cost of paper and ink is negligible.

My question to you is the following: There are many intrinsic properties of a money (portability, divisibility, etc.) and there is one important extrinsic property of money: acceptability. Why/how does one form of money become more acceptable than another?


It's determined by the market. Popularity and the network of people you interact with. Why is Facebook more popular than Orkut?


In my mind, the primary value money has is that it lubricates trade (exactly as tjr described). That provides genuine value to the economic system. It reduces the time and effort it takes to make deals because many people agree on a common value (or medium of exchange) that can be fairly universally traded for things of real value. This takes some of the steps out of making a deal.

Humans can get their needs met without money and did so long before money existed. When monetary systems get wonky, barter and doing it yourself (and similar options) become more popular again because the primary real value money has is that it lubricates trade. When it gets wonky enough that this becomes problematic, it loses a lot of its real value and people return to seeking value more directly (using tjr's example: They return to trading websites for chickens).


I see money as a measure of value.

The exchange of butter for chickens, and determining what exchange rate would be satisfactory for both parties, quite often does not take into account the effort, or cost, of producing the goods. Say it costs the butter producer 5 years of raising a cow, including the cost of grain and water, and also the processing costs, in the total cost of producing butter. Say it costs 6 months of very little grain and water to raise a chicken. Should the exchange rate reflect the "costs incurred" for production?

A market determines the value of these goods, as defined by the demand. That market value is explicitly defined by monetary value. In this view, money is simply a digital representation of the value of goods and services, allowing consumers and producers to more easily draw comparisons.

In many societies, a job in social services is valued much lower than say a job in IT. The effort involved might be identical, but the market determines the value of the occupation.


What is Money? can be broken down into: How is Money used? and How is Money created?

How Money is used is virtually the same for everyone:"medium of exchange, store of value, and unit of account".

How Money is created is more interesting. It is essentially created by fiat, which undermines the general belief that the quantity and value of money are closely associated with the amount of economic goods and services in the consumer economy, and it is not.


Money is a massive scheme to convince young people to do things for old people.




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