Saturday, May 30, 2015

MONEY | What Is It?

Published by Veronica Lane Books, 2014.
On the third day of BookExpo America last week I met Etan Boritzer and got a copy of two of his books for children about economic topics.

The first one I read is What is Money? - in its fourth printing by Veronica Lane Books.

When Boritzer and I talked, he said he has had some success with the book because it allows for altruism - a topic in which economists have recently become more interested. (Although economists have been long interested in the "grants economy" - i.e., gifts made with other people's money.)

The concept of non-monetary transactions should be introduced right at the beginning of a discussion of the role of money in an economy.

The official economic definition of money generally begins with its role as a
-  Medium of exchange, i.e., an agreed-upon basis for buying and selling goods and services.
-   Unit of accounting, allowing all parties to keep track of the value of things and services, and track income and expenses, savings and investment.
-   Store of value, so that decisions to spend can be made sooner or later.

Boritzer goes at the question in his book for children (K to 7th grade) a different way. He asks why we need money. He notes for the record that children "don't really need money" because their needs are largely taken care of by their parents. But children are commonly given an allowance to manage, they are given extra money from time to time, and they can also earn money.

What I like about the book is that it discusses money in the broader context of social cooperation and service, keeping a place for unilateral non-monetary gifts of goods or services.

When economists consider the alternative to non-monetary transactions, they talk about how difficult it is to barter because the seller of a chicken may not want, say, a basket of carrots. But there are other contexts in which the exchange is not a quid pro quo.

Transfers of goods and services are routinely conducted between individuals on a voluntary and unilateral basis through convention, habit and altruism. Parents look after their children with nary a monetary transaction for many years.

Barter is an imperfect method of arranging a transaction if it is intended to be immediate. If all you have is radishes to barter, you won't tempt me to trade my chicken for a year's supply of radishes. But a chicken could be exchanged for several weeks' worth of carrots, delivered weekly.

More broadly, habit, convention and generosity do not require an specific agreement, just an understanding of mutual dependence. Boritzer contrasts chores done for money and chores done voluntarily - routinely doing things and making things for other people within a family:
  • Some of the work that kids do around the house is not paid, and some is. 
  • Some chores are a condition of getting an allowance, or is paid for on an hourly basis or by the task.
  • People can reward you with other things than money, like a kind word or a smile.
  • When you earn money, you can spend it on yourself, on something special to eat or drink.
  • Or you can save it for the future.
  • Or you can give it away. You can buy something for someone else.
  • But money is not the only way that people can give things to their friends.
  • A gift of time, a gift of flowers picked in the back yard, a gift of something that you have made.
This book approaches money from a perspective that is more likely to make sense to a child than the typical introduction to money by academic writers. It makes a contribution by placing money in a larger context than is typically framed by economists.


I just read an answer by Geoffrey Widdison on Quora on the question - What is money?

Here's what he says, slightly abbreviated:
I know exactly enough about money to be dangerous. Here's the thing about money: money isn't real. 
And I'm not saying that from a hippie ... perspective, I mean money is a purely theoretical concept. That’s not a radical idea; it’s something well known to economists, and pretty much always has been. The actual currency in wallets and bank accounts and such are actually a very small part of our economy. The rest consists of stock value and property valuations and so on and so forth. All of that value, upon which businesses, jobs and lives are based, exists only in our heads. The second we lose confidence in that, everything comes crashing down. ... 
Don't believe me? Let’s take real estate as a very relevant example. Pick any given house, what's that house worth? That question is impossible to answer without looking at the local housing market. The value is only partly based on the actual, physical house, a lot of it is based on market forces, which change based on people’s perceptions. To get an estimate of the value right now, you'd look at what people are paying for similar houses in the same area. Problem is, people are only paying that much because they believe that other people would that much for it (and that they’ll be able to resell it without major loss). If they stop believing that, they'll pay less, which means the house is, in a very real sense, worth less. ...
Sound scary? It really is. We live in massively complex and interconnected society where the functioning of our economy requires that most people keep believing in it. ...

Economic growth, which is a very real and vital thing, works a lot like the fairies in Peter Pan, if we say we don't believe in it, it dies.
To which I would add one comforting thought: Money in the United States is what the Federal Government says it is. FDR required individuals to sell their gold to the U.S. Government, then a few months later devalued the dollar against gold (i.e., raised the official price of gold). It helped get the United States out of the depths of the Great Depression. Now, dollars are the medium of exchange by law. The confidence issue relates to how the rest of the world views the dollar, and compared with what?