Friday, September 05, 2008

Money is a unit of measurement

Money is a unit of measurement. It offers a level of abstraction, just like everything else. I don’t see why you need abstract concepts like mithya and maya to explain an abstract concept. Using unknown Indic terms would only lead to more confusion.

Consider this, a village is producing 2 objects, eggs and apples. All you need to know is the exchange. How many apples will I get for an egg and vice versa. Suppose the village produces 5 objects, we now have to maintain a exchange table of 5c2 = 5 * 4 /2 = 10, make it 10, 10 * 9 /2 = 45, n objects results in nc2. I hope you are beginning to see the problem.

This is the exact same problem encountered when you try to relatively measure weight, length, etc. It becomes unwieldy and inefficient. The problems in these areas are solved by standardizing on weight and length and everything else is compared to this standard. If you are considering money as mithya/maya, then length and weight are as well.

In the good (??) old days, Gold was the standard for measuring value and everything was based on that. Since carrying Gold around is somewhat inefficient and cumbersome, paper money came into beign. Any paper money created was backed up by Gold. It carried some value. Now, we have the fractional reserve system and federal banks to screw up with this unit of measurement. If its not standardized (pegged to gold), we have a unit of measurement which is variable. Consider what would happen if we have a unit of length that varies over time. The Govt and Central Bank in addition to stealing large amount of money in the form of taxes, also has a license to print money which is not backed up by production. This creates a stealth tax (inflation or something), which devalues money over a period of time.

The tyranny of Govt doesn’t end there. Govt also screws up the economy by distorting the information. Prices convey information. It is an approximation of how much one values stuff produced. This information disseminates through a complex latticework, known as the market and every person involved in the economy takes decisions, whether to produce or not to (demand and supply), based on this information. If the information is correct, people take good decisions, eg, I would see that people value porn dvds more than apples and would shift my resources in that direction. These information channels optimize resource allocation, which are always fixed. However, Govt interferes with the information channels in hundreds of ways (subsidies, etc), thereby distorting the information that people need. This leads to a lot of people taking bad decisions. Cumulatively, a lot of people taking bad decisions (coz of the distorted information) over a long period of time, is not good, to say the least.

3 comments:

yogijp said...

Originally commented at:

Can Money Simply Disappear?

http://www.deeshaa.org/2008/01/31/can-money-simply-disappear/

I’ve revised my opinion after some deep thought about my last comment. Money is indeed illusory/maya/mithya. I am now an enlightened being. Fortunately, being the kind person that I am, I am willing to help you with your illusion. Sell of all your assets, send me a check for the same and you will be rid of the illusion.

Atanu Dey said...

Money is instrumental in measuring some quantity, of course. It is an abstraction and the actual instantiation of that abstraction can be varied. In the past, all sorts of things have been money. Gold is only one of those. But as humans get more sophisticated in their ability to represent abstract quantities, how we represent money will also change.

From shells to gold to paper money is a progression -- not necessarily liked by everyone and not immune to abuse. Now you can account for all trade digitally. Not even paper need be involved. This is also not immune to abuse. It could lead to even greater inflation than paper (which itself is more "inflatable" than gold.)

But here's the thing. Nothing is immune to inflation. Even gold. Let's say that all our money was backed by gold. Imagine if someone were to discover a mountain sized piece of gold under their farm. Suddenly the guy will be fabulously wealthy. How? Because his find would add additional gold-backed money -- and since nothing in the economy has changed (no new products and services, expect a huge amount of gold), the price of goods relative to the price of gold will go up. That inflation will result from the discovery of gold -- which is exactly the same as the inflation that government does and steals stuff.

For my money (if you pardon the expression), I would rather have straight accounting. It is possible now. We have the means, the technology to keep track of stuff. Let's do away with this government control of money.

Atanu Dey said...

There's an article on money at the Mises.org here.

It is a good background piece. Once again, I am not in favor of gold any more than I am in favor of paper money.