Money

Posted by PITHOCRATES - November 7th, 2011

Economics 101

The High Search Costs of the Barter System Hindered Trade

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  And trade gave us an advanced civilization.  By allowing more specialists to live together in crowded urban settings.  Creating a rich surplus of goods for trade.  That people traded.  With other people.  Near.  And far.

As trade grew civilizations got better.  The division of labor grew larger.  And more complex.  Producing more things.  Soon there was a rich variety of goods to trade with for other goods.  From civilizations in distant lands.  Which made life more interesting.  And enjoyable.  During that brief time when you weren’t working.  Or trading.  Which was taking more and more time.  To find someone to trade with.  That had something you wanted.  And who wanted something you had.

This is the barter system.  Trading goods for goods.  Producers took their goods to other producers.  And asked, “What will you take in trade for that?”  Often the response was, “Nothing that you have.”  To which the trader replied, “Very well.  I shall keep looking.”  And sometimes would spend days, weeks and even months looking.  And that was time spent not making anything new.  This was the high search cost of the barter system.  And it hindered trade.  We needed something better.

Money made Trade more Efficient and Unleashed the Human Capital of the Middle Class

For civilization to advance further we had to make trade more efficient.  We had to reduce these search costs.  What we needed was a temporary storage of value.  Something we could trade our valuable goods for.  And then trade the value of our goods, held temporarily in this temporary storage of value, for something else of value later.  And we call this temporary storage of value money.

Money greatly simplified things.  Allowed a more complex economy.  A greater division of labor.  And it allowed wages.  Allowing more people to work on more narrow specialties.  These producers could then take their wages to market.  And buy what they needed.  Instead of spending days, weeks or even months traveling to find people to barter with.

Money made trade more efficient.  It allowed cities to grow in size.  And become even more advanced.  It unleashed the human capital of the middle class.  For they could spend more time creating and building new and better things to trade.  And this economic activity allowed more people to live together peacefully.  As producers produced.  And traded with other producers.  All made easier by money.  A temporary storage of value.

Money doesn’t Create or Produce, it just Temporarily Stores the Value of what we Create and Produce

Please note what came first here.  First there was trade.  Then there was money to make that trade more efficient.

At the heart of all economic activity is our human capital.  What we use to create and produce.  Money doesn’t create or produce.  It just stores the value of what we create and produce.  Which is why Keynesian economic stimulus doesn’t work.  Making money to give to people to spend simply does not create new economic activity.

Our skills create economic activity.  That ability to create things other people value.  And wish to trade for.  Because we are traders.  Not spenders.  We trade things of value.  And to trade things of value someone has to create them first.  If you just take things of value without offering something of value in trade it is not trade.  It’s plunder.  And little different from the uncivilized barbarians on the frontier of the civilized world.

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