How to Think about the Economy by Per L. Bylund

Author:Per L. Bylund [Bylund, Per L.]
Language: eng
Format: epub
ISBN: 978-1-61016-755-0
Publisher: The Mises Institute
Published: 2022-07-15T00:00:00+00:00

THE IMPORTANCE OF MONEY

In a money economy, we use money to pay for goods and can easily compare prices because they are all expressed in the same unit—a currency. But, as we’ve seen in previous chapters, prices are really exchange ratios. Money serves as an intermediary that facilitates trade that elevates us above the limitations of barter trade.

The existence of money uncouples people’s buying and selling in terms of goods. It makes universal purchasing power of the exchange value of goods. In other words, I can sell my goods or services to one person but use the purchasing power gained in return (as money) to buy goods or services from someone else. This seems obvious because we are used to it. However, the implications are enormous.

Under barter trade, employment would be possible only where an employer can offer the specific goods an employee will accept as payment. Imagine that your employers paid for labor not in money but instead in specific food items: clothing, hygiene products, books, travel, furniture, etc. It is easy to see that finding an employer who offers the most desirable bundle of goods would be almost impossible. It would likely mean that you would need to accept a bundle that is far from perfect to gain employment. You could do much better if you received the exchange value of those goods instead—the purchasing power (money)—and used it to buy the goods you prefer.

Money is therefore much more than a convenience— it is necessary for exchanges to take place and for the advanced, specialized production processes we take for granted in the modern economy. Large-scale production, supply chains, and specialization are made possible because money uncouples our efforts as both buyers and sellers. Due to the uncoupling, we can also specialize in what we do well rather than produce only what we ourselves want to consume. Consequently, we can focus our production efforts on where we make the biggest difference—where we create most value for society. Without money, we would not be nearly as productive.

The uncoupling also means we can use our acquired purchasing power—what we are paid for producing— on what we find most valuable. Money makes it possible for us to pursue wants that would never be within reach with barter. The consequence of having and using money means not only greatly improved production but also that we can pursue more valuable consumption. The former facilitates and increases the opportunities for the latter. And the more value we produce, the more purchasing power we are paid in return.

Because all actors in a money economy can pursue those goods they value most—and can produce those goods that others highly value—there is more value overall. We are much better off in a money economy than in a barter economy.

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