Money Economics and the Banking System Essay

Total Length: 1964 words ( 7 double-spaced pages)

Total Sources: 4

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Money



The existence of money makes exchange easier, compared with barter systems, because money provides a stable store of value. If exchange is conducted with physical goods only – as in a barter system – then there are many points of friction that will inhibit exchange. First, goods have different physical characteristics that can put limitations on exchange. Some goods are perishable, others too large to transport, still others difficult to transport. Two goods may have equivalent value, but these physical limitations create barriers to exchange. How does one exchange a house for a year's supply of fish, for example? They might have roughly the same value, but you can't take all the fish at once, you can't trust that the fish will be delivered later, and moreover if the person wishes to take back the house because the deal fell through, but the other person ate all the fish, there is no means by which to settle the dispute. So money as a medium of exchange removes some of the barriers associated with the physical nature of goods.



Further, money allows for market-based exchange. This allows for goods and services to find their true value. In a moneyless world, a painter might paint all day one day for the week's food, but then paint all day the next for a simple shoe repair. With money, the painter can find fair value for work done, and then use that money any way seen fit. The divisibility of money is one of its best attributes as a medium of exchange.



The last aspect that makes money a powerful means of exchange is that it serves as a store of value. This references again the physical limitations on both services and barter goods – money can withstand time, whereas many physical goods and most services cannot. This removes some friction from the creation and transference of value – money's lack of temporal constraint is one of its best attributes because of how easy it makes the creation and transference of value.



As a unit of account, money is consistent, at least when compared with barter goods. Barter goods can fall in or out of fashion in a way that money never does. Many goods see spikes and crashes in demand over time, so that a good that is highly valuable today might not be valuable six months from now. Money, however, retains its value much better.



Graeber (2011) doesn't really argue that money isn't a medium of exchange; he mostly spends time arguing against metaphorical anecdotes explaining why barter is efficient. By attacking the anecdotes instead of the nature of barter, he is arguing against a straw man. His alternative is a system of credits, which he describes as being frequently the norm in societies with limited money supply.

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These societies were also relatively compact and simple, which enabled the maintenance of credit schemes. Money as a medium of exchange allowed for the development of far more sophisticated economic systems, something Graeber ignores because he was too busy beating up the straw man to understand what those anecdotes about barter were trying to tell him.



Markets II



Markets serve as a decentralized coordination mechanism linking buyers and sellers. They do this by performing a number of critical functions. First, markets allow for prices to more accurately reflect the interests of multiple buyers and sellers. A market does this because it has transparency. By reducing information asymmetry, markets reduce friction related to exchange. The value of goods is more accurately reflected in markets.



Markets are quite different from central planning. In central planning, the central planning body determines the value of goods. This is typically done relative to a common medium of exchange, but ultimately the cost of goods and the price paid for labor is determined centrally. Typically, this has two impacts. One is that the value of things reflects the central body's vision of what it wants for the economy. Two is that the value of things does not reflect what the people living within that economy value. This creates a disconnect. In a planned economy, setting prices serves as the government's way of ensuring demand for goods that it has in abundance or for reducing demand of goods that are scarce. However, there are limits on how well this works. Ultimately, there is going to be a disconnect between the official price of a good and the demand for that good.



I am not sure what a "wrong signal" would be for prices in a market. That is ambiguous wording. What is the signal? What is wrong about it? Making a moral judgment ("wrong") about a signal a price is sending is an odd thing to do. I'm sure there's a concept worth discussing here, but the ambiguous wording leaves me not knowing what the subject actually is.



Externalities are problematic because they are not built into the price of a good. For example, we have long assumed that burning fossil fuels was an efficient means of doing things, when such burning is applied to motors. However, that is because the full cost of burning fossil fuels is not built into the price for them. The price includes the costs of exploration, development and bringing to market, but not of the impacts of the pollution related from their burning. As such we think of fossil fuels as a cheap way to get things done, but if they end up destroying the ability of humans to live comfortably on this….....

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References

Akerlof, G. & Yellen, J. (2013) The fair wage-effort hypothesis. Princeton University. Retrieved May 17, 2018 from http://blog.press.princeton.edu/wp-content/uploads/2013/10/camerer-chapter-16.pdf

Central Banks and the Federal Reserve System. In possession of the author.

Graeber, D. (2011) Debt: the first 5000 years. In possession of the author.

Pettinger, T. (2017). Trade off between unemployment and inflation. Economics Help.org. Retrieved May 17, 2018 from https://www.economicshelp.org/blog/571/unemployment/trade-off-between-unemployment-and-inflation/

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