How Money Works Archives | Page 2 Of 2

Money vs moments - should they be in conflict? What is the role of money? Drawing by Frits Ahlefeldt. Money is a fickle beast of modern society - some people glorify it with an undying desire to acquire more, while others demonize it and say greed lies at the heart of society’s problems. Personally, I’ve flipped between both of these viewpoints through many years of my life, and learned a lot by meeting others who live on both ends of this spectrum. As with many complex topics, the truth lies somewhere in the middle. Money is important because it can help eliminate material wants and suffering - by enabling you to take control of your life, care for your loved ones, and give back to your community. Money is important to society because it raises the living standards of all by enabling trade while minimizing the need for trust. We can think of money as a way to store your hard work and transfer it over time, so that you may enjoy the fruits of your labor. The importance of money to the growth of civilization is hard to overstate, though even those fortunate enough to have a good education are not taught this. Unfortunately, many have vilified money over time, but with good reason: the way our money works today leads to a deeply broken society - as I will explain. 5 Reasons Money is Important for You, Individually Money is important for growing wealth, which is a bit different than having a high salary. Wealth is about eliminating wants so one can pay more attention to more rewarding things in life than survival and basic comforts. A wealthy person holds a good education in the practicalities of money - they bring in more than they spend, and focus on saving money. They are storing their work over time. Contrast this with a high-paid doctor who lives in a giant mortgaged mansion and leases a Mercedes. While this person may have a high income, they also have high liabilities in the form of a mortgage and lease. These liabilities keep this person from enjoying the true benefits of money and wealth, which are: Freedom from the need to work Without wealth, you need to work to survive. By attaining wealth and building assets that pay you without the need to put in your own time, you can free up your schedule. You are no longer dependent on a job you hate, or 40 hours a week away from your family, in order to take care of your basic needs. Getting fired in an economic downturn won’t lead to financial ruin or worse. Money is important insofar as it provides a portable and easily transacted form to store wealth. Control over how you spend your time Money gives you time. When we are in the rat race, working 40+ hours per week, we often get used to spending money when we have free time. We go to nice dinners, or take expensive vacations. However, with more time and possibly even less money, we can have the same or more enjoyment by living slowly. Consider this - if you only have 1 week off of work, you might buy that more expensive Friday night flight returning the following Sunday in order to maximize your time in an exotic vacation destination. However, if you’re able to support yourself without much time spent working, you can leave on a cheaper flight on a Tuesday and return the following Wednesday. You also won’t feel as much pressure to jam in experiences on your week abroad - you may even be able to stay longer and explore more without paying expensive tour agencies and hotels to organize your shorter trip. Ability to support your friends and family When you have money to spare, you can enrich your relationships with friends and family not only using your extra free time, but with money itself. If a friend needs a critical operation, you can pitch in to help them get back on their feet. If your aunt is sick, you can spend time by her side instead of calling her briefly on the way home after a long day at the office. This can only be possible by saving money in anticipation of these unexpected events. Reduced financial stress Stress is a pervasive and dangerous condition almost all of us live with, to some degree, in the modern world. It is linked to poor health, with over 43% of all adults said to be suffering from adverse health effects due to stress. The Occupational Safety and Health Administration has even declared stress a hazard of the workplace, with work related stress affecting 83% of employees. True wealth - meaning an elimination of wants and needs - can remove this stress and its negative impacts on other parts of life. This might eliminate the majority of all stress in your life, considering that the number 1 cause of stress for Americans is money. Better able to give back to your community Many of us want to give back to our communities and help the needy, but are unable to find the time and energy to fit this around work, family, and social activities that keep us mentally and physically happy, healthy, and fed. Money gives us the ability to dedicate the time needed to understand and contribute to others - not just pop into a food bank once in a while. The importance of money is clear when viewed in terms of supporting quality of life for you, your family, and your community. However, money is also a powerful tool for improving society as a whole - if it’s structured well. 3 Reasons Money is Important for Society as a Whole Money improves the ability for people to trade with one another, which encourages some specialization. If your neighbor’s property is great for producing wine, and yours is suited to grain, you can both benefit by trading. Now you both have bread and wine, instead of a drunk vineyard owner and a bored grain farmer! Money improves society in several ways: Allows for specialization As in the example of the vineyard owner and grain farmer, money allows for increased specialization by improving the ability to trade. Any barter trade suffers from the ‘coincidence of wants’ problem - both trading partners must want what the other person has in order to agree to the trade. We can think of money as a good that almost everyone wants. This makes trading much simpler - to acquire a good, you just need money, not some random thing that the seller of that good also wants. Over time, the use of money has enabled specialization, which has increased the quality and complexity of goods and services. Imagine trying to build your phone yourself - there are millions of experts and specialized pieces of equipment that went into producing that device. All of those experts and companies pay each other in money, allowing a complex dance of global producers and supply chains to deliver that phone to the palm of your hand. Even something as simple as a water bottle involves oil fields and manufacturing plants possibly thousands of miles from your home. When people can specialize, the quality of goods and services can increase. Enables beneficial trade with reduced trust Small-scale societies can operate peacefully and productively without money by using favors, “I owe yous” and mutual understanding. However, as societies scale in size, it quickly becomes impossible for everyone to maintain personal relationships and that same degree of trust with everyone else. The system of trading favors and trusting one another doesn’t work too well when a traveler is driving through town, spending only 15 minutes of his entire life in your store. Money minimizes the trust needed to trade within larger societies. Now I no longer need to trust that you’ll help me out later when I need it - I can just accept payment from you, and use that to help myself out later. One of my favorite thinkers, Nick Szabo, calls this ‘social scalability’. Reduces the use of force When a society converges on using a certain form of money to facilitate trade, they can greatly reduce violence in that society. How can this be so? Wouldn’t people still want to steal from each other or take vengeance? If we stand back from preconceived notions, we can start to understand how money can minimize violence. If you and I live in neighboring countries and want something that the other country has, we have two ways of getting it: taking it by force or trading something of ours for it. As stated earlier, money makes trade much easier - so with the existence of a shared monetary system, we are more likely to trade than invade. Why would we risk our lives when we could just trade peacefully with each other? Why people hate money So if money has so many benefits to us personally and to society as a whole, why do so many people hate money? Why is it vilified, along with those who have acquired a lot of it? Part of this can be blamed on problems in equality of opportunity - that it is harder for some to climb out of destitution and into wealth. Some small part is no doubt coming from people who simply do not want to put in effort or take the necessary risks to become wealthy. However, both of these problems have more to do with problems in how our money works today than with any problem in the concept of money itself. A monetary system should reward people who produce valuable things and trade them with others. I believe this is how most people think money works today, but that couldn’t be farther from the truth. Our current monetary system, unfortunately, rewards ‘financialization’ - turning everything into an asset, the value of which can be pumped or dumped by crafting a good narrative and getting others to believe in it. Rampant debt fueled by the constant debasement of all major currencies has added to this quagmire of financialization. It is now more profitable to take out a huge loan and use it to quickly flip an asset for profit than it is to build a business that provides useful goods and services to society. The fiat monetary system expands the rewards for predators, cronies, and rent-seekers. The demise of our money developed over the past half-century, starting when our currencies became nothing more than pieces of paper backed by the full faith and credit of our governments. To better understand this change, check out my post on the purpose and history of money.