Thursday, December 14, 2006

The superior value of money

Value is a matter of perception - right? A 500 Euro bill is only worth more than the paper it's printed on because governments say so, and businesses agree. In fact even metal money was to a large extent a matter of consensus: in the Middle Ages there were very few practical uses for gold. It was used as money because it was rare (so people couldn't randomly make more) and because it was soft, easily malleable. But because it was so soft, you could not make satisfactory weapons or armor, or nails out of it.

Money is a convenient tool for the exchange of things that have intrinsic value, and allows the seller to split up the value in a convenient way. (You can trade a piece of land for 20 years worth of food a lot better if you use money.) But this convenience in itself has additional value. An item worth a hundred dollars is actually less valuable than a hundred-dollar bill.

A real-life example. I am looking for another car, and there's one being sold through the local Honda owners club that I like. The problem is that it's on an island, and it's a six-hour bus trip one way for me. I could have the owner bring it to Tartu... for an extra thousand kroons. Which is around what a bus ticket there and gas money back would cost me.

Whoever makes the trip, risks losing money if the deal falls through. Him even moreso than me, because the bus fare is a lot less than the ferry and gas costs. But I'm lazy, and the price would still be acceptable, so I expected him to come to Tartu. The reason being that even though we would be exchanging an amount of money for something of that worth, he would be getting liquid assets. He would be getting more value out of it.

And yes, I realize that this is probably something you can find in Chapter Three of most economics texbooks. But in a similar way, the thought has a lot more value if it occured to me independently.

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