In “Money: A Definition” I referred to money as an “economic good, or any claim on such a good.” To clarify our definition of money I need to explain the term economic good.
Carl Menger, known as the father of Austrian economics, first defined the terms good and economic good for use in the study of economics. Menger gave the following definition of a good:
If a thing is to become a good, or in other words, if it is to acquire goods-character, all four of the following prerequisites must be simultaneously present:
- A human need.
- Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need.
- Human knowledge of this causal connection.
- Command of the thing sufficient to direct it to the satisfaction of the need.
Only when all four of these prerequisites are present simultaneously can a thing become a good. When even one of them is absent, a thing cannot acquire goods-character, anything already processing goods-character would lose it at once if but one of the four prerequisites ceased to be present. (My emphasis)
Carl Menger, Principles of Economics.
Based on this definition of a good, Menger continues to give a rather technical definition of an economic good. Basically, he says that any good for which the quantity required exceeds the quantity available qualifies as an economic good.
In somewhat simplified terms anything that satisfies a human need and exists in relatively limited quantities can qualify as an economic good. This means that any good that commands a market price (in terms of other goods) can play the role of money. Thus, peas, carrots, shoes, seashells, or ounces of gold could all act as money.
Historically, because it has characteristics that lend itself to the use as money (which I will discuss in later posts), gold has played a prominent role as a form of money. In addition to its other characteristics, gold fits all of those of an economic good. In our current money and banking system, however, gold has been completely eliminated as a form of money. What has been left in its place? And, can that replacement be considered an economic good?
In the current U.S. banking system we have basically two forms of money: 1) currency issued by the Federal Reserve System and the Treasury Department (and delivered by banks), and 2) credit accounts with banking institutions. In spite of their fiat nature, to which many people object, both currency and credit accounts fit the definitions of economic good and money.
In a sort of circular logic these two forms of information qualify as money. First, they satisfy the human need for a medium of indirect exchange – i.e. a need for money. Second, they exist in relatively limited quantities, thereby qualifying them as economic goods, which also qualifies them as money. The fact that one consists of otherwise relatively useless pieces of paper and the other consists of digital entries on bank records does not change that fact. In the end what matters is that the market has accepted these forms of information as economic goods and as media of indirect exchange – or as money.
Understanding the economic-goods-nature of our current forms of money will help you understand some of the concepts which I will discuss later in this series.