Money Matters: Introduction | The Free Market Center Journal

The ubiquity of money in market transactions means that a precise understanding of market activity requires a precise understanding of money. Money Matters will expand the understanding of money and reduce much misunderstanding.

The Donkey

A rich man stopped in a small town. He encountered two men haggling over a mule. The rich man, thinking he could use the mule, out bid the two men and bought the mule.

Several weeks later the rich man again stopped in that small town. By coincidence, he encountered the same two men who had been haggling over the mule. The two men asked the rich man what he had done with the mule.

He responded, “That old mule could not do the work for which I wanted him; so, I had him put down.”

The other two men suddenly look very disappointed. The rich man asked them why they acted so disappointed.

The men responded, nearly in a single voice, “Until you came along, we had made a good living trading that mule.”

Market References

Fast food, shoes, iPads, Ferraris, Stocks & Bonds, and the national economy, we relate to all of them through references to money. We use phrases like: it costs…, it’s worth…, it increased by…, all followed by a number of dollars. We use these phrases as if they actually mean something and that we understand that meaning.

But, do these phrases mean anything?

Do we know whether we speak real meaning? If they do speak meaning, do they comprehend that meaning?

The Comprehension Gap

When we discuss market transactions, we tend to either ignore the role of money in those transactions, or we discuss monetary transactions, with little attention to the goods at the focus of the exchange. By ignoring the interrelationship between money and products we tend to expose what I have dubbed a “Comprehension Gap.”

What don’t we understand? Money or markets?

The donkey trade and the economic references provide hypothetical examples of this “Comprehension Gap.”

Money & Markets

You cannot fully understand most economic exchanges without understanding money and its role in exchanges. If we base our understanding of free markets on our current assumptions about money, we could suffer from grave misunderstanding. We need to make those assumptions explicit and precise to assure that our assumptions correlate with the real nature of the transactions.

So many misconceptions exist about money that clear thinking and communication about economics becomes nearly impossible. To clear up this confusion, we must start with some basic concepts

Economic Reasoning

Money exists inside and as part or market systems, not as separate from market activity. Thus, in order to fully understand money (and close the comprehension gap), we must first understand the principles and theories that govern market behavior.

I will address some of the basic elements of economic reasoning that will support our discussion about money.

Market Systems

Expanding production and limited consumption result in savings, and creates the need for exchange and the use of money.

How does the production process create a need for exchange?

How does increased production and exchange benefit all members of an economic system?

Exchange

Nearly all market exchanges involve money. In large markets, systems of exchange become highly complex.

How does that complexity lead to the use of money?

To understand to role of money in complex market exchanges we should know the basics of market exchanges.

We will examine market exchanges at all levels of complexity — from the simplest, which might operate based on direct exchange, to the complex, which require indirect exchange and the use of money.

To be continued…

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