Chapter 10: Money and Wealth
Update: 1/13/20
Christian Economics: Teacher's Edition
Now Abram was very rich in livestock, in silver, and in gold (Genesis 13:3).
This passage is an aspect of point three of the biblical covenant. It relates to ethics. It relates to private property. Money is an aspect of the market process. It exists only in terms of this process. Money is the result of indirect exchange. People make exchanges in order to obtain money rather than directly exchanging for goods and services. They exchange for money rather than seeking out people who want to barter. Exchanging goods for money reduces search costs of buyers and sellers. Indirect exchange increases the division of labor. It therefore increases people’s output per unit of resource input. It makes them wealthier than they would otherwise have been.
Abram was rich when God called him to leave Ur of the Chaldees and move to an unknown land. He did not leave his wealth behind. He took it with him (Genesis 12:5). It was portable capital. It continued to grow.
Gold and silver in Abram’s day were money. This was around 1,900 B.C. These metals were a major form of wealth. This indicates that the division of labor was well advanced. Money is used only in high division of labor economies. Silver and gold were used originally as ornaments, but as economies become richer and more complex, silver and gold were used more in trade than as ornaments.
Silver and gold bars were units of weight. They were also units of fineness: the same amount of precious metal per weight. They came under the moral law of uniform weights and measures. This law was expressed in the Mosaic law: “You shall do no wrong in judgment, in measures of length or weight or quantity. You shall have just balances, just weights, a just ephah, and a just hin” (Leviticus 19:35–36).
Portability is one of six characteristics of money. The others are these: durability, divisibility, recognizability, continuity of price over time and geography, and a high price in relation to weight and volume. Money can be concealed. It functions over a wide geographical area, preferably anywhere.
Abram was a wealthy man. He possessed gold and silver. His livestock was semi-monetary. In rural cultures, domesticated animals can function as money. They are durable, portable, recognizable, and divisible, but only once per beast. They are not high price in relation to weight and volume. This limitation is partially offset by the fact that they multiply all by themselves.
Money is the most marketable commodity. It possesses unique features. It is used to establish prices of all other products and services in a market. But there is no market-based price for money. There are billions of prices for money, matching every product and service. To assess the price of money, economists establish statistical index numbers, but these all have downsides. The average person has a sense that a particular monetary unit is changing in price, i.e., purchasing power, but this sense is in no way scientific.
Money is adopted voluntarily by traders. Prior to this, traders bartered. There are major problems with barter, i.e., direct exchange. You want to trade for something. The person who owns what you want to buy with your output may not want your output. You must seek out another buyer. But this new buyer may not have what you want to own. You negotiate prices. Maybe you cannot come to terms. So, you look for another buyer.
The best place to barter is in a marketplace. There are lots of buyers and sellers. But it is still small. It is local. It has limited selections.
The way around this is money, i.e., indirect exchange. Indirect exchange involves selling your output for money, and then using this money to purchase what you want to use or own. Because money is the most marketable commodity, you gain access to vastly more possible sellers of whatever it is that you want to buy. Your geographical range is greater: outside a regional marketplace. There are far more people who may want to buy your output. There are more people to buy from.
When Abram went from Ur of the Chaldees to the Promised Land, he took livestock, silver, and gold. He knew that there would be buyers of his livestock or their output: meat, wool, and milk. He also could be confident that there would be buyers of his silver and gold. They would sell him whatever he wanted to buy if he had enough silver and gold. This is why his silver and gold were a form of wealth. They would enable him to make his journey without having to store up supplies. He would be able to buy what he wanted along the way. When he arrived, he would be able to buy land. This proved to be the case when he bought a cave for his wife’s body (Genesis 23).
Silver and gold gave him mobility. It is a hassle to move livestock from place to place. Animals require hired hands to supervise them. Also, Abram had to be granted permission to move them across private land or tribal land. None of this was true of silver and gold. They are easily concealed and easily transported. Silver and gold do not reproduce, but it is possible to buy livestock when you arrive at your final destination if you own silver and gold. Another important factor is continuity of price across time and geography. People impute much the same value to money, place to place, year to year. So, sellers of goods bid for silver and gold by offering economic goods in exchange. There is predictability of what you can buy in exchange. A seller surrenders ownership of some item because he expects the money to be worth something tomorrow, next week, and next year. He knows that someone else will sell him what he wants if he has money. It is the continuity of money’s purchasing power that is the greatest single incentive for sellers to sell for money. The longer a monetary unit maintains its continuity of price, the more likely it will continue to do so in the future. It possesses historic value. This is crucial for any commodity to gain widespread acceptance as money.
Then there is divisibility. A buyer can take his money and divide it into smaller units. He can then buy smaller quantities of goods and services. This gives him greater diversity of purchases than if he had to surrender a horse to purchase eggs.
Because money makes trade less expensive, it extends the free market’s acceptance. “The lower the price, the more is demanded.” The existence of widespread trade encourages the extension of the division of labor. The extension of the division of labor increases the specialization of production. This in turn increases output per unit of resource input. Individuals become more productive. They therefore become richer. The money economy is fundamental for economic growth.
A seller of money is called a buyer. A buyer has a wide range of choices. This is why it is convenient to own money. There are so many opportunities available. This inevitably increases personal responsibility.
And that servant who knew his master's will but did not get ready or act according to his will, will receive a severe beating. But the one who did not know, and did what deserved a beating, will receive a light beating. Everyone to whom much was given, of him much will be required, and from him to whom they entrusted much, they will demand the more (Luke 12:47–48).
Because money is a unit of account, buyers and sellers can see what is available for purchase. Buyers can see the opportunities. Sellers can see the competition’s prices. The buyer can estimate how much money he owns. He can then make price comparisons among those goods and services that interest him as a shopper. This reduces his money cost of shopping, although the time costs may rise. He can make better-informed purchases. His likelihood of making an error is reduced.
There is extensive competition to sell to him because he has money. This is a huge advantage for him. He has a greater range of choices for the money he owns. We usually define freedom as a greater range of choices. This is also how we define economic growth. But we do not get something for nothing in a world of scarce resources. We get an increase in responsibility.
It is important to understand that a buyer does not use money to measure value. Value is subjective. Individuals impute value to things. They place specific values of specific items on a scale of values: first, second, third. Money prices tell them what they can afford to spend. Money helps people select what they are willing and able to bid in order to achieve their value-based goals. But money is not a measure of value. There is no objective measure of subjective value, any more than there is an objective measure of love or hate.
A seller benefits from money. First, he has to have money in order to sell. He must buy inventory. He must buy or rent space. He must pay for labor services. He must pay for electricity and water. Money enables him to budget his expenditures. He knows his limits. “A man has to know his limitations.” A money economy helps people to do this.
Second, he must assess his competition. The first way to do this is to find out what the competition is charging. A seller must also discover what level of quality the competition’s good are. Price is not enough to know in most cases unless the good is overwhelming price competitive. A good example is gasoline. The public is only vaguely aware of quality differences among brands. Price is what matters.
The seller is more rigorous in his accounting than the typical buyer is. A mistake can cost a seller dearly. Prices are the basis of accounting. To determine whether a line of production should be continued, a seller must see what it costs to produce the item, and what is brings in, net, from buyers. If a product is producing losses, the seller must stop selling it. He must either redesign it or replace it. Similarly, if it is making a large profit, the seller must decide whether to increase his inventory, raise the price, or whatever?
The buyers’ decisions to buy or not buy send signals to sellers: more, less, or the same. Prices let the sellers find opportunities, just as they help buyers. Abnormal prices call attention to unique situations that may be profit opportunities. They convey useful information.
The wider the market, the more potential buyers there are. Money extends the market.
The seller is in a position to purchase specialized knowledge. There are people who know how things work in niche markets. The seller’s ability to offer money in exchange for knowledge is what brings possessors of knowledge into the market. Their knowledge allows sellers to decide what to produce, how, and at what price. This is the free market’s system of coordination. People can make plans and adjust them in response to new conditions. The price system is the central pillar on the private planning system. This requires money.
The manufacture of a pencil would be impossible without money. The division of labor apart from money would be so undeveloped that a writing implement as complex as a pencil would not be possible except as a rich man’s toy.
The complexity of the multiple production processes that Leonard Read describes is so great that no one understands it. That fact is the heart of his article. It would not be possible for anyone to design a system of pencil production that is based on barter. Trading a specific good for another specific good, trade after trade, across several continents would never come about. The production system's designer would have to coordinate these trades. The point of the Read’s discussion of the market process is that no one could design any production process like this. It is the product of millions of unsupervised trades. There is no central planning board that could do this even with a money economy. Without money-based pricing, it would impossible.
Buyers know approximately what a pencil should cost. They go to a store ready to pay this price. They have bought pencils before. They have placed pencils on their shopping lists. They know that pencils can be found in the school supplies section. Most of the shopping process is familiar, down through the generations. Maybe someone will order pencils online. Pricing will be comparable. There are no big surprises when shopping for pencils.
Sellers have priced their pencils accordingly. They have also priced the factors of production. They have stayed within a budget. They are now ready to deliver pencils to stores. They can deliver them through the Post Office or UPS when ordered online. It is all familiar.
The pricing system makes all this familiar. There are few unexploited opportunities for profit with existing technologies. The pricing system would reveal such opportunities. They would not be available for long. Entrepreneurs in the industry would fill the gaps. They are alert to such opportunities. Prices are the main source of information on such opportunities.
We do not know when money was invented or where. It is likely that it came about through market transactions. People began trading in order to gain ownership of silver or gold, which were used as ornaments and in religious art. The owners found that others were ready to exchange all kinds of products to gain ownership. The metals went from being sources of ornaments and religious art to sources of money. But there are no historical records documenting such a transition.
When gold and silver became money, this opened up markets for human creativity. Creativity needs ways to be expressed. The division of labor allows this. This is what Read’s essay on the pencil argues. It is an argument in favor of liberty as a source of creativity. Money increased liberty. Money can be hidden, transported, and sold across borders. Kings found it impossible to stop trade once money vastly increased the scope of trade. Greater trade meant greater specialization of labor. This in turn increased output. The range of choices expanded. People could buy far more goods than before if they possessed money. The best definition of liberty is this: “an increase in the range of choices at the same price.” The best definition of economic growth is this: “an increase in the range of choices at the same price.” The expansion of the money economy therefore increased both liberty and wealth.
Money is closely tied to wealth. We define money as wealth. This is an accurate definition. We also define wealth as money. This is also accurate. But both definitions are too narrow and too exclusive. Wealth is more complex than this. So is money. Money is a form of wealth that multiplies wealth indirectly, through expanding the scope of trade and therefore the scope of creativity. Like Abram’s livestock, money gives birth to greater wealth. But, unlike livestock, this is not done through the expansion of the money supply. It is done through the expansion of trade. The existing money supply is used by a larger number of users. Units of money are transferred from one owner to another. Goods and services move in the opposite direction. The number of transactions increases. The time in between transactions decreases. Money moves from owner to owner. Production does the same, but in the opposite direction. Ownership changes. Wealth increases because each trader gets more of what he wants by surrendering ownership of whatever he wants less than whatever he receives in trade. Money vastly increases the number and scope of such exchanges.
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