Popular culture extension of this MONEY CLASS conversation (#737272) —the Nominal and the Real.
I keep coming back to this concept over and over: The difference between the monetary veil drawn over our economic world and the economic world itself. Of course, they can't readily be separated and the current economic world wouldn't be what it is in the absence of a global, semi-successful monetary technology coordinating it all. The monetary unit is not a thing; money is a value language that coordinates human activities (#780358). Even a crappy one (fiat, run by inflation-targeting central bankers under a New-Keynesian, "data-driven" intellectual paradigm) does this job acceptably well.
Waving a wand and wishing money away would instantly retract our economies into something barely above subsistence farming.
While precious few understand how the monetary system works, or the problems it so elegantly helps us solve, investigating it is one of the most hands-on of all economic questions—anyone in a market economy can relate to it, since they have to operate it every day.
Any society more economically complicated than a family or small tribe finds a way to settle their affairs in an indirect fashion: by credit, by mental barter, or through the crude handing over of a reasonably durable item. If we don’t, we can’t operate economic ties much larger than that of a household.
That's why I love seeing money portrayed in fictional worlds. The author or moviemaker either doesn't get it at all and so shoves it off-screen or off-page, or taps into the real-world usage they may or may not understand very well and thus re-create the wonders of our monetary lives.
I wrote some years ago about how money was portrayed in The Hobbit movie:
A wonderful piece I come back to over and over. In a similar vein, girlfriend—not exactly a hardcore Bitcoiner or economist, or having any interest in what money does apart from paying her bills and getting her nice items—recently read a 1930s novelist that feature a banker/store manager whose ledger runs the village economy. (Money as a ledger, and who's in control of it, is the core message of Lyn Alden's Broken Money, a book I helped work on.) Never had as many good conversations about money and banking with her full attention as when discussing that novel.
So let's talk about the economy of the economy of Tolkien's world (well, the Hobbit filmmakers but whatever) and all the gold in the Lonely Mountain, Erebor:
Michael Noer at Forbes estimates the dragon’s wealth at some $62 billion, enough to place you in the top seven wealthiest people of our world. We might quibble over numerical details and how plausible Noer’s implied exchange rate is, but the point still stands: there’s an awful lot of gold and jewelry in that mountain.
From the human de facto leader Bard (“On behalf of the people of Lake Town, I ask that you honor your pledge—a share of the treasure so that they might rebuild their lives,”) to the Elf leader Thranduil ("I came to reclaim something of mine...there are gems in the mountain that I too desire"), they all desire the mountain's “wealth”, yet the audience never quite learns what for. After the dragon had destroyed the entire human settlement and most of the capital involved in the humans' very basic lines of production, there is nothing left to buy with this treasure of gold. YOU CAN'T EAT GOLD.
Bard speaks eloquently about the humans having to rebuild their lives and take shelter from the cold, but gold —if you allow me that well-used pun—doesn't do that: blankets and wood for fire and houses and freaking diesel generators (if Middle Earth would have such wonders) does that.
Economically speaking, the humans’ decision in The Battle of the Five Armies to march toward Erebor seeking part of the treasure after they’ve lost their homes, equipment, fishing nets, and boats makes no sense at all. Sure, the mountain contains endless quantities of gold that they're somehow owed, but how does that help them regain some semblance of living standards when the equipment and fishing nets and boats that sustained them remain destroyed?
Adam Smith, father of modern economics and author of the 1776 The Wealth of Nations has these wonderful lines in Book II:
The gold and silver money which circulates in any country, and by means of which the produce of its land and labour is annually circulated and distributed to the proper consumers, is […] all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country.
And he is right: money doesn’t feed our bellies or heats our homes. If you think about all the things that happen, either in a rudimentary village-type economy or a global, hypermodern world, the money sloshing around doesn’t seem to do anything. It moves and shifts but doesn’t heat or create. That, I believe, is the source of why it's regarded so poorly among many market-skeptic, left-leaning people.
Because the purpose of production—another Adam Smith quote, bonus 1,000 sats if you figure out what Smith says the purpose of production is—or indeed of the lives most humans want to live, not hoarding gold coins. Mercantilists of ages past used to believe that, and children of today watching Scrooge McDuck quickly discover it; even J.K. Rowling’s enchanted world of Harry Potter got this hopelessly wrong, where the wizard bank Gringotts is stuffed with gold in every vault from an altogether questionable real economy.
Cue most academic conversations about money up and down the centuries: the cost of its production1, the inability to flexibly 23 make more of it, who's in control of the presses or mines, and for what purposes may they use them?
What money does provide is this magical, invisible, crazy technologically advanced thing of coordinating economic activities. It provides the avenue for the price signals to transmit, for other neighboring lands to ship in real goods and services to the humans of Lake Town now that they have gold, for the humans themselves to produce things they know how to do and specialize in those lines of production they have available (fishing, carpentry, weaving, hunting), and trade their individual surplus among themselves. ("...turns what you make best into what you want")
Money is merely an intermediary between production and consumption that is separated by time, place, and between individuals. You’re not paying your grocery bill or rent with some abstract device; you’re producing value for your employer and handing over some embodiment of that value to the grocer or landlord. You’re paying for your bread and butter, not with imaginary constructs or digital make-belief but with the sweat of your labor—just with an intermediary step. This is why economists going back at least to Irving Fisher think of money as a “veil” of underlying economic transactions. The real and the nominal.
Money is the conveyer belt on which production moves; it is the way in which products get circulated and distributed, as Smith so elegantly states. Yet it itself produces nothing. Money is all dead stock that “while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either.” (Google this Adam Smith/Wealth of Nations quote and the first result is a Paul Krugman rant against Bitcoin from 2013—LOL!)
And that is its point and purpose: the ₿ corn is there to let the actual corn flow.
That's today's not-so-little money class,
Peace
/J