Money

The Functions of Money

Part V of Money as a Reflection of Political Values, Virtues, and Human Order

Part V of Money as a Reflection of Political Values, Virtues, and Human Order

Previous Parts

An analysis of the functions of money is essential in order to determine what constitutes a just and virtuous money. While there has been a dominant and mainstream school of thought as to the functions of money, there has also been alternative schools of thought which challenge the mainstream thinking. Beyond the established and competing thoughts on the functions of money, however, is an overlooked function that is not mentioned enough and is taken for granted. This function is money’s role in bringing ideas to life. Highlighting that function is crucial, especially when it comes to perceiving what forms of money would be just and virtuous.

Popular Thought on the Functions of Money

Mainstream economic textbooks outline that the functions of money serve three main purposes. (1) it serves as a medium of exchange, (2) it serves as a unit of account, and (3) it serves as a store of value. It is easy to see how money serves those purposes in our daily lives. For a medium of exchange, one buys a service or an item by paying another a specific amount of money. For unit of account, money is used to measure or mark the value of specific items and services. For store of value, one saves money with the hope of being able to use this money in the future knowing that it will maintain a degree of purchasing power and be accepted.

A different school of thought that approaches money as “credit” claims that there are alternative functions of money than the three functions outlined above. For example, they claim that money is primarily a means for settling debts – money does serve as a medium of exchange in some instances, but in most cases, it is used to settle debts. They also claim that while money can act as a store of value, its true value depends on it being spent continuously to settle debts between the parties involved in transactions. An additional claim they make is that for there to be money, there needs to be an established abstract unit of account. In that sense, money, be it paper, metal, shells, or any other form, is an expression of the unit of account, and that the abstract unit of account is the foundation of money.

There is a stark contrast between mainstream economic thought and the credit theory approach regarding the functions of money. Mainstream economic thought looks at money from an individualistic view. Money functions as a tool for individuals to be able to purchase goods, save, and measure the value of items and goods. Whereas the credit theory approach has more of a macro view on the functions of money. It allows for the settlement of debts in a community reflecting the sociality of money and debt, it is expressed in a unit of account that is established by a sovereign body or a group, and its value is rooted in its usefulness in spending and circulation of debt relations.

The Overlooked Function of Money

While both schools of thought provide different perspectives as to the functions of money, they both take for granted and ignore an essential function of money. In both cases, money is used to bring ideas to life. Money is a means that enables communities to build the necessary infrastructure for a good life. It is a means that allows for the creation of new technological advancements. A means that allows for the provision of basic goods and services that are required for a good life and for human flourishing. Money is to be allocated to projects that we deem valuable and benefit us.

It is not hard to see how money allows us to build and develop initiatives and projects that benefit us. Take the light bulb for example. The inventor had the skills and motivation for creating something powerful rooted in scientific experimentation. The goal of the light bulb inventor was to create and see his ideas come to life. What helped build and scale this idea was the inventor’s own money and money provided to the inventor to keep experimenting and perfecting the light bulb. Given our social organizational structure, money is a life blood needed to keep things moving, but the motivation of the inventor wasn’t necessary the accumulation of money, but to build his idea, and money was needed for that. More importantly, money reflects the value of such an invention. The money gained reflects the powerful invention of the light bulb. In terms of public spending, societies’ foundational infrastructure was all built by the appropriate allocation of money into such initiatives with the goal of improving living standards. For the most part, all utilities and inventions that contribute to the good life needed money for them to be built and created, and the money allocated to them reflects the value of the invention and infrastructure built as opposed to the value of money in and of itself. Money’s value is rooted in what money can accomplish. What money can accomplish is rooted in what individuals or communities value and want to build or create. This point is rooted in the arguments raised in Part III - Values and Virtues of this essay series. Specifically, Aristotle’s and MacIntyre’s views regarding “natural” chrematistics and “external” vs “internal” goods (Ferraro & Sison, 2017), as well as Dick’s argument regarding the normative approach to using money and what money ought to be (Dick, 2021).

Given the “scarcity” of natural resources, time, human effort and skills needed to allow individuals and communities to bring their ideas to life and build valuable goods and services, money is used as an abstract representation to organize and allocate the “scarce” items and skills, yet money in and of itself is not the scarce item; it may be scarce in a technical sense, but not in a moral sense. It is a social means that allows us to manage the allocation of “scarce” resources so that we can accomplish the ends we value. That does not mean that we have unlimited money, but that money isn’t necessarily the scarce item in and of itself since it is a tool developed for our needs and benefit, and we are not limited to the technical nature, which might have a sense of scarcity in it, that we impose on money. Rather, money can be shaped by our moral sense, and so it must be flexible enough to be used as an arbitrator of scarce, valuable, and needed items.

Money Beyond an End in Itself

As for the collective nature of money, it is important to acknowledge that we are not individuals living in isolation, but we are rooted in the community we are in, not only physically, but also in terms of values and culture. With that said, given the power of money and what it allows for, it should then be designed with the collective interest in mind. What is meant by the collective interest here is the interest of different individuals and groups within a community. Given the social nature of money, it represents the values of the community and how the community wants to organize and utilize money, and to what ends it wants to allocate money. This is a necessary feature of money, and rather than allowing for liberty and freedom of the few, it allows for prosperity, liberty, and freedom of the many. Afterall, money acts as a tool to facilitate material relationships between people within a community and outside the community, and for managing the goods and services that people need to survive and flourish. Additionally, given money’s role in the collective, this notion allows for money to be flexible and to develop at pivotal moments according to the needs of the time. Of course, this isn’t to say that it is continuously viable for change since that would result in instability, but rather that in times of need or significant circumstances, the mandate of money is flexible to change and is not fixated in a hardly codified constitution. Money must not be perceived as an item of nature that has its own material natural laws that we lack control of and must be strictly abided by.

Money is then a vital resource that assists people to build and shape the community, goods, and services they value. Given the central role of money in human organization and management, it is essential to listen to the communities’ needs when it comes to monetary design. As Dick illustrates, a set fixation on the economic telos of money may go against the needs of individuals and communities (Dick, 2021), especially as needs and circumstances change and evolve. A normative approach to what money ought to be is more appropriate and should be center stage in the political debate around money. Again, the governance process may take a variety of forms including decentralized or centralized forms of governance, but the point here is that money is not a "neutral" instrument to be found in nature with embedded material natural laws. It is a powerful human invention that evolves with the political, social, and economic climate and is up to community members to shape and design. Hayek claimed that “money is one of the greatest instruments of freedom ever invented by man” (Hayek, 2007). Money results in freedom because access to money allows not only for material economic freedom (i.e. the freedom to purchase desired goods and services and preserve wealth) but also liberates individuals and communities in allowing them to gain the needed resources to accomplish their visions, build projects, and achieve the “non-material” and “internal” goods that Aristotle and MacIntyre refer to (Ferraro & Sison, 2017).

Monetary design must keep in mind the function of money as being a good or means that allows for human flourishing since it is easy for money to be narrowed down and distorted in a way that corrupts human flourishing by perceiving it as an end in and of itself.

In Part VI, we will tun to Bitcoin and give a brief overview of its genesis – Part VI - Bitcoin's Genesis

References

Dick, D. G. (2021). What money is and ought to be. Journal of Social Ontology, 6(2), 293-313
Ferrero & Sison, Aristotle and MacIntyre on Virtues in Finance
Hayek, F. A. (2007). The road to serfdom. University of Chicago Press