Money epiphany

mon12feb2007—07w043d11%— 06h46m00s—0utc

I remember being completely, utterly floored when reading in Henry Hazlitt’s Economics in One Lesson about how, at bottom, supply and demand are one and the same.

Those who think that the destruction of war increases total “demand” forget that demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods. All this is inherent in the modern division of labor and in an exchange economy.

This fundamental fact, it is true, is obscured for most people (including some reputedly brilliant economists) through such complications as wage payments and the indirect form in which virtually all modern exchanges are made through the medium of money. John Stuart Mill and other classical writers, though they sometimes failed to take sufficient account of the complex consequences resulting from the use of money, at least saw through “the monetary veil” to the underlying realities. To that extent they were in advance of many of their present-day critics, who are befuddled by money rather than instructed by it. Mere inflation — that is, the mere issuance of more money, with the consequence of higher wages and prices — may look like the creation of more demand. But in terms of the actual production and exchange of real things it is not.

Yes, it was obvious. Ridiculously obvious. But I had never realized it. A whole semester of economics in high school plotting gratuitous graphs and fondling equations for what? They should have put this in big, bold black letters at the very first class and let us go afterwards. My twenty something dollars per hour would have been far better employed.

But yesterday I stumbled on Wikipedia’s trade pedia and realized, mind blown, I had only scratched the surface of it. It only took the first, luminous paragraph. (Its scary how good Wikipedia is becoming.)

Trade is the voluntary exchange of goods, services, or both. Trade is also called commerce. A mechanism that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services. Modern traders instead generally negotiate through a medium of exchange, such as money. As a result, buying can be separated from selling, or earning. The invention of money (and later credit, paper money and non-physical money) greatly simplified and promoted trade. Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade.

Buying and selling are concepts that only acquire meaning when we bring in money. At its essence, trade (barter), is fundamentally reciprocal — providing no ready way to distinguish between its participants.

So simple and yet so deeply buried by mindlessness. Don’t forget it and watch countless everyday fallacies come tumbling down, naked.

(Notice also the definition of market: “a mechanism that allows trade” — a mechanism that allows for voluntary exchange. There’s untold beauty and nobleness in free trade.)

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