What is money? The uncomfortable but transformative truth
By Mike Sosteric on The Capital
Do you know what money is? Despite the critical importance of money to your modern life, I would bet that you do not know. You might have an idea, but likely this idea is partial and incomplete, perhaps even mystified. But, let us find out. Let us ask the question, what is money?
Chances are if you have an answer to that question off the top, you are going to say that money is a medium of exchange. You exchange money for something else, for goods like food or services like a car repair. Money is a medium of exchange. If you want something from somebody, you give them money. If you have something that they want, they give you money. Simple.
It is true that money is a medium of exchange. But if this is so, then “why money? Why is a piece of paper useful for exchange, but a rock from my garden is not? After all, a piece of paper from the bank has no more intrinsic worth than a rock in my garden. The answer is, of course, collective consensus. If we all agree that a piece of paper has some value, whereas a rock does not, then that paper has value. If I have a ten-dollar bill in my hand, and you agree that this piece of paper is worth ten dollars, then that bill becomes a medium of exchange. Once we agree, I can give you the ten-dollar bill in exchange for ten dollars worth of some good or service.
Collective consensus is an important part of what money is. It is the reason why a piece of paper can be used for exchange, but a rock cannot, but this is not the whole story. The agreement is not just that this piece of paper is money. The agreement is that this piece of paper, or that diamond rock, or that classic painting, or whatever, contains a certain amount of “value” which you can use for exchange. A ten-dollar bill contains ten dollars worth of “value.” A one hundred dollar bill contains one hundred dollars of “value.” A one-carat diamond contains, at today’s market prices approximately $4,000 worth of “value.”
The idea that money contains an agreed-upon value that we can use to exchange is exactly what money is. Money is a storage container of value that can be used for exchange. But what exactly do we mean by value? What exactly is stored in that paper container?
I would say the odds are about ninety-nine point nine percent, maybe even higher, that even if you understand that money is a medium of exchange that contains value, you do not know what that value is or how it is derived. In other words, where does the value come from? Answering that question is easy. The value of money comes from time. Time is money they say, and that is totally true. Money does contain time, and time is where the value of money comes from. But not all types of time are valuable. The value of money has a very specific reference, and that is to your work time. Money represents work time. When you work, you put the value of that work into money, and then you use the money to trade your work time.
When you think about it like this, this seems rather obvious. You work for an hour, you get paid for an hour. If you stand around and do nothing, money does not fall from the sky. You only get money when you work. Therefore, money is work time. However, even that is not wholly specified. While it is true that money does represent work time, it is also true that money does not represent all types of work time. I do not get paid money for working in my backyard. I only get paid money when I am doing something for somebody else. When I do something for somebody else, when I build something or provide a service for somebody, I get money in exchange. Although I might fantasize about it, you are not going to give me a single penny for working in my garden to grow flowers for my kitchen table. However, I might be able to convince you to give me a few pennies for a flower I’ve grown for your kitchen table.
If we define “time spent working for someone else” as labour-time, then we can say with clarity and specificity that the value of money equals the amount of labour-time it contains. Put it in a formula, and it looks like this:
The Value of Money = The Amount of Labour Time it contains
As you can see, money is a form of exchange used to trade labour. The value of money is the amount of abstracted labour it contains. You know this is true. Excluding the possibility that you stole it or extracted it in an unfair exchange, any money you have in your pocket is there because somebody else, a neighbour, a trader, a business person, or whatever, gave it in exchange for your labour.
https://www.youtube.com/watch?v=opwUrGVc8dA
Money as a medium for exchanging labour is very important and very powerful. As I explain in my video Money Moksha, money makes the modern world go around because it facilitates easy economic exchange of labour. You can see just how important money is to our modern economies when you consider what would happen if it did not exist. Imagine a baker and a fisherman. The fisher wants some bread for his supper and the baker wants some fish for his plate. In order to get what they want, they could make an equal exchange of labour. The baker could give the fisher a few loaves of bread they spent a few hours baking for some fish that the fisher spent a few hours fishing for. This type of exchange is called barter, and it works relatively well, but only in simple societies, and only if the baker and the fisher want what the other has to offer. What if the baker is a vegetarian and does not want the fish? How is the fisher going to get his daily bread? You see the problem. Barter is an inflexible and inefficient means of trading labour. Economies based on barter are inevitably small and constricted because, in order to trade, both parties have to want what the other has to offer. If the baker does not want the fish, there can be no economic exchange.
The limitations of barter are not a problem these days because humans discovered a solution to the problem long ago, and the solution is to abstract labour and contain it in some form of money. Remember, money is abstracted labour. If the fisher wants bread but the baker does not want a fish, the fisher can just give the baker some of his labour in the form of money and voila, economic exchange. With money in hand, the baker can then use it to buy other things, like vegetables, or beans, or whatever.
And now you know exactly what money is. Money is a container for labour time abstracted. A ten-dollar bill contains ten-dollars worth of somebody’s labour. A hundred-dollar bill contains a hundred dollars worth of somebody’s labour. A one-carat diamond contains four thousand dollars worth of labour. With this labour abstracted and contained like this, human economies flourish because economic exchange is easy. If you have ten dollars in your hand, you can use that bill to buy a good or a service without having to worry about having something concrete to exchange. With money, you can go into a fast-food restaurant and by a burger without having to trade a chicken. With money, you can pay for electricity and a phone without worrying about what your service providers want. With money you can even trade with people all around the world. They can send you their goods, and you can send them some of your money.
This is what money is and this is the power of money.
Money is labour time abstracted. As labour abstracted, money lubricates economic exchange. Without money, the world as we know it today could simply not exist.
As you can see, money is not that hard to understand. Money is a container for labour. The value of money depends, more or less, on the value of labour that we, as a society, agree it contains. We use money to exchange our labour. When we do, we facilitate economic exchange.
This should seem all fairly straightforward and obvious to you at this point. It is so simple and obvious in fact that even a small child should be able to understand this. The problem is, children do not understand money, and neither do the vast majority of adults. Heck, even modern-day economists seem clueless. Adam Smith pinned it down perfectly. He said that money contains “the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity…” (Smith 2003), but modern economists do not reflect that basic truth, at least not in their textbooks. The few economics textbooks that I examined before writing this article do not contain a proper definition of money.
One text entitled “Money, Banking, and the Canadian Financial System” defines money as a medium of exchange and suggests that money is a container of value, but it does not say where that value is derived from. Another text (Krugman and Wells 2015, 854) defines money as “any asset that can easily be used to purchase goods and service.” But, what is an asset? An asset is anything (a painting, a boat, a brick of gold, a house) that stores tradeable (i.e. saleable) labour value. Money is just an abstract asset. Once again, the text leaves this important bit out. A third text says that money is wealth that is “regularly accepted by sellers in exchange for goods and service” (Mankiw 2018, 604), but that’s it. The author does not say the truth, which is that wealth is accumulated labour. If you are wealthy, it is because you have accumulated a lot of labour. Another book says the same thing, that money is a medium of exchange and a way of storing wealth. (Sloman, Garratt, and Guest 2018). And these are university textbooks! Sadly, books aimed at a more general audience, like “Economics for Dummies,” don’t even bother to try to define money.
Pause for a moment and consider this. A definition of money that includes an understanding of its true value (i.e., labour time) is basic and essential, to everyone, especially in economics; but a basic definition seems lacking, even in introductory texts. Any textbook on economics, beginner or advanced, should have a proper definition of money. Yet it appears, based on my small survey, that modern textbooks fail to provide. I think we can presume, since Adam Smith pinned it down, that economists know the true value of money. So, why would economics textbooks fail to properly define it? Why are we not being told exactly what money is? Have they forgotten? Do they not think a proper definition is important? Or, is something else going on?
I explore the answer to this question in my book, Rocket Scientists’ Guide to Money and the Economy, but the short answer is simply this, and that is, economic exploitation. Here we are going to define economic exploitation as the process of unfairly accumulating somebody else’s labour-power, in the form of money, assets, or wealth. When you are unclear about the value of money, it is easier to exploit you (i.e., to unfairly accumulate your labour) because you cannot see where value comes from. When you are unclear about the value of money, it is easy to pull the wool over your eyes. However, when you understand what money really is, you begin to see that something is not right in our modern world. When you know what money is, you begin to question the modern economic system and the absurd level of exploitation it facilitates.
One article suggests that the world’s 26 richest people have more wealth the bottom 50%. How can twenty-six people work harder than 3.5 billion people? If money is something you get when you work for somebody else, if money is your abstracted labour, how on Earth can people like Jeff Bezos, Bill Gates, or Mike Bloomberg accumulate so much of it? When you are a billionaire you have accumulated billions of hours worth of other people’s labour. Even if you assume these people work 100 hour weeks, 52 weeks a year, they can only work 5,200 labour hours a year. In order to accumulate even a single billion dollars, they would have to work the equivalent of roughly 192,000 earth years just to get close. Clearly, nobody can work that hard. Nobody can accumulate that much money simply by dint of their own hard work, and that is the problem. As soon as you know what money is, you start to see this truth. As soon as you start to see this truth, you start to ask difficult questions. As soon as you start to ask difficult questions, the collective delusion that makes the modern economic Regime of Accumulation possible begins to unravel. As it begins to unravel, you begin to get your first glimpses of the rather ugly economic realities of this planet.
So how do they do it? How do they accumulate such obscene quantities of labour? Basically, they rig the system. They steal other people’s ideas. They manipulate your perception and understanding of value. They engage in various forms of unfair economic exchange. They take advantage of your naivete.
The biggest grift is that they do not pay you the full value of your labour, and in so doing they accumulate a surplus, which they call profit, for each economic transaction that occurs. They find ways to skim a little of the top by, for example, oppressing workers and suppressing their wages. The ones who are better at it, like Jeff Bezos, rise to the top of the pile. They then hide the reality of their actions with erroneous ideology and propaganda, and become philanthropists to assuage their own guilt (Giridharadas 2018). They hide the true nature of their rigged system by avoiding a definition of money that reveals the true nature of the game, and they play a game of pretend with each other and the rest of us that enables them to say, without an ounce of guilt, shame, or self-awareness, that “they deserve it.” They don’t say, “I am accumulating your labour-power,” because if they did you would see it is unfair, and they might feel bad. Instead, they say “I am generating profit” or “I am making money” or “I’m genetically superior” or “I just work harder than you.” They can say that and you will believe it because you do not know what money really is, and so it seems like a reasonable statement. However, once you know the truth, the big lie becomes obvious.
So what are we going to do? Once again, I refer you to my book Rocket Scientists’ Guide to Money and the Economy, but it basically comes down to this; we need a transformation of our global economic system and a redistribution of abstracted labour to the people from whom it has been stolen. The addicts might have a problem with that (Sosteric 2018). In fact, they almost certainly will; but they can go into therapy to deal with their unresolved issues. As for the rest of us, with modern computerized finance and our advanced administrative apparatus, a transformation and redistribution would be super easy to accomplish.
The first step would be to have a debt jubilee. A debt jubilee is system reset. It is an event whereby all personal (and probably some corporate) debt would be forgiven. It makes good sense, and it is not a radical idea, especially when you understand what debt really is, which is just a black pit of your stolen labour-power (Sosteric 2016). And besides, if you can believe the Christian bible, it is something they did in ancient times. It is also something that more and more people are calling for today.
The second step would be to institute an economic system that enforced fair trade and that put an absolute cap on how much any one individual or corporation can accumulate. Fair trade would be trade based on a grounded assessment of labour-power, and not some mystified and obscured conception of “value,” wealth, or assets. The cap could be instituted with simple and progressive taxation policies. Dollars extracted through progressive taxation could be put into a central pool to be used to help fund projects that required a lot of capital, like infrastructure or the conversion to carbon neutral energy sources.
It would not have to be total equality for everybody; in fact, it should not be. People should still be rewarded for working hard, developing advanced skills, contributing to the collective good, and so on and so forth. But the extra reward should be fair and reasonable. The system certainly shouldn’t allow people to accumulate thousands of years of labour-power, because that is absurd, and it causes a lot of suffering for the people who are exploited. I would even argue that it is a pathological sign of their addiction, and very likely to lead to the untimely end of this little human experiment on this isolated little planet we all affectionately call Earth (Sosteric 2019).
The world’s richest people (March 1, 2020)
Jeff Bezos — CEO of Amazon (net worth: $117.5 billion)
Bernard Arnault — CEO of Luis Vuitton (net worth: $112 billion)
Bill Gates — Founder of Microsoft (net worth $108.8 billion)
Warren Buffett — Berkshire Hathaway (net worth $89.9 billion)
Amancio Ortega — Founder of Inditex fashion (net worth $77.9 billion)
Mark Zuckerberg — Co-founder of Facebook (net worth $77.7 billion)
Larry Ellison — CEO of Oracle (net worth $66.6 billion)
For the complete list, see “The 25 Richest People in the World 2020.”
Further Reading
- What is Money?
- The World’s Addiction to Money
- Money and the End of the World as We’ve Known It
- My Blog
- Giridharadas, Anand. Winners Take All: The Elite Charade of Changing the World. https://amzn.to/2FDfF49.
References
Krugman, Paul, and Robin Wells. 2015. Economics. New York: Worth Publishers.
Mankiw, N. Gregory. 2018. Principles of Economics. Cenage Learning.
Sloman, John, Dean Garratt, and Jon Guest. 2018. Economics. Pearson.
Smith, Adam. 2003. An Inquiry into the Nature and Causes of the Wealth of Nations. Bantam Classics.
Sosteric, Mike. 2016. Rocket Scientists’ Guide to Money and the Economy: Accumulation and Debt. St Albert, Alberta: Lightning Path Press.
— — — . 2018. “How Money Is Destroying the World.” The Conversation, 2018. https://theconversation.com/how-money-is-destroying-the-world-96517.
— — — . 2019. “The Red Pill or the Blue Pill: Endless Consumption or Sustainable Future?” The Conversation, 2019. https://theconversation.com/the-red-pill-or-the-blue-pill-endless-consumption-or-sustainable-future-110473.
1https://wealthygorilla.com/top-20-richest-people-world/
