Thursday, February 23, 2012

Money as transaction good

This is based on a comment I made here

Money is a transaction good: it is used to do transactions. Hence, an economy with three goods (output, money and assets) has two markets. The output market and the asset market with money as the good used in transactions in either (and so both) markets. And anything that can be used as a transaction good is money.

Since money is something used for transactions, we accept payment in money because we can use it in future transactions. It is a store of value in that sense, but, as Nick Rowe explains, a peculiar one. For its value is purely due to its potential use in future transactions.

Which is why fiat money is money in its purest form. It is not "distorted" money or "false" money or "perverted" money: it is money in its purest form for it has no value apart from its value in transactions.

Which leads to lots of interesting questions. Those about what determines the value of money in transactions (how much one gets, or pays for, what) and what determines the range of transactions money in general (or a specific money) is used for. These are related questions, but not the same question. And the ambit question is not only why US$ works in Red Square (even in the days of the Soviet Union) but why there are a whole lot of transactions we engage in which are so personal that using money would be inappropriate.


  1. > why there are a whole lot of transactions we engage in which are so personal that using money would be inappropriate.

    I think the reason that very very personal transactions are not done with money is because the value of money is far TOO transparent.

    We sometimes want signalling to be muddy, or deniable. If I value a woman enough to cook her a fancy dinner, and I do not usually supply the service of on-site catering for a fee, then I can engage in it at whatever cost it has to me (forgone opportunity to read a book), she can enjoy it to some degree ("eww! burnt food!"), yet still imagine that the intended value is much higher ("he's SO romantic!"), and then tell her girlfriends about it for comparative status jockeying ("your boyfriend got you flowers? Well MINE cooked me dinner!"). At each step of the signalling chain the two parties are free to have subjectively different valuations. ...and even if they suspect what the other party truly thinks, they can massage their own egos, or brag, etc. as they want.

    A check for $22.45 (not $25 even ... this woman isn't THAT good!) is not deniable, and is far too strictly ordered with all the other real numbered dollar values.

    1. That makes a great deal of sense.

    2. A related element is that money is impersonal. A money transaction could be with anyone. Transactions where an essential point is the personal connection, that very message of personal connection is vitiated by the impersonality of money.