Money as a Crusoe Concept

[Hermes]

Alone on an island, you would need morality. You would need language. You would need money.

Money's first attribute is its being a store of value. That is what allows money to be (3) a medium of exchange. On his island -- in the Defore story, actually -- Crusoe's primary money was food. If he could store food, his labor could be invested. When he discovered that he had accidentally sowed wheat which "took" he was overjoyed. (Historically, in fact, wheat (not gold or silver or even cows) was the first form of money.) In other times and places, stone arrowheads -- which require significant effort -- would be a form of "money" not for trade -- there is little evidence of that -- but as a store of labor for the individual who makes it.

It is also possible to "exchange" with yourself across time. You fish today and catch more than you need. Some you can dry. The chum you can bury to improve the soil into which you will plant your wheat later. Thus, in planning and carrying out plans, you effect economic trade with yourself across time.

Planting today means that you harvest tomorrow. Should you plant? Build a fire -- and tend it? Catch fish? Look for coconuts? What you do on an island is determined by how you value your time and the return on it. You need bookkeeping of some sort and that means that you must have a unit of account. You must have "money" if only as a conceptual construct: youi might not have "coins" but you need some way to count and account.

Even Ricardo's Law of Association applies because if you are going to undertake any complex task, then it is more efficient to break that down into repetitive actions, rather than carrying out the entire process in sequence. Sawing boards, drilling holes, braiding twine, etc., each should be done as a distinct task rather than sawing a board, drilling a hole, braiding a rope, and then drilling the next hole, and after four, going back and sawing the next board, and so on.

[DavidV]

I wrote about this analogy here.

Edited February 10, 2008 by GreedyCapitalist

[Tenure]

To anyone stumbling across this thread, I would highly suggest you read GreedyCapitalist's blog post there. It's a very good concrete analogy about how money works, as well as inflation.

[aleph_0]

You can still have exchange without money, though. That's bartering, which is just trading one good for another. What makes money money is that it is a common medium of exchange between individuals. I think you could theoretically have money with just two economic participants, but it would be rather useless and more of a theoretical fancy. Money only becomes particularly useful with three or more people who have incommensurate goods and demands, and they need a method of tracking what goods have been given in the hopes of gaining some other good.

So say there are three people, A, B, and C, with cows, goats, and chickens respectively. A wants to have some goats, though; B wants some chickens; and C wants a cow. A can't just get goats because he doesn't have what B wants; B can't get chickens because he doesn't have a cow; C can't get a cow because he doesn't have goats. But they all want wheat--not only do they all want wheat, but everybody in this world wants wheat! So what A can do is say to B "Look, give me some goats and I'll give you my wheat. With all that wheat, you'll be able to buy chickens from C. C will want your wheat because he knows that I want wheat, and he'll trade me the wheat for a cow. And we'll all be happy." That's a common medium of exchange.

Even though you can, in a sense, exchange with yourself over time by investing some labor now which will pay dividends later, I can't see how money could intelligibly play a part in that.

[Hermes]

I wrote about this analogy here.

Thanks, Greedo! That was a nice piece of work.

Aleph_0, you are correct, of course, and that is the framework from which I move back to Crusoe. If he were alone on an island, would he need money? The answer is yes.

He would need language and morality as well, even though collectivists and mystics think that these are only social skills.

It is true that you learn language socially, but alone on an island, you could put it to good use with no one else to talk to because language enables thought. The first word had to be thought of before it could be spoken.

The reason for deriving money as a Crusoe Concept is to take it out of the domain of the collectivists who make it a "social good." If social utility were the primary basis, then "anything" could be "money" -- which is what the statists attempt to achieve by fiat (command). Furthermore the Crusoe Concept shows why it is up to you to decide what you want to use for money.

There are other forms of money, to be sure. As a unit of account, money can be something different from a medium of exchange. But those considerations come later. The Crusoe Concept is the basis.

[aleph_0]

Language, probably. Morality, sure. But money? I don't see it. Money isn't a social good, but you shouldn't try to prove that by means of an invalid argument.

And just because money is a tool of "social utility" (in a narrow sense) in no way implies that anything can be money. Especially when you consider that "social utility"--or, otherwise put, the ability to facilitate exchange between distinct individuals--is only a necessary condition, and is not sufficient.

[Capitalism Forever]

Money's first attribute is its being a store of value.

By "first," do you mean "essential" ? If so, then I disagree; you can also store value in real estate, stocks, diamonds, ... basically any kind of durable, non-obsolescent good. Different individuals in the same economy can use different goods to store value, and even the same individual can well prefer to diversify his portfolio.

Nor is being a unit of measurement of value the essential characteristic of money. You could pick any other good. "Right now, a bottle of wine is as valuable to me as two pounds of sugar." "I would exchange my Hummer for three Harleys." "My wife is worth six Claudia Schiffers."

The essential characteristic of money is that it is used as a means of exchange. And since you don't need a means of exchange if there's no one to exchange things with, money would not be present in a one-person economy.