A PCT view of money How is money created? At first glance, it is obvious what money is. It's a unit of value that allows goods and services to be traded more easily than can be done by direct barter. On examination, that simple statement hides some important issues. Let's consider the situation in an economy without money. If I want a haircut, I have to find Sam who not only can perform the job, but also wants something I can do or can give. If I don't have any such thing, and can not perform any service Sam wants, I don't get my haircut. But suppose I find out that Sam would like a fancy set of buttons, which I don't have, but I know that Joe down the street has some, and Joe's lawn needs cutting. I say to Sam that I can get the buttons, but he will have to wait until I have mown Joe's lawn, which I can do, and I think Joe will trade the mowing job for buttons. Sam may trust me, that I will choose to mow Joe's lawn, and that Joe will trade the buttons for the mowing job, and that I will then give Sam the buttons. Sam and I can agree that this is OK, and Sam cuts my hair. Some time later, I arrange with Joe to cut his lawn, get the buttons and give them to Sam. All is now square. Suppose now that Sam wants to get some steak from Bill the Butcher. Bill wants buttons. Sam says that's a fine trade, but he hasn't at the moment got buttons, but will be getting them from me. Bill trusts Sam, as Sam trusts me, and they make the trade, based on the fact that I owe Sam some buttons, and Bill perceives that debt as being good. In this scenario, all that passes between me, Sam, and Bill is words in one direction (a promise of buttons to come), and goods or services in the other direction. The promise of buttons has performed the function of money. In fact, it is money, even though there are no physical coins or paper involved. I could have given Sam a piece of paper on which I had drawn the buttons I expected to get from Joe, and Sam could have given that paper to Bill. Bill may have known that Sam got it from me, in which case he could come to me for the buttons. Or he may not, in which case he might not know where the buttons would come from. Whether Bill knows where the buttons are, and who wrote the paper, is immaterial, if Bill doesn't really want buttons. What Bill really wants may be cattle feed, but he knows a farmer who wants buttons. Provided the farmer trusts Bill not to give him a false debt, Bill can tell the farmer that he is owed buttons, or can pass on the piece of paper. So long as the person to whom the paper is passed can trust that it is worth buttons, it can be passed from hand to hand, permitting the trade of goods and services, even if I keep procrastinating and delay mowing Joe's lawn. What happens when I do finally mow Joe's lawn? I get the buttons from Joe, and pay them to Sam--or try to do so. But Sam says that the debt is no longer owed to him. It is owed to Bill the Butcher. I go to Bill, but he has traded it to the farmer. Finally, I give the farmer the buttons and retrieve my debt (which may or may not be on a piece of paper). I tear up the piece of paper,if there was one, since it now refers to a non-existent debt. What happens now, if the farmer wants to acquire some fertilizer? He hasn't got a piece of debt-paper or a promise of buttons. He has to find something he has or can get that Fred the fertilizer producer wants. Suppose that Fred can't settle on anything he wants right at that moment. The farmer can still trade, if he promises to give the producer something of value equivalent to the fertilizer, later. He may write another piece of paper that has a picture of a bag of fertilizer on it. And Fred can use that just as Sam used my picture of buttons. It is new money, and can be used until the farmer pays off the debt. Now suppose that before I pay off my debt of buttons, Fred wants something (not buttons) from Joe. In this case, the farmer has given Fred the paper with buttons drawn on it, not a new paper with a bage of fertilizer on it. What does Joe do? Does he accept the button paper, which he doesn't want as he already has buttons? Or does he ask Fred to give him something else for what Fred wants? If Fred offers something else that Fred doesn't have at the moment, but expects to be able to get, they have made new money. Fred can still trade his button promise for Ethel's milk, while Joe can trade Fred's new fertilizer promise for a haircut from Sam. The point of all this is to show that money is debt that is not paid off, and that to pay off the debt is to reduce the possibilities of further trade. To repudiate a debt, as is done in bankruptcy proceedings, is also to reduce the possibility of further trade, and moreover, it reduces the trust of future traders in the value of the money. If one set of fancy buttons is worth one haircut, one promise of a future set of fancy buttons becomes of less value than one present haircut. If someone who is asked to hold that promise believes that the originator of the promise may just possibly not pay off, the chance of that failure has to be subtracted from the face value of the thing promised. Trust is the important component of money--trust that at some future date the money will be as usable to acquire goods or services as it is now. How is trust developed? Normally it is by experience: that Sam has in the past kept his word, that other people have accepted my pieces of paper with buttons, fertilizer bags, and what-not as being acceptable substitutes for the real thing, even if they didn't really want the thing depicted. I could trust that they would accept the pieces of paper because they could trust that other people would accept them as well. If Sam is going to wait a long time before using the promise of buttons that I say I will give him, the greater the chance that I will have repudiated the debt. If he is going to use it very soon, then he can take the promise almost at its face value, as being worth almost as much as a set of buttons in his hand. If he expects not to use it for some time, he should ask for more buttons in the set, or for something else of value in addition to the promise of buttons. This is inflation, and it is built into the very concept of money. An economy with zero inflation had better have some way to input value, or it will quickly grind down into a subsistence economy! ------------------------------ Trades and Value Under what circumstances will a trade occur? Let's consider the trade between Sam, who has buttons (or a promise of them) and wants steak, and Bill, who has steak but wants buttons. Are buttons more valuable than steak? If so, Sam should not want to trade, but Bill will be enthusiastic. Is steak more valuable than buttons? If so, then Bill should not want to trade. Are they equally valuable? If so, why would either want to trade? For Sam and Bill to trade buttons for steak, buttons cannot be more valuable than steak, buttons cannot be less valuable than steak, and buttons cannot be equally valuable. But trades do occur, so something is wrong with the argument. What is wrong with the argument is that buttons can be more valuable than steak for Bill the Butcher, who has lots of meat, while at the same time steak is more valuable than buttons for Sam, whose clothes hang together pretty well but who has a hungry family to feed. Value cannot be a property of a thing that might be traded. It is a perception held by a person. The value of an item can change over time, even if the thing itself doesnÕt change. To the person with growing hair, the value of getting a haircut increases over time since the last haircut, but to the person providing the haircut, the value of providing the haircut is very little affected by how long it was since the customer last had one. Since the value of a thing to be traded is a perception in the mind of the trader, it is quite reasonable for Sam to perceive that giving buttons and getting steak increases the total value of his possessions, while at the same time Bill perceives that giving steak and getting buttons increases his overall value. What this means is that the value of goods or services cannot be measured according to any fixed standard. In particular, value cannot be equated to money. --------------------------------------- The Value of Money Money has value, but only in the context of the goods and services for which it can be traded. The physical manifestation of money may be coin or pieces of paper. They have value, too, but the value of a physical manifestation is independent of the value of the money it represents. A coin, for example, may be used to enhance a piece of jewellery or to hold down some paper against a mild breeze; varicolored paper money may be used as wallpaper. But a ÒdollarÓ has no intrinsic value. Just as the value of a piece of steak to Bill the butcher is lower than it is to hungry Sam the hairdresser, so the value of a dollar to a millionaire is usually less than it is to someone on welfare. This last statement is not always true. If the millionaire has almost enough money to be able to trade for some goods or services, each extra dollar might be very valuable. Without it, the millionaire is unable to do or get something he wants very much; with it, he can satisfy this great desire. To get the necessary dollar, the millionaire might trade something that under normal circumstances would seem to be of great value. The dollar at that moment has this great value, but usually it has a very small value to the millionaire. Sometimes the reverse can happen. A dollar may sometimes have very small value to someone on welfare, if at that moment they are feeling well fed, warm, and with someone they love. The key to value is control. An item can have value because in itself it satisfies some want (in the terms of Perceptual Control Theory, its acquisition reduces the error in some perceptual control system) or because it gives the person freedom to control better a variety of things. A haircut may have the former kind of value: the person had hair longer than desired, and the haircut reduced the hairÕs length to what its owner wanted. Health and strength have the second kind of value, since a strong healthy person can do more different things than can a sickly, weak person. Money also has the second kind of value, in that the possessor of much money can trade it for a variety of goods and services unobtainable by a poor person. If value relates to a measure of control, and is also a perception, it follows that what a person is perceiving relates to how the person perceives their ability to control their own circumstances. That is an aspect of imagination, of self-perception, and may well be available only to humans and their close relatives. The person perceives how their life would be changed by making a trade; every trade involves giving away something that has value (reducing the personÕs ability to control), and getting something that has value (enhancing the personÕt ability to control). ------------------------- Trading as conflict It is a reasonable assumption that better control is always desirable (that we have a reference to perceive ourselves as being in perfect control, but never can achieve it). If, in controlling any perceptual variable, we reduce our perceived ability to control other variables, we have a conflict. Conflict is therefore intrinsically involved in any trade, and the making of the trade is the resolution of the conflict. One can feel the conflict involved in trade every time one ponders whether a desirable item is worth the price asked. It doesnÕt matter whether the item took 300 hours to make, if its value to you is less than $10. Nor does it matter that the cost of making the item may have been a few cents if it is a rare postage stamp for which the owner is asking $10,000. The conflict is within you, as to whether the control you gain by the trade is worth the control you lose (or may lose) by it. You may accept or reject the trade immediately if the difference is large one way or the other, or you may dither over it for a long time if you perceive your loss of future control from using the money is nearly the same as the gain from acquiring the item or service. Conflict can be resolved in two ways. One way is that one of the two conflicting control systems overwhelms the other. The perceptual error in one of the conflicting control systems goes down to near zero, while the perceptual error in the other one is maintained or even increased. This is the only way conflict can be reduced if both conflicting systems act through the same medium (such as money). If I spend all my money on steak, I cannot spend it on travel. But there is another way conflict can be resolved, which is to recognize that the two conflicting control systems are acting in support of some higher level goal or goals, and those higher goals may not be in conflict; they may be satisfiable in other ways. It has been said that ÒMoney canÕt buy happinessÓ but it helps. Money is one way to effect control, at least control involving the actions of other poeple, but there are other ways. People do things for love, as well as for money. ------------------- The creation of value In the section on the creation of money in a barter economy, one of the examples was that I wanted a haircut, and Sam the haircutter was prepared to accept a set of buttons in exchange. The haircut and the buttons obviously have value to both parties, though Sam thinks the buttons are worth more than the haircut, and I think the reverse. For the moment, we can assume that the buttons have the same value for each of us. They may not, but assume they do. How, then would I think the haircut worth more than the buttons while Sam thinks it is worth less? It clearly is not the amount of work Sam puts into the haircutÑhis cost for the job. He can be as energetic or as economical as he wants, but it would make no difference to me provided my hair is cut the way I want. To some degree, is a question of how hard it is for Sam to do the cut. If it is easy for him, being well trained, he will need fewer buttons than if he finds it very difficult. One might ordinarily expect him to want as many buttons as he could get, and how many he can get depends on the value I have for the haircut at that moment. Why would I think the haircut worth more buttons than Sam thinks it is worth? For one thing, it is harder to cut oneÕs own hair than to cut someone elseÕs, even if one is trained. For another, it is often the case that the longer one goes without satisfying a want, the stronger becomes the need to satisfy it (quite apart from the fact that the hair grows longer and more in need of cutting!). My desire to have my hair cut is likely to mecome stronger over time, whereas SamÕs desire for the buttons may not, and his cost to cut my hair is unlikely to change much over time. If Sam wants more buttons than I am prepared to get for him, all he has to do is to wait, and the number of buttons I am willing to pay will probably increase. (Of course, I may get someone else to cut my hair for fewer buttons than Sam wants, and then he will get none). After the haircut, I have something of value that I did not have before, and I have given something away of lesser value to me. Sam has something of value (the buttons) but has not given anything away. Instead, he has performed some work. He created the value I received. If it were legitimate to add up the total value in the world of Sam and me, we would have to say that it has increased, because both Sam and I have more value after the transaction than before. Every transaction into which the partners enter freely has this characteristic, because each partner winds up (or expects to wind up) with more value after the transaction than before. Sam created the value that was added in the haircut transaction. But what of the transaction between Sam and Bill the Butcher, in which only tangible items are exchanged: BillÕs steak for SamÕs buttons that he got from me for doing my haircut? It seems that no value has been added to the world of Sam and Bill, even though each perceives a benefit from the trade. But this is not true. If steaks could be had by picking them off any tree that Sam would pass every day, Sam would not have to trade buttons to Bill for them. Bill has, in fact, taken an unfortunate cow to whom he paid nothing (though he may have paid a farmer for it), and has performed skilled work that Sam would not have known how to do. Sam might have paid the farmer for the cow, but that would not have provided him with a steak, and even if Sam himself could have created the extra value embodied in the work that makes steak out of cow, he would have wound up with too much meat. The value of the extra meat to Sam would have been very small, and he would have had to do work in setting up trades in order to turn it into value for himself. Far better for Sam to let Bill create the extra value, turning cow into steak, and better for Bill, too, since Bill already has the shop, the cold storage, and the like, that enables him to make trades with other people for the extra meat with rather less effort than it would have needed for Sam to do so. The proposition being developed is that every bit of value in the world is obtained either by selecting something from the natural world for which no trade is made, or by creating structural organization of a kind that is useful to somebody. For example, most people enjoy fruit, at least some of the time. Another way of saying this is to say that most people have a reference value for perceiving themselves to be eating fruit. They may exchange items of value in trades for fruit, so fruit has value. But fruit can sometimes can be picked off trees that grow without human intervention. It has value, but it comes for free to the person that picks it from such a tree. It does not come for free in an orchard. Somebody has created the structure that is the orchard, and has probably continued to maintain that structure by weeding the surrounds, pruning the tree, perhaps applying insecticides, and otherwise working against the tendencies of nature to make the orchard less organized and controlled. A person may pick a gold nugget out of a stream with very little effort when out for a casual stroll. That nugget has some immediate value, being pretty, but it has a greater imagined future value, in that the person can imagine that someone else will trade items of great value for the nugget. It has a status similar to that of money, in that it facilitates trades, but it does not add much value intrinsically to the economy. Nevertheless, if it facilitates trades by virtue of the imagined value with which people invest it, it really has value. Value is what people perceive it to be. If value can be created by finding and picking up a gold nugget, it can also be created by creating money, and destroyed by destroying money, so long as the amount of money created is not more than is needed to support the trades people woiuld like to do. How is money destroyed? Paying off a debt is one way, but repudiating a debt or going bankrupt is a much more effective way, since it destroys not only the money that was involved in the debt, but also the trust that other debts may be defaulted, particularly those whose repayment was expected to be based on repayment of the repudiated debt. -------------- The destruction of value Money can be destroyed by bankruptcy and dept repudiation, but can value be destroyed? Value is a perception, after all, and cannot be compared across people. Nevertheless, it is possible to argue that value can be destroyed, and moreover, that value ordinarily decays over time, whether it be the value of a tangible good or of a service. The perception of the value of an item represents the degree to which the item enables the owner to achieve some current or future goal. Consider first a service. The typical service enables the person served to satisfy some goal that existed at the time. The effect of such a service dissipates fast, as goals change. The value of having had oneÕs hair cut becomes less as the hair grows long again; the value of being given a programme for a play becomes less as the play progresses. Some services have longer value, of course. The value of being taught a skill may stay for a very long time. But for the most part, the value of a service declines toward zero with time since the service. Consider a tangible good. When it was acquired, it served to bring some perception nearer its reference value at the time.That was its value to the acquirer. As tiome goes by, controlled perceptions change, and the reference values change for perceptions that remain controlled. While it is possible that the tangible good increases its effectiveness in controlling the owner's perceptions, it is more probable that it becomes less effective, and therefor of less value. The owner has "moved on". Moreover, the good itself is subject to decay and damage, which will decrease its value if not corrected (a perception of its quality being controlled by the owner). So, on average, the value of a tangible good, like that of a service, is likely to decline over time. Exceptions exist, of course. Part of the value of a good (or of a skill) is the possibility that it may be exchanged for money, so the more value the money-equivalent has to the possessor of the good or skill, the more valuable that good or skill. Antique goods, in particular, are more likely to increase in money-equivalent value than to diminish in money-equivalent value over time, and this increase may more than compensate for any decrease in other contributions to its value. Since, with some notable exception, both services and goods are more likely to decline rather than to increase in value over time since their acquisition, it follows that if the overall value of an economy is to be sustained, compensating value must continually be created. It has been argued earlier that this compensating value derives from two sources: (1) the increase in value to each partner in a mutually agreeable trade, and (2) the work involved in creating structure from natural resources. Increases of the first kind have a natural limit, inasmuch as things and services tend to decline in value over time, so even as the fit of the goods and services to the needs of the people improves, the usefulness of the goods and services is declining. If this is true, then stability in an economy can derive only from the work that is put into enhancing the usefulness of natural resources, including the reworking of discarded goods, and the enhancement of skills.