Economists
continue to be confused about money. Most economics textbooks
ascribe three functions to money.
- a means of exchange
- a unit of account
- a store of value
They have identified these
functions correctly, but they quickly forget this when developing
theories about money. They produce confusion by developing a
theory of supply and demand for money. However, the concept of
demand for money is nonsense. People may wish to have money, but
it is not something that can be bought like other goods and
services. Therefore, speaking of the demand
for money changing in response to price does not make sense. People may want to have
more money, but the only way to get more is by exchanging some
good or service for it.
People may make choices about the
form in which they want to hold their money. These choices are
made on the basis of the way money will be used and the cost of
these options. This is not the same as demand for other services.
The theory of supply and demand is useful for understanding the
market for other goods and services, but it is not helpful with
respect to money.
The reason for this false view is
that economists see money as a commodity. This leads to their
developing their models in terms of supply and demand. This produces total
confusion, as money is not a commodity. It is an
accounting unit. Bank notes are a record of the debt of a bank,
etc. A gold coin is not primarily a commodity. It is a portable
record of a debt. It is proof that I have given up some goods, and
am entitled to receive some back from someone in the econcomy.
Being a unit of account is the
prime function of money. It can only be a medium of exchange if it
is a reliable unit of account. Money can only be a store of value,
if it is a universally accepted unit of account. However, it can
never be a perfect store of value, because the future can never be
certain. |