The Invisible Hand

Chapter 2 Crises of Market Economies (Macroeconomics) (p. 71-73)

How Does Money Enter the Economy?

From Shell Money to the Peel Banking Act

So far we have dealt with the functioning of individual markets, for instance the housing market or the market for eco-certificates. These questions are issues of what we call microeconomics. However, in order to understand how a national economy works, we cannot just summarize the processes that occur in individual markets. As in other areas, the total in economics amounts to more than the sum of its individual parts. This is because the economy as a whole will often react very differently from an individual market. These contexts and especially the resulting crises such as unemployment and inflation are the subject of macroeconomics, to which we shall now turn.

Anybody who wishes to understand how macroeconomic processes work in an economy has to deal first of all with the issue of money. People have always been suspicious of money, even many economists. This is because money embodies a value even though it often has no intrinsic value. Obviously we can neither eat a bank note nor use it for any other useful purpose other than to light a fire perhaps. Even gold coinshaveonly a very limitedutility as such. Greek legend has it that King Midas wished that everything he touched would turn into gold. He was granted this wish, but it was almost his undoing because every time he put his glass to his mouth, the wine in the glass would turn into gold. The same happened with all the food that he wanted to eat too. Had he not been allowed to take back his foolish wish, he would have died of hunger and thirst. In Thomas More’s novel ‘‘Utopia’’ gold was only used to manufacture such profane things as the chains of slaves. Like other Utopian Socialists, Thomas More held the view that gold and money were basically superfluous in human society, causing more harm than good.

Karl Marx as well was more on a war footing with money than anything else, feeling that it was a typical product of capitalism even though he realized that money considerably facilitated the exchange of goods. We only have to imagine what things would be like if there were no money. A baker, for instance, would have to exchange his bread rolls directly for shoes, meat and all the other goods he needs to live on. This means he would have to find a person who would not only want to buy his rolls but would also want to sell shoes or meat. Needless to say, this would be very difficult, which is why money was eventually adopted as a general means of payment. However, according to Marx, in a capitalist system the pursuit of wealth would rapidly become an end in itself, where the act of exchanging no longer worked according to the motto ‘‘goods-money-goods’’ but according to the motto ‘‘money-goods-money’’ instead. In fact, going byMarx’ crisis theory, it was those sort of contradictions thatwould ultimately lead to the downfall of capitalism. There have been repeated attempts to draw up Utopian societies that were supposed to work without money. The best-known were those by Robert Owen (1771--1858), Francois Babeuf (1760--1797) and Pierre Joseph Proudhon (1809--1865), who coined the famous phrase ‘‘property is theft’’. However, none of these Socialist models of society were ever successful in practice and they all went with a strict obligation to work as well as with government-regulated prices and wages. This alone is a sign that money is an important prerequisite to individual freedom.