How does money work?
September 19, 2019 3:11 PM Subscribe
I'm interested in books and other resources to learn about money and wealth from a philosophical point of view. How money moves through the economy. What it means to be wealthy. How these relate to more tangible goods and services, and other things you can do with money like influence how resources are spent. I'm interested in this a foundational qualitative sense, not in terms of how to predict recessions or set monetary policy.
Like I'll see a statement like "giving $100 to a poor person is better than giving it to a billionaire because the billionaire will just sit on it". And I start wondering:
Like I'll see a statement like "giving $100 to a poor person is better than giving it to a billionaire because the billionaire will just sit on it". And I start wondering:
What happens to that $100? How does it moving through the economy affect people's actual lives? I guess there's a corresponding counter-movement of goods and services, and maybe also the creation of wealth? And does that new wealth mean more "stuff" in the world?And this makes me realize what I need more than specific answers is a framework for thinking about how money functions in an economy, how it relates it wealth, and how both relate to tangible things like quality of life or ability to create influence. This previous question is also the kind of thing I want to be able to reason about. Are there contemporary works on economics that cover the foundational background rather than the mathematical models. (I can handle some amount of math, but the conceptual understanding is more interesting to me.)
And then on the other hand, it's not like the billionaires money isn't doing anything. If it's in a bank, it's being loaned out and moving through the economy that way. But if it's stock, like the wealth of the very richest is, then is that wealth moving around? Or is it just like "potential money", which may not ever be realized, or even be liquid enough to be converted in full.
And if you have money than you might not ever convert into "stuff", what it is good for? It is a proxy for power? Is it a "vote" towards influencing world production? Is anyone looking at how wealth inequality quantitatively translates in power inequality?
Response by poster: tl;dr: I want to learn more about how wealth (especially great wealth) relates to money. And how money relates to tangible quality of life, and also non-consumer aspects like influence on society and the economy as a whole.
posted by serathen at 3:45 PM on September 19, 2019
posted by serathen at 3:45 PM on September 19, 2019
I think you'll be interested in the work of Thomas Piketty, specifically Capital in the Twenty-First Century. it might help to have a basic knowledge of macroeconomics, which you can pick up at any of the better online "universities."
posted by General Malaise at 3:46 PM on September 19, 2019 [3 favorites]
posted by General Malaise at 3:46 PM on September 19, 2019 [3 favorites]
I don't think you'll find a definitive book or essay on how money works, because people still aren't sure how it works, or whether our entire economic system is a house of cards waiting to fall apart. I don't think people realize how close the world financial system came to unraveling in the 2007 GFC. You'd basically want to do a university degree in economics or finance.
The 17,000 word blog post about the "full stack" view of wealth is a decent overview that tries to capture the entire history of wealth, from Conrad, previously posted on the blue. It explains how a society grows wealthier, in various fundamental ways, in various eras, why humans stayed at the same level of wealth or productivity for 10,000 years, and then rapidly accelerated, with each new innovation unlocking / exploiting new sources of wealth.
Here's a brief overview of what I mean, why money and wealth seems so obtuse and how it can be that people still debate what they mean... again from another post on the blue on modern monetary theory.
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In the conventional view of money most people have, we save money first, then spend it later. If translated to how government budgets are perceived, they would first raise money (via taxation) then spend it on projects later.
In the MMT model, it's turned on its head - it says that governments first spend money, then earn it later through taxes.
Basically in the 1600s, the government and indeed the entire colony in Massachusetts had a problem - they had lots of productive output like timber or wheat, but they lacked gold coin to use as currency as they were far from the gold mines and supply of gold was limited. This was a problem, because no one could make transactions.
When it came time pay wages, the government cheekily issued fake "paper" money... and why would anyone in the economy accept payment in this form? Because on the paper it said the government would accept it as payment... for taxes. So even if no one accepted this money as payment, people knew the government would accept it when it inevitably came time to pay their taxes, so it had value. (can't avoid death and taxes...).
So essentially the government purchased services upfront first, by issuing money, which entered the economy, increasing liquidity and making transactions easier... then at some later date, "earned" that back through taxes and destroyed those notes.
If you look at it that way, taxation is a way of destroying money, while spending money they don't have (creating a deficit) is the only way we create money.
posted by xdvesper at 4:00 PM on September 19, 2019 [2 favorites]
The 17,000 word blog post about the "full stack" view of wealth is a decent overview that tries to capture the entire history of wealth, from Conrad, previously posted on the blue. It explains how a society grows wealthier, in various fundamental ways, in various eras, why humans stayed at the same level of wealth or productivity for 10,000 years, and then rapidly accelerated, with each new innovation unlocking / exploiting new sources of wealth.
Here's a brief overview of what I mean, why money and wealth seems so obtuse and how it can be that people still debate what they mean... again from another post on the blue on modern monetary theory.
---
In the conventional view of money most people have, we save money first, then spend it later. If translated to how government budgets are perceived, they would first raise money (via taxation) then spend it on projects later.
In the MMT model, it's turned on its head - it says that governments first spend money, then earn it later through taxes.
Basically in the 1600s, the government and indeed the entire colony in Massachusetts had a problem - they had lots of productive output like timber or wheat, but they lacked gold coin to use as currency as they were far from the gold mines and supply of gold was limited. This was a problem, because no one could make transactions.
When it came time pay wages, the government cheekily issued fake "paper" money... and why would anyone in the economy accept payment in this form? Because on the paper it said the government would accept it as payment... for taxes. So even if no one accepted this money as payment, people knew the government would accept it when it inevitably came time to pay their taxes, so it had value. (can't avoid death and taxes...).
So essentially the government purchased services upfront first, by issuing money, which entered the economy, increasing liquidity and making transactions easier... then at some later date, "earned" that back through taxes and destroyed those notes.
If you look at it that way, taxation is a way of destroying money, while spending money they don't have (creating a deficit) is the only way we create money.
posted by xdvesper at 4:00 PM on September 19, 2019 [2 favorites]
I know I've been meaning to read Debt: The First 5,000 Years about this topic.
posted by foxfirefey at 4:02 PM on September 19, 2019
posted by foxfirefey at 4:02 PM on September 19, 2019
Graeber -- Debt: The First 5,000 Years
> "If history shows anything, it is that there's no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt—above all, because it immediately makes it seem that it's the victim who's doing something wrong."
The soviet dream of using linear programming to optimise an entire centrally-planned economy: Spufford -- Red Plenty
Even if you start regarding the physical economy as some kind of system to optimise, with no notion of prices or money or currency, you can mathematically derive shadow prices for input materials, labour, etc (resources that are bottlenecks in the system will have relatively higher prices)
Modelling the physical economy, society & environment as a dynamic system of stocks and flows: Meadows, Meadows, Randers, Behrens -- The Limits to Growth . There's a lot of material in here connecting the physical economy with quality of life. E.g. expect death rates to start climbing if society has less resources to invest in healthcare due to increasing costs of extracting non-renewable resources or decreases in EROI .
Discount rates & interest from capital investments: Bernstein -- Of Mines, Forests, and Impatience
posted by are-coral-made at 4:14 PM on September 19, 2019 [1 favorite]
> "If history shows anything, it is that there's no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt—above all, because it immediately makes it seem that it's the victim who's doing something wrong."
The soviet dream of using linear programming to optimise an entire centrally-planned economy: Spufford -- Red Plenty
Even if you start regarding the physical economy as some kind of system to optimise, with no notion of prices or money or currency, you can mathematically derive shadow prices for input materials, labour, etc (resources that are bottlenecks in the system will have relatively higher prices)
Modelling the physical economy, society & environment as a dynamic system of stocks and flows: Meadows, Meadows, Randers, Behrens -- The Limits to Growth . There's a lot of material in here connecting the physical economy with quality of life. E.g. expect death rates to start climbing if society has less resources to invest in healthcare due to increasing costs of extracting non-renewable resources or decreases in EROI .
Discount rates & interest from capital investments: Bernstein -- Of Mines, Forests, and Impatience
posted by are-coral-made at 4:14 PM on September 19, 2019 [1 favorite]
I think you will love the podcast Planet Money.
posted by selfmedicating at 4:19 PM on September 19, 2019 [2 favorites]
posted by selfmedicating at 4:19 PM on September 19, 2019 [2 favorites]
This is an influential book on the subject.
posted by hypercomplexsimplicity at 6:40 PM on September 19, 2019
posted by hypercomplexsimplicity at 6:40 PM on September 19, 2019
Seconding Piketty's Capital. It absolutely taught me more in one text about how money works vis a vis government, business, and history than any other single source I've read.
posted by shadygrove at 9:14 PM on September 19, 2019
posted by shadygrove at 9:14 PM on September 19, 2019
In your first two questions, you're basically asking for an overview of macroeconomics (the study of the economy as a whole). Two suggested places to start: The Banks, Money, and the Credit Market chapter of the free CORE economics textbook (which is a center-left Econ 101 text), and
To try to address a few of your questions: Resources can be either consumed or saved. In a stable economy, savings equals investment. E.g., you could spend the day making a fancy dinner (which you'll eat tonight-consumption) or building a new room (which you'll use for many years - investment).
The economy can have slack - underused resources, most importantly worker who can't find jobs - or it can be at full employment, where basically everyone who wants to work is working. If there's slack, you want to stimulate the economy; if you're at full employment, you don't.
Poor people want to consume more and will spend every extra dollar they get. Rich people have all they need, so will save extra money. (Most people are in between, but the richer you are, the less you will spend out of each additional dollar.) If there's economics slack, you want to stimulate the economy, so you (that is, the government) should give more money to poor people.
Separately, but more importantly, poor people benefit more from an extra dollar of spending than rich people. A poor person will use that extra money to, for example, not starve. A rich person will get more truffles on their pasta. The former creates more additional human welfare than the former. (Again, these are extremes, but the idea holds: A person making $10,000 will benefit more from a $500 bonus than a person making $100,000.)
posted by Mr.Know-it-some at 6:07 AM on September 20, 2019
To try to address a few of your questions: Resources can be either consumed or saved. In a stable economy, savings equals investment. E.g., you could spend the day making a fancy dinner (which you'll eat tonight-consumption) or building a new room (which you'll use for many years - investment).
The economy can have slack - underused resources, most importantly worker who can't find jobs - or it can be at full employment, where basically everyone who wants to work is working. If there's slack, you want to stimulate the economy; if you're at full employment, you don't.
Poor people want to consume more and will spend every extra dollar they get. Rich people have all they need, so will save extra money. (Most people are in between, but the richer you are, the less you will spend out of each additional dollar.) If there's economics slack, you want to stimulate the economy, so you (that is, the government) should give more money to poor people.
Separately, but more importantly, poor people benefit more from an extra dollar of spending than rich people. A poor person will use that extra money to, for example, not starve. A rich person will get more truffles on their pasta. The former creates more additional human welfare than the former. (Again, these are extremes, but the idea holds: A person making $10,000 will benefit more from a $500 bonus than a person making $100,000.)
posted by Mr.Know-it-some at 6:07 AM on September 20, 2019
I did a Ph.D. exam in labor and economic geography, and I read this question from that perspective, different from some other posters.
I see the most important of the OP's questions as the last one, particularly in relation to the title ("How does money work") and the request for philosophical and qualitative approaches:
I would start with several key questions here (and bracket "power" for a moment) to ask:
Some points of departure: I read Stephen Gudeman's The Anthropology of Economy in grad school and its strength is in technical discussions that remain accessible. While it's focused more on transactions and markets (if I recall correctly), the book is very good at orienting question of economy as the making of social relations, rather than taking money and wealth as solely the tools of subjection.
Graeber's Debt is not bad although not really focused on the philosophical question, and it definitely could have been 75 pages shorter. But very very readable.
Marx, especially the chapter on money in Capital, Vol 1, contains an earnest and extremely sophisticated discussion of what money and wealth are. That said, the beginning of the book is dry as a bone and for obvious reasons Marx's review only goes until the mid-19th century.
Finally, if you're also interested in how "the economy" might not be a unified object ("the neoliberal economy"), I would put in a plug for JK Gibson-Graham. Her/their work is all about the diversity of economic practices that exist out there, and the different ways of understanding how power operates in and through "diverse economies".
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(Also, the climate strike popover ate my original comment, which was soooooo frustrating (even while I'm in support). It also means that this rewritten comment is probably less eloquent and more curt than I'd like it to be.
Just a note for the mods.)
posted by migrantology at 9:04 AM on September 20, 2019 [3 favorites]
I see the most important of the OP's questions as the last one, particularly in relation to the title ("How does money work") and the request for philosophical and qualitative approaches:
And if you have money than you might not ever convert into "stuff", what it is good for? It is a proxy for power? Is it a "vote" towards influencing world production? Is anyone looking at how wealth inequality quantitatively translates in power inequality?On this reading, I would suggest economic anthropology as the entry point, much more so than Piketty, The Limits to Growth, or Planet Money as suggested above.
I would start with several key questions here (and bracket "power" for a moment) to ask:
To begin with, wealth, labor, and exchange are fundamentally social processes. That means there's no economy "out there"; the economy is composed of the practices and behaviors of individuals and social groups situated in place and time. The above bullets go a long way in answering directed questions, such as:What counts as wealth?
What counts as labor?
On what basis, and with what limitations, can wealth and labor be converted for one another?
I find this approach more fruitful than one that begins with money or takes money as the atomic unit of explanation (metaphorically speaking), because it has to allow that money operates in several ways and in different ways at different times.How and when does money operate as a store of wealth?
How and when does money operate as a medium of exchange?
How and when does money operate as a claim on future labor?
Some points of departure: I read Stephen Gudeman's The Anthropology of Economy in grad school and its strength is in technical discussions that remain accessible. While it's focused more on transactions and markets (if I recall correctly), the book is very good at orienting question of economy as the making of social relations, rather than taking money and wealth as solely the tools of subjection.
Graeber's Debt is not bad although not really focused on the philosophical question, and it definitely could have been 75 pages shorter. But very very readable.
Marx, especially the chapter on money in Capital, Vol 1, contains an earnest and extremely sophisticated discussion of what money and wealth are. That said, the beginning of the book is dry as a bone and for obvious reasons Marx's review only goes until the mid-19th century.
Finally, if you're also interested in how "the economy" might not be a unified object ("the neoliberal economy"), I would put in a plug for JK Gibson-Graham. Her/their work is all about the diversity of economic practices that exist out there, and the different ways of understanding how power operates in and through "diverse economies".
--------
(Also, the climate strike popover ate my original comment, which was soooooo frustrating (even while I'm in support). It also means that this rewritten comment is probably less eloquent and more curt than I'd like it to be.
Just a note for the mods.)
posted by migrantology at 9:04 AM on September 20, 2019 [3 favorites]
Interesting idea—and if you wrote this book, I would want to read it! There are two sources I can think of that have written works related to this topic, though they are closer to the monetary policy side of things. Though they’re not quite on the nose, they explore areas that are quite close to the philosophical questions you’re asking about wealth.
First is Christine Desan’s Making Money, which explores how law and politics has historically influenced the creation of money and how we think about money. It might be worth emailing her to see if she would engage with you on the topic or be able to direct you to resources that respond more directly to what you’re asking. She’s a professor, so her email address is publicly available.
The second is Elizabeth Warren’s The Two-Income Trap. Whatever you think of her as a political figure, she had a long career as an academic specifically focused on how wealth is and is not generated by lower- and middle-class Americans. She has a well-developed perspective on how individuals and society think about debt, which is very much related to your question of what it means to be wealthy.
posted by saltypup at 9:32 AM on September 20, 2019
First is Christine Desan’s Making Money, which explores how law and politics has historically influenced the creation of money and how we think about money. It might be worth emailing her to see if she would engage with you on the topic or be able to direct you to resources that respond more directly to what you’re asking. She’s a professor, so her email address is publicly available.
The second is Elizabeth Warren’s The Two-Income Trap. Whatever you think of her as a political figure, she had a long career as an academic specifically focused on how wealth is and is not generated by lower- and middle-class Americans. She has a well-developed perspective on how individuals and society think about debt, which is very much related to your question of what it means to be wealthy.
posted by saltypup at 9:32 AM on September 20, 2019
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posted by lex mercatoria at 3:42 PM on September 19, 2019 [1 favorite]