Money: The Big Spiked Hammer

(Bluegrass fans will get the reference.)

Many of the most concerned, well-intentioned people I know have concluded that "money is the root of all evil." And, while I certainly understand where they're coming from, I think they are only looking at part of the picture. They are ignoring something incredibly important — the enormous benefits of money. Trying to do without money at this stage of human evolution would be absolutely disastrous, in my opinion. In fact, I have argued on many occasions that money is the most important tool ever created by man — by a long shot. I continue to believe that. However I also think the "money is evil" crowd has a valid point.

Here's a metaphor that I came up with to communicate my view of money’s pros and cons. Compare money to a hammer. A hammer is a useful tool. No one would argue otherwise. However our existing form of money is poorly designed. In fact, throughout thousands of years of human history I would argue that we have never had properly designed money.

Our existing form of money is like a hammer with a sharp spike on the back side. Every time we swing the hammer to drive a nail we stab ourselves in the eye. It is still a useful tool, without which we couldn't drive nails, but it is also a source of great harm.

The point of the metaphor is that we do not need to choose between the perspectives of money being the most useful tool ever created by man and money being the root of evil. It is not an either/or proposition. Both can be true at the same time.

I speak to a lot of people who are trying to envisage the future of economics. They see the obvious flaws of the existing model and believe that it is in the process of collapse. I agree with this perspective completely. However where differences of opinion come up is when we start thinking about what comes next — i.e. what will replace the collapsing system. This is where I part ways with the “money is evil” perspective. People who hold that view believe the next step in human evolution will be a system in which money is no longer used. And, while I don’t necessarily disagree that it is possible that in the future humanity will evolve to a point at which money is no longer necessary, I don’t think we are at that point yet. I believe the era of money still has a long way to go. In fact, at this point, with the number of people who live on the planet and the degree of economic coordination that is necessary in order to sustain them, I believe elimination of money would represent a death sentence for the majority of people currently alive.

I think about money as being a story. It is a story about solving the problem of “coincidence of wants”. Direct exchange — i.e. barter — is a natural, fair system (provided the parties are acting on their own free will and are not subject to coercion). But barter is extremely limited in terms of the scale and scope of exchanges that can be made. And the reason this is so is because of the coincidence of wants problem. In order for A and B to make an exchange via barter, A needs to want what B has at the same time and place (and in the same quantity), while B wants what A has. This rules out 99% of all possible economic exchanges.

Consider a very simple situation in which Person A has eggs and wants cheese, Person B has cheese and wants meat, and Person C has meat and wants eggs. Such a simple situation cannot be resolved using barter. Of course, the three people could make an agreement to do a 3-way exchange, but such an exchange would not be barter, strictly speaking. And as soon as the exchange dynamics get more complicated than that, a medium of exchange — i.e. money — becomes necessary.

From a story telling perspective, it would not make sense that what we are living through now is the final chapter of the money story. How could driving nails and stabbing ourselves in the eyes be the end of the story of the hammer? That would be a terrible story.

There may come a time when hammers are no longer necessary because we come up with a better way of driving nails. But we are not at that point yet. Trying to live without money at this point would be throwing out the baby with the bath water. We have not yet come up with a better way of solving the problem of coincidence of wants. We may develop a better way in the future, but until that time we need hammers. Our lives depend on them.

The story line that makes sense to me is that we have not yet figured out how to build and use money properly. It is not necessary that all hammers must have spikes on the back of them. It is not inevitable that in order to drive nails we must also stab ourselves in the eyes. Building hammers without spikes would allow us to reap the benefits of money without experiencing all of the negative consequences of our existing form of money.

Designing and building such hammers is why The Silvio Gesell Foundation exists.