I’ve never quite been able to grasp the way money circulates. I know that my company gets paid for making people’s publication of information more efficient and usable. Our clients pay us with money that they get paid by their clients, who get paid in turn by their clients, who get paid because they provide value to…and so on. But if everyone is getting paid by everyone else just so they can pay still others…well, at that point my brain sort of went “o help, I can’t compute this, it’s too circular and I don’t understand where it starts or what it means”. This has been bugging me since 5th Form!
This morning on the way to the office I finally got it.
Money measures the relative value of exchanges. If we didn’t have it, every exchange would be negotiated uniquely – by bartering what each party had. “I’ll give you three sheep for one of your pigs”. But when everyone agrees to measure the value of their stock (of sheep, or boxes, or hours, or pens) with coins, money becomes the stock that the buyer always agrees to exchange.
So, one way of saying this is that money is the universally traded commodity which provides a common bartering stock.
To come back to the point, I was always confused about the circulation of money. But now I see that’s a red herring. Money ‘works’ because it measures how valuable the supplier’s stock is to the buyer. When an exchange happens between two free parties, one gives the other a measure of money in return for part of their stock of something. If that stock is worth lots and lots to the buyer, then the seller gets lots of money. He can then exchange that money for stocks of something else.
How do some manage to gather more money than others? Well, you might think it’s because the stock they sell is measured as far more valuable than usual. But many people have made lots and lots of money selling cheap stock (Stephen Tindall of The Warehouse; Sam Morgan of Trademe). The price of a stock is another red herring: the real secret is being able to keep part of the money that you’re given for your stock (of hours, or pens, or boxes, or sheep) as profit.
After all, you must have been able to create the stock you trade, right? Even the stock of hours you sell have been created by purchasing inputs from the food-makers, the house-providers, the health-providers, and the training-providers. You combine all these inputs into hours, and sell them to someone. But if you pay less for the inputs than what you get paid for your hours, you’ll have money left over (’disposable income’). You can spend this on consumable pleasures, you can use it to help others, or you can invest it into more (or another type of) input that you hope will increase the value of your stocks. For instance, you might spend some of your disposable income on a training course.
So, if you can do this profitable exchange again and again and again, you’ll be able to retain money each time – and you’ll build up a surplus. How great a surplus is a function of the profit each transaction creates multiplied by the number of times you transact. And that’s why some get wealthy: they make huge profits on a few transactions, or small profits on many. And it all comes back to the difference between cost-of-manufacture and value-of-output (cost vs. price). Cost is what you pay for inputs, and price is what you get paid for the inputs you provide.
So money is the universal measure of the value of the inputs. Whenever someone buys something from another, they’re buying an input for themselves (housing, food, training, pleasure, sheep) and measuring its value with money. So, the money-go-round is not really about circulation at all. It’s about the convenient measure of each transaction’s worth: that is what it ‘means’.
And despite (or maybe because of) constant circulation, money accumulates in lumps wherever someone manages to capture part of the price they get for their stock in profits.
