Sunday, October 26, 2014



An economy is comprised of a realised portion and a potential portion.

The realised portion of an economy consists of all the completed binary voluntary exchanges of goods and/or services within the community that possesses the economy. The economic relevance of completed exchanges is depends not so much on the time of completion but on the current economic relevance of the exchange as the exchanges can range from those just completed to those completed in the dim and distant past such as a major road network.

The potential portion of an economy consists of  all the potential voluntary exchanges of  goods and/or services within the same community and these can range from nearly completed exchanges to those that are just glitters in the eyes of members of the community.

What is fully embraced by the terms ‘completed’ and ‘potential’ is dependent on the particular universe of discourse that is being addressed. For our purposes here the universe is the immediate present.

Generically for convenience in what follows the term ‘item’ will be used to  refer to both goods and services.

A completed binary voluntary exchange is comprised of

Two exchanging parties A & B
Two items to be exchanged,
Ia, belonging to A, and
Ib, belonging to B
Two, mirror image exchange processes, taking place simultaneously,
A taking ownership of Ib, and
B taking ownership of Ia

Such completed binary exchanges are the fundamental building blocks of the realised portion of any economy. It is thus useful to give such successfully completed binary exchanges a generic term, a name that fits comfortably  within the universe of economic terms. I suggest that they be called ‘economic nuggets’, because of gold’s historical  role in economic life rather than ‘economic atoms’ which would also reflect their fundamental atomic nature from an economic perspective.

It is worth noting the following about such completed exchanges. The intrinsic worth accorded by A to both Ib and Ia must meet the following criterion Ib >/= Ia, and similarly for B Ia >/= Ib otherwise there would not have been an exchange, but, as the intrinsic worths involved are purely in the heads of A and of B, they do not need to coincide. When money is used in an exchange however they have to coincide.


But first before discussing the implications of introducing money into the exchange process we need to define some  terms relevant to the discussion.

Intrinsic worth is the relative value that a person accords, in their heads, at a point in time, to a specific item in comparison to the values that they accord to other items at the same point in time.
Quantified intrinsic worth is intrinsic worth that is externally represented in a commonly accepted and measurable way. This is usually, and conveniently, done by means of a numbering system.

Socially validated intrinsic worth is the quantified intrinsic worth of an item that at least two people nave agreed upon.

Money, in general terms money represents the quantified, socially validated, intrinsic worth accorded to the exchanged goods or services in an economy.

It is also essential that we recognise two different categories of money, old  and new.

Old money is money that has had the intrinsic worth that it represents socially validated. New money is money that has not yet had the intrinsic worth that it  represents socially validated.

Thus if new money is used in an exchange it has a direct bearing on the further actions required of its user in order for the binary exchange to be completed successfully and thus forming an economic nugget.

The obvious and completely natural way to socially validate the intrinsic worth being represented by new money is for it to participate in a successfully completed binary exchange.

Economy, is the collective result of the freedom to enter into voluntary exchanges, with others, of goods and/or services.

Currency  because a currency is a representation of the socially validated quantified intrinsic worth of the realised portion of an economy this is the umbrella term that is used to refer to society’s money as a whole.

Unit of currency this is the generic term that is used to refer to any single unit of currency.

Money is introduced into the exchange process in order to act as a stand-in, or general purpose surrogate,  for one of the exchanged items. It achieves this generality by representing the intrinsic worth of the item in question, whatever  that item might be, because intrinsic worth, although belonging to a specific exchangeable item in each instance, is nevertheless a general property of all exchangeable items.

When money is introduced into the exchange process the question that  naturally arises is, can this introduction disrupt  in anyway the formation of economic nuggets, these building blocks of the economy? The short answer is, only if new money is used and the further action[s] required of its user is/are not successfully executed.

Now let us look at the composition of two successfully completed exchanges, one involving the use of old money and the other one involving the use of new money.


Two exchanging parties A & B
One item, Ib, to be exchanged [purchased] belonging to B
Intrinsic worth,W, of Ib agreed between A & B
One set of old money, Ma, belonging to A and equal to W
One sale comprised of two exchange processes
A gives Ma to B and
B gives Ib to A
The fact that old money is being used means that its user, A, has already supplied something of intrinsic worth W, equal to the value of the money, into the economy therefore the exchange is completed and an economic nugget has been correctly formed.


The completed exchange will exist in two mirror image halves dis-connected from one and other in time and location and only one participant is constant. The halves remain connected to one and other by only one thing and that is, the unchanging aggregate quantified intrinsic worth, W, of the items exchanged. W is reflected in the money used.

In each half of the exchange the constant participant plays different roles, in the first as buyer and in the second as seller.

First half of the exchange: [enacted in the present]

One item, Ib, to be sold, belonging to B 
One set of new money, Ma, possessed by A
A & B agree that the intrinsic worth, W, of Ib is reflected in Ma
A purchases Ib from B with Ma, or put the other way round,
B sells Ib to A for Ma

Second half of the exchange: [enacted after the first half]

One item, Ia, belonging to A, to be sold 
One set of money, Mc, category irrelevant, possessed by C
A & C agree that the intrinsic worth, W, of Ia is reflected in Mc
A sells Ia to C for Mc, or put the other way round,
C purchases Ia from A for Mc
Mc is then withdrawn from circulation because A has already expended intrinsic worth W when, earlier purchasing, Ib from B with Ma.

The completion of the second half of the exchange ensures the completion of the full exchange and thus the correct formation of the economic nugget.


From the foregoing it is hopefully clear that when we broadly view money as ‘the facilitator of exchange’ rather the more limited view of ‘the means of exchange’ then there is no theoretical reason why any member of a cash based society should be poverty stricken. Poverty is endemic however in our societies so there must be an on the ground reason for this to be. To find it we need to look at the current money system and its evolution.


In order to understand why the powerful in society have become fixated on ‘money as the means of exchange’ rather than on the broader ‘money as the facilitator of exchange’ it is useful to look at the  development of money over time.

During the social evolution of the concept of money the things that were used as money had intrinsic worth in themselves so that any  ‘money’ that you held was unlikely to either, gradually [through inflation] or suddenly [through changes in outer circumstances] become worthless.

A consequence of money having an intrinsic worth in its own right, e.g. gold,or legally attached to it under the gold standard if it was paper, was that money was always old, as define here, and naturally this kind of money, which was the only money that there was, could only be earned in trade or given as charity to somebody who had no money.

When paper money was introduced we adhered to the gold standard which meant that each unit of currency had to be legally backed by a fraction of the hoard of gold stored and held by the State. Under these circumstances money in itself had real intrinsic worth, even though it was only paper, because  legally it had to be convertable to gold, something with inherent intrinsic worth, thus it  was old money whether just printed or not.

When nations abandoned the gold standard for their paper money then the currency became a ‘fiat’  currency. This meant that there was no longer, even at one step removed for paper money, a real physical material, the intrinsic worth of which  attached, at least legally, to the currency. Money’s value under the current money system now had uncertain backing. With a change in the money system however new money’s value  could, naturally and rightfully, be linked to the value of the economic nugget that it played a role in forming. As we saw from the earlier section, titled ‘AN EXCHANGE INVOLVING NEW MONEY’, honest money, i.e.  new money that has successfully been converted to  old ,is the consequence of successfully completed halves of a binary exchange using the new money as the exchange facilitator.

Exchanges by ordinary citizens using new money will probably not be sufficient to address any real  needs for increases in the overall money supply so the National Currency Authority will have to keep a watchful eye on the Monetary supply statistics releasing new money into circulation when needed. The new money should be released to government for State expenses. Such releases of new money will not be inflationary provided that they correlate with the real need for new money in the economy.

For all this to be actualised however we will need to make many changes to how  the current money system, i.e. the system that administers the money, operates. This will be a multi-year project and because money is in a sense both the glue and the lubricant which keeps society together the whole of society will need to be involved. Involvement of the whole of Society will also be essential if the maximum number of beneficial changes to the system are to be conceived of and implemented.

No comments: