I Finally Understand Money!

That probably sounds like an odd comment from someone who spent his life in finance, but bear with me.

Being of a scientific bent, and having worked in a number of small companies and start-ups, I’ve found the process of wealth creation to be more than a little odd. Think about it for a second: a bunch of folks have an idea, they get together with some other folks who have a credit surplus (i.e., arbitrary markers on file at a bank), an abstract entity (money) that is more of a promise than a real thing is exchanged, and, voila, work is performed and wealth is generated! It always struck me as akin to the old physics cartoon showing an Einstein-like character at a blackboard. In the midst of a long series of equations are the words “…and then a miracle occurs” :).

Not being one to put much stock in miracles — particularly repeating miracles — I figured there was a better explanation out there, somewhere.

Today I read several blog posts that, for me, answer the question. Money — and it’s role in creating wealth — is the way we compensate for friction in the world of real (e.g., hard assets, labor) asset transfers. Or, as Krugman writes, “In a frictionless, perfect-information, costless-calculation world we wouldn’t need money, and it wouldn’t matter how prices were listed.” Metaphorically speaking, money is like a wheel, which takes advantage of friction to enable more work to be done than would otherwise be possible in the real world.

If this stuff interests you at all, take a moment to read this post by Yglesias. Make sure to read the links to the two Krugman pieces, too (here, and here; the second piece, about the Great Capital Hill Babysitting Co-op Crisis, is worth reading for the humor alone).

This perspective on money has all sorts of implications for a number of important political debates.

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