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What makes money?

Our modern economies revolve around money. The health of the economy, in one way or another, is measured in terms of sums of money. When people consider their futures, they think about the money (or lack of it) that will be involved.

So what makes money? We’ll leave aside the trivial answer: mints or central banks and the like, and assume that at least those mechanisms for the creation of the material stuff of money are already up and running.

Fundamentally then, what makes money must be what people value. Or, better, what is valued by the political-economic society in which that money circulates.

This is the view of money sometimes described as as ‘a store of value’ as opposed to money as ‘a medium of exchange’ and other definitions.

In a completely free market and a free society, with no legislation, one could (provided that structures were in place to create money and administer its flow) make money from whatever it is in that society that people value.

Now people’s values change with circumstances. Although criticized in some circles as too simplistic, Maslow’s hierarchy of needs is still a good sketch of what people value at various stages of their personal or collective development. One starts by needing food, then shelter, then certain material goods and so on up to a stage where all physical needs are taken care of and one seeks what one might call realisation or fulfilment as a person. Each of these stages can be monetised and, indeed, we see this clearly in the West with the growth in monetary value of such things as health spas, healing therapies etc.

But it is also true that three great universals of human culture: sex, weapons and drugs can also make you a good deal of money if you are allowed to trade in them. There are billionaire porn barons, drug dealers and arms traders throughout the world. And perhaps the fact that we are not all more implicated in these particular money-making exercises is just due to the fact that many of them are illegal – so it is hard for the average Joe to get involved and earn something from them. Just in case it needs to be repeated, then, not all ways of making money are good ways. In fact, this does need to be repeated; the fact that people forget this is behind the desperate statements of some porn stars who say, for example, ‘well, my parents didn’t like it at all, what I did, but when they saw the money I was making, they understood.’ Prostitution is OK as long as the price is right.

So there are good things you can do to make money: grow and sell fruit; make clothes; offer cleaning or caring services; sing a song or sell your paintings; invent and sell new ways of communicating or travelling; and there are less good things you can do: sell drugs; sell arms; make money from prostitution or pornography.

But where does banking fit into this? Here I struggle. The value of fractional reserve banking is that the banks oil the flow and exchange of money; they provide an administration of money which allows business to develop and individuals to keep safe any money they have. Here they act like a service industry. Fine. But banks also create money: famously in the phrase ‘fresh air banking’ used by Mary Mellor and other commentators. Every loan they make appears not as a debit on their balance sheets but as an asset. The mysteriousness of this is well documented and I will not progress the discussion here.

I guess I don’t have any issue with making money from this – none at all – if (following the description above about what makes money) this process really is giving something which societies or individuals value: if the service works. But if it does not (and surely asking each tax payer to stump up several thousand quid a year to keep the system going is not giving individuals something to value), then the questioning starts about whether this banking process, these banks, really should be making money.

One more thought on this for a future blog. All the examples given above: fruit, songs, machines etc are ‘positive’ examples of making money by way of production. As we move towards a state of plenty and excess (obese people, diseases of excess, pollution, waste) there is increasing value in taking things away: rubbish disposal, weight loss classes – even the offering of silence  to counteract the excess of noise.

As an amateur economist I would like to understand this better: how can adding something somewhere and taking it away somewhere else both contribute to a growing GDP – a ‘healthy’ economy? Again, does it all come down to what we value: we value eating so much food that we get overweight, then we value the drug company which gives us a pill to help us slim down? That kind of works, but also seems kind of crazy. A zero sum game which increases our wealth. A contradiction in terms.

What can and cannot be monetised, some might describe it as ‘commodified’, remains a subject of interest, research and philosophy.

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