The previous post showed the importance of having zero inflation in order to maintain economic sustainability and eliminate the oppression caused by ‘those who lived by profits’ (business owners) against ‘those who live by wages’ (workers). This post explains how this can be done — by eliminating the dual purpose of money and reducing it to a single purpose. This dual purpose is divided into the subjective use (as a store of value) and the objective use (as a tool for trade), explained by Adam Smith:
That wealth consists in money..is a popular notion which naturally arises from the double function of money, as the instrument of commerce and as the measure of value.
In consequence of its being the instrument of commerce, when we have money we can more readily obtain whatever else we have occasion for than by means of any other commodity..
In consequence of its being the measure of value, we estimate that of all other commodities by the quantity of money which they will exchange for..
In consequence of these popular notions, all the different nations of Europe have studied, though to little purpose, every possible means of accumulating gold and silver in their respective countries.
Goods can serve many other purposes besides purchasing money, but money can serve no other purpose besides purchasing goods.
Money..frequently signifies wealth, and this ambiguity of expression has rendered this popular notion so familiar to us that even they who are convinced of its absurdity are very apt to forget their own principles, and..to take it for granted as (an)..undeniable truth. Some of the best English writers..set out with observing that the wealth of a country consists, not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds. In the course of their reasonings, however, the lands, houses, and consumable goods seem to slip out of their memory, and the strain of their argument frequently supposes that all wealth consists in gold and silver, and that to multiply those metals is the great object of national industry and commerce. (WN IV.i)
The proper purpose of money therefore is really to be a tool of trade and not as a store of value, because unlike physical goods, paper money is inherently worthless while gold and silver money must be processed further (melted down) to be of any practical use. Instead, the store of value ought to be in the commodities themselves. To explain this further, we must explore the duality of value.
The Metaphysics of Nominal (Subjective) and Real (Objective) Value
At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire; and that cheap which is to be had easily, or with very little labour. Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only. (WN “Of the Real and Nominal Price of Commodities”)
Generally, financial instability is caused by the fact that there exists a difference between a thing’s nominal value and its real value, which in turn, is based on the fact that the mental world (subjective) can be entirely different from the physical world (objective). The difference in values is referred to as arbitrage which comes from the Latin word arbiter, meaning to judge. Nominal value is the value that is perceived by the imagination, which makes its way into the physical reality through expression, or in most cases, by being written down on paper. This is how paper money, stock certificates, and financial statements get their nominal value. Real value is the value actually experienced by the mind resulting from the amount of difficulty and work or pain and pleasure experienced in producing a good or service. In most cases, the real value of anything is derived after the “higgling and bargaining” of two parties. The price arrived at after the negotiation represents a compromise between their experiences.
To put it simply, the nominal value is arbitrarily assigned by the mind, akin to a promise, while real value is that which is actually experienced in reality, similar to whether the promise was kept. In the long run, the nominal value of a good will gravitate towards the real value, just as we can better ascertain whether a person can keep his promise or not, the longer we have cognition of the person.
A socio-economic example of this is when a person launches an IPO. In principle, he can price his company whatever he likes (nominal value), but it will be the investors that will decide its real value. For years, Enron succeeded in propping up its nominal value despite its real value sinking. Only when people had cognition of its possible real value did Enron’s nominal and real values actually come together.
Commodities, instead of money, as a Store of Real Value
Now that we have identified the difference between nominal and real values, or the imaginative and the real, we will explore in the next post how real value can be measured in a socio-economic system. In the succeeding posts, the difference between the imagination and reality will form the basis of our case against arbitrage and profit maximization, which in essence takes advantage of the ignorance of others in order to benefit oneself, and is inherently anti-society, capable of causing crashes and recessions, just as broken promises can cause real-world damage and injustice.