Saturday, August 16, 2014

Money matters

As much as I have tried to explain money in various posts another seems in order and my motivation is to understand an important area where I think simple concepts can help.

These are just my opinions as I sit here typing them up. Nothing here should be construed as money or legal advice or as a claim of expertise in money matters. Terms may be defined by me for the purposes of this discussion without claim that they are used the same way by anyone else. Money for many reasons is an extremely complex area and it is not necessarily the case that I succeed here in simplifying understanding as I try talking it out. But I'm going to have fun trying. So if you're still here, no promises, as we continue.

Like consider two neighbors where one does a favor and mows his neighbor's lawn, and that neighbor later returns the favor by cutting his hedges. In this hypothetical example we can ask, is it equal reciprocation?

Now in contrast, consider one neighbor pays $50 US to have his lawn mowed, and the other neighbor pays someone $35 US to trim his hedges, and we can say now in this hypothetical scenario that one thing is worth more than the other where money has enumerated the cost of the favors.

So, money is consideration received in exchange for doing a favor, which abstracts the value of the favor and it's a better system than simply guessing at what roughly equals in some other kind of reciprocal exchange.

Use of the word "favor" here may seem odd, as some may think the idea is that a favor is done without expectation of something in return. But I think the reality is delayed return. Generally decent people will return the favor. But there is a delay which can be indefinite.

In contrast, it sounds very different if I say, two neighbors barter where one says he'll mow his neighbor's lawn in exchange for having his hedges done.

Maybe some neighbor might mow lawns as favors without any expectation of any kind of return, but what kind of people would accept it without giving anything back? Maybe if he were rich? Nope. Most people would want to give something back. Decent people return favors. People who never return favors are not liked.

Notice a direct trade of mowing lawns in exchange for doing hedges is not as free floating as the favor. Say you mow your neighbor's lawn as a favor, and know he'll do something in return, and he does your hedges. That has a completely different feel, as he could do something else.

That freedom in the return is what I think can be missing and is encapsulated by talking about a favor. Someone does something for you, so you wish to do something for them in return.

On that level then money is extremely simple and has been a valuable invention as it allows us to figure out the numerical value of favors, store favors for later use, and even transfer the value of a favor to someone else.

Money actually takes the indefinite nature of the favor to the limit. A person may get a return on the favor hundreds of years later with inherited money.

But what about a sheriff who saves a person's life from an attacker, possibly facing danger in that action?

Well the sheriff has a job, for which there is consideration given in the form of some type of monetary compensation where such an event is considered part of that job. And we really don't think of it as a favor! That is part of the job.

Here the notion of favor assumes a desired need and request of some kind. That then would also preclude someone trying to push a favor on you! (People pushing favors on you can be really annoying.)

Doing someone a favor is doing them a service. Handing someone a product is a favor as well, where equal reciprocation would involve a favor in return of equal value.

Now we can figure out just about everything related to money with this simple framework.

So the abstracted value of a favor can be correct, too much, or too little.

For instance a person may get paid $10 US for a service that is actually worth $100 US. Or a person, say a banker on Wall Street, may get millions US for a service which can cost the US economy billions.

Every dollar theoretically traces back to some kind of favor under this framework unless it is counterfeit. So counterfeit money can be said to be an attempt at stealing favors. Like if you told someone you'd actually done something you had not, and they did you a favor in exchange, and you were long gone by the time they found out you had lied.

Information then helps tremendously, so you can know how much a particular favor is worth. Which means I can make a prediction that the web helps monetary efficiency by allowing people to check the value of services.

Which I know is useful as I'll go check now to try and see what things cost in comparison at different places which I suggest has done a weird thing, it has lessened something called inflation.

Now that's a powerful claim, which I think is easily explained in this framework. Theoretically if people could establish accepted values for all favors then that value would not change. Inflation would not exist.

Different cultures use different money, for instance the United States where I live uses the US dollar. Whereas in the Eurozone they use the euro. The value of these currencies relative to each other shifts in an attempt to balance them so that a favor in the US costs roughly the same as a favor in the Eurozone. That constant balancing act can be impacted by a vast array of things, which can change the relative value that people see in exchanges which are about money used to buy money. So it's still set by transactions.

It can be easier when people just use one currency, like the US dollar, which is considered a global currency as lots of people in many countries use it.

Transactions for this discussion are when at least two parties make a buying decision, where there is consideration given in exchange for a favor.

Where that consideration is enumerated by money. So money just lets you put a number on it.

Now we can talk policy, and for instance, to the extent that money is in return for favors as a society I think it is problematic to limit the favors people can do for others! And I think in the US especially the feeling is people should make as much money as they can, as long as they earned it.

We can now say that earning your money involves an appropriate exchange in consideration for a favor within a desired transaction. That is, someone wants something, you provide it, and get a number on that value which is the money you receive.

However, it can be problematic if some people are getting more money than they really earn, though try to get anyone to admit it! Or which may be more common, people are working for less than the value of their work, which I addressed in a prior post.

Reality is, I think, people can have a hard time figuring out what their work is worth! And companies don't help and even try to exploit, like by going to some other country where wages are traditionally low. The web helps there as those people can talk with others and find out what they should be making so I think that problem is temporary, but great harm can be done when people work for far less than they should.

Some people see unions as a solution, but in my country unions are associated with the least common denominator, and forcing equal pay or a lower limit on pay ignores when some people aren't worth it.

The inability to negotiate an appropriate wage is the primary justification for forcing a minimum wage, in essence, saving certain people from their lack of knowledge about how much their work is worth.

I support wage understanding. Figure out what your work is worth. That is what you should get paid. And don't let yourself be cheated as you make it harder for others. Women especially are problematic in terms of getting their proper wage, which drags down tax revenue. People have a duty to be paid appropriately.

That doesn't remove responsibility from companies, but there are traditional views in this country that see underpaying workers as ok for a company, if you can get away with it. This mentality is hard to break even though it's actually stealing.

People need protection for a wide variety of reasons, and at the highest levels government is tasked with protecting its citizens, but I don't think that covers enough.

My full position is that governments have a duty both to protect and enable citizens. For instance, governments may regulate exchanges enabling citizens to feel safer about engaging in transactions.

So governments by necessity provide services to their citizens.

Government now can be seen to have a cost, and taxes represent what people are forced to pay as otherwise they just take services without giving anything back! Trying to not give anything for government services is something often seen where this behavior seems to be built into the human animal and is immune to reason.

People who have obtained the most by presumably giving the most favors to others, tend to bear a greater weight because they have disproportionately succeeded--your success is not just about you but also about your environment--and they have greater ability to pay without distress.

Distress is very important. One man can only give so much before he's starving. While another can give much more and still not cut into luxury. But both need the society that makes that possible.

Some wealthy are functionally insane: they work to pay nothing back to the society without which they could not have their wealth, and pride themselves on this behavior. There is no fix for this particular insanity so government must simply pursue them and force them to pay.

The simple way of looking at things here leads to rather specific prediction which kind of surprised me, but now lots of things make sense to me that I didn't understand before.

With the idea of a favor enumerated with money, one can say that in an ideal situation every unit of money would trace back to a favor, and would represent a desired transaction between two entities.

Since people will always be doing each other favors that means that money will always be here as long as there are people which really surprised me, as I'm a fan of science fiction including the Star Trek franchise where money is no longer used within the fictional Federation in that idealized view of a possible future.

Now I know, as I bring science to money, from a simple methodology--that bit of science fiction will never happen.

James Harris