Money, “intrinsic value” and record keeping devices.

From a very interesting twitter discussion about Money being a “record keeping device” or not, I learnt about this paper from David Andolfatto. The objective of this post is to briefly share my comments about David’s paper.

The most important comment I have is about David’s concept of “intrinsic value”. I am not going to take the nitpicking path of saying that all value is subjective and all that… I assume that David is more than well aware of that so I am departing from his concept of “intrinsic value”.

I think it is confusing and not a useful concept to explain the reality. One thing is to observe that some goods may have individual or standalone utility (an apple or salt ) and other goods have only collective or social utility (a telephone, Bitcoin), but another very different thing is to claim that the telephone has no intrinsic value because it is useless for Robinson Crusoe.

This is as confusing as saying that all excess apples that Robinson Crusoe cannot consume (marginal utility) have no intrinsic value either. Each good is useful in a specific context, and claiming that something is useless because it is not useful in an individual context is of very little theoretical value in economics, especially considering that economics is a social science and therefore is all about understanding and explaining scarcity and exchange where precisely goods that are collectively useful are of key relevance. The Robinson Crusoe analogy might be ok for didactical purposes but I fully reject it as a criteria to qualify a thing as useless because that “individual / intrinsic context” is inconsistent and unrealistic. A theory is useful as long as it explains the reality.

Let’s dive into the paper. David builds a model where Adam produces dinner, Betty produces breakfast, and Charlie produces lunch. Adam values breakfast, Betty values lunch, and Charlie values dinner. They coordinate by trusting each other, that is, they use credit. But in section 2.3 of the paper it is assumed that the actions are hidden from each other, so credit is not possible and to solve this problem the following is proposed:

Thus, imagine that there exists a durable, non-counterfeitable, and easily recognizable token. Imagine that this token is initially held by Adam. Of what use could this intrinsically worthless object have?

As hinted in the above paragraphs, I do not share the premise that the token is intrinsically worthless. In this context where credit is not possible due to the lack of information, the cost of coordination is infinite in practical terms, so any tool that helps to reduce that cost would be useful just for that purpose (all tools derive their utility from the costs they save). Whoever comes up with the invention of this tool could create or pick up the token, in this case Adam, and could sell it for breakfast if Charlie and Betty agree on the utility of the tool after Adam explains it to them. And from there on it is a Quid pro Quo exchange, because Betty finds more useful the token than her excess breakfast, therefore it makes sense to her to accept it. Adam is rewarded for his idea and can skip cooking dinner for one day in exchange of the token, the same way he could be rewarded if he invented a set of 3 telephones.

Why would initially Betty and the other two find the token more valuable than a single meal from that point onward? Because the token makes all of them twice as rich. Without the token they only would have access to their own meal, with the token they have access to a second meal everyday. So it would be fair to say that the token is at least more valuable than one meal, therefore ceteris paribus it will always make sense to give a meal in exchange for the token.

However, I do not find inaccurate the analogy of the “record keeping device” as long as it is not understood as a credit system, which I would fully reject because credit implies a future obligation of a specific party, and in this example no one is obliged to give anything in exchange of the token. The token is demanded for its well deserved value due to its intrinsic qualities (durable, non-counterfeitable, and easily recognizable) that enables all three of them to enjoy the additional value of exchanging their meals. The reason I don’t find it inaccurate is that since the token is an economic good (useful and scarce) it always has an owner. By Carlos Bondone’s axiom of the biunivocal relation “owner-economic good, there is no economic good without owner nor owner without economic good. Therefore, I would agree that the token is somehow a decentralized record of wealth ownership, although it is a rather convoluted way to explain the value of the token as this is a quality shared by all economic goods (not special for the token). IMHO its value is easier to understand from the simpler notion that exchanging is valuable on itself ¹ as it improves our ex-ante situation, and the token is a tool for exchange.

¹ Bondone, Carlos (2012) “Exchange is an economic good”, Currency Theory Chapter I p. 13

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