In case you thought that car insurance was the only thing that a caveman could teach us about financial matters (thank you, Geico®), think again. Take a little trip with me. Let’s go back in time. Yes, if you can believe it, I have a time machine. No, you don’t need to pack anything. All we’re taking with us is a crisp, new $100 bill. Don’t worry about why, you’ll see. Out of all of the possible questions you could ask, the most important question you might raise when there is a time machine involved is when, and the answer to that question is at least 40,000 years ago. Why? Well, if one wants to find cavemen, then one must go to when cavemen roamed the Earth.
Ok, we made it. Yes, the world looks very different, but don’t worry: evolution has seen to it that you are equipped for this environment. You see that Neanderthal guy over there? That’s the one—that’s our caveman. How do I know? Well, I simply noticed the family resemblance between the two of you and figured that might help you to feel more comfortable while conducting our little experiment. Oh, you didn’t know that you would be involved in an experiment? Did I leave that part out? Oops. Anyway, here: take this $100 bill that we brought and go offer it to him. Just do it and let’s see what happens.
Seriously?! You ran away?! I can’t believe it. You and he are practically siblings—just look at the two of you! What’s there to be scared of? Oh, he jumped up and down and yelled, did he? He didn’t seem to recognize you, huh? Typical family reunion—I understand. Anyway, did the sight of cold, hard cash not calm him down? No? Interesting. I mean, I know how the sight of money gives you tunnel vision and I was kind of counting on it running in the family. Anyway, what did you do with the $100 bill when you ran off? You just left it?! Ugh, I see it. He sees it too! He’s inching up to it! He’s picked it up! Wait, no, it’s not a hat. Wait. What is he doing? Did he really have to lie down to figure out that it won’t function as a blanket? What is he doing now? Did he just try to throw it around his neck like a scarf? Is he pretending to be on a catwalk? Don’t look at me; he’s your kin!
In case there is any confusion, this short story was not based on actual events—this was a completely fictional scenario that I made up. What isn’t made up, though, is that you don’t actually have to travel back in time to know exactly what a Neanderthal would do when presented with a $100 bill. Well, actually, it might be more accurate to say that we know what a Neanderthal wouldn’t do: see the $100 bill as having any value, and certainly not the value that we assign to it. The reason for this is simple: to someone who has never seen a $100 bill, or any form of currency for that matter, it’s not obvious that it has value. A $100 bill is just a piece of paper with some ink on it, nevermind that the person looking at currency would have to know what ink and paper are, and that the most legible item in the world doesn’t help an illiterate person to read. Therefore, the characteristics that give a $100 bill its value in our world mean nothing to the Neanderthal in his.
Now, let’s consider another scenario, but you will be the subject of this experiment—just keeping it in the family: if I were to walk into your living room, hand you a blank piece of notebook paper while you were resting comfortably in your Laz-Z-Boy®, and attempt to walk out with your TV, all without saying a word, you would most likely protest and maybe even move to stop me. From your vantage point, I’m basically stealing your TV.
Let’s look closer at what’s really going on, though: I am gaining from the situation at your expense, I have not made any promises or guarantees to make you whole, and you didn’t agree to this arrangement ahead of time. Even though I gave you something when I walked into the room, you most likely discarded any concern for the notebook paper immediately, because notebook paper isn’t very remarkable, especially compared to a TV. As a result, I gain and you lose, all because I didn’t offer you something of equal or greater value, as compared to your TV.
In our world, there are at least four possible remedies to this situation: criminal punishment, forced restitution, repayment of my debt to you based on an agreement between you and I, or some combination thereof. The exact remedy, or combination of remedies, that results is most likely predicated upon whether I am seen as a thief or a debtor. Regardless, there is an expectation that you will be made whole, and it’s all because you do not perceive the paper that I handed you to have any value, or at least value equal to or greater than that of your TV. Ironically, if I were to cut that paper up into small rectangles, print some particular things on it using the right color of green ink, and hand that to you, you might see things differently, even though all I’ve done is change the size and shape of the paper and the color of the ink—set aside any concerns that our Treasury Department might have with this and just go with it.
Now, let’s have a little fun with some of the details. If I was to provide you something of equal or greater value than that of your TV, it would most likely come in the form of at least $1,000 cash, or something like a check written for that amount. What if I didn’t have cash, or a cash equivalent, though? What if I knew that you had always wanted a 1967 Shelby Mustang GT500 and I brought the keys to one in mint condition to offer you in exchange for your TV? (Side note: in case you aren’t familiar, a 1967 Shelby Mustang GT500 is worth over $1 million, maybe much more, based on sales at auction.)
You’re ready to carry the TV over to my house and install it for me, aren’t you? Now, I suppose that you could say that the reason you might be motivated to facilitate the trade is pretty obvious, but the particular factors at-play are noteworthy. Generally speaking, we know that a car is going to be worth more than a TV. Further, the year, model, and make are indicative of a car that might be considered a classic or a collectible, and we perceive that as adding to its potential value—interesting: another example of specific characteristics dictating value in a specific context. In case you thought we were done there, we also need to account for the extent to which you covet the car—this further compounds the value. Bottom line: there are plenty of variables that play a part in the ultimate value of the car, or anything else, for that matter. As a result of the details that we changed, however, the outcome of this scenario is basically the opposite of the previous one: you are now the one who has gained and I have lost—i.e., the value you received is substantially greater than the value that I received.
In a world without money, the pendulum swings of one individual gaining a value advantage over another are seemingly inevitable, even if only temporarily. This is simply because, generally speaking, no two things require the exact same input costs (time, effort, and materials) to produce or extract. Therefore, one thing must be worth more than another—we won’t explore this particular topic here, but I am noting it as a potential topic for a future post. Essentially, the only way to keep track of all of this is to keep tabs on who owes what to whom—enter money.
We’ve already changed a few details, so let’s keep going and change a few more. Let’s imagine that you attempt to sweeten the pot by offering things to go along with your TV. There’s just one problem: I don’t want any of your stuff. Let’s say that I have previously told you that I really like a pair of pants that Bob was wearing the other day and that I was initially torn between offering the Mustang to Bob for the pants or to you for the TV, but that I just couldn’t go another day without my Golden Girls reruns. Further, let’s assume that I would consider receiving the TV and the pants, together, to be a fair trade for the Mustang—trust me, those pants are sweet.
This gives you an idea: you have an open tab for Bob—i.e., he is indebted to you; what if you gave that tab to me to give to Bob in exchange for the pants? Essentially, this is what that would mean: Bob would be able to destroy the tab, relieving himself of his debt to you, and I would be made whole because I would have the TV and the pants, and of course, you’ll be all fat and sassy with your new Mustang. Talk about killing the bird in the bush and the bird in the hand with one stone. Wait—did I say that right? Anyway, by giving one person a piece of paper (a tab, in this case), a trade imbalance was avoided, debts were resolved, and three people were made whole. That is the role of money: “…legal tender for all debts public and private.”
Now, to arrive at the point at which I am aiming, we need to revisit one detail: the fact that I didn’t want any of your stuff. What this reveals is that both sides in exchange have to feel as if the net value that is received at least leaves them in a position equal to where they started. Otherwise, the perceived imbalance merely results in another tab and the cycle of indebtedness continues. Again, enter money: given that tabs are a sign of indebtedness, then it would probably be fair to say that money simply improves the efficiency of trade and the resolution of debts. In addition, it removes any ambiguity over the quantification of the value at-hand—the value is declared directly on the money that changes hands.
From my vantage point, however, this leaves one last question that needs to be answered: how do we know that the value of the good or service being offered is equal to or greater than the value of the money that is involved in the exchange? The simple answer is that we receive confirmation because an exchange occurs. If the trade being offered is seen as being imbalanced, then one party or the other would most likely object to the exchange. So, how does one determine whether values are equal? Ultimately, that answer lies with the good or service being offered in the exchange. Simply put, the demand, because of need or want, for the good or service being offered, must be qualitatively equal to or greater than the money involved in the exchange; and that ultimately has to do with comparing what it takes to acquire money with the benefit(s) experienced through the intended use of the good or service that is received in exchange for the money—i.e., the quality of life that results in having to acquire more money, as compared to the quality of life that results from acquiring the good or service.
To put a nice little bow on this discussion, here is a summary of what we have learned. First, value is in the eye of the beholder—i.e., the reason that someone sees value in something is unique to every individual. Second, because the value is dependent upon an individual’s perception, parties in exchange have to perceive that the value received is at least equal to where they started, lest there be an imbalance to be resolved. Third, money takes the guesswork out of quantifying value—value is declared directly on money. Fourth, the ultimate value of money is not quantitative—it’s qualitative. The ultimate value is found by observing the benefit(s) of what is received in exchange for money, and understanding that a conclusion was reached that the qualitative benefit(s) of what was obtained is at least equal to the qualitative cost(s) of acquiring money. Last, but not least, we learned that your physical family traits run deep—Ancestry.com® ain’t got nothing on me.
If you want to know what something is worth, just observe what someone is willing to part with in order to obtain it, and understand that one arrives at such a calculation by considering the quality of life believed to be waiting on the other side of the exchange as being superior to the quality of life without the exchange taking place. Therefore, money is only as valuable as what you can do with it.
Matt
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