Barter and Money

Many of the reasons that governments are needed in the first place have to do with economics, and so if you don't understand how economics works then you obviously can't understand why governments are needed or what it is they should be doing (or what they shouldn't). Nowadays few schools teach economics, and those that do either gloss over it without giving it a serious treatment or only teach theories of economics which are fundamentally wrong and invalid. Governments encourage this because citizens who understood economics would be a threat to their continuing irresponsible behavior.

The vicious cycle of corruption, propaganda and abuse of individual rights and the means to defeat this cycle is something which I will come back to over and over in this blog, but for now we'll focus only on economics and then on how it relates to government. To start with, economics is the study of trade, money and investment, and of those the study of the behavior of money is perhaps the most central to any theory of economics. Before you can begin to understand how money works, however, first you need to know what money is or isn't.

Barter and Trade

Before the advent of agriculture, trade between humans was relatively infrequent. Everything a tribe needed was made within the tribe, and hunting and gathering took up most of the tribe's time. However, once human societies began adopting agriculture food security improved greatly, which gave humans a lot more free time to do other things. This allowed for specialization of labor, where people could do things besides hunt and gather full time by trading the things they made for food (and other things) from other people. With specialization of labor, people can produce things more efficiently and become more skilled because they are able to focus on one thing instead of having to do many things just for survival.

In its simplest form, trade means giving some of the things I make directly to other people in exchange for the things they made that I want or need. When things are traded for other things, it is called barter. For example, if I am a farmer that grows tea, I could trade barrels of tea for food, furniture, horses and ploughs that I need for my field, and so on. Of course, this only works if the people who make the stuff I want actually want tea, otherwise I cannot directly trade with them.

To that end, instead I would sell my tea to a merchant, who might have a variety of other things like furs, wheat, or chairs that he can trade for my tea. Since a merchant carries a variety of things, it's more likely that he'll have something that I want, and since he spends most of time trading rather than making things he can afford to buy tea that he won't necessarily use himself.

Merchants are experts at appraising goods, or in other words knowing how to tell good quality stuff from bad quality, and knowing about supply and demand of various things to know what is easily saleable and what is not. The merchant class provides essential services to a free market, taking a cut for themselves in exchange.

Money vs Barter

Even with merchants to facilitate trade between many people, barter still presents many limitations to trade and the specialization of labor. For example, if I am a farmer and I want to hire a farm worker, it would be difficult and cumbersome to pay them in food. Also, in order to barter typically you have to present goods up front, which means you can only trade when you have stuff to trade, and you have to lug that stuff around any time you want to trade for anything else. More importantly, accounting for your goods and what you get for them is very cumbersome in a pure barter system, which makes it hard to tell whether you're actually getting a good deal or not.

note: this is still oversimplified

For these reasons people began using "money" as an intermediate for trading. With money you no longer have to worry about whether the merchant who buys your stuff has the stuff you want, since he can now give you money which you can trade to any other merchant at your convenience. Workers can also be paid in money so that distributing labor becomes convenient,  and since money can be traded for anything that people are willing to trade, it allows you to compare the relative trade values of various things (wages and prices).

Fundamentally, money can be anything that can be discreetly counted or weighed. Money might be rare shells, or metals like gold, silver and copper, or even paper notes like modern fiat currencies. In modern times much currency exists only as numbers on a computer, and there are even completely digital currencies that use a distributed network to perform transactions and accounting. The only strict requirements for something to be money is that it must be divisible enough for small practical transactions, it must be finite and preferably limited in quantity, and it should be difficult to forge so that people cannot simply make up money without providing anything in return. What makes a good currency is a much more complicated topic, however, which will be covered in more detail later on.

Finally, money gains another property due to its usage as a central medium of exchange. When goods are unused, they just sit around either doing nothing or possibly spoiling. When money is unused it can be saved and invested, which allows it to be returned to the economy and used for improving the processes for making things in order to make more and better stuff. In this way money can represent capital, or excesses of productive capacity, and allows it to be put to efficient use in exchange for interest (and other returns) which is paid for the privilege of borrowing someone else's capital. This makes money much more efficient than barter, and this efficiency forms the basis of capitalism.

This is only the most basic of basics regarding money and capitalism, most of which is taught in public schools. However, money also has more complex dynamic, systemic and cyclic behaviors which build on these basics, which I will talk more about in future articles.