How to make money

Welcome to the first installment of my discourse on general economic principles and how it affects you and me as individual economic participants. According to my previous explanation, I have decided to compose this series in English, since it contains information that is universally applicable, but presented quite differently from any other literature on economics that you may find elsewhere (I think).

Be warned however, that I am by no measure an expert on economics. I rely purely on my limited knowledge and my imperfect logical deductive reasoning abilities.

In staying true to the general theme of this blog, I must mention that I have developed a keen interest in economics as it relates to my ability to build a star ship, with which I can travel to other planets that orbit other stars. And, we all know that star ships cost a lot of money, especially in light of the fact that we still need to research (and hopefully discover) and develop the appropriate technologies to actually build one. I am also somewhat curious to know how we might do transactions with any alien life that we may encounter on our future voyages.

The Earth is littered with all kinds of recipies, charms and self-help books that presumably explain how to make lots of money. But have you ever stopped for a moment to think about where money comes from and why we actually need it?

Let me take you a short while back in time to the first monetary transaction (or how I imagine it would have happened). Suppose there was once a farmer, called Abraham, growing wheat crops and baking bread from the flour that he got after harvesting and milling. Also suppose that Abraham had a neighbour, called Bartholomew, who was a dairy farmer with cows aplenty. Normally, Bartholomew enjoyed eating his cheese on a slice of bread and had an agreement with Abraham to exhange one jar of milk for one loaf of bread, since Abraham also fancied having some milk in his coffee.

But, one year the rains were scarce and the wheat grew sparse, so Abraham had very little stock of bread. Abraham couldn't sell all his bread anymore, or else he would starve. And one jar of milk would not sustain him equally. So, Bartholomew proposed to pay with two jars of milk and two blocks of cheese to get his loaf of bread, since bread has become his staple food without which he would surely starve. (Note how the principle of supply-and-demand increases or decreases the value of products.)

Soon, Abraham became tired of having cheese and milk all the time. But, Bartholomew still needed his bread. So, Abraham devised a cunning plan and told Bartholomew that he can get his loaf of bread in exchange for a little token. This token would serve as a contract, stating that Abraham may exchange it back for two jars of milk and two blocks of cheese at any time of his choosing. The idea spread like wildfire and pretty soon everybody was exchanging tokens for resources. And a funny thing happened. Suddenly Abraham was not limited to getting milk and cheese for his tokens. This was convenient, since he never acquired a liking to milk and cheese again. Instead he used his tokens to buy fruits and desserts. He also invested in some newly invented tools with which he could channel water from the river and increase his crop yields. By making more bread, he would be able to sell to more people and get more tokens in exchange.

But there remained a big problem with the token system. You had to remember the value of each individual token. In some communities, they used valuable objects as tokens, and they ended up negotiating the value of their tokens at each transaction. So, at some point in time, another clever mind invented a standardised monetary system, in which tokens had a fixed, predetermined value.

Today our tokens are little pieces of paper or metal coins, without intrinsic value, but they still symbolise a contract between a buyer and a potential seller. The seller will always agree to the value of the token, although the value of the product being sold may still fluctuate. And once you have taken goods from the seller, he/she will agree to accept your token.

And this is how you make money: Everytime there is the potential for resources to be exchanged, money is created. So, in order to get more money (or even to grow a country's economy), all you need to do, is acquire exchangeable resources. As soon as people want those resources, your money will start flowing in. It's funny, but this concept is fundamentally equivalent to stealing, unless you exchange something of equal value upon acquisition (which defeats the purpose). It also reminds me about how certain countries became exceedingly wealthy by colonising and effectively plundering half of the undeveloped world. They understood this principle very well.

So now you have to ask yourself: what kinds of exchangeable resources can you acquire that other people will want to buy? Typical resources are farming and mining products. Farming acquires resources by tapping nutrients from the ground (or stealing it unless you replenish it with fertiliser or compost) and energy from the sun. Mining acquires resources by cutting and gathering pieces of rock (or stealing it from the Earth). Artisans can acquire skills by which they can trade in the resource of time through delivering some kind of service. And, certain skills may be more valuable than others.

I hope you have now gained some insights into (or refreshed what you knew all along about) some of the fundamentals of economics based on money. Of course, this is not the complete picture, and there are many more aspects that I would like to share, but that is to be continued in another entry.


Anonymous said...

Interesting and entertaining post on a plausible origin for the concept of money.

Under which system of law do you call the harvesting of natural resources "stealing"? Stealing implies rightful ownership, and that is a bit of a theological/moral issue where "the Earth" is concerned.

Also: I'd like you discuss the creation of wealth as a distinct topic, quite separate from the creation of money. It's the former which I find more interesting.

Francois Cilliers said...

Thanks FrancoisM. I'm glad you liked it. I was going for entertaining. ;)

With regard to stealing from the Earth, I tend to lean towards the system of natural laws, and in particular, the law of conservation of energy (and all its relatives). In that context, if you take something without giving back something of at least equal value, you are effectively stealing. I have no problem with someone taking minerals from the ground, but the essence of the action is still the same. You are taking ownership of something that does not intrinsically belong to you and then gaining "free" wealth from it. In reality, none of us can ever own anything on this Earth, even though we fabricate the idea of ownership. The only thing we have that is vaguely related to ownership, is the amount of effort we expend to accomplish a certain task (such as plucking fruit from a tree or digging gold from a mine). Of course, you may argue that you pay the Earth in blood and sweat, but the value of your energy expenditure is not necessarily comparable to the value of the resources that you acquire. In a later post, I'll discuss how I see the role of energy in economics.

Hehe, yeah, I guess I was a bit devious in choosing the title for this entry. I'm not sure that I am the correct person to be giving advice on wealth creation, and the methods and techniques available for that purpose are seemingly endless. The best I can probably do, is give advice on how to maintain your wealth. But, I do hope that by sharing my understanding of the fundemental conepts of economics (on which wealth creation relies), you will gain a better idea of how to approach your own wealth ceation activities, and comprehend its consequences.