What drives demand for money?

John Carney at CNBC tells the fascinating story of a college currency called the Buckaroo and asks the question: is the demand driven by the community service taxes that the college only collects in Buckaroo, or is it driven by what goods/services these Buckaroo can be traded for from students. John argues in favor of the latter.

This has implications for real world economics, of course. It demonstrates that taxes are not sufficient to give money value—at least, not beyond the level of near-term anticipated taxes. What is required first is the creation of wealth, or genuine economic output.

The desire for the products of our economic output drives money. If productivity collapses—or if it is anticipated that productivity will collapse—the value of money will collapse right along with it.

I tend to agree with John. Here’s my comment, based on my practical experience with rewards systems and simply looking at young gamers:

There is no need for coercive tax to assign value to the unit in a credit system. All is needed is that the units be accepted/ recognized by those with the products/services people want, and people willing to get in debt measured in such unit b/c they know they will be able to earn/repay later.

Case in point: kids spend enormous amount of time earning points in their virtual games, only because they can buy virtual goods that they value from the game’s marketplace. No taxing authority here drives the demand for the virtual currency.

Another example are rewards currencies. Hoarded and desired enough that they are used by some as pseudo-money, not b/c of taxes, but b/c they are redeemable for travels.

So what does the capability of forcing people to accept a computing entry in exchange for desired goods/services bring? what does the capability of taking back by force these computing entries and deleting them bring? what does the capability of arbitrarily creating these entries and buying other entries with them bring?

It brings stability of the liquidity over time and space.

I ran out of credits characters before I could finish my thought. What I describe is the very reason why Governments borrow money. They could spend it and tax it back, but instead they spend it, then borrow it, then tax it. Why? Well they borrow it as a way to show that they are not abusing their coercive spending power, while providing a risk-free financial savings assets and stabilizing the amount of liquidity available in space and time via monetary policy.

Of course one can question how well there are doing this. It seems that – perhaps because of a political process driven by money – every market-driven credit expansion comes with demand for lessened Government oversight, while market failures require massive and messy Government interventions. In both cases a more gradual counter-cyclical use of coercion might be a good idea, but somehow it never works out this way, only through bubbles and crisis.

The big question then is whether there is an alternative to coercion for keeping a credit system robust and stable. More specifically, is there a decentralized algorithm, a set of simple rules through which we can provide good enough liquidity in a way that matches the (hopefully expanding) real productivity. In other words, will banking someday shrink to a clearing algorithm, in which everyone will pay w/ their own promises and will vote by accepting others’?

2 thoughts on “What drives demand for money?”

  1. I suspect (though can't prove) that the answer to your final question is yes, but I think it will shrink even further, i.e. to a backup procedure for when things go wrong.  Family and tribal “economies” very rarely rely on exchange currencies, because they are focused on building the wider levels of wealth (relational wealth) which bring with them automatically the level of wealth addressed by money (tradable wealth).  Only when things are going really wrong relationally in a family or a tribe do you need to resort to accounting exchange balances.  The potential implicit in your examples is the realization that non-coercive relational economies are the most efficient.  Families and tribes (gift economies) are more efficient than market economies.  We just haven't yet learned to scale the relational wealth that are possible at those levels.

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