For higher or worse, Elon Musk has taken a liking to outdated Milton Friedman movies. On the great aspect, Musk has embraced Friedman’s mistrust of presidency and cash printing. Friedman, nevertheless, was no Rothbard concerning the constant utility of moral and financial ideas to the actions of the state. Regardless of Friedman’s compromises and error-ridden macroeconomic theorizing, there’s no denying that he was a fantastic popularizer and eloquent defender of laissez-faire.
On the dangerous aspect, Musk has now embraced monetarist-inspired inanities like, “Money is simply an abstract representation of real things.”
The put up was connected to a video of Musk reflecting on the character of cash:
Folks get confused. They often suppose an financial system is cash. However cash is the database for the change of products and providers, and/or time-shifting the change of products and providers. Cash is a database. Cash is just not an influence in and of itself. You possibly can run a thought experiment the place you’re shipwrecked on an island and also you’ve obtained a trillion {dollars} in a Swiss checking account. It’s nugatory. You’d fairly have a can of soup. You might have all of the bitcoin on the earth, and also you’re nonetheless going to starve. The precise financial system is items and providers.
Probably the most sense I can get out of Musk’s declare that “money is a database” is that he signifies that cash merely refers to actual items and providers, in the identical approach an entry in a library’s database would possibly word the placement of and different figuring out details about a specific bodily e-book. Musk’s level is that the database entry is just not the e-book. The database entry helps you get hold of the e-book. Bringing the analogy again to cash, cash solely helps us get objects available in the market.
Now, this analogy does work when you’re making the straightforward (however necessary!) argument that more cash doesn’t enhance the inventory of shopper items or elements of manufacturing. For instance, creating extra library database entries doesn’t magically create extra books. However that’s so far as the analogy goes. It breaks down as quickly as you think about why individuals demand cash, the formation of cash costs, and the total results of modifications within the cash relation.
Why Folks Demand Cash
Cash is an “element of change” as a result of individuals maintain it and settle for it as fee in view of an unsure future. As Mises defined,
Cash is neither an summary numéraire nor a regular of worth or costs. It’s essentially an financial good and as such it’s valued and appraised by itself deserves, i.e., the providers which a person expects from holding money. Available on the market there’s all the time change and motion. Solely as a result of there are fluctuations is there cash. Cash is a component of change not as a result of it “circulates,” however as a result of it’s saved in money holdings. Solely as a result of individuals anticipate modifications in regards to the sort and extent of which they don’t have any sure data by any means, do they preserve cash.
The one motive to carry cash is since you don’t know the long run completely. In case you knew the long run completely, you’ll maintain interest-earning property that mature as quickly as you can be able to buy one thing.
Thus, cash is just not “an abstract representation of real things” or a database. It’s an financial good that we worth for the distinctive providers that cash affords. Holding cash removes the uncertainty related to future exchanges—we don’t know what or after we will purchase sooner or later, nor the precise costs of issues we are going to buy sooner or later, so we maintain money.
This perception issues as a result of should you don’t perceive why individuals maintain cash, you begin to slip into the considering that money balances are “idle,” or held for no good motive, and should be plundered by the state or stimulated into circulation for the sake of kickstarting the speed of cash or mixture demand.
The Formation of Cash Costs
Since cash is an financial good, we rank it towards different items and providers on our worth scales. For instance, somebody (we’ll name him Ksum Nole) who purchases a 2025 Tesla Mannequin S might have a choice rating like this:
Ksum Nole
$79,990.01
(2025 Tesla Mannequin S)
$79,990.00
That’s, Ksum Nole would pay as a lot as $79,990.00, however not a cent extra. Fortuitously, Elon Musk is prepared to simply accept $79,990.00 however not a cent much less. They’ll commerce!
Elon Musk
($79,990.00)
2025 Tesla Mannequin S
($79,989.99)
The value that emerged on this mutually helpful change was the results of a reverse valuation between the merchants concerning the cash and the automobile. The cash was not a regular of measurement. If it have been, then no change might happen. There can be settlement concerning the “equality of value” concerning the automobile and the $79,990, like two individuals agreeing {that a} piece of lumber is eight ft lengthy.
Nor have been the realized worth, the customer, and the second of the change pre-recorded in some incorporeal “database of destiny” that made this change inevitable. The change occurred as a result of two potential merchants discovered one another and realized they might change property for mutual profit.
Additionally, the cash was not an “abstract representation” of the 2025 Tesla Mannequin S whereas it was in Ksum Nole’s money steadiness earlier than the change. The cash was offering financial providers to Ksum earlier than the change, identical to the stock was offering stock providers to Elon earlier than the change. We will solely affiliate the cash with the bought automobile after the change came about, as a result of values are solely made evident in motion. Even so, it should be remembered that there was no equality of worth.
Thus, cash is an effective. The one approach for change ratios to emerge is for 2 people to agree that every would like to have the opposite’s property as an alternative of what every presently owns. The truth that just about all transactions characteristic cash because the property provided by one occasion doesn’t change its nature as an financial good.
The Full Results of Modifications within the Cash Relation
Musk appears to suppose that the federal government shouldn’t manipulate cash. On that we agree, however it’s not as a result of we’d get a defective cash database, no matter that would imply.
When the federal government prints cash, extra models of this distinctive good enter the money balances of sure people, together with these within the authorities. The marginal utility of every cash unit is now decrease for these individuals, that means they will now outbid different consumers for sure items and providers. For instance, think about one other particular person, named Gov, whose choice rankings earlier than and after an inflow of money appear to be this:
Gov (earlier than receiving $10,000)
$77,990.01
(2025 Tesla Mannequin S)
$77,990.00
Gov (after receiving $10,000)
$87,990.01
(2025 Tesla Mannequin S)
$87,990.00
Earlier than the inflow, Gov would solely pay as a lot as $77,990. After the inflow, Gov can outbid Ksum for a similar automobile. Supposing that Elon is a superb businessman, he sells the automobile for Gov’s most willingness to pay: $87,990. (I’ve simplified this. Gov would probably outbid different consumers in quite a lot of markets, not simply the Tesla market. In that case, Gov’s new most willingness to pay wouldn’t be as a lot as $10,000 extra.)
The story doesn’t finish there, as a result of now Elon has extra models of cash than he would have had, absent the cash printing. Elon can now outbid different consumers for different items, after which these sellers can do the identical. That is how worth inflation works: the primary receivers enhance their calls for for items and providers, outbidding those that would have bought the products; then, the following receivers do the identical. Costs rise as people obtain the cash, reorder their preferences in gentle of this newfound buying energy, after which outbid different demanders. This straightforward inflation course of continues till no one’s elevated money steadiness is ample to outbid others, due partly to the truth that many costs have been already bid up by others.
The total results of cash printing, due to this fact, embrace what Mises referred to as a “price revolution,” not a proportionate and instant change within the worth stage. There isn’t any such factor as “the price level” anyhow. We every face a distinct array of costs, and these costs are decided by the entire demand for the great (which can be influenced by cash printing) and the entire inventory of the great.
The total results of cash printing embrace the redistribution of products and providers towards these closest to the cash spigot. It contains entrepreneurs’ modified manufacturing plans because of new cash pouring into the financial system by way of credit score markets. You can not see and perceive these results should you maintain that cash is a “database” or “an abstract representation of real things.”
There isn’t any unbiased mechanism by which cash exerts some basic energy on all costs. Cash’s “driving force” is effected by the shopping for and promoting selections of market contributors, who rank models of cash as towards non-monetary items and providers. As Mises defined:
Whereas cash could be considered solely in a altering financial system, it’s in itself a component of additional modifications. Each change within the financial knowledge units it in movement and makes it the driving drive of recent modifications. Each shift within the mutual relation of the change ratios between the assorted nonmonetary items not solely brings about modifications in manufacturing and in what’s popularly referred to as distribution, but in addition provokes modifications within the cash relation and thus additional modifications. Nothing can occur within the orbit of vendible items with out affecting the orbit of cash, and all that occurs within the orbit of cash impacts the orbit of commodities.
The notion of a impartial cash isn’t any much less contradictory than that of a cash of steady buying energy. Cash with no driving drive of its personal wouldn’t, as individuals assume, be an ideal cash; it could not be cash in any respect.
What about Musk’s instance of the shipwrecked particular person?
Musk’s instance involving the shipwrecked particular person doesn’t assist him make the case that cash is a database. It’s a crimson herring. The explanation Robinson Crusoe doesn’t want cash is as a result of he has nobody to commerce with. Cash (qua cash) offers no providers to economically remoted people as a result of there aren’t any different people who demand cash for its providers.
Cash is exclusive as a result of it’s used as a medium of change. Not like different items, cash is just not demanded in order that it may be destroyed in consumption or used up in manufacturing. It’s demanded as a result of others demand it. This, nevertheless, doesn’t imply that it’s some ephemeral and unbiased factor outdoors the true financial system.