No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eleven: Money, Money, Money! 251 INTRODUCTION In the last chapter, we highlighted the importance of institutions in helping entrepreneurs chart the waters of an uncertain future. Institutions—whether rules such as property rights, or norms of behavior such as walking on the right—help us because they convey information and reduce the sphere of uncertainty. Entrepreneurs may not know the future demand of their product, but they do know that the laws that protect their property are not likely to change much. They can plan for the future when they know how much their tax rate is likely to be, and what the interest rate is that finances their venture. But what if those are subject to change too? We’ll see in chapter 16 that an entrepreneur’s expectations on interest rates play a critical role in estimating returns on investment. In chapter 12 we’ll learn how interest rates are affected by inflation. But as Milton Friedman says, inflation is “always and everywhere a monetary phenomenon.” So our current chapter must explain this most curious institution—that of money. When money works well, we hardly think about it. It just is. But when it doesn’t work well, such is in hyperinflationary Zimbabwe in 2008 or Venezuela in 2019, commerce in the native currency comes to a complete standstill. So what is money? And how does money go from being something that works well to something that curtails economic activity? That is what we will learn about in this chapter. THE ORIGIN OF MONEY: THE MOST MARKETABLE COMMODITY After Creation and the Fall, Adam and Eve had children who began their God-given task of subduing the earth. In Genesis 4, we find that Cain and Abel are the first recorded children. There were obviously many others, as apparently Cain had already married one of his sisters (v.17) and was concerned, after his punishment from God, that others might kill him (his siblings or their offspring). But in this initial rude environment we already see specialization in production; Cain was “a tiller of the ground” while Abel was a “keeper of the flocks.” In this simple, two-good economy, if Cain wanted sheep he could trade with Abel. Abel could likewise do the reverse. They would have to engage in a bargaining or bartering process to determine the appropriate exchange rate. How many bushels of corn are worth one sheep? Ultimately it would be decided by the marginal utility for each increment of the goods up for exchange. The marginal utility of the sheep would have to be less than the marginal utility of corn for Abel to be willing to trade, while the reverse would be the case for Cain. For a voluntary exchange to take place, both parties must benefit—but not necessarily equally. Since sheep are very difficult to divide, an exchange [Specialization in production:] Cain was “a tiller of the ground” while Abel was a “keeper of the flocks.” Bartering: exchange of one good for another directly, without using money.