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

Chapter Eleven: Money, Money, Money! 255 enable exchange. By avoiding bartering, money saves us a tremendous amount of time and therefore reduces transaction costs. Of course, we may still negotiate on the money price, but we will not negotiate what the method of payment will be. When Abraham was purchasing land for Sarah’s burial place from the sons of Heth, he was using money as a medium of exchange. He negotiated the amount but not the form of payment. Money also is a store of value , and enables us to delay immediate consumption and maintain future purchasing power. We noted earlier that money must be durable; in part it must be durable to fulfill this store of value function. This suggests that money must be valuable not only today, but should be valuable in the future as well. There is no such thing as an objective value that we can assign to money over time; it will always be subjectively valued and therefore susceptible to change. But we do know that some things of value have historically changed more dramatically than others. In Luke 15 , Jesus tells the parable of the lost coin. In this parable, the woman has ten coins and loses one, and she diligently searches until she finds it. In this parable, she is using the silver coin as a store of value. We see money used a different way in Matthew 17:24-26: 24 After Jesus and his disciples arrived in Capernaum, the collectors of the two-drachma temple tax came to Peter and asked, “Doesn’t your teacher pay the temple tax?” 25 “Yes, he does,” he replied. When Peter came into the house, Jesus was the first to speak. “What do you think, Simon?” he asked. “From whom do the kings of the earth collect duty and taxes—from their own children or from others?” 26 “From others,” Peter answered. “Then the children are exempt,” Jesus said to him. 27 “But so that we may not cause offense, go to the lake and throw out your line. Take the first fish you catch; open its mouth and you will find a four-drachma coin. Take it and give it to them for my tax and yours.” In this case, money is functioning as a unit of account . There is a standard defined for payment in terms of money. Everyone is able to calculate what they owe for the tax, and plan on it. The unit of account also helps us plan by providing a basis of comparison for differing goods that are exchanged for money, since the unit of account is a common reference between differing goods. Finally, money can serve as a standard of deferred payment. If I borrow $100 from you today, I have to pay it back (if I am not wicked —for the wicked borrow and do not repay ). But what do I repay? For now we’ll defer the question of interest—this is just a question of what we will repay with. We could repay in cows, tobacco, or lawn mowing services. But ordinarily we expect to be paid back with money. In the US, we like the little green pieces of paper with pictures of dead presidents on them (or better yet, dead inventors like Ben Franklin!). We expect this because money is the standard of deferred payment . Store of value: Money is considered a store of value because its role as a medium of exchange can be both now as well as in the future. When held for its future purchasing power, money is a store of value. Unit of account: Money serves as a unit of account by providing a common way to compare different goods in terms of their price. Standard of deferred payment: Money facilitates transactions across time by providing a standard for (or format of) what the final payment in the future will be.