A Revealed Preference for Money

Money allows people to trade anonymously. Some economists see that anonymity as money’s great weakness. They argue that money is valuable because it is a form of record keeping, albeit a limited one. As Narayana Kocherlakota says, “Money is memory.” For example, I provided an (exhilarating) economics lecture, a student gave me money for that lecture, and now I have a record that says “Federal Reserve Note” and indicates merely that I provided some service and contributed to society. But when I give that money to the coffee shop down the street, the shop has no record of who I am, who the student who gave me the money is, and so on.

In the “money is memory” framing, monetary anonymity is a necessary evil. It would be better if we did not need money, but alternative record-keeping systems are too expensive. In an ideal world, the argument goes, we wouldn’t need money, because a complex system of gift giving and credit would do the job. However, in the real world, such systems are too costly, so we begrudgingly use money. That is a standard way to imagine money, as a pale imitation of the gift-giving systems used in primitive societies.

Rather than providing record keeping, money provides the opposite: privacy. Certain economists, such as Ken Rogoff, see this privacy as a problem with money: people can use money without governments’ tracking them. Again, anonymity is the problem.

However, if people value privacy, then again money serves a purpose not served in other ways. What is a weakness from one angle is actually a strength from another angle.

While theoretical questions depend on the precise nature of money, many policy questions do not. What matters is that people use money when given the opportunity.

Let us go back to Econ 101. Economic surplus is the difference to an individual between the benefits of an action and the costs. In a simple example, we consider a person buying a t-shirt. A consumer of a good can receive surplus in two ways. She can love the shirt a lot, or the price can be low. The difference between value and price is all that matters for trade to bring benefits.

While surplus is easy to understand in a simple decision like buying a shirt, the same idea holds for more complicated actions. The logic applies even for something like people’s demand for money, which depends on a myriad of factors such as expectations about interest rates, the probability of going to a store that doesn’t accept credit cards, and much more.

In the real world, we cannot, in general, observe why people value money. Is it because money is a low-cost form of record keeping or because money provides the benefit of privacy? Luckily, we often do not need to find that out to do welfare analysis. The revealed preference for using money means money has net value over alternatives. The gain to people of using money exists no matter the precise reason. The beauty of revealed-preference arguments given in Econ 101 is that they show us that the exact reasons people value money are irrelevant.

Through the lens of surplus, the “problems” with money are in fact money’s greatest features. Yes, money is an imperfect form of record keeping. But the alternatives to money are not costless themselves. Record keeping for millions or billions of people would require an immense cost. Similarly, stomping out the “problem” of monetary privacy would create vast costs in other ways.

By itself, revealed preference for money should be a reason to be skeptical of any calls to abolish or manipulate money. As always, the goal should be sound money.

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