Capitalism Post 2 – Money as Distributed Cognition and a Measure of Trust

Definitely at this point, it is obvious that I would be someone who agrees with the merits of capitalism/a free market.  I got some interesting comments on the first article I wrote regarding captialism, I have talked about capitalism before in the discussions, and it is a relevant point of discussion for the class.  This blog is going to talk about money’s function as a sophisticated technology and an integral part of capitalism.

In the last post I made, I talked about the merits of having a currency as opposed to a barter system or nothing.  Building off of that, it is import to deconstruct the idea of money in the modern context.  We all use money every single day.  We use money as a standard of measurement, a means of motivation, a form of glamor, and a trading device – just to name some uses.  Money is all of these things, and yet it is not bound to any gold standard (a way to directly define a material worth to a note or coin) or hold any other physical value besides the raw metal of coins.

In recent years, the suggestion of bringing back a gold standard for the US dollar has become somewhat of an issue due to concerns of over inflation of the US dollar.  I mentioned in a comment (not sure how many people saw) that inflation was a good thing for an economy with a growing population to have because it provides adequate access of currency and a general increase of value of goods and services in the economy.  I also mentioned that deflation is much more terrifying and destructive than inflation.

To touch upon deflation, as it is a good example of my point, consider the following situation (and this would be just one element of a situation of rapid deflation).  Imagine you want to go buy a car for $20,000 (true value) and also imagine this action is the only thing going on in the economy (I know it sounds silly).  When you get to the dealership, you have all the $20,000 in your right pocket, but the car you want is $20,500 so you decide to wait until it goes on sale.  That dealer has had a hard time selling that car so he decides to lower the price.  You walk back into the dealership the next day and the dealer for the car has marked down the car to $19,000 dollars.  Stunned, the price fell so much in one day, you decide to wait till tomorrow.  That night the dealer who thought you would buy the car for $19,000 lowers the value again to $18,000 because he needs to sell this good, even if he is making less money from it.  So this downward spiral would continue to occur.  You would refuse to buy because you believe the good is worth less but in reality the value of the good can’t change in that sense.  Yes this is kind of a silly/flawed example because it is such an extreme microcosm, but what would occur on a national scale would be a large scale devaluing of goods, debt, and services as the currency becomes devalued.  Everyone gets a lot poorer, a lot faster.

So why does this relate to having a gold standard?  If we now pretend the US is currently using a gold standard what would happen if there was a large injection of gold supply into the market?  Supply affects demand which affects the price.  More supply means less demand, lower price.  If there was a discovery of a huge gold mine outside of Toledo, or if there was a gold robbery from Fort Knox or more realistically, if there was an embargo imposed upon a gold exporting country all of these things directly affect the health of the US dollar because the dollar would be a function of the gold present in the economy.

As it is now, the dollar is a representation of trust that is backed by the US that it can pay back debts.  That’s all it is and that is a good thing, it isn’t dependent on anything material, just people.  People are defining the value of money in the system.  It functions as a form of distributed cognition among the masses and with 315 million citizens, it is an extreme measure of trust in our government.

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