Friday, March 9, 2012

The fisherman and the farmer

Let's imagine a society with 2 people: a fisherman and a farmer.

At first they are self-sufficient. There is no trade. They survive by eating what each of them  produces.

Then they start trading by bartering. They exchange products. Their menus get more varied and they are happier.

But bartering is troublesome. It is difficult to get an agreement on how many tomatos an atum is worth or how many bananas a sardine is equivalent to.  So they decide to create money. And each product will be assigned a price.

What can be used as money? Anything. As long as both parties agree on it, anything can be used as money. Maybe we can use rice.  Rice is food, anybody accepts food. Rice can be stored, it doesn't spoil so easily. Rice can be packaged in all sizes so it can be used for cheap or expensive products.
Or maybe we can use  gold.

How to measure wealth? Who is rich? Who is poor? How to be richer? The fisherman and the farmer produce food, they eat up all their production. The only asset available in this society is whatever they use as money, let's say gold. So to be richer, you need to have more gold.
To have more gold you need to sell more and buy less. For one guy to be richer, the other guy necessarily needs to get poorer.

Why get richer? Why would anyone want to be richer? Money was invented only to facilitate the exchange of goods and services. Money itself is useless. You cannot eat money.  You don't need money. You can always barter. The goods and service themselves are what we really need, what we really want. Money is just the middleman.

In this society what happens if you get richer? The other guy gets poorer. Eventually the other person runs out of money. Trade either stops or reverts to bartering. Either way money becomes completely useless and worthless. The richest man becomes the poorest.

Again why get richer? There may be some reasons. You want to take a vacation and stop working for a while. You need money to buy food while you are not working. Or maybe you want to retire. You want to stop working and live off your savings, hoping that your savings are enough to last until your death.
But there is a problem with retirement. In this society there are only 2 people: you and your neighbor. You have to convince you neighbor to accept your money even though this money is useless to him.  He will not be able to buy from you anymore because you will be retired.

Now let's imagine another society: a farmer and a carpenter.
Why a carpenter? To have other kinds of assets besides money. In the previous society the only asset available was gold, what they used as money.
But a carpenter will produce all kinds of objects, furniture, even wooden houses. As long as this stuff is sellable, they become assets.

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