What is money?

Money is a social resource – the primary social resource. Money has no inherent value of its own, but we assign it value through social agreement. If I give you $100, you can withdraw $100 of value from society. The only reason this works is that we agree by consensus that $100 has a certain value. If we all agreed that money was worthless, then money would have no value whatsoever.
Because it’s a social resource, money isn’t a perfect medium of exchange. The value of anything, including money itself, is determined by social consensus. That may be the consensus of just two people, such as when you buy an item from another person. Or it may be the consensus of a large group, such as when you buy or sell stock in public companies.
When your personal valuation roughly matches the social consensus, you’ll conclude that pricing is fair. When your personal valuation drifts from the social consensus, you’ll conclude that certain items are either over- or under-priced.
Although there will be serious consequences to doing so, you’re free to opt-out of the social contract of money. Most people would find this totally impractical, but you can choose to assign no value whatsoever to money if you wish. However, if you still want to take advantage of social resources, you’ll need to create your own social contracts on a case-by-case basis. This could include barter or other forms of exchange, or it could involve leveraging relationships to meet your social needs.
For most of us, the social contract of money is far too advantageous to ignore. While the monetary system is far from perfect, it’s more efficient than the alternatives. By assigning a monetary value to our social exchanges and by making it easy to transfer money from one person to another, social trades are performed with relative ease. Buying groceries, going to work, using electricity, or connecting to the Internet are all examples of social trades, and by social consensus, all of these are reducible to money.
Even money itself can be assigned a price, as anyone in debt can readily attest. If you want money today, you can purchase it by pledging a greater amount of money tomorrow.
So money is essentially social credit. It’s an IOU from society, enabling you to extract a certain amount of social value whenever you want. The more money you have, the more society owes you, and the more value you can extract.
How to earn money
Let’s consider what it means to earn money. Since money is a social resource, earning money means acquiring more of that social resource. When you spend money, you convert money to value. But when you earn money, you convert value to money.
One way to earn money is to sell possessions. Take an item and sell it, and you’ll receive money for it. Another option is to acquire items at one price and turn around and sell them for more than your costs. Companies dig up resources all over the planet and sell them for a profit. For individuals this approach might take the form of buying objects, stocks, or bonds at one price and selling them at a higher price. Sometimes value is added in the process (which may just be added convenience), while other times the money earned comes from market inefficiencies.
Perhaps the most common way to earn money is to sell your time. Get a job and trade hours for dollars. The greater your ability to personally deliver a high social value, the greater your earnings potential. The difference between making $10/hour vs. $100/hour is that the latter work has much greater social value. This difference isn’t anyone’s “fault” — the difference is due to the social consensus about the value of certain work. Note the difference between absolute value and social value. Top athletes may not perform useful work in an absolute sense, but their compensation is based on the social value of their service, which is currently very high.
Another way to earn money is to create a system that earns money for you, such as a business. This is my personal favorite, since it can provide far more leverage than selling time. I also find it much less risky in the long run, since owning and controlling a money-generating system is more secure than trading hours for dollars at someone else’s discretion.
You can also earn money by selling money itself… aka investing. By loaning your money or assets to someone else, you can earn interest and/or dividends. How you earn money depends on what you invest in. Investing in a new business is very different from investing in a criminal organization. One form of investing creates social value; the other steals it.
And of course a final option for making money is to steal it. Historically this has been a popular option, but I won’t give it serious consideration here.
If you think about it, there are two basic ways to earn money:
Make a social contribution, and receive payment commensurate with the social value of your contribution.
Take advantage of market inefficiencies to extract money without contributing any value.
Option 1 includes getting a job, running a business that provides products or services, reselling items with value added, or investing in any of these outlets. Option 2 includes reselling items without added value, gambling, mooching off others, crime, or investing in any of these.
Here’s another way of labeling these two strategies:
Contribute.
Mooch.
Unless you’ve somehow opted out of the monetary system, you’re using one or both of these two strategies right now. One strategy will likely be dominant in your life — either you’re creating genuine social value and being paid for it, or you’re mooching off the value created by others.
Note that #1 is essential for the monetary system to survive and thrive, but #2 is not. The only way moochers can survive is by extracting value from the contributors. But ultimately someone must contribute, or there can be no value for the moochers to extract.
Incidentally, Ayn Rand wrote a fascinating novel called Atlas Shrugged about what would happen if the world’s contributors left to form their own society, leaving the moochers to fend for themselves. The contributor society became a paradise, while the moocher society fell to pieces. Rand suggested that a system that rewarded moochers at the expense of contributors was evil and that contributors should be free to decide how their work is used (and whether or not they will support any moochers).
Some degree of mooching is to be expected. Children mooch off their parents. Those who are unable to contribute mooch off those who can. Whenever we enjoy the fruits of someone else’s labor without paying for it, we’re mooching. We all mooch off the hard work of our ancestors. But eventually we have to decide whether we’re going to continue to mooch for the rest of our lives or begin making a genuine contribution. Will we remain moochers for life, or will we become contributors?
Obviously your life will include some contribution and some mooching, but what’s your primary strategy for generating income today? Do you contribute social value? Or do you mooch off the value of other contributors?
Let’s consider both possibilities.