Monday, February 6, 2017

The Natural Monetary Chart

Here at the Mechanical Money blog site, the philosophy is to make the monetary system as mechanical as possible. This requires each monetary concept fit seamlessly into the next concept.

Our Questions

A question that frequently arises in basic monetary discussions is the initial pricing of the reference item. How do we decide if the initial price is 100 units or just 10 units?

The second question is a follow-up of the first. Knowing the first price, what is a second item worth?

Some Background

Now assume that we have no monetary system at all. How do we select the first price? Logical deduction supplies no answer. We must simply pick a beginning point.

Wait! Pick a point? Where in the mechanical world might that be?

Let's assume that our model society understands arithmetic. They would understand a measuring stick that was scaled between zero and some commonly used maximum measure. An example would be a 'yard stick' that is measured in inches, having a maximum scale of 36.

Our Monetary Scale

We can build a monetary scale that begins with zero and expands to infinity. The width of each unit is completely arbitrary. We will call this imaginary line "The Natural Monetary Scale".  It can drawn onto paper but we don't  yet have scaling units. Scaling will follow after we introduce another concept.

More Background

The reason we are considering the money concept is because we would like to theoretically move past the barter system. In barter trade, dissimilar objects change ownership group-by-group. For example, five arrowheads could trade for one elk antler. This is very inconvenient if the antler owner, wanting to not break his elk antler, wants only one arrowhead. Money is a standardized physical object (some claim an "abstract or non-existent" object), available in very small sizes that can easily be aggregated and stored. The use of money (if he had some) would simplify the antler owner's trade decision.

The Value Question

The problem faced by the antler owner is faced by every owner of every item. The value of the item is not the same as the item potentially purchased. Money does not solve this problem. Money is just another item (whether physical or abstract). Money has it's own valuation problem.

Further complicating the value question, the value of any item varies in the eyes of the trading persons. The person owning eight arrowheads will have a different unique value assigned compared to the person owning just one arrowhead. A red arrowhead will have a different value than a black arrowhead.

If we expect to value property, it will need to ranked and scaled just like money needs to be scaled. The money scale will have one advantage--it will be a scale with uniform steps.

The Chart

With this background in mind, we can draw Figure 1, the Natural Money Chart.

Figure 1. The Natural Monetary Chart. The uniformly increasing numbers on the x-axis constitute the Natural Monetary Scale.                                
We use the Natural Money Chart by entering the item-of-interest onto the vertical axis. In Figure 1, we see that several apples are worth about 3 units on the Natural Money Scale. Gold is more valuable but not yet evaluated. One apple is less valuable than several apples but (again) not evaluated.

The Natural Money Chart is a purely arbitrary chart. The Money Scale is arbitrary. The single factor that makes it  (the scale) physically real is the decision to relate several apples to a point on the scale. In Figure 1, several apples translate into 3 natural money units.

We will need to add more items into our Natural Money Chart. To do this, find agreement on the relative value of any other item. A single apple is an easy example. Assume that several apples are counted to be seven individual apples. We would calculate that when seven apples are valued at 3 units, one apple would be worth 3/7 money units. Draw the connecting lines to 0.42857 on the Natural Money Scale. One apple is worth 0.42857 units of money. [We already assumed that our society understood arithmetic.]

There is a second way to set the scale units on the Natural Money Scale.  Any two dissimilar items can be picked and assigned an arbitrary value [preferably an evenly scaled value such as when the more valuable has seven times the value of the less valuable]. To make the chart, place the physical items on the vertical line and the arbitrary values on the horizontal line. Following the scale lines, establish a reference line with the correct intersecting slope.

Conclusions

Once we have monetary units, we can begin bookkeeping.

The Natural Money Chart allows a seamless transition from physical property to money-as-a-physical-object. It is immaterial whether money is considered as abstract or physical; all that is important is that a seamless translation from socially acceptable value to a uniformly scaled number be made.






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