From: Too Different for Comfort, by Louis-Vincent Gave, which you can read here:
(This post is also about robots!)
Excerpt:
The question of what constitutes money has pre-occupied much finer minds than ours. For example, a wall display in the Bank of England museum notes on the debate on the nature of money between William Pitt the Younger and Charles James Fox that: “Fox argues, quite rightly, that every note issued by the Bank should be backed by gold. Pitt, on the other hand, maintains that the Bank should issue as many notes as are needed.”
Obviously, times have changed and the “quite rightly” seems somewhat at odds with the philosophy currently prevailing at the Old Lady. The fact that the Bank of England could, two centuries later, feel so differently about the core issue at the very center of its own existence than the faith professed on its own walls is a revelation in itself. By comparison, we doubt that there will ever be a Pope in the Vatican who will state publicly that perhaps Jesus-Christ did not multiply bread, or that he was not born from the Virgin Mary. This illustrates how difficult it is to define the nature of money. For centuries, we have used money to measure value, to store wealth, and to exchange goods, but no-one can really say why money has any value at all; a paradox which has trumped the greatest minds in Western civilization.
Aristotle was the first to try and tackle the topic and expressed the view that money had to have a high cost of production in order to make it valuable, and to allow it to represent a lot of value in a small physical format. He also argued that everybody had to accept money as a means of payment, as a store of value or as a standard of value. This drew Aristotle, the first famous gold-bug of sorts, to the conclusion that only gold and silver could be accepted as money. But even a gold standard leaves us with the quandary of a farmer selling his wheat for something that is essentially useless? Aristotle also does not explain why it would make sense, and generate wealth, for people to spend resources and time to dig up holes in mountains, and then take the proceeds of their efforts to bury them in another hole somewhere else? Even more alarmingly, it seems that the core of the Aristotelian argument is that gold/silver have value because they take a lot of effort to extract; in other words, at another time, Aristotle might have been a paid-up subscriber to the Marxist labor theory of value, a theory that we now know to be an intellectual dead-end.
Indeed, as the Austrian school amply demonstrated, the labor theory of value (the idea that the price of things should be determined by the amount of effort that was put into producing them) is not worth the amount of time that the classical economists and later Marx spent on the topic. Incidentally, this makes it ironic that so many people who claim to be Austrian economists also happen to be gold bugs. Indeed, one can be a disciple of Aristotle, Ricardo or Marx and be a gold bug; but one cannot claim to be a follower of Ludwig von Mises and argue that gold is the answer. Indeed, the founding stone of Austrian economics is that value is totally subjective. So how can we have a world in which all values are subjective—except one, gold, which would be objective?
The Aristotelian explanation thus falls short. The reality is that gold and silver do not have a value because of the time, resources and cost involved in producing them. Instead, gold and silver have value because everybody believes they do. This is not at all the same thing and leads us to the second view, namely that of Plato.
For Plato, money is just a social convention and has no intrinsic value except the one that people ascribe to it. This is a lot more acceptable, and very close to the marginal theory of value. Thus, for Plato, money is little more than a social convention and money itself need not have value, except the one that people wish it to have; which only brings us back to the debate between Fox and Pitt immortalized on the walls of the Bank of England and quoted above.
