(Ááron Sepúlveda-Cué, Money Metals News Service) “Prices are information wrapped inside an incentive.” ~ Alex Tabarrok, Economics PhD
Monetary systems convey information about priorities, scarcity, preferences, and trust among individuals and societies.
Money is more than a generally accepted medium of exchange. It serves not merely as the primary payment asset for any particular community, but as an unintended mechanism for communication. “Trust” in this context refers to financial transactions such as lending and buying equity stocks. The prices of financial assets communicate the level of trust a company has with its creditors.
Information, then, is “wrapped inside an incentive” to cooperate with those we do not know.
We can draw parallels between language and money. If you look closely, you’ll find that every time we spend or save, we are making “economic statements.”
In short, monetary systems let us communicate, to those we do not know, the world we want for those we love.
Just as words, images, and symbols allow humans to express ideas and negotiate meanings, money facilitates the “pronunciation” of economic desires and human priorities. Have you ever had a discussion about the meaning and definition of a word? It is not much different than negotiating a price.
Social institutions like family and friendship let us cooperate with those we love. What remains underappreciated is that monetary networks allow us to communicate and cooperate with those we do not know.
Our monetary transactions “speak,” helping illustrate what our priorities are.
When you buy, for example, a chicken sandwich instead of a slice of pizza, you are stating you like one economic good over the other. Therefore, the process of production must change to match your preferences and will, in fact, change because the purchase is both the signal and the incentive to change the production process.
More of our time and other resources are to be used in the production of chicken sandwiches and, therefore, more of our time and resources must be used to produce their ingredients.
First and second order effects also work in opposite directions for other goods like pizza. Less of our time and less of our other resources are to be used in the production of pizza. Thus, less of our time and less of our other resources will be used to produce pizza ingredients, or they will be redirected.
The direction and redirection of inputs (ingredients and tools) to produce different outputs (the different final goods production aims at) goes through the same exact process. Sandwich bread producers see their monetary sales increase; they use their profits to demand more dough, so more dough goes to produce extra sandwich bread, and a bit less pizza bread.
The example just above comes from an interesting 2019 event that some people might consider inconsequential. It was way more than that.
Chick-fil-A and Popeyes were both heavily marketing their chicken sandwiches. With the limited data we have, we can see that competition or the event did, in fact, increase sales of chicken sandwiches many years forward. That trend seems to have nudged people to buy more chicken sandwiches than before, so the structure of the economy—our supply chains—is now more aimed and shaped towards producing those types of sandwiches than other fast-food items. All thanks to the communication and incentives provided by money, which serves as the largest and most effective social institution that facilitates cooperation with strangers.
What happens if the change of preferences and therefore the change in expenditure flows happens in another market?
Well, the same thing.
Carl Menger, the Father of Austrian Economics, used a hypothetical example about tobacco and its production process. If people reduce their consumption of tobacco, then tobacco inputs such as land, machinery, and workers will be in less demand in the tobacco market. So that land, that machinery, and that labor will go to other lines of production, to other markets with more demand than the tobacco market.
A more contemporary example could be coffee. If energy drinks, green tea, and yerba mate increase in the public’s preference, the production and distribution of coffee will likely fall or slow down because some portion will be crowded out or pushed away from the caffeine consumption market by customers buying more energy drinks and, consequently, less coffee.
As sales of coffee fall or slow down, physical capital, land, workers, energy, and financial capital move to markets servicing the production processes of energy drinks, green tea, and yerba mate. As our expenditures on final goods change, those monetary units move backstream through the supply chain, attracting resources towards supply chains of final products in increasing demand and away from the supply chains of final goods under slower or contracting demand.
We now conclude that what conversations accomplish among the people we do know, money achieves it with the people we do not know. Monetary institutions allow trillions of independent decisions made by strangers to coordinate themselves into supply chains, creating a shared economic order as its unintended but outstanding byproduct.
A tool for exchange such as money, a payment asset, developed into the most extensive language we possess for communicating and providing incentives to build the world we want for those we love, with the unintended help and coordination of those we do not know.
Ááron Sepúlveda-Cué is an economist with a Master’s degree in Economics from Georgia Southern University. Born in Houston, Texas, and raised in Monterrey, Mexico, he has made Texas his permanent home since his early 20s. He is the Libertarian Christian Institute’s in-house economist. His areas of specialization are Monetary & Banking Theory and History, Austrian Economics, Liquidity Theory, International Trade, & Intellectual Property.
