The current debate: what good is money?
Will Wilkinson seems to have sparked off an interesting debate on the value of money, which I picked up thanks to The Economist‘s Free Exchange blog. I should really read Will’s blog directly, but although the posts are generally high quality, they are too long for my blog-browsing habits, so I dip in only when interesting questions here are picked up elsewhere.
The interesting question in this case is:
Suppose you made a million dollars last year and put all but $50,000 of it in a shoebox. Now imagine you lose the box. What good did the $950,000 do you?
I have spent only ten minutes thinking about this, but I would evaluate access to cash as having ‘real option value’. In other words, the value of the shoebox is the value of the options it gives you: to retire, to start a new business, to travel the world.
This real option value will vary from person to person. $950k won’t increase the real options available to Bill Gates, but it would make much more of a difference to the options open to me (even at $1.70 to £1). Therefore, I figure that the value of money to an individual will vary in real option terms.
Real options will have value, even unexercised. That’s why people pay more for flexible travel tickets. As such, the money in the box has value… up to the point you lose it. Afterwards, no value. However, I don’t think the eventual loss of the box means that it was never worth anything. Okay so the money was sitting in the box, but it wasn’t doing nothing. Even in the box, it was storing value and holding open potential options – that is the unglamourous job of money. Its loss matters.
I understood the debate as discussing the utility of the money rather than its value., in which case whether you view the money as an option or just as an asset any explanation will involve at least one of:
-Pleasure from anticipated consumption;
-Pleasure from ‘consumption’ which does not damage the good/money (e.g. if I own a shiny rock and enjoy looking at it); or
-Pleasure from enhanced consumption in some state of the world that may or may not occur (i.e. the money as insurance).
Jonny, thanks for the comment. You’re right, of course. I should have been clearer about value. My position is the third option here: that money provides utility as insurance, even when that insurance isn’t called in. When you lose that money, you use that ongoing utility.