This section is brand-new; really it should be set right after the “Trilemma” section. I include it here now as a way to catch up; so I blog two sections today. I will also blog two sections Friday, because I will be out of town on Monday.
When my daughter Hannah was very young, she liked trading Pokemon cards; for they had different values. I said, “But why trade? Who would trade better for worse?” Hannah explained that there were different kinds of cards, with different value systems and different rules. This encouraged card trade.
I thought it paradoxical that card trade would exist at all, if they have agreed-on values; Hannah’s reply was that trade was possible because there was no single measure of value.
The same logic applies to money. Money seems to exist as a measure of value; but if there were a single measure, agreed upon by all, then all trade would cease. Who would trade better for worse?
We trade because what’s best for me is not always what’s best for you; both sides can profit, so exchange is rational. Mutual profit makes trade possible; but mutual profit is possible only if there is no single measure of value. To a single measure, mutual profit is a paradox; therefore money facilitates trade not by measuring value, but by persistently failing to measure value!
Money is in theory a single measure of value, to facilitate trade in a free market; but in practice it can’t be all three of: single measure, facilitate trade, free market! A single measure in a free market will not facilitate trade, for who would trade better for worse? A single measure can facilitate enforced trade, but that’s not a free market. And a free market can facilitate trade, but only with multiple measures!
Money is the single measure of value; money facilitates trade; money is in a free market; choose two! That is the Money Trilemma.