Freeman

ARTICLE

The Cheapest Means of Payment

MAY 01, 1984 by JOSEPH S. FULDA

Joseph Fulda is Assistant Professor of Computer Science at Hofstra University and resides in Manhattan.

We were sitting in my mentor’s study discussing the vagaries of the teaching profession when he remarked: “You know, Joseph, we must pay for everything in life, and generally the cheapest way is with money.” I chuckled, but was struck with the insight. And on the way home later, I found myself asking “Why?”

In this short piece I would answer that question. Free market economists define money not as that which is “legal tender, for all debts public and private”—i.e., what government accepts or obliges others to accept as payment—but rather as the most marketable commodity—i.e., what people most willingly accept as payment. It is true, to be sure, that our money—unbacked legal tender as it is—is also most marketable; we make the distinction, however, because the answer to our question depends on the defining quality of money, not on any incidental attributes.

Money is so marketable in part because it has been so marketable and the recipient is thus assured that he will be able to use it as a means of exchange for goods and services of direct use. (This is a reason why once-backed money can so long survive by government fiat.) What is really desired, of course, are goods and services of direct use. In a specialized economy such as ours—or any modern economy—the chances are quite small that one person’s surplus goods or services will be precisely those needed by his trading partner. To pay his partner in exchange with these, then, would necessitate his giving more. For what he offers is neither of direct use nor easily marketable (or as easily marketable as money) in exchange for items of direct use. The matter is made even worse when the payment will be with such intangibles as favors or other private services for which there is almost no general market; for knowing that situation the trading partner is likely to ask for far more than he otherwise would. He will ask, as is customary, for whatever the market will bear. And the market will bear much when the supply is almost unlimited and the demand almost nil.

Economic analysis reveals that payment in kind will have two components: (1) the market worth of whatever is received in exchange, and (2) the market cost of transferring the items received into items of direct use or, alternatively, the price the recipient is able to charge for re ceiving something of lesser utility in exchange for something of greater utility. This second component merely confirms that before an exchange both parties must believe that they will be better off. This does not mean, however, that whoever offered payment in kind—perhaps in intangibles—is actually better off later, nor does it mean that he would not have been still better off had he offered a commodity which is more marketable—money. Money, after all, is the cheapest means of payment.

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May 1984

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