The Price of Money: A Thought Experiment

Imagine that you wake up tomorrow and money has been abolished.  A magic wand was waved over the Earth and no one uses money anymore, but everyone still produces exactly what they would have produced and consumes exactly what they would have consumed if money were still around.  This may be a fanciful notion, but stick with me.  How would the world be changed?

There would be no change in anyone’s standard of living.  Dollar bills don’t grow food, drive trucks, or give haircuts.  People do these things.  And they could keep on doing these things without money, assuming the magic wand makes them behave that way.  There would be nothing physically preventing any good or service from being produced and consumed exactly as before.  Money is not physically required to produce anything.

What does money do then?  It produces motivation and information.  Sure, the farmer could grow food, but why would he if he isn’t going to be paid?  And how would he know if he should grow corn or wheat?  Right now the prices of corn and wheat help him decide.  If money were abolished we could still provide all of the goods and services we do now with no change in anyone’s standard of living, but would we?

But right now, I’d like you to join me on a little side trip.  I’d like to ask, “How much are we paying for these motivational and informational benefits we receive from capitalism?”

I have claimed that we could theoretically abolish money without reducing anyone’s standard of living.  In fact, the situation would be somewhat better.  We could actually increase people’s standard of living because abolishing money would reduce the labor input required to provide this standard of living.  For example, there would be no checkout lines in stores.  Goods would be created and delivered to the store just as before.  You would go to the store and pick out what you want just as before.  But rather than wait in line to exchange dollar bills with a clerk you would just leave with your goods.  Exchanging money with the clerk does nothing to help produce the good or deliver it to your hand.  The clerk would be unnecessary.  The clerk could loaf around at home without reducing his consumption or anyone else’s consumption one bit.

So we have just reduced labor input without reducing standard of living output.  This is not the bad kind of unemployment where you don’t work and have to curtail your consumption because you have no money.  The clerk consumes just what he did before, and so does everyone else.  The clerk’s loafing doesn’t result in a single good or service being unavailable that would have been available if we had money instead of the magic wand.  I suppose it would be more fair if the clerk did some other productive work and allowed everyone else to work a little less or consume more.  But for illustrative purposes I want to ask how many people in our economy could loaf at home without reducing the production of goods and services.

The Bureau of Labor Statistics keeps track of the number of workers in various industries.  I took this data from the Occupational Employment Statistics survey of May 2007 (http://www.bls.gov/news.release/ocwage.toc.htm).  In that survey, there were about 135,000,000 jobs.  Here are the number of jobs that we could completely forego if we didn’t need to keep track of money:

523,710 advertising, marketing, and sales managers

526,170 financial, compensation, and benefits managers

291,550 insurance appraisers and claims adjusters

219,070 cost estimators

109,870 compensation, benefits, and job analysis specialists

1,115,010 accountants and auditors

66,210 real estate appraisers

1,133,260 budget, credit, and financial analysts; personal financial advisors; insurance underwriters; financial examiners; loan officers and counselors; tax examiners, collectors, and preparers

14,332,020 sales and related occupations

3,610,150 bill collectors and billing clerks; bookkeeping, accounting, and auditing clerks; gaming cage workers; payroll and timekeeping clerks; tellers

239,810 loan interviewers and clerks

232,700 insurance claims and policy processing clerks

That’s 22,399,530 jobs, or 16.5% of the 135,000,000 total jobs.  There are also other industries that are less clear, but still seem like they comprise a lot of money handling work.  Restaurants, for example, are in the business of making and serving food, but they are also in the business of running credit cards, and making change.  And every industry has some accounting, billing, and other money handling work that could be alleviated.  The true cost is undoubtedly higher than 16.5%.

There are also actual productive industries that could be reduced that I didn’t count.  If we eliminated banks we could reduce the amount of office furniture that needs to be manufactured.

Finally, there is a lot of work that could be avoided that isn’t accounted for above.  When you wait in a checkout line the Bureau of Labor Statistics counts the number of hours spent by the clerk, but doesn’t count your time.  That’s ten minutes you could have spent at home with your family.  Every time you wish for a few more minutes in the day think about trips to the ATM or time spent opening junk mail, paying bills, and balancing your checkbook.

Our society is paying at least 16.5% overhead for the information and motivation we receive from our system of money.  This overhead isn’t necessarily wasted.  A loan officer helps answer the question, “does John Doe get to add an addition to his house?”  But if we decide to use a different system to answer this question, it is overhead that would be available to use to implement the new system.