- How do you calibrate value of a commodity without money? If we dropped every currency today and people used money denominated in X amount of Y material at Z% purity; what is the cost of a smartphone, much less the service contract? How many oz of .999 silver is an iTunes download, or an hour of my time?
- Money is a metric. Without money, you can't measure value. How long is a stick of wood in thumb lengths when the standard thumblength is undefined?
I liked my answers so much, I thought I'd post them here. Indeed, this answer is sort-of the post I intended to get around to write, where I wanted to make this point:
Money is an illusion. It isn't, in and of itself, valuable--it's merely a means of communication we use to say "I have done something of worth, and I would now like to trade a portion of my service for a new item or service."
The surprise is this: we don't have to use government-printed money! Value is produced when we do something of value for someone else--whether it be to bake a loaf of bread, or rake some leaves, or even sell an item--and using dollars, or gold, or silver, or bullets, as a medium of exchange, is merely a way to simplify the trade. While gold and silver have certain chemical and rarity properties that make them ideal for trade, we could use literally anything for this purpose--and, in time, we have come to the point where we use little bits of paper printed by--and largely controlled by--government entities.
And the IRS knows this. Several years ago, before I resorted to computer software to do my taxes, I remember reading an example in the Federal Income Tax Instructions, where, if you were a dentist who traded "putting braces on the mechanic's daughter" with a mechanic who "fixed the dentist's car", both were expected to pay income tax on the value of the trade they received.
So, here is my comment, in its entirety. I'm actually surprised at how long it ended up being!
The 11th and 12th Comments
If we are using commodities as money, we would calibrate value the in same way that we already do with dollars.
For example, if I had some smartphones I wanted to sell, I would ask myself, "How much gold would I accept to give up a smartphone?" Then I would say to myself, "It took this much effort to make this device, and I want enough profit to feed my children, and to go to Europe this year, and I know that if I sell X smartphones for price Y, I'd be able to do that--but I also know that my competitor will sell his smartphones at price Z, so I better lower my price a bit--but my smartphone has features A, B, and C that my competitor doesn't have..." and, taking all these factors into consideration, and a bit more, I would settle on some sort of price, in ounces of gold.
I would then repeat this with silver, because when silver isn't money, the price of silver won't be tied to the price of gold, and so I'd want to make sure that the price in silver is reasonable. In practice, this would be easy to do: I would just check out the trading rates between gold and silver for the day, and make adjustments accordingly.
Of course, I could get the price wrong--if it's too low, I'll sell out too quickly, and if I set it too high, then I won't sell very many units. But this is a risk of pricing in general, and has nothing to do with the money we use.
While it's true that money is a metric, it's not the only metric. Indeed, I could sell a TV for dollars, or pounds, or francs, or yen, or pesos--and if I wanted the same value across all of these things, I would just look at the exchange rate. I can, and people often do, set the price in tables, or in services (if you rake my leaves for a year, I'll give you a smartphone and a contract), or in TVs, or in bullets and guns, or anything else imaginable. The IRS knows that when you do this, you produce "income", so the IRS wants you to keep careful track of these things, so that they can tax it.
We can even print our own money, as was done in Salt Lake City, during the Great Depression, when deflation literally sucked Salt Lake dry of money. It facilitated trade between barbers, grocers, and so forth, so things didn't grind to a halt--but it was an imperfect solution, because you couldn't use Salt Lake dollars to pay your mortgage to that company in Omaha. They could have easily traded in bullets instead, and they would have worked just as well, and would have had the same problem.
The funny thing about claiming that money is a metric, is that while it's true, it's also not good to compare it to thumb-lengths. The nice thing about thumb-lengths is that I could either use my own thumb, or just declare a given length before I start my project as "one thumb", and complete my project with consistency. Unfortunately, no monetary system has this attribute--every system is subject to inflation and deflation--and even if I traded only in smartphones, the "price" of smartphones, relative to anything else, is always being adjusted.
I would also add that the only thing that keeps us from going to a private gold or silver standard is the widespread belief that we have
Finally, if we traded in things where their value is allowed to float, we avoid the effects of Gresham's Law. This is why a gold-backed currency is a bad idea--we fix the price of a dollar to a fixed amount of gold--but imagine what would happen if we fixed our dollar to the price of the pound, and the value of one or the other dropped! By allowing the values of currencies relative to each other to float, we avoid the effects of Gresham's Law.
For that matter, isn't Black Friday an attempt by merchants to take advantage of Gresham's Law, in order to sell things?