The Mathematics of Money

500 euro notes

Probably the most fashionable word in the business world at the moment is ‘resources’. We talk about energy resources, raw material resources, human resources and, of course, financial resources. This does give the impression that they are all pretty similar and to be used wisely, as they are all, apparently scarce. My purpose in writing this little essay is to actually pinpoint some of the ways in which these resources are not quite so similar as we are led to believe, particularly financial resources.

Money is a somewhat different resource in this way – all the money in all the world is already owned by someone.

Energy resources are still up for grabs, pretty much all over the world. True, in most cases, you need some personal financial resources in order to harness this energy. It is necessary to build certain devices to convert energy from the sun, wind or waves, and probably you will need some permits to erect at least some of these devices, all of which costs money. If you wish to extract more conventional fossil resources, then you will need considerable capital and obtain major permits, which may take much more time and money to get. Finally, if you want to source uranium and turn that into nuclear power, the capital investment and permits are things that only the biggest of companies, or indeed governments, can find. There are still a few places on the planet which are still available for relatively permit-free extraction of energy, for example oil reserves lying offshore. Of course, many countries lay claim to vast areas of shallow continental shelves, and as drilling technology improves these claims get wilder and wilder. It will be interesting to see how the currently untouched Antarctica will continue to be untouchable. Nobody owns Antarctica, and anyway most of its resources lie deeply buried under kilometres of ice and snow, but as the ice melts many prospectors will be looking south. Not all countries have signed the non-exploitation agreement.

Raw material resources, in as much as they usually lie on land, are usually controlled by governments. Various governments have different policies; for example, in the US, if you own land then you own the resources lying under it. In the UK, this is not true – you only own the top few metres. Most countries where gold can be found allow prospecting by individuals, the deal being that the government in question will buy the gold at the market rate after you’ve dug it up, thereby increasing that country’s gold reserves. As it hasn’t really been economically viable to extract non-energy raw materials from under the sea, the question of ownership and permits hasn’t come up. There’s plenty of iron and gold and other tasty stuff under the sea, but extraction is too expensive to get a return. The one exception to this regards fishing, and it has been necessary to create quite extensive fishing limits around coastlines to protect commercial fishermen, and regulations have been put in place to protect fish stocks from overfishing – such regulations are not obeyed by all.

Human resources are available pretty much everywhere, the only question is cost. There are two solutions to this, either you attract cheaper workers to your production facility’s location, or you move your factory to where the cheaper people are. This creates an ever-changing situation where low-cost countries get more and more expensive, and then you have to move on again.

Finally, let’s discuss the ‘resource’ which is really different – money. Money is unique in that, as I said at the beginning, all of it is already owned by somebody, be it individuals, companies or governments. There is, actually, no spare money just waiting to be dug up, drilled for or extracted from thin air. This is because money is not really a concrete thing, and its value always depends on other things. Individuals, companies and governments only get rich (i.e. have a lot of money) if they have or produce something that other people want. Oil-rich countries sell their oil and get dollars in return. Successful companies sell their products or services for money. If nobody wants their products, money doesn’t come and they go bust. Individuals can sell their labour, expertise, products or services, and the same applies to them – if nobody wants what they have to offer, they go bust.

The value of money is also a fragile thing, and many individuals, companies and governments prefer to invest in something real, like gold. Banknotes are really only cheques – the bank that issues the notes “…promises to pay the bearer the sum of Five Pounds”, but of course if you’d prefer that five pounds in coins, the metal itself is not worth much at all. It’s all to do with trust. Hard currency is currency that people generally trust will still be worth pretty much the same tomorrow. When faith in a currency is lost, it usually happens quite fast. The government in question may just print more money, but that only causes wild inflation and the need for much bigger wallets to carry all this paper to the shop. Governments can only print more money if they hold something concrete, like gold, to back it up. When criminals start printing counterfeit money, the result on public confidence can be dramatic, and this is by no means new. Back in the ‘good old days’, when coins were made of gold and silver and actually had real value, people were still suspicious of fakes and would bite coins to check their metal content.

So, my point here is that money is not actually a resource. Money only reflects the existence of other resources, be they energy, raw materials or human.

1 Comment (+add yours?)

  1. The Mathematics of Money | Malcolm's English Pages
    Apr 03, 2013 @ 10:10:52

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