Any physical object can be money, but obviously, some materials perform the functions of money better than others, hence are historically more common as money, as Menger laid out in 1896 (On the origin of money). Anyway, above all, money is not a thing but a social relation of credits and debts enforced by some authority (Ingham 1996, Money is a social relation). If you want to dig deeper on the relation between the physical and the social, I would recommend Searle's discussion of money as an institutional fact (1995, The Construction of Social Reality). Here are some relevant quotes:

“Intuitively it seems there are no institutional facts without brute facts. For example, just about any sort of substance can be money, but money has to exist in some physical form or other.” (p.34)

“This suggests what I think is true, that social facts in general, and institutional facts especially, are hierarchically structured. Institutional facts exist, so to speak, on top of brute physical facts. Often, the brute facts will not be manifested as physical objects but as sounds coming out of peoples’ mouths or as marks on paper – or even thoughts in their heads.” (p.35)

We are living in a world with various monies: fiat money (created by the central bank), bank credit, trade credit, IOUs, bitcoin, various tokens (e.g. for riding the roller-coaster on Coney Island). All possess purchasing power.

True, any good or service can take the *functions* of money. That is, it can have the functions that money performs [insert the classical 3 money functions]. But putting philosophies aside, the simple fact of the matter is that goods and services can be consumed, while money cannot.

@Kristofer: Well, the sentence that money has to exist in some physical form or another ... that seems to be wrong ... I mean, a bitcoin is not physically existing - but of course it needs some kind of "container" to be created, handled and stored ...

@Sander: Yes, we see a lot of different kind of money ... and that makes me asking, if it is really true that we use some part of the physical and non physical part of our economy to use it as a measurement tool for the rest of the economy.

The term "can be consumed" is a good hint - but it is not really sufficient. Because the definition of a consumption is also not totally clear.

Ok, the normal convention is that money is on paper or at a bank account ... which is not easy to consume. But "consumption" of an mp3-file ... ok, for my ears it sound like music, unlike the sound of money ...

The only goods which we really can consume is food. But as described ... even food (goats) was and still is used as money ...

@all:

I mean: There is really a big big open field of critics into this kind of daily doing.

Of course, some parts of the matter is more easy to be used as money ... but there is a theoretical problem ... as long we have no proper definition, what kind of physical dimension we use as the basic unit for any given economy ...

I mean, there is no proper definition of how to create or to define a new "money stuff". I mean, ok, someone likes gold and silver ... but why not use copper or wolfram? And why not using old and used iPhones as money?

Or bitcoin - what is the principle difference between bitcoins and an mp3-file?

Or a paper like stocks ... is it money or a common good? And if you think it is not money ... why is it often used to buy other companies, used like money?

And if you think it is money ... why is it not included in the calculation of the inflation rate?

The simple fact that not everything is in reality able to be used as money is not sufficient. for a proper and clear definition.

Both money and goods are not really have a dichotomic character ... it is some kind of a duality character ...

And I really asking: If there are these uncertainties in the definition of money ... the logical next question should be: What is the proper definition of the economy itself? What differs "an economy" from "not an economy"?

I really think that there are open questions around ...

Hi again Olaf,

I just want to point out that Searle, and myself as an ecological economist, understand "physical" in the strict sense. Although you could colloquially call Bitcoin "virtual money", bitcoins always have a physical existence as magnetic traces on a computer. The physical underpinnings of Bitcoin are extremely important to keep in mind, because they are environmentally disastrous: "Bitcoin Mining Uses $15 Million's Worth Of Electricity Every Day" (Forbes, 3 December 2013).

Ok, then i understand your point. But I still do not completely agree ... since "one virtual coin" is only a logical interpretation of a given set of magnetical or electron based order of a bigger structure ... The order of a bitcoin itself can in physical terms not been distinguished from the order of an mp3 file.

And it depends on the file system where are the single magnetic structures are located, so there is no direct expression of one given magenical structure to a given "product" like a bitcoin or a mp3-file.

For me this is out of a physical structure which I would name a physical "thing". It is like the convention that four stones somewhere in the nature forms a perfect rectangular formation. It is not a real structure, just a logical interpretation of some physical structures.

But I totally agree that there is a physical structure necessary as a container of small given structures which are interpretated as the bitcoion later by a file system and an operation system ... And I also agree that Bitcoins are a bit of nonsense ...

But my point was, whatever definition of a physical structure we use, there is no logical difference between money (bitcoin, or else) and products (mp3-files, games, whatever software ... )

For both products you need some amount of energy to create and to store the proper order of the substructure to be named as "bitcoin" or just "data" or "code" ...

And this is of course also valid for each of the real physical products, and also for the biological systems like goats, cows or snake heads ...

In physical terms ... money is also just one minor part of the total products of any given economy ...

That leads to the question:

How in heaven could you really "measure" the total product of an economy with just a subsystem, a part of the total product?

It is like measuring the dimension of a barrel from inside with a unit defined from inside - with no link to any outside.

The philosophy of what is money is an extremely interesting one and a very difficult question to get one's arms around. Olaf, your last post is in a sense about the unit of account and not really about money at all. In economics, this has been the problem of a standard of value (from Smith-Ricardo Labor Theory of Value all the way through Sraffa's Production of Commodities by Means of Commodities). Then there is the medium of exchange function of money (eliminate the need for bartering, where, in a sense, all goods serve as money). There is the store of value function, which gives the ability of the holder of money to separate say the act of providing labor from the act of purchasing goods. Clearly not all goods could serve all of these functions. For example, bananas would make a very poor money because they are highly perishable and would not be a good store of value. Gravel would be poor money because it would be so difficult to carry around. So in the history of money came from two things: social convention and ruling power. The latter creates the ability to declare legal tender. If it is not legal tender then there are some things that cannot serve the functions of money. Money has to be scarce because otherwise lots of it would be produced, resulting in inflation. Salt water would be lousy money. No one would accept it for anything. Bitcoin gets its scarcity from the very cost of mining it but it is not money in my view (as its price volatility and the collapse of MtGox rather suggests). Bitcoins (or perhaps better Bit-tulips) are just a speculative vehicle and a secretive means of exchange for illicit goods and services (or bypassing capital controls in China). Clearly, however, money does not have to have intrinsic value. It just has to be accepted (the social convention). In the end, it is probably as well that the average Joe does not think too much about the nature of money because it might undermine its very functioning!

Yes, I know, it is quite a good mixture of nearly all these questions. And extremely interesting ... (even if I am not an economist ... for now.)

That is what I am working on. In my optinion, money is only (!) a medium of exchange, and is not the right medium of accounting (since it is never absolute and always relative) ... and it is also not a medium of a storage of value.

Looking for a standard of value ... is the wrong question, in my point of view.

Looking to the real physical world of the real goods is the better one.

Why?

Value is nothing which you can measure. There is absolutely no condition where you can name the value of anything really, except you trade it once.

Then you have done a value measuring ... but again, this does not tell anything about the value or monetary price of the very same thing in the next second ...

Value ... is just a percentage of all traded goods, devided into a unit of trading intermediate "things".

Therefore it is much more interesting to look at the side of the real world.

The final question is: "What is the dimension of "economics?"

What Ricardo, Sraffa etc. were looking for was the a unit of account, a unit of measuring, was always looking, as you pointed out, for a "standard of value" ... and was not asking the right question:

What is or what can be the measurable physical dimension of economics?

And I am very sure:

There is an answer out there. There is a unit out there, to measure the size of any given economy, always and everywhere. One physical dimension, absolute over time and with a fixed and defined measurable unit.

If there is no logical difference between money on the one hand and the goods on the other hand ... what really are we talking about in economics? It is always a relative discussion ... it seems to be bound to reality by the inflation rate ...

But the inflation rate ... only counts a bunch of things of daily use ... and ignores totally the inflation of a lot of asset prices ... (luxury goods) ...

... and it totally ignores the simple fact, that a lot of things can be used - and are already been used as money or as a money replacement ...

I mean, moving 100 million bucks for an old sheet of linnen and a bit of old colour ... which is quite old, and not at all a product of this years economy ... is accounted as a todays product ... ? what is this? This is not at all the productive part of economies ...

Therefore I again come back to the very stupid and simple question:

What is or what can be the measurable physical dimension of economics?

This question seems to be totally stupid, but without an absolute unit there is no measuring.

Even this statement seems to be totally stupid in economics, everybody believes that money is the right thing to use as the storage of value, to use it as the unit of account ... but it is a unit which is defined from inside the economy itself.

How you would ever really know anything about any real dimension of an economy ... while using still a unit defiined from inside the object to be measured?

And again ... it seems to be again a stupid question about the physical dimension of an economy ... but it is not.

The discussion of the limits of growth is in total a discussion of physical constraints. With a constant growth rate of whatever percent ... we will in very few generations run out of a planet, out of everything.

The only thing we will never run out of ... is printed money ... or maybe unprinted money but virtual number money ...

And give the case that I am right, and there is a final answer for the question of "What is or what can be the measurable physical dimension of economics?" ...

we hav the perfect possibility of watching out for the inflation rate ....

Im May i will hold a talk at the Westfälische Wilhelms University in Münster about my idea. I hope this question and my idea gets its way ...

The issue of an invariant standard of value had been a thorn in the side of economics since Adam Smith 1776 as I noted. Money works for a nominal measure because the amount of spending is inherently a monetary concept. But unless all prices change by the same percentage or all phydical units increase the same there is no unique way to measure say the quantity of output between two different periods. In modern times economists refer to this as the aggregation problem. Different from money but equally perplexing.

Thanks, John, ... your words express my questions much better than mine.

And it is ... well, perplexing ...

... and i think it is possible to define a unit to measure the size of economics in an absolute term - stable over time, over all times.

With this unit it is possible to name the size of the egypts 4000 bc. and of germany 2010 ... on the same scale.

What I want to show is that money is nothing but a medium of more easier exchange of all goods produced ...

If you want to know about the real size of an economy you have to measure the true size of all goods ... outside of any monetary system.

Given the idea this would be possible: You would have a tool for measuring the true size of any given economy ... and you could easily say if or when a given exchange rate ... represents the reality or is out of a physically based measured balance.

What I want to say is that you do not need money to measure economics ... and one small step is the question above. If there is no logical difference between money and products ... what else then is money but nothing as one small part of all products?

It is a logical tricky field of thinking ... you start easily trick you out by yourself ... but keeping the idea of physical measurable dimensions pushes you back on the track of the idea.

Or in other words: The importance of money in the economic theory is much overstated ... and there is a better answer.

200 years of the history of economic thought would argue that there is no answer to your question. How can you evaluate how many bricks are equivalent to how many planks of wood etc other than by using relative prices? And while relative prices are free of the unit of exchange they do change over time. Therefore there is no fixed standard of value.

Well, I think in the last 200 years there were a lot of ideas in the right direction, but the final breakthrough was not made.

My answer is very similar to the labour theory of work ... but I replace labour with the pure muscle energy and treat human labor and mechanical labor as the very same thing ... then you have the answer on its way.

All starts with the missing input factors for the general circle of "labour" and the produced goods in one direction and the money circle in the opposit way.

The missing thing is something what makes this economic machine running.

Basically, physically spoken: You need whatever kind of matter and also energy, or more precisely exergy. There is no way out of this ... so, whatever you name "a given economy" (it can be even a tree growing) ... you need some kind of matter (for a three it is minerals, water and CO2 and something else) ... and energy (sunshine) to grow it. If you limit one of the physical factors, you stop growth. Even without having a price tag on each leave.

During human history this is also valid.

Growth of any former economy was only possible by growing the number of heads, let it be inhabitants or slaves. There was absolutely no way out of this limiting factor.

Building a pyramid took ten thousands of workers for decades ...

The first machines as a replacement of human muscle work were slaved animals, working stronger and replacing humans.

The result was, in physical terms spoken, more energy available for doing work. And besides that, these kind of biological machines reproduced themselfes and also were able to feed themself ...

But still: The total amount of work was limited. (To give an example number: One strong young guy working all day long is able to deliver in a year (!) the total amount of work in an amount of roughly 200 kWh, if you treat him very hard. With our 40 hours a week ... this number shrinks to not more than 120 kWh.

And of course, economist would say: "Do not forget efficiency" ... but the normally seen "efficiency gains" are nothing but a shift from human body work to machine work, driven by external energy.

Why is the total energy consumption so closely connected with the GDP?

Not because of "a higher GDP puts pressure anto the energy consumption" ...

it is because "energy conversion for producing whatever kind of good, whatever kind of commodities, whatever kind of service" - IS what really is doing economic doing.

What I mean: The labour theory of work is totally valid, if you replace labour with energy, but of course NOT for a single product ... there is absolutely no connection of the amount of work or energy put into the production of whatever with its later seen selling price ...

... but this is valid for the total economy in its overall size.

Whatever you do in an economy - there is exergy necessary, the effective part of the total throughput of energy to do whatever you name "economic doing" (producing, serving, etc) ....

The fact that some kind of energy servants (humans) gets more paid and others gets less paid (fossil fuels) ... and even the human servants or workers not at all gets the same loan ... doens kill this argument.

It is like not accounting the amount of total sum of prices that you get for the corn produced but to measure the total amount of energy which is used to make the corn existing.

Or replace corn by all kind of plants ... the total sum in monetary terms of a lot of corn, some herbs and so on .. is the farms GDP. You might think herbs are more valuable ...

But then start planting herbs instead of corn ... and think of the price effects this change in total amount of money this will have ...

You may change the kind and the characteristics of all your farm products all the time ... but they are limited by the total amount of energy put through (if you get more corn ... you see that by more energy converted) ... and a farms GDP will also in monetary terms not grow at all ...

And now you can replace the farms products with "labour" - or better, with energy.

The energy total throughput is the limiting factor af every production.

Just think of a very big company, with a lot of machines ... the number of product output is bound to the energy throughput ... and efficiency does not change the game. If you get new machines (that needs a lot of energy as an invest first!) ... maybe you get the last percentages of efficency out of your process ...

But in the long run ... you sink your cost ... which will in the long run also sink the price you can get for your products ... .(the market ... and the other producers will force you to do so in the long run ... )

... so, maybe you will end with a maximum production. But still the energy is to 100% necessary and is not replaceable by anything else than energy.

What means: Technology can change the character of the products, it can bring new products, but the total production always and everywhere is limited to the total energy throughput.

Therefore technology can play also a second role: Make more external energy available as a replacement for doing workd for you as the owner of a company ...

And one more remark:

The human muscle work today ... is neclectable. It is much smaller than 1% only.

And we need money only to have a medium of exchange to share all produced goods to each inhabitant.

There are a lot of humans placed into jobs were they do not produce anything, teachers, military, police, priest ... they all want a car, a warm house ...

The total economy taxes the rest and deliveres some real products to these people. Not with a material transport ... of course not. They get paid with a medium of exchange ... with money to buy the necessary stuff by themselfes.

Olaf - yes, you're pretty much right about money. It only really makes sense as a token of exchange, and your earlier comment about it being invalid as a unit of measurement within the sub-system is spot on. The knot that monetary economics has historically tied itself in trying to use money to establish absolute value appears to be more based on a desire to impose on the world an order that simply isn't there, than any underlying physical reality.

I think the problem there is they're trying to solve too many problems with the same approach. Money works well as essentially a form of information transmission in the distributed system that we loosely term our economy. From that perspective it's a means of providing organisational structure towards an end. Where it really doesn't work is as a measurement, because price is a direct function of money and an inverse function of production, and so it's not possible to know purely from a price measurement which is varying. Energy input, or at actual physical output probably makes more sense to measure, and 19th century economists seemed to do that more - the statistical yearbook of the 19th century German Empire seems to have taken that approach for example. (Statistisches Jahrbuch für das Deutsche Reich - it's online)

With respect to your last point - if you take the role of money as being a packet of information - then one way to regard money is analogous to water flowing through a water wheel to drive a mill. The water flow is controlling the rate of output of the mill - and by diverting the flow we can drive other mills to control other machinery. Teachers, military, police (we can debate the role of the priest) in this context are a necessary administrative/maintenance overhead that the system needs in order to maintain its function. This is again very similar to what we see in other distributed systems - the operating system, the network your computer uses necessarily all take cpu away from the total amount theoretically available - in order to provide support for the applications you're actually using. While administrative overhead is necessary though, it's important to make sure it's also strictly limited - especially in networks there are several pathological cases where it can take over an increasingly large amount of resources, and drive actual 'goodput' to zero.

To me the three standard functions of money are correct: money serves as an (instantaneous) unit of account by which all goods' values can be compared; as a medium of exchange, which is traded back and forth for goods; and as a store of value (you can put it in your pocket and not worry). These are of course imperfect, but the same could be said for gravity (we weigh more or less depending where we live) and a million other things. The definition is good enough for the hand grenades we toss.

Dear Peter, well, I agree that the use of money inside of an existing economic system is somehow "sufficient" as you laid out.

But: there is no definition of what money really measures ... no phyiscal based definition.

So I totally agree with the medium of exchange function. that is what we do when changing money for things. that is obviously right, no discussion.

But storage of value ... for me that is a usecase for money which is determined not only by the money itself, but more important by the constant outer conditions called "economic system as it is". I mean, if you use some money as a "storage of value" - the necessary precondition must always be: There is something you want to buy in the future.

Without that condition ... the storage of "value" is worthless - and the money itself can not change anything to this necessary precondition.

And also comparison of values ... (which is one level below measuring the values since it is not a real measuring it is right to say "compare") ... It allows a comparison - of course, we all can easily see that each day in the shops .. but the fact that it allows only a comparison of "things" -... where is the definition of an whatsoever characteristic physicla dimension? I know, in daily shopping malls this question is irrelavant ... as an example: Given the case we "surprisingly" get the information from mars:

"There is an economic system", ... and more important: "its official gdp-size from last (mars-) year: 5.000 trillion mars coins"

What the heck does this tell about the real economic system? I mean, it is the fully approved Gross demand product from mars ... but we simply have absolutely no glue what that really is. We can compare the time difference from one mars year to one earth year .. but that is all we can without more and other information not supported by the pure gdp-number.

It just tells nothing, except that there is some money circulating on mars. But for what? We simply do not know. We have no exchange rate ... no big mac index from mars ... the circulating money tells nothing about any real world dimension ... is it a group of three artist making and selling "worthful" stamps? ... or is it a hidden industry constructing and selling "imperial destroyers" from star wars? ...

Dear Jacky,

"I think the problem there is they're trying to solve too many problems with the same approach."

I assume that this is a comment to my point of view, that there is an other theory possible, right? I would reply that it is not my intention in the first line to answer a huge number of questions, or that i am trying to solve (too) many problems with one answer.

My intention is more simple, it is to give a "definition of any economic system based on its determining physical dimension, to be measured purely in the defining single one physical dimension, which makes the measured dimension 'value' stable over time as it is an absolute physically measured 'value'.

The double meaning of 'value' is leading into the very interesting field of "what is the source of value?"-Question. I want connect this question in the first line with a proper definition of any economic systems based on physical units. Because as long as you use any thinkable monetary value - you use a relative value.

I absolute agree with your comment that the search for an absolute value was not succesful. I would say: No way have it and could it ever be possible to find a proper absolute value definition by using a ruler with a relative unit scale. 200 years of searching for such an answer of an 'absolute value' were ... waste of time, I would say.

Any absolute value discussion can only be based on an abolute value ruler. That makes me pointing at the physical dimension of economic systems... that is the starting point for any discussion ...

And by stating this ... it is the other way round as trying to solve too many problems with the same approach, I would say: Take the new way of "defining the size of an economic system", defined and measured in one single physical dimension, and then look to some open and unanswered problems with this new approach.

It is just to check if there is a new point of view which makes sense in any way ... and if yes, what is the result out of this?

And there should be no discussion about the physical dimension that I want to use as the determining characteristic of any economic system. It is following the thermodynamic laws ... so my way of looking onto any economic system is simply possible - the only question for me is: What are the insights out of this new approach?

I am trying to answer your question because I have done some research on the interaction of stock markets and interest rates and I would like to point out that the existence of general equilibrium (Arrow-Debreu) in stock markets depends on interest rates in a way which can be factored into supply of financial capital and demand for financial capital and the elasticities depend on the industrial sector  or the stock market sectoral classification like BSE20 stocks. You can refer to my coauthored paper on mathematical statistical stock pricing on my RG site. If you invert the estimated ARIMA equation you can readily get the equilibrium interest rate time path. I hope that is of some help so far as cost of money to companies is concerned. SKM

I need to weigh in again. First, I'm not surprised that there is an inverse relation between stock prices and interest rates given that the returns compete against one another as substitutes; but interest rates are not the price or cost of money, the amount of goods and services they can garner is.

To Olaf's original point, it very well might be true that anything can be (and pretty much has been) used as money. But all those "monies" met the three functional criteria I mentioned earlier. These functions are especially vital now. No commodity goods exist anymore. Fiat paper and electronic money rules. So, what money does is what money is: a means to keep track of and measure the values of all of the innumerable trades that take place.