Dear Economist

How would an economist respond to the phrase “money is the root of all evil”?

Mike Choe, via e-mail

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Dear Mike,

Economists always seem to talk in dollars and cents, yet few economic models contain any reference to the stuff.

The reason why economists will use strange phrases such as “the value of a kiss is $49” is not that they think money is particularly important, but simply that it is a convenient way to measure things. If a toffee apple is worth $7 then a kiss is as good as seven toffee apples; however if the toffee apples cost $6 and the kiss costs $50 then the toffee apples are a better buy.

All that said, why do we have money at all, rather than using - for instance - toffee apples as a medium of exchange? One reason is that the price of toffee apples may fluctuate wildly, which means that although I could in principle write a contract denominated in toffee apples, it would be hard to have much confidence in what that contract really meant. Contracts in the ancient world were sometimes denominated in salt, because it had a stable price. These days, dollars are even better.

A complementary explanation is that money is a simple way for people to gain credibility. I can settle my debts by writing a note that says “I owe you one kiss,” but I may not make good that promise, nor will you be able to use my IOU to pay for anything else. If, instead, I give you $49, this is a promise made by the US Treasury, a more dependable debtor.

In short, we need money because people simply don’t trust each other. In the words of economists Nobuhiro Kiyotaki and John Moore, “evil is the root of all money”.

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