Most economists can explain the mechanics of the monetary system, like a plumber explaining pipes. However, they often fail to grasp money's deeper influence as a sexy, dangerous, and motivating force that shapes human desire and societal structure.
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Unlike physical technologies like the internet, money is a social technology. It's an invented system of trust that allows billions of strangers to cooperate and transact, forming the basis for complex civilization. It is the fifth element, propelling human progress.
Economic theory is built on the flawed premise of a rational, economically-motivated individual. Financial historian Russell Napier argues this ignores psychology, sociology, and politics, making financial history a better guide for investors. The theory's mathematical edifice crumbles without this core assumption.
Money acts as a "non-specific amplifier," much like alcohol or power. It doesn't fundamentally change your character but magnifies your existing traits—both good and bad. Insecurities become more pronounced, generosity becomes super-generosity, and a "micro asshole" becomes a "mega asshole."
Post-WWII, economists pursued mathematical rigor by modeling human behavior as perfectly rational (i.e., 'maximizing'). This was a convenient simplification for building models, not an accurate depiction of how people actually make decisions, which are often messy and imperfect.
Money is not just a medium of exchange; it is a core social technology that allows individuals to influence others' actions without resorting to violence. When monetary systems fail, society reverts to a state where physical power dictates outcomes.
Contrary to popular belief, economists don't assume perfect rationality because they think people are flawless calculators. It's a simplifying assumption that makes models mathematically tractable. The goal is often to establish a theoretical benchmark, not to accurately describe psychological reality.
The ability to print money creates inflation that widens the wealth gap. This hyper-inequality triggers a deep-seated, evolutionary psychological response against unfairness, which then manifests as widespread social unrest and societal breakdown.
People don't treat all money as fungible. They create mental buckets based on the money's origin—'windfall,' 'salary,' 'savings'—and spend from them differently. Money won in a bet feels easier to spend on luxuries than money from a paycheck, even though its value is identical.
People's relationship with money is deeply personal, shaped by everything from childhood memories to cultural background. When discussing finance, two people may be using the same words but speaking different 'languages.' Recognizing that a dollar sign can evoke freedom for one person and anxiety for another is key to effective communication.
Drawing on economist Wilhelm Röpke, Jim Grant reframes inflation as a moral and societal issue, not just a monetary one. It represents an economy's reaction to a 'riot of claims'—demanding more than can be produced—where money becomes the weak organ that ultimately fails under the strain of collective hubris.
