A New Definition of Money
I recently attended a talk given by the knowledgeable Garrick Hileman who is due to publish a paper on virtual currency in the near future. After some skeptical questions on the viability of Bitcoin, he asked the audience (a large group of eager young economics students) the following question:
“What is money?""
He got the standard first year econ student exam response:
“Well it’s defined as a medium of exchange, a store of value, and a unit of account.”
His response stumped me. At first it might seem like a strange assertion, but it begins to feel weirdly intuitive the more you play with it.
“Money is memory.”
A brilliant economist named Narayana N. Kocherlakota, of the Federal Reserve Bank of Minneapolis wrote a paper by the same name in 1996: it was his work that Mr. Hileman was referencing.
I’m baffled as to why I’ve never heard of this idea in any of the economics courses I’ve taken. Maybe it hasn’t gained widespread recognition yet, or maybe it’s just easier to explain the three functions of money than to go through some of the mathematics required to rigorously prove such a simple statement.
From the abstract:
The main proposition proves that any allocation that is feasible in an environment with money is also feasible in the same environment with memory. Depending on the environment, the converse may or may not be true. Hence, from a technological point of view, money is equivalent to a primitive form of memory.
How is memory defined?
Memory is defined as knowledge on the part of an agent on the full histories of the agents with whom he has had direct or indirect contact in the past.
Sound familiar? This is an exact definition of the blockchain, the backbone of Bitcoin and the innovation behind every virtual currency in existence today.