There is one very important variable from your equation that most people miss, which is why most people can't answer the question: "What is money?"
Counterparty trustworthiness.
In your island example, before Mr. Food and Mr. Water engage in a barter transaction, both must market their product to one another and establish enough trust for a mutual, voluntary exchange to occur.
Both parties must believe that the other is acting in good faith—that they are not lying, not misrepresenting their goods, and will not use force to seize the other’s resources.
If either Mr. Food or Mr. Water defaults on their obligation, the exchanged commodity becomes worthless to the opposing counterparty, and future transactions between them become either impossible or more costly due to lack of trust.
Trust is accumulated through repeated transactions, meaning that a single breach of trust can permanently reduce or eliminate the value of future exchanges. In a low-trust environment, economic activity declines as counterparties either refuse to trade or demand costly enforcement mechanisms.
Expanding this analogy to a monetary economy, there is an additional layer of trust that factors into the value calculation of each transaction: trust in the medium of exchange itself (money).
Fiat money does not derive its value from intrinsic worth but from institutional trust.
Governments enforce its use by requiring taxes to be paid in it and by maintaining legal and economic stability. This state-backed mandate reinforces trust in the currency’s value and ensures its continued use in economic transactions.
However, when the government defaults on this obligation—whether through excessive money printing, fiscal mismanagement, or political instability—trust in the fiat currency erodes. As people lose confidence in its ability to store value, they seek alternatives, causing inflation, depreciation of the currency, and a breakdown in its role as a stable medium of exchange.
As I've said before, we live in a time where everyone is lying to everyone all the time about everything and (most importantly) NO ONE CAN TRUST ANYONE WITH ANYTHING, hence the value of things procured through low-trust transactions (such as wages for skilled labor) goes down, while things procured in high trust transactions (such as crypto-currencies and durable hard commodities) goes up.
This post reminded me of this video I watched over a decade ago.
I think you might enjoy it:
https://youtu.be/Yb-wM_SAX30?si=3K4VDeHhwa9NUkUW
Yea that looks right up my alley lol
There is one very important variable from your equation that most people miss, which is why most people can't answer the question: "What is money?"
Counterparty trustworthiness.
In your island example, before Mr. Food and Mr. Water engage in a barter transaction, both must market their product to one another and establish enough trust for a mutual, voluntary exchange to occur.
Both parties must believe that the other is acting in good faith—that they are not lying, not misrepresenting their goods, and will not use force to seize the other’s resources.
If either Mr. Food or Mr. Water defaults on their obligation, the exchanged commodity becomes worthless to the opposing counterparty, and future transactions between them become either impossible or more costly due to lack of trust.
Trust is accumulated through repeated transactions, meaning that a single breach of trust can permanently reduce or eliminate the value of future exchanges. In a low-trust environment, economic activity declines as counterparties either refuse to trade or demand costly enforcement mechanisms.
Expanding this analogy to a monetary economy, there is an additional layer of trust that factors into the value calculation of each transaction: trust in the medium of exchange itself (money).
Fiat money does not derive its value from intrinsic worth but from institutional trust.
Governments enforce its use by requiring taxes to be paid in it and by maintaining legal and economic stability. This state-backed mandate reinforces trust in the currency’s value and ensures its continued use in economic transactions.
However, when the government defaults on this obligation—whether through excessive money printing, fiscal mismanagement, or political instability—trust in the fiat currency erodes. As people lose confidence in its ability to store value, they seek alternatives, causing inflation, depreciation of the currency, and a breakdown in its role as a stable medium of exchange.
As I've said before, we live in a time where everyone is lying to everyone all the time about everything and (most importantly) NO ONE CAN TRUST ANYONE WITH ANYTHING, hence the value of things procured through low-trust transactions (such as wages for skilled labor) goes down, while things procured in high trust transactions (such as crypto-currencies and durable hard commodities) goes up.