Money is the liquid form of human interaction and equates the exchange of work, energy, effort, creativity and time.
Money is whatever can be used in an exchange of value, and which doesn't have direct use, like: sticks, stones, shells, gold, silver, paper, bits. For example, in an exchange of gold for a sheep, the gold is called money if it will be exchanged for something else (from someone else) instead of being directly put at use by its new owner. However, when both parties of an exchange have direct use of the subjects of their trade, like in an exchange of a goat for a sheep, that is called barter and does not involve money.
Money is a measure of commodities such as goods and services, that is, their comparative values on the market. Money itself has no value, it is just liquidity which facilitates exchanges. Money has value only through what it stands for: the commodities it can buy.
Money has a context in which it is money. For example, game money is money only within the game (or anywhere else it is accepted for a trade). But when used outside its context, game money ceases to be money and becomes worthless. This will happen even for gold, when it will become possible for humans to create gold from pure energy using something similar with particle accelerators, at costs comparable with the mining costs of gold.
Money is substitute for value because its primary use is as "a medium of exchange of value used in a specific context"; gold money is also a substitute for value because it would be worthless in a world where it could be created from energy (at a lower cost than mining).
Money is primarily a medium of exchange used on a market. If there is no exchange of goods, there is no need for money. This purpose of money can be successfully fulfilled by various types of money, like: gold and silver, paper money (either issued by governments or private banks or individuals), various goods and assets (like food, clothes, animals), basically anything which has value for the opposite side of a trade.
Money is also a medium used to store value a long time. This purpose of money can be successfully fulfilled by few types of money, like: gold and silver, usually non-productive (which have little risk of deterioration associated) assets.
Money can be an asset or trust (as in "I trust the grocery will accept the money which I accept from other people, and will value it at the same level as I do").
A trust is a contract or promise of delivery of asset money (or other products or services) of equal value with the bought products and services.
Because the main purpose of money is to exchange value, money is not necessarily an asset. For example, even with no exchange of assets, the assets would still exist, but money would not. Self-sustained people have assets, but don't need / have money.
Assets can be productive (including those with direct usage, but not directly productive), like cows and houses, or non-productive, like gold (of course, gold can also be a productive asset if it's used in industry to create added value to other products and for work).
The productive assets are used to produce but not to store value, and non-productive assets are used to store value (because these assets degrade very slow) but not to produce it. The best form of money is a non-productive asset, like gold, because it preserves its relative market value for a very long time.
Since exchanging cows for grocery is not exactly an easy thing to do, money is used. Since asset money is difficult to use, trust / promise can also be used as money.
The best way to preserve personal wealth, from ancient times, was to keep one's savings in the form of gold and silver.
Is there enough gold in the world to use as money? This is an irrelevant issue. In a free society, the price of assets is automatically adjusted according to the amount of money in circulation (it is irrelevant how much gold there is in vaults).
Unfortunately, these days people make money in the form of non-backed and non-redeemable paper money. This means that people are exposed to whims of states and to inflation.
Most people would think that the best way to preserve the value of their savings would be to keep the money in a savings account to accumulate interest. That is, however, false because on the long term the inflation is at least equal with the interest for savings accounts. Don't use the "official" inflation to see that, just look at market prices (like food and rent prices, that is, your purchasing power).
Also, savings accounts are at risk (of being lost) because of the fractional reserve banking used by most banks these days. This could determine some people to put the paper money in a safe-deposit box, to have total control over it. But, the problem is that there would be absolutely no interest to cover the inflation. Besides, if the system crashes, the paper money would be worthless anyway.
This means there is only once choice, and that is to store one's value in the form of (physical) gold by buying it and store it a safe-deposit box; there is of course the issue of the storage fee which eats away the purchasing power of the stored gold.
Let's say you regularly receive a fixed amount of paper money. You want to invest the paper money into gold. What trading strategy should you use? Remember that this discussion is about preserving wealth for time frames which span on years and decades.
To do this, you have to regularly buy with the paper money which you want to save, a variable amount of gold. Let's say you have a monthly wage and buy gold once a week or month, using a part of your paper money (PM).
The gold (expressed in weight) has a specific quote (GQ), meaning that the buyer can get a gram of gold for a specific amount of paper money.
To buy gold, simply buy all the gold you can with the paper money you allocated for this. The amount of gold you will get is PM / GQ.
This means that when the price of gold raises you buy less gold, and when the price of gold drops you buy more gold. This may seem weird to beginners since you would buy less gold when it's more valuable, but it follows a clear rule of investment: buy low and sell high.
Any market has cycles. This means that the quote goes both up and down, alternatively. Thus, if you would buy a lot of gold when its price is high, after some time its price would drop and you would lose more than if you would have lost if you would have bought less gold.
Basically, this investment method smooths your potential loses. In investments, it's more important to limit your loses than it is to increase your gains.
Remember that the stated goal is to preserve wealth, over a long time frame, not to actively make money, so don't worry about the variations of the price of gold expressed in paper money.
Why does trade happen? Is there inequality or equality in a trade?
Any product or service has a price of trade. The price of a transaction is not unilaterally set. It is the intersection between the minimum price requested and the maximum price offered.
In a free society, one kilogram of potatoes can cost as much as a computer chip. The potatoes can be produced with one's bare hands, yet a computer chip integrates the entire human history and technology.
Why are the prices equal? Because prices directly reflect the benefit of use, not the amount of work, creativity or effort to sell the product.
The benefit of use represents a degree of necessity, but can be roughly split in three categories. This means that people buy things because:
Benefit of use of products
The buyer of a product wants to make a trade because he benefits from the use of the product. The sellers wants to make a trade because he benefits from the use of the products he can buy with the money he obtains from sales.
There is only one thing which determines a trade in a free market: equal exchangeable benefit of use. Both sides benefit from a trade. It is irrelevant how much this "benefit" is valued (anywhere). The buyer benefits from the use of the traded product. The seller benefits from the money obtained from the seller. If the seller can't cover the work he invested in the product he sells then he stops selling.
The benefit of use (BU) represents the usefulness of a product / service to one side of a trade. The befit of use means that an individual has a benefit from using what he has in his possession.
The benefit of use is not limited to immediate usefulness, but includes stored usefulness, that is, the usefulness of a product at a later time. Actually, immediate usefulness is almost nonexistent; even if you buy a bread, usually, you are not going to eat it immediately, but only after a number of hours.
The benefit of use rarely reaches a critical level for a buyer (like when food is critical to a starving buyer). It usually remains at the level of stored usefulness, and thus the trade is subject to potential postponing.
The maximum benefit of use of work occurs when work (= knowledge, experience, abilities, time, energy) is enough to just barely satisfy (personal) sustainability needs, like when an individual can use his own work to farm his land (without producing goods in excess). The minimum benefit of use of work occurs when work is in excess of sustainability needs, like when a farm produces goods in excess.
A product has almost no benefit of use for its seller because he can't do anything with the product, but has benefit of use of the money obtained from a sale: the money is used to buy products which have benefit of use (for example, direct usage or creation of other products).
A product has a benefit of use for its buyer because he needs to use the product for something; this is where the stored benefit of use of the product influences the decision.
Benefit of use of money
Money has the highest (general) benefit of use because it can be traded for virtually any product. There are contextual differences between the benefit of use of paper money and of gold money, due to the different ways they store and exchange value.
Money has benefit of use for a seller of a product because he needs to use other products, products which he can buy with money.
Money has benefit of use for a buyer of a product because he can trade it for virtually any product, at any time.
Benefit of use of profit
The profit of a trade has benefit of use for a seller of a product because this is how he accumulates money which he may need to use later.
The profit expected from a trade is not critical, that is, it can decrease down to zero and trades would still happen, depending of much the seller benefits from the accumulation of money.
Benefit of trade
The befit of trade means that an individual has a benefit from using what other individuals have, and thus wants to make a trade with them.
The benefit of trade (for seller – BTS, for buyer – BTB) equates all factors involved in a trade, for one side of the trade: benefit of use of product (for seller – BUPS, for buyer – BUPB), cost of production (CP), price of trade (PT). The benefit of trade for the seller is "BTS = BUPS + PT – CP". The benefit of trade for the buyer is "BTB = BUPB – PT".
The trade profit of the seller is "PS = PT – CP".
Balance of benefit
The balance of benefit (BB) represents the difference between the benefit of trade of the seller (BTS) and the benefit of trade of the buyer (BTB): "BB = BTS – BTB". The balance of benefit equates "BUPS + PT – CP = BUPB – PT".
A trade occurs when the balance of benefit is zero. Since at the end of the production process, the cost of production remains fixed, during the negotiations in a free market, products and services are traded (sold / bought) when their benefits of use reach their minimum / maximum value for each party of the trade, and the price of trade balances the difference.
A trade occurs because the traded products have some benefit of use for the buyer, and the money has some benefit of use for the seller.
A product has its minimum benefit of use for the seller (creator) immediately after creation because its purpose is to be exchanged for some other product, using money as intermediary. Basically, the product is of no (direct) use to its creator.
The buyer needs a product, thus assigning a maximum benefit of use to the product. If the price of the product is too high relative to its benefit of use, the buyer skips the trade.
Products, the result of some work, have no value to producers. Sellers assign no value to their merchandise. However, there are people who assign some benefit of use to products. These people are willing to pay for products. If the products are not sold, they have a zero value. So, the price of a trade is a factor which equates the benefit of trade (or simplified, the benefit of use) for both parties, not work, nor type of goods.
While every human needs to eat (potatoes, in this case), not all people need a computer chip. People buy first the products with the highest benefit of use, then, if their budget still allows it, they buy products with lower benefit of use. The products with the highest benefit of use are those which relate to people's most basic needs, like food and shelter, which require no hi-tech to be manufactured.
However, hi-tech products have low benefit of use because they don't address to people's basic needs. Thus, either the price of the chip is low enough so it can be bought by people who need it (people who at their turn are paid for the various products they sell), or the seller goes out of business and the hi-tech disappears from the market.
This is the reason why technological improvements are not a threat to the balance of a free economy. Useless (or overpriced) products / services simply fade away.
This is also why the risk of work, the physical and mental effort required to produce something have relative value. If a product has no benefit of use, the physical and mental energy used has no relevance in trading because there is no trade.
Value of work
Work has several types of value:
If the output or trade values of work are lower than the input value, the work is inefficient and thus will fail providing at some point. However, some of the work can still be used because some of its input value (not time and energy) has been exhausted in the past.
Value of products
Products have several types of value:
If the output or trade values of a product are lower than the input value, the process of production is inefficient and thus will fail at some point.
What happens when there is competition? What is the immediate effect of competition: a price drop, or a drop in the benefit of use?
A buyer, apparently, has the same benefit of use from a product, regardless of the competition of sellers.
But if there is competition, a buyer feels less pressure to buy a product and can postpone the trade, since there will be a supply of the product at a later time, because the benefit of use of most products doesn't reach a critical level (which would require immediate purchase). As such, the benefit of use (= the stored usefulness decreases) for the buyer decreases when there is competition.
Many times, a buyer wants to have some specific features for a product, and since competition represents an increase of the choices a buyer has, this specific benefit can be fulfilled only by some sellers. The only choice the others sellers have in order to turn such buyers into their clients is to decrease their prices, as the last factor which determines the final benefit of use of their products.
So, when there is competition, each seller decreases his prices because each individual buyer has less interest in each individual seller's products, due to the increase of choices buyers have.
It can be easily seen that when a seller decreases his prices way under the prices of his competition, he still can't attract more buyers than a given threshold. Only when everything else is the same do buyers generally choose the lower price. This happens because buyers want to fulfill their specific needs more than they want to be offered a lower price. The less beneficial a product is, the less is the buyer interested in fulfilling the needs which are satisfied by it, and therefore the more important becomes a lower price.