One thing that the rise in fintech and concepts like cryptocurrency have done is invite us to re-examine our relationship with money. Not our own spending and savings habits as such but more how we understand money in our society and how monetary systems work.
For money to be effective, for it to have importance or value, society has to agree to give it that importance and value. Money is a social construct and at a basic level money is purely symbolic.
It only works because everyone collectively agrees to participate in the shared belief that a pound coin is worth a pound, or a dollar is worth a dollar, and so on. If we didn’t agree on this, the economy, the world, would grind to a halt.
Another way of thinking about it is in relation to how much it costs to make it. Often, the intrinsic value of our physical currency, the metal or paper (or plastic) they are made from and their cost of manufacture amounts to less than the value we give them.
The combined inherent value and cost of manufacture of a £50 note is a lot less than £50. Without humans agreeing over what the paper or the coins represent and can be used for, the paper money is just paper and the coins are just pieces of metal.
An exercise in trust
This is not to say that because money is a social construct and social constructs have been invented they are somehow inauthentic, or not to be trusted, or divorced from the real world. I think the opposite is true, particularly on the issue of trust.
Money and monetary systems can’t survive without trust. Like all social constructs, they need the collective trust and faith of society to work and to be effective, and the evidence all around us suggests that people do trust this system.
We trust that everyone involved in this shared enterprise will accept the value and status of money as the best means of operating in a complex, globalised market economy. It’s a huge exercise in local, national and international trust.
Social constructs can change
Money isn’t the only social construct. The pound in our pocket only has value because we believe the UK has a strong and stable currency, backed by the government. The concepts of countries and governments are social constructs also.
They only exist because we agree they should and while they are far from perfect, have demonstrated sufficient advantages over human history to earn their continued status as the best way to organise a complex, densely-populated world.
It’s important to note that social constructs can change over time. Using countries as an example again, borders can be redrawn, old nations atomised and new nations created out of this catalyst. As humans continue to interact, thinking evolves and social constructs have to change if they are going to remain relevant and survive.
Right now, it’s possible that our relationship with monetary systems is changing faster and more fundamentally than ever before.
For financial advisers, this is interesting, because changing perspectives around money is something we do as a matter of course. We encourage our clients to develop a mindset where they think less of acquiring wealth for the sake of it, and more about what this wealth will allow them to do.
That could be personal fulfilment, achieving financial freedom, or improving the present and future lives of their loved ones or other causes they wish to support.
At a global level, we are seeing the growing popularity of new types of money and currency, like crypto, along with the emergence of new ways of investing, like, for example, NFTs, at the same time as we’re witnessing the gradual disappearance of physical cash.
These shifts are challenging some of our fundamental beliefs about what money is and how it should operate. Perhaps this means that, in turn, the social construct of money is changing or needs to change, but only time will tell.