Fungibility is a measure of how easily one good may be exchanged or substituted for another example of the same good at equal value.
Fungibility versus liquidity
Fungibility is different from liquidity. A good is liquid (or tradable) if it can be exchanged for money or another different good. Many commodities that are fungible also tend to be liquid. For example, gold is fungible (i.e. one can trade pure gold scrap for gold coins, for example) and highly liquid (i.e. one can easily trade gold for money), while diamonds are not fungible and have lower liquidity (i.e. two diamonds of the same weight are not necessarily worth the same amount). There is not always this relationship between fungibility and liquidity, as air for example is highly fungible but illiquid. Whereas the fungibility of a good is dependent on the intrinsic properties of that good, the liquidity of a good is dependent instead on how frequently that good is traded.
Fungibility in relations
Discussion about exchanges between parties is nearly impossible to separate from discussions about the relationships between those parties. Parents will often limit what their children may spend their allowance on. Employers will limit what their employees may purchase when traveling. Fungibility provides one a way to discuss such examples. For example shop keepers are sometimes willing to sell you a gift certificate at a discount because it creates a marketing relationship.
Fungibility gives rise to a persistent puzzle of how to retain control after funding an activity. Consider the example of charitable giving. Donors would often prefer to earmark their donations for a particular purpose. That frustrates the recipents who would prefer to retain their freedom of action. Both sides can find this frustrating. The donor can be frustrated to discover the money he gave for a particular purpose wasn't spent as he desired, but yet the organization reduced its usual level of funding for that purpose shifting funds to other activities. This puzzle arises in all funding situations. For example, international development, venture capital, and children's lunch money.
Fungibility and open/closed systems
Beyond simple relationships fungibility can give rise to puzzles around groups. Groups may take the decision to reduce fungiblity for planning purposes. For example: annual budgeting in hierarchical organizations reduces the organization's ability to move funds across the organization. A group may place tight controls on the fungiblity around their periphery. For example in a nation that provides numerous benefits for its citizens, currency controls are needed to collect the taxes that support those benefits, particularly at the nation's borders.
Fungibility can make it difficult to get a clear picture of what's really going on. Consider medical debt where conversion of medical debt into a different kind of debt, such as credit card debt, will mask the real amount of debt's origin from health care costs. For instance, an individual might pay for his or her emergency-room visit on a credit card, and therefore convert health care-generated debt into credit-card debt. The fungibility of medical debt is oftentimes more insidious, however. In many cases, individuals are forced to pay steep health plan deductibles as well as out-of-pocket co-payments to receive care. These high medical costs drive many people to delay paying other bills, like mortgage or utility payments, which cause them to incur debt.
Fungibility in science
In Does God Play Dice? The New Mathematics of Chaos, the mathematician Ian Stewart argues that fungibility applies to science as well. The example he uses is that subatomic particle theory is fungible when studying molecules "provided it led to the same general feature of a replicable molecule."
Another example is the concept of mass, either gravitational or inertial mass. Mass is fungible in all observationally consistent theories of gravitation. All compositions of matter fall identically in vacuum, including binding energies.