The substance of money
Not much epistemic effort here: this is just an intuition that I have to model a vast and possibly charged field. I’m calling upon the powers of crowd-finding to clarify my views.
Tl;dr: is the debate in economics over the nature of money really about the definition or just over politics?
I’m currently reading “Money—an unauthorised biography” by Felix Martin. It presents what is to me a beautifully simple and elegant definition of what money is: transferable value over a liquid landscape (these precise words are mine). It also presents many cases where this simple view is contrasted by another view: money as a commodity. This opposition is not merely one of academics definitions, but has important consequences. Policy makers have adopted different points of view and have becuase of that varied very much their interventions.
I’ve never been much interested in the field, but this book sparked my curiosity, so I’m starting to look around and I’m surprised to discover that this debate is still alive and well in the 21st century.
Basically what I’ve glanced is that there is this Keynesian school of thougth that posits that yes, money is transferable debts, and since money is merely a technology that expresses an agreement, you should intervente in the matter of economics, especially by printing money when this is needed.
Then there’s an opposite view (does it have a name?) that says that no, money is a commodity and for this reason it must be treated as such: it’s creation is to be carefully controlled by the market and it’s value tied only to the value of an underlying tradeable asset.
I think my uncertainty shows how little I know about this field, so apply Crocker’s rule at will. Is this a not completely inaccurate model of the debate?
If it is so, my second question: is this a debate over substance or over politics?
If I think that money is transferable debts, surely I can recognize the merit of intervention but also understand that a liberal use of said tool might breed a disaster.
If I think that money is a standard commodity, can I manipulate which commodity it is exactly tied to to increase the availability of money in times of need?
Am I talking nonsense for some technical reason? Am I missing something big? Is economics the mind-killer too?
Elucidate me!
Hey,
I’m gonna give you sort of an unsatisfying answer. I had a similar interest, which resulted in me getting my MSc and working in research at the Fed for a few years, with the goal of sorting it out in my head (ended up going private sector instead of getting a PhD). As far as I have surveyed, there are different models of money, but it’s scientifically an unsolved problem. There seems to be a level of complexity that arises as you increase the number of people on a monetary system, increase industries, increase geographical scale, add new countries and exchanges, and add complex financial systems. As this grows, filtering out what and how, exactly, money interacts with these systems, starts to get very messy.
As an example, during the financial crisis, trillions of dollars ‘disappeared.’ They disappeared because they only ever existed because we were borrowing from our future selves, then collectively lost faith in our future selves having that money, so the money ceased to exist today. Is that how a commodity behaves? Well, now we are trying to build classifications for what is and isn’t a commodity. Of course, you could do the same thing on a gold standard if banks were allowed to issue demand deposits, which combined with fractional reserve banking leads to the same thing.
Monetarism, I firmly believe, isn’t something you can reason through intuitively at a casual level. I decided it wasn’t something I wanted to devote my life to, and even though I spent a couple years working daily in the field, I don’t know that I understand that much (although I do know what I don’t know, which definitely counts as real knowledge).
I think monetary economics is sort of a mind-killer, since trying to intuitively reason through monetarism can take you down many very different paths, all of which seemingly arise from an incredibly reasonable set of axioms and inferences. If you ever listen to really clever Austrians or Keynesians discuss their view, it’s incredibly compelling. That sets off alarms in my favorite heuristic of undeterminism, when multiple models of the world fit the data equally well. It’s super common for blogosphere denizens or naive rationalists to try their hand at monetary economics, convinced they’ve stumbled upon some key insight that means all econ professors are wrong.
I will say, while I didn’t leave the fed enamored or anything, a subset of those economists are brilliant and humble. I notice this flawed reasoning so often, where independent researchers, or researchers in another field, will construct elaborate arguments against the most uncharitable readings of economists arguments. Often they won’t have ever spoken to a notable economist in person. They don’t ever have to present to peers, they never have to formalize their arguments mathematically, and they never bother engaging in the more advanced formulations of economic arguments that wind up in journals. Anyway, I’m getting off track here...
While as a rule I don’t think mathematizing things necessarily makes them clearer, I am convinced it’s the right way to proceed in monetary studies. It forces a strict structure, which prevents us from using words to overfit or get lost. Although the field is so complex, and it’s intertwined with historical narratives that aren’t always easily turned into data sets, so that can sometimes make it harder. The math often gets sorta complicated as well.
Of course, the actual monetary economy has real data. Most of which we can’t collect. So the theoretical models are our way of trying to imagine what the structure would look like, even though they aren’t empirical. Which gets to another problem, which is how confident can one be in theoretical economics? Sometimes the assumptions are incredibly robust, but the systems are often very complex.
One place I will say I think many economists act contrary to LW style rationality, is in choosing a side, rather than taking the rational view that there are many sides with equally valid claims to truth, and they should work together to expose what is correct. It has always struck me as being mind-killed when people state “Oh, I’m a neo-Keynsian so I believe XYZ, you’re a non-Keynsian, so you reject ABC” (or whatever). I mean… maybe the Austrians are all right, and they have this unique perception of reality none of the Neo-Keynsian scholars have, because they have some more profoundly true insight into the mesh of reality that is lost on the other econo-plebs… But that doesn’t seem like the most likely scenario to me.
Or maybe Paul Krugman really is right about everything, but still… I doubt it. He was once a smart young man that had some crucial insights on the theoretical mathematical structure behind international trade, which earned him an econ Nobel. I don’t think he’s in tune with empirical realities though. He’s just a genius at imagining some elegant mathematical structure that characterizes an economy which might or might not map to reality, and then convincing himself it’s actually exactly how reality operates. That’s the big mistake, I think.
If you want to take a look down the rabbit hole, I’d suggest reading Milton Friedman’s books on monetary history. Even his detractors tend to agree his insight and clarity on money is absolutely incredible. He also is great at explaining things without too much math, but still using ratios and dataseries in his books when appropriate.
For shorter term stuff, check out John Cochrane’s stuff, he’s my favorite social scientist, (http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_policy.pdf, http://johnhcochrane.blogspot.com/search/label/Monetary%20Policy). His blog—second link—is really great.
The standard mainstream view is that money has three main functions:
Medium of exchange
Store of value
Unit of account
There is no single dominant function (for all times and all societies) while others are secondary.
I’m not sure what monetary policy (and/or Keynes) is doing here. The government has always attempted to control and manipulate money, with greater or lesser success. That’s just the normal state of affairs. Whether the government should have an activist monetary policy is a question with the standard answer: it depends. As usual, it depends on the context and what are you optimizing for.
Yes, this is the standard economic approach..
Yes it is isn’t it. It is also widely criticized. What Nash explains is that Keynesianism is simply an advance opaque form of bolshevik communism. It’s an excuse to sell the public bad money under the label “good” money”. Nash explains that we can view it as it has a missing axiom:
The axiom is effectively that our currency system should be arranged for a different result:
People (these days) are trying to postulate and theorize about how we can idealize our money, or in other words, how can we design the perfect money. Nash (and Hayek) points out that perfect money is FREE from such design, and so its actually an logical absurd pursuit.
This is what Keynesians are doing with the argument “There is no better way but clear and admitted sanity”.
Nash proposes a money: ” …intrinsically free of “inflationary decadence”..a true “gold standard”, but the proposed basis for that was not the proposal of a linkage to gold”
But it is not by design per se.
He says everyone is Keynesians even post-Keynesians, can we understand that?
Also James Miller. I got in trouble from the community for saying that its silly that a game theory professor could never have heard of 20 years of Nash’s works, especially his lifes passion, that is wholly and perfectly related to game theory. Do you think thats wrong of me to suggest?
I was unfamiliar with Nash’s theory of ideal money until I looked it up on Wikipedia in response to your comments on LW. It’s possible I heard about it before but forgot it since I don’t study macroeconomics or monetary policy. Based on this reading, I don’t understand why ideal money is important to the art of rationality.
Maybe I’ve missed something, but why should we all agree that stability of value is a the most important feature of money? I could imagine a number of different views (for example, deflationary money is useful if you want to incentivize savings, and inflationary money is useful to incentivize spending).
From a rationality standpoint, this is backward. Money has no nature, it is not a substance. How do people behave is the fundamental question, and how do their shared delusions about money affect their behaviors.
It’s important to understand that there’s no actual bedrock truth about money—it only exists as long as people pretend/believe it does.
Oh, and to get a better handle on what is “money”, I recommend glancing over a variety of measures of money, specifically the money supply aggregates.
Do you mean fiat money? It was invented a very long time before Keynes.
This is the big discussion of gold bugs, and bitcoin enthusiasts, India policy just upped the game, along with the negative interest rates in Europe, and the drive to ban cash.
What is really abhorrent here in the US, is the fact that the Banks get to create money by entering a credit on their ledgers, rather than the State actually printing money and taking the markup from paper to dollars.
Homeland Security just announced they are going to use blockchain to monitor their IoT sensors and cameras also...
It seems like money is a tool, and commodity to the average citizen, and just a gambling token to financial gamblers and institutions.
The problem happens when we approach the economy from the question of “how do we design the best money” Money arose NATURALLY to solve a problem mankind couldn’t solve with design and intuition. The (most significant) problem it solves is provided and objective basis for value, but it doesn’t perfectly solve it, there are still intrinsic problems, paradoxes, and dilemmas.
The problem is how to optimize our economy, not how to create an ideal money.
What we are looking for is a stable metric, not an optimized money, it is simply that some people feel money and provide this metric. However, over our history money of any form has never remained stable.
Only ideal money, or money comparable to it, can be stable and properly solve this problem
Keynesian money doesn’t even attempt to address the problem, it doesn’t understand the problem.
In my view, it’s both. It’s a transferable obligation, but since it’s a nonspecific obligation (really, only “can be used to pay future taxes to the issuer” is guaranteed) people tend to treat it as a commodity.
It’s definitely not real—you can’t eat it or use it in any way except to barter for other, specific goods and services. But it’s ubiquitous and common enough that this gets forgotten by most participants, and people start to confuse money with actual future value.