Essays in Monetary Theory and Policy: On the Nature of Money (Continued)

Yves here. I thought this essay on money was useful in and of itself, and it also contains a useful primer on the views of major schools of thought in orthodox economics.

By Samuel Ellenbogen, a MA student at the University of Missouri, Kansas City. Cross posted from New Economics Perspectives

The nature of money has been a discussion entailing ongoing debate between historians, philosophers, and economists for centuries as Bell (2001) wrote. There is no easy solution to the delineation of almost all aspects of money; from discussions concerning the origins of money to discussions concerning the functions of money to discussions concerning the “proper” policy prescription parameters involving decisions about how to spend government money. This is because money has been defined in various different contexts, as Bell (2001) discusses its ambiguousness as “A numeraire, a medium of exchange, a store of value, a means of payment, a unit of account, a measure of wealth, a simple debt, a delayed form of reciprocal altruism, a reference point in accumulation, an institution, and/or a combination of these”.

Arguably, the most important distinguishing criterion for the way the economy functions involves an explanation of what money is, what it is used for, and what the origins are. Each school has its own viewpoint on what money is, and therefore must explain its role in the economic system. Certainly, examinations of both the orthodox and heterodox schools have valuable insights. The orthodox schools (classical, neoclassical, and their modern macroeconomic offshoots) agree on what money is and what the origins are; but there are defining differences in terms of the functionality of policy prescription parameters. The heterodox schools tend to agree amongst one another, but view the nature of money in a radically differing manner than the orthodoxy in terms of origins, usages, and policy prescriptions. This means that there is no uniform understanding of money for the standard orthodox framework the heterodox framework. First, a depiction of each of these delineations of the nature of money, (including a narrative of the origins and functions of money) are necessary. This will be done for the orthodox as well as the heterodox approaches. Then, a summary of the variety of policy prescriptions for both the orthodoxy and the heterodoxy will follow. A conclusion will not be written given the nature of the essay-the reader can simply refer to sub-titled sections for review.
The Nature of Money: An Orthodox Approach

For the orthodox view, money is typically described in money and banking textbooks in the context of its medium of exchange function. This understanding is predicated from the primitive bartering system that the orthodox schools refer to in terms of the origin and development of money, such as Samuelson (1975.) It is understood under this conceptual framework on the nature of money that the bartering system was ineffective; it requires two people to have a simultaneous double coincidence of wants for a trade to transpire. Money is said to facilitate this problem and make the process much more transparent; instead of going and finding someone in the community who wants what I have and has what I want (which is quite difficult in many, many situations) now everything is salable in the revolving currency and is denominated in terms of the cardinal magnitude of that currency. It becomes a unit that merely facilitates exchange; it has no functionality in the real economy for the orthodox schools of thought. This is what has been termed the classical dichotomy- the separation of the so-called “real” factors of production in the economy from the monetary factors-the modern factors being fiat currency and banking institutions.

The orthodox view on the nature of money insists that the first means of payment were things with intrinsic value; that is to say that these money “things” had value regardless of whether they were used as “money things” in markets as a medium of exchange, as Cecchetti (Second Edition) explains. The understanding here is that successful commodity monies had characteristics that were unique, often to the commodity in consideration. For example, a block of salt is valuable in the sense that it keeps food from going stale or un-edible. Commodity monies could be made into standardized quantities, making accounting non-arbitrary. They are durable, reducing the risk of accidental destruction of assets. It had high value relative to weight and size, which made them transportable to wherever a purchase was made. Finally, they are divisible into small units to make trade amongst cultures accessible.

The Origins of Fiat Money: An Orthodox Articulation

A discussion of the nature of money for the orthodox view would not be complete without a historical reconciliation of the origin of fiat money. As Cecchetti discusses, the origins of fiat money in Europe began in 1656 by a Swede named Johan Palmstruck, who founded Stockholm Banco. At the time, the commodity accepted as payment for debts in Sweden was the Swedish copper ingots, which did not carry much value per unit weight. The currency solved this problem and was welcomed at first. Palmstruck’s partner (the king of Sweden) took to the currency almost immediately and convinced Palmstruck to print more of the notes to help the King finance the war. The realization was that since bills were redeemable on demand for metal, the system had stability, so long as people believed that there was enough metal sitting in Palmstruck’s vaults. However, soon the number of notes circulated dramatically, and Swedish people lost confidence in the notes and began redeeming them for metal. The result was a run on the bank that led to failure. The key point is that both the belief that the metal was sitting there and the belief that the metal was no longer sitting there gave stability and yet took stability away. Fiat money is thereby irrelevant when trust in the money is altered or destroyed. Finally, fiat money has very little intrinsic worth and cost of producing it is very low relative to its face value.

The Nature of Money: A Heterodox Alternative

Now that the orthodox vantage points concerning the nature of money have been discussed, and its origins have been sufficiently summarized, we can turn to the non-orthodox, or heterodox conceptual framework concerning these criterions for money. According to the heterodox view, money is simply an IOU. All exchange cancels debts by parties involved. It is therefore a unit of account that keeps records of debt. As Wray (September 2007) writes, “money is neither a commodity (such as coined gold), nor is it “fiat” (an asset without a matching liability)”. Furthermore, this means that money is ultimately a credit relation (Innes, 1913); any denominated unit that is generally acceptable and thus, facilitates an exchange of debts can be used as money. Therefore, all forms of money are credit monies, and all credit monies are debt instruments. Exchange yields a credit on somebody’s books and a debit on somebody else’s books, regardless of what the unit of account is. Third, a sale is not the exchange of a commodity for some intermediate commodity called the medium of exchange, as the Neo-Classical model would have. Rather, as (Innes, 1913) described, “It is the exchange of a commodity for a credit”. This means that credit and only credit is money, and only sales of property or skills give us credits that offset debts. As Levine (1983) articulates, nothing significant changes when you add money to a society because money is based on commodity relations; money only solves the technical problem. It is because we can imagine exchange existing preemptively to the emergence of money things that Levine has come to such a conclusion.

In recognizing the nature of money as a social unit that is predicated upon credit and debit relationship based on commodity relations, money’s medium of exchange function is irrelevant to a depiction of what money actually is in the heterodox vision. It is understood in the context of credits and debits that such a system predates the view of markets as necessary financial intermediaries between buyers and sellers. As Levine says, “money is the value of commodities existing outside of them”. Here, he explains a situation where commodities embody the already existing wealth which money represents. This means that for the heterodox, the unit of account function is a much more accurate depiction of what money actually is; money is a socially accountable representation of “commodity ratios” where we can distinguish value from one commodity to the next. With this understanding, money can be understood as “scorekeeping”, as Wray (2013) and Mosler (2010) put it.

A further understanding on the nature of money is to reflect and regulate economic activity, as Foley (1987) writes. As originally delineated in Marx (1867) however, money is used as a “social construct” as the object of production in capitalist systems. Wray (2010) has described a situation in which not merely the way social evaluation of output is measured; production is deemed to be “thoroughly monetary at essence”. This approach was first articulated by Marx with the M-C-M’ delineation of money as the end goal of capitalism, not C-M-C’ as the classical writers supposed. This means that if production is thoroughly monetary, the goal is to make money in a capitalist economy. Both Keynes (1936) and Veblen (1904) expounded on this framework. In addition to this shared understanding of Marx amongst Keynes and Veblen, Keynes associated money as a function of fundamental uncertainty in capitalist economies; Veblen recognized money as an institution whereupon possession of money gives the holder power.

The nature of money for the institutionalist is that money itself is an institution. Money sustains the life process in modern capitalist systems, but also allows people to “conspicuously consume” and “pecuniarily emulate” peers. This means that for the institutionalist, part of the social process of money is to “fit in” with our neighbors and friends. Institutionalists insist that the public seeks out money to impress our colleagues and establish ourselves within a community. He who has money is perceived to have power and social status.

The Origin of Money: A Heterodox Narrative

While the precise origin of money has been lost over the course of time and contributes to the debate between heterodox and orthodox as Wray (2012) writes, the heterodoxy points to the historical record for proof of the variety of forms money has been documented to take, as Forstater (2006) discusses. Simultaneous to this understanding, the heterodoxy has accepted it as a stylized fact that the ascertainment of the first use of money in civilization will most likely never be realized. Even with such a device as a time machine it would be exceptionally difficult to be transported to the precise moment in which man first used money; It would require a great deal of communication by our part throughout the world in a time where the English language and writing were not developed yet.

In fact, many historians note the origins of writing to be inexorably tied to keeping track of the community’s prevailing commodity money stock. It has been further articulated that the purpose of keeping track of these IOUS was to keep track of debts of crime that were committed by community members. Even in very primitive society, people had to keep track of debts; this is because there were crimes that communities demanded to be re-paid. This led to a demand for a commodity to pay for these debts (to facilitate the payment process). There was no necessary reason to have a unit of account in tribal societies, but clearly there was a great incentive embedded into society to denominate a unit of account in the community to keep track of payments of debt. In this context of record-keeping, money did not originate out of the barter system; the fundamentals of money (primarily) even pre-date a bartering system.

The orthodox view simply ignores this point, however; the historical record is not a factor for the orthodox. Metallic units, such as (gold and silver) are really all that is referenced in the orthodox literature- they assert that the first money was gold coins from the ancient Sumer civilization. In this regard, they ignore the reality that money has taken the form of many different commodities. One example of a primitive money that the heterodoxy has alluded to as a different unit of account in Forstater (2006) is the cowry currency that was used in parts of Africa or Asia. It is speculated that this commodity unit of account began in the late 13th century. Another is tally sticks, which were used well into the 19th century as Innes writes (1913). Therefore, money has taken the form of many different commodity units over the course of time; it did not have to have intrinsic value that exists outside of a market in order to be used to facilitate an exchange, as the orthodoxy insists. Money can simply perform its record-keeping function without such criteria. As Smithin (1994) writes, “It is fairly obvious that this is a change of form rather than of substance”.

The Functionality of Money: A Heterodox Articulation

While money has been denominated in many different units in different time periods and societies, the functionality of money (in terms of a recognized social construct predicated on trust) has always been maintained throughout the differing mediums. In every medium, economic agents have to have trust in exchanging IOU’s, whether the IOU’s are commodity moneys, fiat moneys, or tally sticks. If trust is not there, money’s functioning as a debt cancellation process breaks down. Even in a bartering system, trust is imbedded in the exchange of good A for good B; the holder of good A trusts that the holder of good B will accept good A for good B when the trade occurs (Innes, 1913.) Money loses its value if the commodity unit of account is not accepted everywhere.

Fiat Currency: A Heterodox Reconciliation

Fiat money makes trust in government debts ubiquitous, as long as the government accepts payments of debts in its own currency and can sufficiently collect these debts in a timely manner. Furthermore, this is precisely why government debt is at the top of a “pyramid” of liabilities (Bell 2001.) If the state imposes an obligation on citizens, it must also accept fulfillment of these obligations in the states’ currency. This implies that the state promises to accept its own IOU’s. In this implication, money is a record of the state’s debt to you, and payment of taxes in the unit of account fulfills the citizens’ debt to the state.

Fiat currency issuance is a state-controlled monopoly that is designed not to facilitate a market exchange to deal with the double coincidence of wants issue that we can conceptualize in a primitive bartering system. It is rather used to drive the demand for the state’s money of account: government IOU’s, as Wray (2013) discusses. Since the nature of money is at essence simply credit, (Innes 1913) anything that is generally accepted in a society as forms of payment can be used. This admittedly creates trouble for governments who are interested in expanding into new markets that use units of account that are not redeemable in the mother country’s unit of account. This conflict of interest was resolved when the mother country (who presumably seized control of the new land) imposed new obligations on its citizens. These obligations are commonly known today as taxes, but they are not limited to strictly taxes. Any obligation imposed is sufficient and has taken the form of “fines, tithes, fees, duties, or tributes.” (Wray 2007). In this understanding, both fiat money’s origin and its use has to do with the notion that taxes drive the demand for money, as Forstater (2006) discusses.

This notion of taxes driving money is what is called chartalism, where money is a function of sovereign state power. As Lerner articulates in (1947), “Whatever may have been the history of gold, at the present time, in a normally well-working economy, money is a creature of the state.” He goes on to say that “its general acceptability, which is its all-important attribute, stands or falls by its acceptability of the state.” In other words, the public doesn’t hold money because of its relation to gold; they hold it because it is accepted for payment of debts (because the government says it has value.) Hence the demand for sovereign currency is initiated, and if the demand is initiated, money is functional. Finally, the imposition of required obligations to the government onto the citizens through taxation actually destroys government IOU’s. Therefore, sovereign states harness inflation, since the only accepted unit of account for payment of government debt is the fiat currency. This means that fiat money is also used to keep inflation in check, as Lerner originally wrote (1946.) In this conception, government spending or selling of its fiat currency can be used to remove monopoly power from private interests. Lerner called this process counter-speculation. Last, taxation is never used to finance government spending; it is used to curb inflation.

Policy Prescription Parameters: The Orthodox Approach

As previously mentioned in the introduction, the orthodox view of the nature of money is generally agreeable; it is the policy prescription of its use that differentiates from school to school. At one point, there was simply one understanding: Keynes’ work in the General Theory (1936). Policy prescriptions parameters in response to economic recession or depression were virtually invented by Keynes in the General Theory, although it was vastly misinterpreted. This misinterpretation was originally predicated from Sir John Hicks’ interpretation of Keynes. His work became known as the Neo-Classical synthesis, which took Keynes’s work and the Classical school’s work and essentially combined them both. It is still used for the Orthodox schools of thought, despite the evolution within orthodox schools concerning policy in the past 50 or 60 years.

Hicks constructed what he defined as the IS-LM framework, where the interest elasticity of investment demand is delineated as a backdrop for desirable policy. In a world where the money supply is exogenously determined by a central bank, if the interest elasticity of investment demand was perfectly elastic, only monetary policy was effective for stimulating the economy in the short run, and policymakers should pursue its use. Conversely, if the interest elasticity of investment demand was perfectly inelastic, fiscal policy was desirable for stimulating the economy in the short-run, and policymakers should employ its’ use. Keynes believed that this was indeed the case; (at least that it was nearly perfectly inelastic for Keynes.) Neo-Classicals eventually formed policy prescription parameters in the context of the Phillips curve when Phillips (1958) first articulated the costs of reducing unemployment at the expense of inflationary measurements. This view prevailed in the Neo-Classical synthesis until the stagflation phenomenon of the 1970’s occurred. Inflationary pressure with simultaneous high unemployment had no articulation in the Neo-Classical synthesis. Therefore, the policy prescription parameters were in question, and the road was paved for the first evolution of the Neo-Classical synthesis.

Evolution #1 of the Neo-Classical Synthesis: The Monetarists

The implications of policy making for the Monetarist school derive from Friedman and Schwartz (1956) original work, which recognizes a world where money prices are relatively stable and the public is both rational and backwards-looking. In this context, laborers adapt their inflationary expectations into their labor contracts based on previous expected inflation rates. In this context of stable prices and rational thinking by economic agents that are backwards-looking, if policymakers are interested in stimulating output and employment, they can do so in the short-run by increasing the money supply. This understanding of policy assumes that money can be exogenously controlled by the central bank, meaning that the money supply is governed by regulation and regulators can therefore control the money supply.

The Monetarists argue this for two reasons: first, because workers will be temporarily “fooled” into supplying more labor, and second, Monetarists insist that there is positive correlation in economic growth and money supply increases (which again, is assumed to be exogenously controlled by the central bank.) Employers can therefore afford to give their employees wage increases, and because laborers view this as a signal of their productivity, laborers are fooled- they are happy and supply more labor in the short-run, as the substitution effect of labor dominates the income effect. However, after the laborer goes to the bank, cashes his or her paychecks, and realizes that their income only buys the same amount of goods as it does before, the laborer decreases the amount of hours he is willing to supply, and the economy moves back towards the output level that it was at before. As Friedman warned, the only result long-term is a permanently higher level of prices. The Monetarists said that there should be a slow, steady increase in the money supply to properly grow the economy, and any short-term stimulus would simply come at the cost of longer-term inflation, given their understanding of the rational expectations augmented Phillips curve. With the revival of Monetarism in place, further thinkers eventually adopted new ideas to improve it.

Evolution #2: The New Classicals

The New Classical school adopts Friedman’s rational expectations augmented Phillips curve in terms of policymaking as well as the stability of the velocity of money to the Neo-Classical synthesis, as Wray writes (January 2010.) However, instead of laborers being backwards-looking, they are forwards looking and adaptive for the New Classical. Lucas (1972) implied that Friedman’s assumption of laborers negotiating contracts predicated on past inflation rates is problematic because of the serial correlation that is involved. There is a time-lag between increasing or decreasing the money supply and the level of inflation, so that wage contracts are not accounting for an accurate level of inflation (most of the time). Instead, the New Classical school advocated the notion of “fooling” the public to stimulate output in the context of underlying perfect competition microeconomic foundations. The assumptions firstly include that laborers have perfect information about what the Fed is going to do. This is a very weak assumption because they only have a probability distribution concerning what the Fed is going to do; the Fed could behave randomly. Second, there are no transactions cost to obtaining this information, and third, markets are continuously clearing. In this context, laborers can be fooled into believing what the Federal Reserve says if the Fed says one thing and does another thing in terms of policy in for example, interest rate determination. The result of which is an increase in output and employment. The New Classical School advocates that the public can be consistently fooled into making personal finance investment decisions, labor allocation decisions, business investment opportunities, and the like.

The New Classical School was an improvement upon the serial correlation errors of the Monetarist school, but was still not very realistic in terms of policy. On one hand, there is the issue that the assumption that the public has all the information about economic performance is particularly erroneous one; not even economists have all of the correct information, so it is not plausible to make such an assumption. On the other hand, markets simply do not continuously clear in the real world; there are a variety of nominal rigidities that prevent such circumstances, such as the inside-outside labor model, the notion of efficiency wages, the reality of the principal-agent problem, asymmetric information between laborer and employer which often results in adverse selection scenarios, and a variety of others that are well documented in the microeconomic literature. These realities left room for further evolution in terms of policy prescription parameters.

Evolution #3: The Real Business Cycle School

The Real Business Cycle School rejects the notion that velocity of money is stable as the Monetarists and the New Classicals propose in the revival of the quantity theory of money. For the Real Business Cycle economist, the role of technology is always prevalent and able to change the amount of money the public wishes to hold, as Plosser delineates (1989). In conjunction with this understanding, the Real Business Cycle school argues that the Monetarists have reversed the causality of money; it isn’t that increasing the money supply leads to directly increasing levels of output. Rather; it is the increase in output that accommodates the demand for increasing the money supply. The demand for real money balances increases after it is determined that profit opportunities exist in a growing economy. In addition, the Real Business Cycle school emphasizes that there are inter-temporal substitutions of goods for labor and labor for goods when technology advances, and advocate an economy that can exist without money altogether (the Robinson Crusoe model.) In this context, the economy has no long-term natural rate of growth as the Monetarists propose (that is primarily determined in the quantity theory equation.) Rather there is a change in the rate of growth of the economy as technology improves. The result of all of these frameworks for RBC thinkers is that the central bank shouldn’t do anything; nor should it hope to be able to do anything in terms of policy’s ability to change the economy’s growth path. Monetary shocks are unpalatable in this context for the Real Business Cycle economist. However, the reality of modern economies entails the use of monetary policy. Damage to the monetarists was evident in some respects, but hardly any economists found the Real Business Cycle’s assumptions to be realistic as Wray (January 2010) writes. Yet, there was still room for another evolution in orthodox theory- to their current state in the Orthodox approach.

Evolution #4: The New Keynesians

The final stop for a discussion of the orthodox view in terms of the role of money’s involvement with policymaking is the advent of the New Keynesian school. New Keynesian economists follow the Hicksian IS-LM framework as a backdrop for understanding policy (and therefore see the money supply as being exogenously determined by the central bank). However, they adopt microeconomic market failure foundations into their understanding of the world. For the New Keynesians, it is understood that the Neo-Classical framework that assumed away nominal rigidities is not relevant to the world in which we actually live- one that has all of the microeconomic flaws of monopoly, monopsony, and (the others previously mentioned in the brief summary of the critiques of the New Classical school.) New Keynesians such as Mankiw began revising the Neo-classical synthesis to accommodate these realities in the early 1980’s as an attempt to improve policy prescriptions by the Federal Reserve. Modern economists that the public has often heard of that subscribe to this school are regulators such as Ben Bernanke and Janet Yellen.

Policymaking: A Heterodox Narrative

Now, a discussion about regulatory policy parameter measures in the context of each heterodox school’s vision for the role of money is in proper order. For the institutional economist, making money is the goal of the machine process, as Veblen (1904) wrote. The industrial complex (capitalists and capitalism) require organized technology and institutions for progress. Furthermore, consumption and production are a function of the evolution of technology and institutions simultaneously, and the industrial complex acts as an intermediary between the private sector and the public to determine how we make a living. In this framework, money is the goal of business and the making of money is how we “keep the machines running” as Clarence Ayres (1944) put it. Institutionalists recognize correct policy parameters to be those that allow the technological side of society to be utilized in this context of production. They argue that creation of policy should be focused on either creating institutions to accommodate technological innovation (for example, as in the New Deal) or reforming institutions to accommodate the progressive uses of technology. The argument is that the technological side is constrained by institutions, and proper policy parameters can facilitate the adoption of technology to help make the life process better.

The Post-Keynesians/MMT Policy Approach

For the Post-Keynesian economist, money is endogenous to the system; the money supply cannot be directly controlled by the central bank. Therefore it is not determined exogenously by the central bank, but rather, horizontally. This closely follows the work of Basil Moore who first argued in favor of “horizontalism”, as Niggle and Wray (1989) review. The Federal Reserve simply sets the overnight interest rate and banks standby to supply the demand for loans to creditworthy borrowers as they come. It follows that in times of economic success the Post-Keynesian argues that expansions finance themselves, since money is demand-driven. The Fed keystrokes checking accounts as necessary in the process. Ultimately for the Post-Keynesian, expansions naturally accommodate money into the system without any external institutional control beyond interest rate targets.

Post-Keynesians are therefore very skeptical about the role of monetary policy in terms of influencing output. Not only because of the horizontal conceptual framework concerning banking procedures, but also because they argue that economic processes work in three periods simultaneously- the past, present and the future as Brazelton, Sturgeon and Weinel (1994) review. Therefore, any attempt to influence future output is futile in a context where we must understand the propensity of future outcome realizations by policy determinations in the present. Since money is endogenous to the system, any central banking policy procedure is likely to be irrelevant, because all it can do in terms of influencing the demand for money is set the overnight interest rate target; these loans will be accommodated regardless of what that target interest rate is.

Furthermore, the Post-Keynesian delineates that expectations of future profit returns are the most important criteria to predict future growth in capitalist systems. This is because Minsky (1986) like Keynes, understood that the economy is not just composed of markets; it is a complex financial system predicated on starting a business project with money and ending with more money than the project began with. Minsky writes that over time, “stability is destabilizing”, and at some point banks “make position by selling position” and the economy is highly vulnerable to banking profit motives. Therefore, any institutional restraint or restriction imposed by policymakers that is designed to stabilize the economy is actually undesirable. The logic is as follows: when investors expect profit margins to be high, they begin to invest, but they hedge their invested money with borrowed money. When expectations are relatively higher than when the economy came out of a recessionary period, past failures of investment schedules are soon forgotten, and investors are no longer hedging their own funds against borrowed money; they are purely borrowing money in speculation of profit margins. Eventually, investors are completely involved in what Minsky described as a “Ponzi finance” scheme, where borrowing money is not to accommodate increased production measures, but to finance interest on loans. At this point financialization has corrupted the markets, and recession/depression is necessary to wipe out debts.

Additionally, the Post-Keynesian economist understands the reality of constraints and parameters that are difficult to measure or that might shift quickly instead of gradually, as Brazelton, Sturgeon, and Weinel (1994-1995) carefully remind us. The Post-Keynesian economist dismisses the “correct” interest elasticity of investment demand as being a relevant policy conclusion. This is because this variable does not provide a medium for understanding the way the economy works in a world where fundamental uncertainty exists. Some constraints and parameters to policy making’s relative effectiveness include bottlenecks, price increases, or structural changes in the economy that is determined by factors that cannot be foreseen in today’s policy impositions. Post-Keynesians point to the reality of these complex market failures and caution us to be careful of policy parameter decisions in addition to the financial instability hypothesis’ presence.

However, there are policy prescriptions that can be condoned to deal with the aftermath of financial crises. In a world where money is not readily available because the private sector is dealing with a painful debt deleveraging process (post-financial crisis), it is understood that the government (as the sole sovereign monopoly currency issuer) has the means to fully re-employ resources. This is called the functional finance approach that was first proposed by Lerner (1947.) Lerner says that the role of government is to be like the steering wheel of a car: when the economy steers off course, government stands by to correct it. Lerner further argues that the question of whether government spending is “good” or “bad” is erroneous in terms of sustainability and affordability. The government, as the sole monopoly currency issuer, can always afford whatever it wants, as long as the debts are denominated in the sovereign’s currency. Lerner states (1946), “We owe this money to ourselves and not to anybody else.” In this context, rather, government should be concerned with spending effects on the economy in terms of a primary determinant for a necessary course of action. As Lerner continued to write in (1946), “the financial activities of government should be judged not by any traditional canons of fiscal propriety but by considering the effects of each act and deciding whether these effects are desired or not.”

Not only does the sovereign government have the means to adopt a full employment jobs program; this is desirable- output gaps are reduced very quickly while effective demand is restored. Lerner keenly states “It is unlikely that any other single way of increasing the efficiency of our economic system can add so much to the social output.” Put simply, the private sector is not in business to employ people simply for welfare’s sake; it is profit-motivated (Wray, 2013.) In opposition to this understanding, however; government does not have to be concerned with profits. And as Godley originally explains in the sectoral balance approach (1999), when the government has a deficit, the private sector has a surplus and the reversal. Additionally, the two can’t be in surplus at the same time because this process behaves according to accounting identity. This means that when the government is at a surplus, the private sector is in a deficit. Therefore, spending in terms of a full employment program that correlates with a government deficit is both affordable and desirable. It is affordable because of sovereign monopoly currency issuance; it is desirable for two separate reasons. The first is that government spending puts more money into the private sector than it takes out. The second is that a full employment program is superior to any monetary stimulus that “may suffer slips from the cup to the lip” as Keynes (1936) famously put it. It is also superior to fiscal policy such as infrastructure spending or tax cuts, which may or may not lead to increased effective demand; it depends on the marginal propensity to consume as Keynes (1936) delineated. Furthermore, monetary and fiscal policy actions suffer from inside and outside lags as Friedman (1948) articulated. A full employment program can be conceptualized and mandated very quickly; one only needs to review Roosevelt’s New Deal program for evidence- within two months, his plan was “articulated, proposed, and adopted in practical use” as Kregel puts it (2009).

See note at end of original post for more background on this series

Print Friendly
Tweet about this on TwitterDigg thisShare on Reddit0Share on StumbleUpon0Share on Facebook0Share on LinkedIn0Share on Google+2Buffer this pageEmail this to someone


  1. Hugh

    Money is simply a medium to distribute calls upon society’s resources to accomplish the social purposes of building and maintaining the society we wish to live in. Any deviation from these purposes is a maldistribution.

    The primary resource of any society is its people, their skills, knowledge, labor, and goodwill. We the people, not the government’s ability to tax, is what gives money its value. Taxation, along with spending, legislation, and regulation, is one of the four ways government can adjust society’s resources to accomplish society’s purposes.

    It is easy to get lost in monetary definitions. It is even easier, indeed intentionally so, for the primacy of society and resources to get lost in them.

    The post doesn’t really get to how the Fed works in this country. The federal government doesn’t have a monopoly on currency issuance. This power has largely been ceded to the Fed, a private banking cartel. Monetary policy is largely ineffective because of wealth inequality, a topic which is again not mentioned in these UMKC posts. QE and ZIRP do not filter down to ordinary Americans. Only corporations and the rich have access to their benefits. QE by the way is not a straight swap of assets. I mean you could argue it was more of a swap when the Fed was buying Treasuries, but seeing how the Fed was paying a premium for those Treasuries, the Fed was overpaying for them. When it started buying MBS in QE3 at the rate of $85 billion a month, I think the overpayments were far more substantial. The Fed was buying at bubble prices. If housing prices fall, and they are still nowhere near their pre-bubble 1990s prices, before the Fed can retire them, it will face huge losses on these transactions.

    Looting is also not mentioned and this is important too. The powers that be favor monetary policy because it is much easier to use them to transfer wealth/money to the rich than fiscal policy. Fiscal policy can be looted too, but even so more of the funds attached to it leak down to the general public. The more successfully looted fiscal policies are the less leakage occurs. So it is a mistake to maintain that fiscal policy is some kind of cure-all, especially in a kleptocracy.

    The author as is common for MMTers tries to pass from MMT as description to MMT as prescription. Outside of a social purposes framework, this is completely arbitrary and misses the key point that MMT can work just as well as a vehicle of theft by and for the rich and elites. There is also the even barer than usual mention of full employment. It is unclear what is meant by full employment, how it would be accomplished, the nature of the social purpose it would fulfill, whether it would pay a living wage and involve meaningful work, and whether it would be compete with private employers or be envisioned as simply a labor stock, a holding pen of labor, they could call up as needed.

    On an editorial note, there are odd word usages in the post. “Preemptively” is used where “prior” or “previous” is meant. “Agreeable” is used instead of “agreed upon”. “Differentiates from school to school” should read “differentiates school from school” or simply “differentiates schools,” etc.

    1. Ben Johannson

      “The author as is common for MMTers tries to pass from MMT as description to MMT as prescription.”

      No, no and no. The “author” (who has a name, by the way; Samuel) is stating he accepts a full employment buffer as a superior policy tool than the current unemployment buffer, given his understanding of the monetary system.

      MMT cannot any more be a tool for elites to loot than it can be a tool for trimming weeds in your garden, because it is a description. You are literally arguing that we need more ignorance and an anti-progressive intellectual mindset so as to protect ourselves, a view that seems strangely common on the political left. Yet never is there an explanation from these advocates as to how continued ignorance on the part of the masses can be good when the elites they claim to revile possess the knowledge we are expected to deny ourselves.

        1. from Mexico

          I didn’t realize that there were so many different schools within the monetary reform movement until a thread here on NC a couple of weeks ago:

          I followed a number of the links from various comments and what I found was a millions flowers blooming in the field of monetary reform. There is of course MMT. But in addition to that there is MCT (Steve Keen) and Michael Hudson with his clasical/Marxist approach. Then there are the NCTers and the Chicago Plan schoolers.

          The hardest hitting and least fact-challenged critiques of MMT come neither from the right nor from neoclassical economists. They come from other schools within the monetary reform movement.

          1. Greenie43

            Thank you for this gracious and informed comment, more important being carried by your well-earned gravitas and currency on these pages.
            Please understand this minimal adjustment, just from my own perspective. The Chicago Schoolers, which now include Adair Turner as a tide-changer at INET, are really Soddy-school reformers.
            And in the big picture, Soddy schoolers are kind of an engineered version of the ‘currency’ school.
            All of Simons, Fisher, Graham, Douglas and others, including young Friedman on sovereign money issuance, were rooted in the works of Frederick Soddy, who was an originator of many of the ideas that became the foundation of the Chicago School reformers.
            I trust the purpose of your comment was to inform the readership that there is much more to the money power question than MMT’s superiority over the economic ideas that found neoliberalism.
            Money remains the pending discussion.
            Soon to be front and center, as it should be.

      1. Hugh

        “The “author” (who has a name, by the way; Samuel) is stating he accepts a full employment buffer as a superior policy tool than the current unemployment buffer”

        The key word is buffer, a buffer for what, a buffer for whom? Most MMTers do not focus on workers as people, as members of society. I am supposed to applaud MMT because it treats them when they are unemployed as a “buffer” or employment pool for private business and given undescribed “work” and paid a wage, although neither work nor wage are supposed to be good enough for them to opt to stay in this full employment program, that is they are to be at the beck and call of private employers. Wow, how enlightened.

        If MMT is just a description of money and money can be used however, then of course it can be looted by the rich and elites. You are just trying to slide in your own prescriptivist interpretation of MMT as description by intimating that MMT has some kind of virtuous aura around it that precludes such uses and misuses. As for keeping the masses (what a word) in ignorance, MMT seems to do that very well by clinging to, even revelling in, obtuse counter-intuitive “explanations”, blurring the line between prescription and description, and failing utterly to give a philosophical context that would reconcile these two.

        Don’t blame the rest of us for MMT’s intellectual sloppiness. Many of us have been pointing out these defects for years now. MMTers remain as arrogant in their formulations, and both sensitive and deaf to criticism, as any neoclassical or libertarian.

    2. Dave Whelan

      That’s the essence of his post as I see it: there are several views on the nature of money. Your view is just one among many. That’s why ordinary people like me, who are trying to understand it, have no hope. The irritating and distracting mistakes do not help either: Samuel could do with a copy editor.

    3. Thorstein

      Yes and no, Hugh and Ben. I like Hugh’s broader definition of money, which then enables him to include legislation and regulation (two sides of one coin, so to speak) into consideration. That’s one of the great things about NC–it’s not just about the money: knowledge, labor and goodwill are just as important– probably more important than taxation and spending.

      But I think it’s unfair to accuse MMTers of “getting lost in monetary definitions”. It’s more like they get locked into monetary definitions by the boundaries of their academic department. IMHO one of the problems with academia (and the MSM) is the way <strikethrough> intellectuals </strikethrough> inquiring minds are increasingly herded and kept locked in our narrow pens.

      1. diptherio

        The balkanization of spheres of knowledge has been going on for a long time. Let us not forget that economics started out life as a branch of Moral Philosophy. The invention of Political Economy removed moral and philosophic considerations from economic analysis and began the process of intellectual divide-and-conquer. Next, politics was separated from economics with the division of Political Economy into Political Science and Economics.

        Reminds me of the etymologist who wanted to learn about moths. He caught one and proceeded to dissect it. He pulled the wings off and studied them closely, noting their every detail. He removed each leg and examined every joint, made diagrams of its eyes and organs, analyzed its antennae and every piece of that poor little moth. And yet, after all of that, he still couldn’t figure out why moths are drawn to a flame…The tale of the blind men and the elephant would also seem to apply.

        The Europeans seem to have done a slightly better job than us Americans at counteracting this creeping intellectual divisiveness, as witnessed by the classic PPE degree (philosophy, political science, and economics) which I think is still pretty popular in the old world. A few schools offer that course of study here, but I get the impression the combination is much more common overseas.

    4. Banger

      Good points–I look at economics as a division of politics so I interpret economic ideas as either some ideological system to benefit some faction or group of factions within the power elite or, perhaps worse, the usual Academic counting how many angels can exist on the head of a pin or, for the younger economists, as a cool online game.

      To put it another way the issue of economics gravitates around power and the result of economic debates and definition of terms provides certain boundaries and maps for the application of power. Money has fulfilled many roles but today it has evolved into a way of allocating power first; second, as a new secular religion. How it is generated and managed is a political question economists argue over as a means to influence policy. I genuinely believe economists believe they are creating a “good” world by pursuing their profession but they have the luxury of not needing to define their terms well whether it is “full-employment” or anything else.

      The issues we have to face are not what economic policies to pursue but the level of larceny and authoritarianism we are willing to live with.

      1. coboarts

        Eschew obfuscation… if you can’t work out what money is and how it works within the world you live without a masters degree and charts, then it is all BS. Or what Banger said, but he said it better.

  2. MikeNY

    Thoughtful post, Hugh.

    Off topic, but I’d love to hear your views sometime on why you think we have 5-15 years to address inequality and class warfare. I, too, think a powder keg is building, but I haven’t been able to estimate the length of the fuse.

    1. Banger

      It’s not something you can measure–it is something you sense because our society is complex beyond the imagining or calculation. My sense is that, at the moment, the public is very passive but beginning to become deeply cynical about our institutions which can only increase since all of our institution are either deeply corrupt, underfunded, or are structured in a way that would have been useful 50 years ago but are irrelevant to the current situation. We need radical change and, sadly, it is mainly the right-wing that has been articulating that need–the left, hypnotized by a President created by the advertising and PR industries, remains moribund as a dynamic force in society.

    2. Hugh

      World population will be 8 billion with all the pressure on resources that entails.

      Events that today are still sporadic but increasing in frequency will be common and the norm. In terms of climate, we are likely to see more and larger storms, floods, droughts and related damage such as failed crops, famine, and political instability. This will be most noticeable in Africa’s Sahel. But one or two missed monsoons in Asia could be devastating to hundreds of millions there too.

      In the US, we are also likely to see increased desertification in the Southwest with severe water problems for that region’s urban areas. These effects are likely to extend into the western parts of the Midwest. Prime real estate along the Atlantic coast hit by storms like Sandy is likely to become uninhabitable.

      We have been in the plateau of Peak Oil since the mid-2000s. Even with fracking by 2030, we will be on the downward slope with all the disruptions that the end of not only cheap but available oil supplies imply for both developing and developed economies.

      Somalia has been the modern exemplar of the failed state, but even today we are seeing a proliferation of permanently failing states. These are states caught between demographic, resource, and sectarian constraints on the one hand and the lack of a civil society on the other. They don’t fall apart completely, but they can never be made whole. They already make up quite a list: Mali, Central African Republic, South Sudan, Yemen, Libya, Syria, Iraq, Egypt, Afghanistan, and the largest Pakistan.

      My calculation is a simple one. Up to about 2030, we and the world have a shot at changing the trajectory we are on. After that, the processes we have ignored for so long will be so embedded that we will not be able to change them and most of the rest of the century will be dictated not by us but by natural processes we can no longer control or significantly modify.

      1. MikeNY

        I understand your logic, Hugh, working backward from the environmental crunch point. Thank you for your considered response.

      2. Moneta

        We keep on growing our infra and energy and resource dependency when we can’t even maintain what we currently have adequately City after city will go under (New Orleans, Detroit, etc) due to storms or badly maintained systems over the next few decades.

        The trillion dollar question is whether a change in paradigm will come in time or not. Here in Canada, I am not holding my breath. Houses still are still getting bigger and bigger and no ne wants to pay for a transit system because everyone is better than that.

  3. digi_owl

    Interestingly, the orthodox view of money — in particular the commodity money aspect — touch on things like gold-bugs and their recent bit-bug relatives.

  4. Greenie43

    When heterodox theory is built upon the unit of money account identity, accounting arises to an undeserved determinant about things money.
    Before double-entry bookkeeping, it was called double-booking of accounts, and cleaned up because double-booking sounded like fraud, as in Silas W. Adams’ short read titled “The Legalized Crime of Banking”, which it is.
    The private creation of ‘money’ by ledger entry privilege, a.k.a., an accounting identity, ought to be a little more suspect by progressive thinkers.

    The problem with trying to educate people about money by throwing up total strawman orthodox theories as a sounding board and using the ‘wrongness’ of those positions for smartness-indicators, is that it leaves out the most basic of our money’s essential identity, THAT which provides exchange media in the monetary system of every sovereign national economy.
    What people really want to know about the role of money is its standing in our evolving political economy…..IOW how to fix what’s wrong. The relation between the evolution of our political and monetary economies is determined by the laws that each nation establishes regarding the operation of its money system.
    In this country, the laws that define the operation of our monetary “system” are that of private-privilege issuance of debt-based things that serve as money.That’s what determines the one percent and ninety-nine percent results.
    THAT is the foundation issue for any dialogue involving money theory.
    We continue to avoid this reality at our collective peril.

    1. from Mexico

      Greenie43 said:

      “The problem with trying to educate people about money by throwing up total strawman orthodox theories as a sounding board and using the ‘wrongness’ of those positions for smartness…”

      I think that’s only part of it.

      In addition there’s the rhetorical strategy deployed against Hugh above, which is one of intimidation and mockery, trying to paint anyone who doesn’t march in lockstep with the one true faith with the face of evil, ignorance and stupidity.

      Then there is the invention of historical accounts which depart significantly from reality.

      Then there is logic which is so loaded with internal consistencies that it really has trouble passing for logic.

      1. Greenie43

        I agree, of course.
        But one must dig deeply to find the illogic.
        The mockey and intimidation are but a sign of effectiveness.

        Most readers are so taken by the progressive ideals expressed among believers, and their pro-publica money pitch, that they do not go that deep. Acceptance of MMT just happens much too soon in the modern student’s understanding of things money. It’s OK, though, a healthy distraction that will be informed over the long term by reality, history and science. Soon enough come.
        The essence of Hugh’s understandings about the ‘distributive’ nature of our money system is as that wholly advanced by Soddy in his “The Role of Money”, which should be on the 101 reading list for almost all social sciences.

        A failure to understand the ‘money power’ is to prevent understanding of all financial, political and economic power. It’s why Lincoln called it the ‘supreme prerogative’ of government.
        Money. It’s what’s happening.

    2. F. Beard

      The private creation of ‘money’ by ledger entry privilege, a.k.a., an accounting identity, ought to be a little more suspect by progressive thinkers. Greenie43


      Banking should be 100% private otherwise government is subsidizing gamblers since borrowing short to lend long is inherently risky. And if banks are not 100% private then government is subsidizing the transfer of wealth from the less or non so-called creditworthy to the rich and other so-called creditworthies.

      1. Greenie43

        Banking should be and would be completely private under a public ‘money’ system. Nationalizing money leaves banks to issue all the credit/debt they can peddle in the face of an adequate money supply.
        Both scarcity and capital markets are removed from our money-issuing paradigm.
        The Restofus will have all the money needed for consumption of our economic needs without debt, and the casino will be much smaller, without a Fed-led hand into taxpayers’ pockets.
        The banks can still create their assets and liabilities by loan-making ledger entry, but the money supply will remain unchanged.
        Removing “money” from the credit-worthiness pyramid, the separation of money-issuance from banking, is what the basic 1930s proposals to FDR were all about.
        That’s why they’re needed now more than ever.

      2. Old Soul

        I respectfully disagree. “To coin money and regulate its value” was properly delegated to Congress in Article I, Section 8, Clause 5 of the Constitution of the United States. Whenever private banks are allowed to issue credit as money, the result is theft of assets and income from the commons. I believe that we need to take the power to create “money” away from the private debt merchants and then we must appropriate and spend sovereign, debt-free money into circulation for the public good: infrastructure, education, food, shelter, health and justice. It is time to abandon the failed idea that the private sector pretending to be a “free market” will lead to prosperity. The last hundred years of the operation of the private banking cartel known as the Federal Reserve had conclusively proved that the opposite it true. Of all the things which must be controlled by the people through their duly elected representatives–not the current crop of sold-out banking industry lackeys–the creation and circulation of “money” is the most important.

  5. F. Beard

    Not one mention that money can be shares in Equity when they clearly can be. And shares in Equity requires neither usury nor fractional reserves nor deposit insurance nor a default monopoly on the risk-free transaction and storage of fiat. Nor is deflation built-in. Nor is the new issuance power under the control of anyone but those affected by it.

    But why argue? Let’s remove all privileges for the banks and allow true liberty in private money creation and see if sharing beats gambling.

    Or continue to believe that government-enabled theft and oppression of the poor is the way to continue?

    1. rob

      The thing is; ” What is a share of equity?”. How do you translate that to “money in your pocket”, for everyday transactions? Or why should “one” company or even an oligopoly of companies be so highly valued as to be called “money”. They will then be what is TBTF. Rather than banks.
      Won’t we, everyday people need the services of “moneychangers”, to get smaller denominations of our private stock equity notes… or something….This is just another layer of lipstick on the pig.
      Money, just needs to be a unit of exchange, in control of the gov’t formed by consensus. Created as fiat, for use by all. Money needs to be something we all have in common. It seems to me, it is one of those areas where we have to acknowledge, we have a common stake in keeping a useful monetary system. Like public transit, we need to make it a vehicle for the uses of society and every person.
      It is a recognized fact that people who control the money, control the game…all the way down the line. Like in mining camps where the boss, offers scrip, which is pay, and media to buy goods, and services….The boss knows he controls the means of production, the labor forces, and benefits from a closed loop in the sale of goods…skimming quality and quantity off at every turn…all to enrich themselves and control the masses…
      It seems like the basic idea of civic responsibility, for a people who are self governed, to be self financed. Which we could do by passing a bill like HR 2990 “the need Act” 112th congress into law. Which moves the money taking power from an opaque privately controlled group of banks(federal reserve) to a transparent publicly issued US dollar, by the treasury dept.
      In the beginning, this country needed the help of the first bank of the US(1791-1811), and then the second bank of the US ( 1816-1836),because we were a fledgling experiment with self governance.We were exploited by the british financiers who owned most of the stock in those banks, until the final abolition by Andrew Jackson in 1836.But in this day and age, the USA, is supposedly the leader of the world(whatever that means). We as Americans need it to start leading somewhere good, not just leading on the road to hell, with 100 years of a federal reserve and all the new trade/corporate plunder agreements in the making..

      1. F. Beard

        Use what you want for private debts but to those who insist that endogenous money creation is so important that we MUST keep the government-backed credit cartel I say shares in Equity is an ethical form of endogenous money and you really have no excuse for government privileges for the banks.

        But if some people would rather steal than share, there’s a place for them and it’s not pleasant.

  6. Malmo

    “In addition there’s the rhetorical strategy deployed against Hugh above, which is one of intimidation and mockery, trying to paint anyone who doesn’t march in lockstep with the one true faith with the face of evil, ignorance and stupidity”.

    There are more than a few MMTers, academic and otherwise, who will rip your head off if you question their views. There are also many in that camp who are quite civil and tolerant–Bill Mitchell and Stephanie Kelton come to mind.

    And what Hugh said above I agree wholeheartedly with. But you can bet the farm his words frosts many an MMTers butts..

  7. Ted

    Thanks for posting Samuel’s essay. It’s very useful in a number of senses. I particularly found the definition of money as a system of credits and debts particularly useful because, as a cultural anthropologist, it fits with many systems that exist outside of those created by financiers and modern nations states. Although, please do avoid the archaic (and racist) terms “primitive” or “tribal” as many non-modern systems of money are neither simple nor are modern societies nontribal (i.e., visit any of the many family own corporations and businesses in the so called first world nations today). As Bruno Latour claims, we have never been modern.

    I think Hugh is on to an important point about the origin of value in human societies from the ground up. And as I read the post, I felt as though the further we ascended from the material reality of human economic relations to the ideal speculations into the nature of “money” the further we found ourselves from practical human realities and politics. Thus, the social and political implications of Veblen’s insights into conspicuous consumption and the system of debt financed overconsumptions by those with an increasing rate of return from whatever economic and speculative activities they are engaged in gets lost as we end up, once again, focused on the nature of government taxation and spending. There are real political faultlines between the insitutions of the state and those located in the everyday lives of people in community … but somehow this is always missed in these MMT type essays.

    1. F. Beard

      I particularly found the definition of money as a system of credits and debts … Ted

      That definition is a lie because private money can also be issued as shares in Equity (common stock) with absolutely no necessary debt at all.

    2. craazyman

      you just used the word tribal after telling people not to use it. hello? :)

      I am also an anthropologist, I’m currently a visitiing profeser at the university of Magonia Department of Contemporary Cultural Studies and Analsysis, NFL, GED, a full profeser too with an electric fireplace in my office.

      Tribal is not a racist word. But race is a tribal word. Money is the universal solvent that dissolves race and tribe. ecce homo. -Profeser D. Tremens, NFL, GED

      i’ll have to read this essay later but it’s a good day to take pictures of old buildings in the sun over in Queens New Yoark. It will be read after dark.

      1. diptherio

        “Tribal is not a racist word. But race is a tribal word. Money is the universal solvent that dissolves race and tribe.”

        That D. Tremens is one smart cookie. I would only add that certain chemical compounds have also proven themselves effective as this type of “universal solvent.” And, of course, there are countless mystical exercises that provide the same effect. Here’s a fun one for your Sunday afternoon–sit comfortably with eyes closed and repeat (either aloud or to yourself) the following mystic mantra:

        shabada shamana shabada shamana shabada shabada shabada shamana shabada shamana shabada shamana shabada shabada shabada shamana shabada shamana shabada shamana shabada shabada shabada shamana

        Do this for half an hour and afterwards you won’t even know what continent you’re on, much less with race or tribe you belong to…

    3. financial matters

      I also think it would be good to incorporate more Veblen..

      “This concept of unearned income as an unnecessary element of price led Veblen to focus on what now is called financial engineering,””” speculation and debt leveraging. The perception that a rising proportion of income and wealth is an unearned “free lunch” formed the take-off point for Veblen to put real estate and financial scheming at the center of his analysis, at a time when mainstream economists were dropping these areas of concern.

      Veblen described how credit was being created for speculative reasons rather than to finance the production of goods and services

      Denial of the classical distinction between value and price (and hence, between earned and unearned income)

      he found rentier interests behind the narrow-mindedness that ignored the predatory character of rent and interest”

  8. Min

    “As Cecchetti discusses, the origins of fiat money in Europe began in 1656 by a Swede named Johan Palmstruck, who founded Stockholm Banco.”

    Tally sticks go back more than four centuries before that. The author, Ellenbogen, mentions tally sticks, but for some reason does not consider them to be fiat money. {shrug}

  9. Adam_Smith

    None of these schools seem to attach much importance to the distribution of money. Perhaps its influence can be seen somewhat in “microfoundations” but otherwise it has become a very recent political issue with only tentative macroeconomic theory responses.

    I believe that individuals must be able to pay for their own employment by spending their income. Created money, as opposed to savings, may temporarily finance some investment but, at least as presently institutionalized, is very ineffective at financing consumption and sustainable growth. Currently, money is more a tool for accumulation of wealth by rentiers than a means of payment for labor or accumulation of working class wealth. The economy is over-financialized leading to damaging income disparities. (My $0.02).

  10. dutch

    Imagine the state physics would be in right now if there were still as yet no agreed upon definition of ‘mass’ and ‘energy’. That economists still cannot agree upon the meaning of a construct so central to their discipline as ‘money’ reveals to anyone who cares to look just how confused and unproductive this field of study truly is. Clearly, economics ain’t rocket science.

  11. rps

    Ellenbogen’s “the ‘nature’ of ‘money” is either a deliberate tongue in cheek phrase or a disingenuous rhetorical device to persuade the reader that money is inherently part of the natural world. He links money and nature as if they are one and the same; and thus, promoting the illusion that money is a natural resource rather than how capitalism determines distribution of nature’s resources. However, we know money is not part of nature; and instead, nature and money are binary opposites. Nature is defined as everything that was not made by man such as: stones, plants, animals, all life on earth, etc… Also, there are the events of nature such as: wind, earthquakes, food, rain, etc… Therefore, the definition of nature excludes all things that were introduced or developed by mankind. On the other hand, culture is defined as the totality of socially transmitted behavior patterns, arts, beliefs, institutions, and all other products of human work and thought and human development such as ‘money.’ Ellenbogen disingenuously employs (cough) other words such as origin and evolution to once again impart that money, nature, evolution and origin are inherently a natural phenomena. The truth of money is lies in Ellenbogen’s vocabulary of ideological abstracts that connote religious belief structures such as: orthodox, heterodox and reconciliation. Simply, money is a religion based on an ideology abstract and seen as ‘real’ through societal praxis. It’s the magic show (blood into wine) and you can only make it exist if you believe it’s real….abracadabra

      1. rps

        Disagree, nature is defined as facts of the physical world collectively, and that which consists of animals, plants, the physical elements of landforms such as (ice-capped) mountains, hills, water bodies and other features and products of the earth, as opposed to human creations such as theories, ideologies and perceptions. Does civilization exist or is it humankind’s praxis of societal ideologies such as: culture, laws, justice, race, gender, class, money, etc… that creates a perceived/material reality? Simply, it is reification -that is to make (something abstract) more concrete or real such as the constructs of institutions aka ideological state apparatuses that makes it appear as a material thing. Simply, nature exists with or without human ideological constructs. On the other hand, ideologies are abstracts of the human mind and do not exist in nature; and therefore, in binary opposition. Finally, money only exists in the human mind. It is a collective contractual agreement through our “acts” of engaging and practicing of this ideology.

      2. Banger

        What a philosophical can of worms you just opened! Technically, you are right, on the other hand I agree with RPS’ distinction–after all if Nature is all-that-exists then it can’t be a distinctive term. So, I agree with both of you. “What is the nature of nature” could well be a Koan.

        1. rps

          In my indirect approach, I was pointing out and deconstructing Ellenbogen’s unobserved selected language terms and partially employing Saussure’s model: the signifier, signified and the value of a sign is determined by the relationships between the sign and other signs within the system as a whole. In other words, what’s his purpose in combining terms such as nature and money? Perhaps to persuade people that ‘economics’ is part of nature or a natural event; and therefore, this field of academic study is truly a science. He is cleverly trying to claim the study of money is a science as more and more people question the validity of economics as a hard science; and perhaps preventing it from moving down the academic ladder and back into the basement/study of philosophical/religions department. But more importantly, elevating his status as a man of science; and that hard-science is the study of money. Whereas, I’m point out that money is ideology and not part of nature. It’s origins are the creation of the human mind and abstract. Its a tool used in the man-made structurally tiered organizations through societal practice of agreed exchanges of value in the distribution of nature’s resources and man’s labor. In my opinion, the accurate title of the article would be “The Culture of Money.”

          Koan is an apt term since none of the economic gurus can agree on how money fully operates since it is a practiced ideology. Other ideologies such as gods, sons of these mythical gods, why we exist, what’s the purpose of life, etc…; all belong under the realm of human philosophy and religions.

    1. Greenie43

      May I suggest a read of Soddy’s Lectures in Cartesian Economics which goes directly to the real relationship that must exist between or system of money and our system of natural resources, that each be sustainable.
      Titled: “The Bearing of Physical Science Upon State Stewardship”, it is available here.


  12. American Slave

    What a mess of a world money is creating. So what in the hell kind of a universe does it make sense to ship raw materials across the world to make goods and then ship them back across the world to be sold, what a waste of oil and energy but hey it efficient because it costs less playschool monopoly money so it must make sense. Maybe the global economy made sense back when we had sail ships that didn’t use fuel but not anymore.

    And now it seems were starting to deal with human warehousing and hence things like the make work job guarantee program in our McDonalds Wallmart economy. One has to start asking is it really necessary to have people waste gas driving to work at a place that probably isnt even necessary for civilization not to mention the energy needed to heat and cool the place.

    The only way I could see us end the stupid waste of finite (non unlimited) resources is very early retirement at the least and a guaranteed minimum income at best with people getting a job to make more money like it was in the Soviet Union with there unlimited unquestioned welfare they had yet still had a world class space program and a 6hr workday.

    And the other thing we should do is have the Vietnam and south east Asian style economy where they have street food venders everywhere and build a more leisure economy.

    One thing I read about and find funny is how people are complaining that the younger people are starting to move into communes and group housing. I dont know what the hell older generations found fun in living alone in a studio apartment, people may complain that millennials are always texting each other but thats because were used to being in constant contact with people and more or less get along with other people. Id much rather live with other people and go out and have Sushi and come home to game night rather than work long hours and come home to a crappy studio apt. and watch tv alone especially when there’s nothing but junk on.

    The desire especially among young people to live life other than to work is getting stronger as people are getting less material, as an example if someone drives an expensive car most young people say they are compensating for having a small di*k or something so people are understanding that theres more to life than money but we still have to do ridiculous tings to get it.

    1. Banger

      Interesting comment–I like your attitude.

      I think that the wasteful nature of globalism will be finessed in the next couple of decades, barring major disaster or war. The method will be the general spread of robotics and intelligent everything. I believe we are developing the capacity to manufacture goods locally as the price of robotics and the growth of variants of 3-D printers evolve. Amazon, for example, is setting up local distribution centers to speed delivery thereby cutting costs. This tendency will increase as infrastructure in the U.S. continues to degrade. There is also an increasing interest in locally grown produce and meats which may change the agricultural economy somewhat.

  13. tiebie66

    I have found these posts and the comments on the nature of money interesting, for they reveal much about what we know, what we think we know, and what we don’t know. Thus, a daunting task for any new author to tackle and my comments are not meant as criticism on the essay, but rather, they are reflections of thoughts provoked by the essay.

    I must start, again, with the basics: the core economic act is an exchange of goods/services/ for goods/services. Ignoring this fact generates much trouble. Only numismatists will want to hold money for the sake of holding money. Some argue, though, that the objective of the capitalist is to make more money, not realizing that money confers status and power only because the latter ultimately relate to goods and services. Status is a ranking of power, and power governs access to resources, hence influences the act of exchange to the benefit of the more powerful party. Thus making money is a way to drive a bargain in the exchange process (figuratively: M-C-M’ = [C-M-C’]^2). Has anyone noticed non-numismatists avidly collecting obsolete currencies? If so, this will prove me wrong.

    Money are tokens of demand. If I offer apples in exchange for eggs, the apples constitute tokens of my demand for eggs (they are not apples to me, but are tokens or money to me; though, generally, they are apples to the other party). But sometimes the exchange cannot be completed, and stand-in tokens or credit/debt is used to permit completion at another location and/or another time. Not completing the exchange is either (i) slavery or (ii) altruism (… cans of worms, both …).
    The more money I have, the more effectively I can express my demands. It is the latter effect that provides pressure to augment one’s cache of money without having to have generated a commensurate amount in goods/services. Thus, if I deliver apples on ‘credit’ and can have the credit double while waiting for eggs, I can get twice as many eggs. Likewise, if I can extend credit without having delivered apples at all, but could make the other party believe that I did, I could get eggs for very little effort. This is counterfeiting and exactly the same as a government that spends money into existence without having delivered the ‘apples’.

    How, then, can the accounting function of money operate in such circumstances? Aside from the fact that, whenever money is spent into existence without creating ‘apples’, the unit of account is diminished, the core transactions cannot be completed. Hence, the debts can never be extinguished. The best one can do, if this situation is to be accepted, is to distribute them evenly, not create more imbalances. If there is a lack of aggregate demand, because too much money already flows to the 1% or to the state, then spending more into existence to continue flowing there is not the answer.

  14. American Slave

    Its strange to see how money can destroy places like Detroit (even if it is now being rebuilt) vs the Soviet Union that had an economy heavily based on quotas based on actual availability of materiel and not fake pieces of paper with fancy colors and digits.

    I always look down and shake my head when I read or hear people say that the Soviet Union went bankrupt. The only thing they needed money for was to pay workers or maybe foreign money to import items but most trade was done with actual items such as machines for raw materials. And the factories received there quota inputs free of charge and gave there products free of charge (but could still buy or sell more than the quota if they wanted too) kind of like how a car manufacturer doesn’t sell itself car engines if they make them for example.

    What went wrong for which they had good intentions was to switch to performance based pay and make everyone a stakovite worker and pay a huge bonus for producing over the quota, which would cause people to cut corners like making half welds on cars or not putting in all the screws. The other part is that people just didnt care like a family member of mine who was a carpenter in East Germany and would steal supplies from the government supply house to do side work for people and it didnt help that the CIA and other western organizations were paying factory managers to sabotage production.

    So it is possible to create a small community less reliant on money. And putting an end to senseless destruction such as building a factory and then closing it down soon after.

    1. Banger

      Technology will enable us to live in decentralized more self-contained communities if we want to. Whether it is robotics or the dramatic growth of 3D printing or the growth is alternative housing and methods to grow food we can choose to live closer together both in terms of space and intimacy after decades of moving in the direction of cocooning. We have to make choices in our lives–do we want to be isolated in our little home or do we want deeper connections with others? It’s quite a drama we are facing–it’s more a matter of our cultural and internal software than a technological problem.

  15. dutch

    By postulating that “self-love” (self-interest, greed) as the ultimate motivating force behind human effort, capitalist theory can claim that markets are a natural phenomenon operating according to natural laws which can be discovered by economists. Interfering in the natural operation of markets then, is to intrude into the natural order of things and must always produce catastrophic results. The distribution of wealth produced by free markets acting according to natural law is therefore the right (proper, natural) order of things.

    This way of thinking is the perfect justification for the rich getting richer as the poor become poorer, and it is no wonder it has held sway for so long, given the powerful interests it protects. Nevertheless, it is pure bullshit. Greed is a choice, as is sharing. The distribution of wealth, goods and services is likewise a matter of choice – pure and simple. Like I said, this ain’t rocket science. The central problem in getting to where we want to be is to convince people that they have a choice.

    1. Greenie43

      It’s one thing to recognize that all people have a choice to ‘pursue’ sharing over concentration as a guiding light for their whole passion, but it is another to have a monetary system that is working in support of the former ideal, rather than as at present, the latter.
      Nobody ever explained these important differences better than Dr. Frederick Soddy, early Nobelist in Chemistry, in his book on ‘The Role of Money’.

      Our system of money will either be distributive or confiscatory in its operations.
      In order to make it distributive, it must be publicly issued without any attachment of debt.
      Those are the minimums you will NEED to have present if a sharing society is to actually evolve.


  16. Andrea

    The question *What is Money?* is in some way a question of semiotics.
    Which means that money should at heart be considered first independently of its various and complex uses. But then, as it comes in different material or immaterial forms (gold, dollar, shell, purely mental figuring, digits in a ledger…) these different forms should be considered as fulfilling the same function.

    One is left with defining it’s core function – it is a symbol, a sign, a representation, but of what?
    Were we to ask linguists / semioticians to give a definition or description of the letter A these would vary, particularly in terms used and details stressed, but at heart they would be similar, or could at least be considered to be so.

    Mrs McGinty would give a partial definition, “A is a letter that stands for like some sounds or like parts of words or sumptin’ ” resembling the experts.

    For money, such a consensual description is lacking. When defining A, or a whole writing system, we would not enter into how written language is used, for. ex. to write laws (etc.) – that would be a different topic.

    So? First, money is always represented in a number system – which may be poor / elaborate, handy / clumsy for calculation, oral / written, etc.

    — Its physical manifestation, if any, is of no interest, these are chosen to ‘keep track in a secure way’ and/or to be ‘stable, safe’, be easy ‘to carry, store, conserve’, etc. —

    Whatever concepts underly money, their expression is uniquely quantitative (not qualitative) and is translated to an all-purpose numerical scale. Why did we use number? Because our concepts of money were abstract, we used another abstract construction to express them, much as we did for other quantities like distance, time.

    For time and distance though, physical elements are more obvious, salient, and important: night and day, the moon; how far the eye can see, how fast the body can move. Money has no such external landmarks: it is socially fixed.

    Therefore one of money’s essential characteristics is to *measure* – that of ‘unit of account’ in modern terms. But…account of what?

    This is where it gets difficult. !
    I do believe that speculation about the deep origins / construction of money are useful or at least interesting.

  17. giangi75

    Am I the only one in this thread whose first tought, after reading the essay, was like “that’s purely an ontological debate”?

    Which came first? Money, exchange, or credit? Who made credit and debit ? Who made money? These are all questions for which we may never have a definitive answer, for lack of historic evidence. Yet, I think everybody agrees that money and credit are human constructs, that depend on humans and that convey some meaning only to humans. Indeed, I am not aware of any evidence of the existence (hence ontological) of money or debit/credit indipendant of human tought.

    Nonetheless, much thinking is devoted to understanding the properties of “money” or “credit/debit” as if they were entities that can have any property of their own, agents capable of exercising some influence on humans because of some characteristics that are not originated from humans tought, such as mass or elasticity (mass and elasticity being “labels” we attribute to name the models we use to describe such properties).

  18. mark branham

    Is there anyone here who can explain MMT? Simply, in as few words as possible… cause I don’t understand what you mean with that acronym.

Comments are closed.