Yves here. Even though a lot of the material in this post is familiar to regular readers, I though it was worth featuring. since the economics textbook story of the history of money is not just a fabrication, but also distorts the role of money.
By Steve Roth, a successful Seattle-based serial entrepreneur, and a student of economics and evolution. He blogs at Asymptosis, Angry Bear, and Seeking Alpha. Twitter: @asymptosis. Originally published at Evonomics
You probably won’t be surprised to know that exchange, trade, reciprocity, tit for tat, and associated notions of “fairness” and “just deserts” have deep roots in humans’ evolutionary origins. We see expressions of these traits in capuchin monkeys and chimps (researchers created a “cash economy” where chimps were trained to exchange inedible tokens for food, then their trading behaviors were studied), in human children as young as two, in domestic dogs, and even in corvids — ravens and crows.
But humans are unique in this as in many other things. We use a socially-constructed mechanism to effect and mediate that trade — a thing we call “money.” What is this thing? What does it mean to say that it’s “socially constructed”? What are the specifics of that social construct? How does it work?
Money has lots of different meanings when you hear it in the vernacular. A physical one- or five-dollar bill is “money,” for instance (“Hands up and gimme all your money!”). But so is a person’s net worth, or wealth (“How much money do you have?”), even though dead presidents on paper or even checking-account balances are often insignificant or ignored in tallies of net worth (think: stocks, bonds, real estate, etc.).
You might think you could turn to economists for an understanding of the term. Not so. They don’t have an agreed-upon definition of “money.” The closest they come is a tripartite “it’s used as” description that completely begs the question of what money is: It’s used as a medium of account, as a medium of exchange, and as a medium of storage. I and many others have pointed out the myriad problems with this tripartite non-definition. Start by asking yourself: what in the heck do they mean by “medium” in each of those three? You’ll often hear economists speak of (undefined) “monetary assets,” “monetary commodities,” and similar, attempting to communicate in absence of a definition.
When economists speak of the “money supply” (a stock measure, not a flow measure as suggested by “supply”), they are gesturing toward a body of financial securities that are somewhat currency-like. Primarily: they’re used in exchanges for real-world goods and services, and have fixed values relative to the unit of account — e.g. “the dollar” (think: “the inch”). They assemble various “monetary aggregates” of these currency-like things — MB (the “monetary base”), M0, M1, M2, M3, and MZM (“money of zero maturity”). Here’s a handy chart on Wikipedia.
This conflation of “money” with currency-like financial securities reveals a basic misunderstanding of money that pervades the economics profession. That misunderstanding is based on a fairly tale.
In the golden days of yore, it is told, all exchange was barter. Think: Adam Smith’s imagined bucolic butcher and baker village. This worked fine, except that your milk wasn’t necessarily ready and to hand when my corn came ripe. And moving all those physical commodities around was arduous. This inserted large quantities of sand and mud into the gears and wheels of trade.
But then some innovator came up with a great invention — physical currency! Coins. “Money.” This invention launched humanity forward into its manifest destiny of friction-free exchange and the glories of market capitalism.
Except, that’s not how it happened. No known economy was ever based on barter. And coins were a very late arrival.
The best efforts at understanding the nature and origins of money have come from anthropologists, archaeologists, and historians who actually study early human commerce and trade, and from various associated (“heterodox”) fringes of economic thinking. David Graeber recounts much of this history (though unevenly) in Debt: The First 5,000 Years. Randall Wray, a leading proponent of the insurgent and increasingly influential Modern Monetary Theory (MMT) school of economics, has offered up some great explications. (Though even he is reduced, at times, to talking about “money things.”) If you’re after a gentle introduction, Planet Money has a great segment on money’s rather vexed history and odder incarnations.
The main finding from all this: the earliest uses of money in recorded civilization were not coins, or anything like them. They were tallies of credits and debits (gives and takes), assets and liabilities (rights and responsibilities, ownership and obligations), quantified in numbers. Accounting. (In technical terms: sign-value notation.) Tally sticks go back twenty-five or thirty thousand years. More sophisticated systems emerged six to seven thousand years ago (Sumerian clay tablets and their strings-of-beads predecessors). The first coins weren’t minted until circa 700 BCE — thousands or tens of thousands of years after the invention of “money.”
These tally systems give us our first clue to the nature of this elusive “social construct” called money: it’s an accounting construct. The earliest human recording systems we know of — proto-writing — were all used for accounting.* So the need for social accounting may even explain the invention of writing.
This “accounting” invention is a human manifestation of, and mechanism for, reciprocity instincts whose origins long predate humanity. It’s an invented technique to do the counting that is at least somewhat, at least implicitly, necessary to reciprocal, tit-for-tat social relationships. It’s even been suggested that the arduous work of social accounting — keeping track of all those social relationships with all those people — may have been the primary impetus for the rapid evolutionary expansion of the human brain. “Money” allowed humans to outsource some of that arduous mental recording onto tally sheets.
None of this is to suggest that explicit accounting is necessary for social relationships. That would be silly. Small tribal cultures are mostly dominated by “gift economies” based on unquantified exchanges. And even in modern societies, much or most of the “value” we exchange — among family, friends, and even business associates — is not accounted for explicitly or numerically. But money, by any useful definition, is so accounted for. Money simply doesn’t exist without accounting.
Coins and other pieces of physical currency are, in an important sense, an extra step removed from money itself. They’re conveniently exchangeable physical tokens of accounting relationships, allowing people to shift the tallies of rights and responsibilities without editing tally sheets. But the tally sheets, even if they are only implicit, are where the money resides.
This is of course contrary to everyday usage. A dollar bill is “money,” right? But that is often true of technical terms of art. This confusion of physical tokens and other currency-like things (viz, economists’ monetary aggregates, and Wray’s “money things”) with money itself make it difficult or impossible to discuss money coherently.
What may surprise you: all of this historical and anthropological information and understanding is esoteric, rare knowledge among economists. It’s pretty much absent from Econ 101 teaching, and beyond. Economists’ discomfort with the discipline’s status as a true “social science,” employing the methodologies and epistemological constructs of social science — their “physics envy” — ironically leaves them bereft of a definition for what is arguably the most fundamental construct in their discipline. Likewise for other crucial and constantly-employed economic terms: assets, capital, savings, wealth, and others.
Now to be fair: a definition of money will never be simple and straightforward. Physicists’ definition of “energy” certainly isn’t. But physicists don’t completely talk past each other when they use the word and its associated concepts. Economists do when they talk about money. Constantly.
Physicists’ definition of energy is useful because it’s part of a mutually coherent complex of other carefully defined terms and understandings — things like “work,” “force,” “inertia,” and “momentum.” Money, as a (necessarily “social”) accounting construct, requires a similar complex of carefully defined, associated accounting terms — all of which themselves are about social-accounting relationships.
At this point you’re probably drumming your fingers impatiently: “So give: what is money?” Here, a bloodless and technical term-of-art definition:
The value of assets, as designated in a unit of account.
Which raises the obvious questions: What do you mean by “assets” and “unit of account”? Those are the kind of associated definitions that are necessary to any useful definition of money. Hint: assets are pure accounting, balance-sheet entities, numeric representations of the value of goods (or of claims on goods, or claims on claims on…). That’s where I’ll go in my next post.
Sneak preview: we’ll start by thinking carefully about another (evolved?) human social construct without which assets don’t, can’t, exist — ownership.
* Some scholars believe repeated symbolic patterns going back much further, in cave paintings for instance, embodied early “writing,” but that is widely contested, and nobody knows what the symbols — if they are symbols — represented.
Sorry, but that article says nothing. It certainly didn’t increase my knowledge about the meaning and use of money.
I don’t take responsibility for reader comprehension issues, nor do I take well to intellectually lazy attacks on guest writers. If you didn’t get anything out of it, that suggests you do not read carefully or are close minded.
This article cuts away a lot of imprecise thinking and reduces the definition of money to its original essence. If you think that says nothing then you don’t understand what the word “nothing” means.
Pop quiz, hot shot: do you have any money in your wallet? No, don’t go and look…
Pop quiz: How much “money” do you have? ie. What’s your net worth? You probably won’t bother to count the money in your wallet, or quite possibly your checking account.
The whole point of the piece is to distinguish between money and currency-like things, point out that their conflation is a core conceptual problem.
You’re basically saying, “But. but…this one goes to eleven!”
but wait, there’s more: if the basic definition of money is “the value of assets designed in a unit of account” it is a functional definition only because there is another universe beneath it which raises the question: what is the definition of value and we have to wind our way all the way back to your first paragraph on the human instinct for fairness. maybe an adjunct definition for money is a synthetic medium designed to keep people from getting too pissed off.
“a synthetic medium designed to keep people from getting too pissed off.”
e.g. blood feuds
That’s the point. Money is abstract. It doesn’t come from anywhere. We made it up. It is an IOU. A liability.
A $5 bill is a zero coupon perpetual maturity note issued by the government. If you have one, you can use the government’s liability to pay off your liability. Because the government has the ability to enforce laws, you are now confident that it’s liability has value.
“It is an IOU. A liability.”
I really object to this widespread statement. Money is credit, embodied in various financial instruments. It’s an asset of the holder, not a liability.
Some balance sheet asset entries recording the values of those instruments have offsetting right-hand-side liabilities on other balance sheets. But those other-balance-sheet liabilities are not the money; the credits, the assets, are the money.
A Target gift card is not a liability to the holder. QTC. Target did create a liability on its own balance sheet when it issued the card, but that doesn’t alter the nature of the card itself, or its asset value on the cardholder’s balance sheet.
This is arguably “just semantics,” but…words are what we use to talk to each other, and to think together.
Are you arguing just to argue?
Your financial asset is someone else’s liability. Always.
If Target goes out of business before you cash in the gift card, your asset gets written down to zero.
I do beg to differ. If I hold a $10 bill in my hand, explain to me how that $10 in reality represents an IOU? To whom do I owe the IOU to? The government?
It’s a bit like arguing that a car actually represents a whole in the ground where the iron to make the car was originally extracted. It’s technically true; the iron that makes up the car had to come from some where, and iron is always mined from the ground. But the observation is pointless when trying to understand what a car is. A car is NOT a hole in the ground.
According to MMT, a $10 bill represents a -$10.00 liability on the government’s books. But only because that is how it was defined to be. Double Entrée Book Keeping demands this by definition. And while this is technically true, it offers no meaningful insight to what a $10 bill actually is to the person holding it.
Arguing that a $10 bill is actually a credit makes a lot more sense to me. It’s “worth” something with which I can use it to exchange for something else – like for a meal or some gas for the car.
credit/debt. two sides of the same coin?
Sure – just not on the same coin.
Another way to think about it is the difference between a relative measurement (in which it can either be a negative or positive value, depending on what you are comparing it too) and an absolute value (to which there is no such thing as a negative value.) A $10 bill is an absolute value of $10. That means that to say this $10 bill represents a ($10) is a nonsensical statement. I can not carry around negative money any more than I can carry around a negative number of keys.
But in relative terms; say I lend you my $10. You now have a liability of ($10).
BTW: Yves, why did my “Thank you thank you thank you” post not pass moderation?
Tiresome repetition, I know, but I genuinely want to know the answer. I have a gold coin in my hand, it’s my asset. I believe it is “money”. But whose liability is it?
Gold coins are not money. We are not on a gold standard. The fact that it is in the form of a coin does not change the fact that it is a physical, like a painting or real estate or another commodity.
In some sense a $10 bill is a swinging door that value passes through. Absolute value may be thought of as distance from the door. -10 is also 10.
In MMT sense a $10 bill is government issued value in the form of debt the government could reclaim by taxation.
Re your comment in moderation: please do not ask questions that can be answered by reading our Policies tab. This is a weekend, I am exhausted (as usual) and trying to get some rest, and in general, we commit to getting to the mod queue only once in 24 hours.
Your asset but you don’t even know who owes you…you actually worked but for all your sweat you got a nice piece of paper that you could frame… or spend or save… And for all you know the state could debase its value and you would not get your fair share in sweat.
If you lived in Argentina, Greece, etc, you would understand how money is debt.
Words have meaning. You might not like the meaning, but it is what it is.
“This note is legal tender…”
I think it’s better to stick with facts than to try and re-define words. It much more helpful.
Consider the body that issues the $10 bill to consist of the system of trade denominated in dollars. This is the economic entity that several hundred years of investment in dollars by the US govt has created that now denominates trade globally in dollars.
While the $10 is an accounting liability on the Fed’s balance sheet, practically, for you, you redeem that value when you spend it and that system of dollar denominated goods and services delivers to you $10 worth of whatever you purchased.
That $10 circulates like a letter of credit until someone pays taxes with it at which point the value is extinguished, properly redeemed, both from the tax payers account and the Fed balance sheet. Also, when the paper piece you once held gets too threadbare, banks trade it in for a new one and the old one is burned.
To be clear, I should have pointed out that when you hold the $10 it is your asset, the dollar system owes you $10 worth of something.
This remains true unless/until you owe $10 in taxes, at which point the govt has shifted its liability to you and you can extinguish that liability by volunteering up your $10 or going to jail.
> Are you arguing just to argue?
No, really not. Just saying that it’s the credit, the asset, that circulates, going from the lefthand side of one balance sheet to another. The liability doesn’t circulate.
An IOU from someone, in hand, is an asset, not a liability.
Arguably pettifogging, but I think it’s important for understanding.
This is indeed the central problem in discussing money, and leads to policy problems like thinking that government has to conserve it’s own supply of money that it has infinite ability to issue.
The asset you carry in your wallet is recorded as a liability on the government balance sheet. As a recent series by Randy Wray points out, the government is *obligated* to take that asset back for redemption of tax liabilities that *you* have. That is what gives that asset value. So it’s an IOU for a tax credit, basically.
Anticipating the next installment, based on the sneak preview:
An “asset” is an object of “ownership”. What does the “owner” of “money” own that makes money an “asset”?
I say that object of ownership–which I am going to call the “property”–in money is — and here it goes — the right to receive performance of the obligation (or, in other words, the “liability”) to redeem the money.
But to make this statement clearer, I have to say what I mean by “ownership”: Ownership is basically my claim against your obligation to keep your hands off of my stuff. How do I know you have such an obligation? I learned by observation and experience: when summoned to enforce such claims of obligation, the sheriff will do so.
I am with Yves on this, I don’t get your point. Modern fiat money is a credit instrument plain and simple, nothing ambiguous about it.
Most lawyers understand what “money” is better than any economist because money is property and property is law. Property is easily understood as a bundle of rights and duties. These rights and duties have evolved and continue to evolve because they are nothing more than promises that society agrees are socially useful. These promises are enforced because we believe it is equitable to do so. When we stop believing the enforcement of certain promises is useful, we change the laws thereby creating new forms of property. Sometimes those new forms of property take the form of money, be it: currency, a tally stick, securities, derivatives, etc. Hope that clears things up …
‘Money is abstract.’
If Bernie Madoff didn’t say this, he should have.
Life is just a dream…something the brain conjures up.
Randy, Is that because you already understood the ideas being expressed or because they didn’t make sense to you?
The author is getting at the very essence of what money is and in that sense the article is quite informative. The idea of money is much more abstract than most of us realized. Money is fundamentally a social construct and that is hard for people to grasp. Felix Martin’s book “Money; The Unauthorized Biography” does a great job of explaining money and he too argues that most economists and financial professionals don’t truly understand money. In fact this post reads like a Cliff notes version of Martin’s book.
If someone is familiar with these ideas or hasn’t given a great deal of thought to the idea of money, this post won’t have much value because it’s too abstract for most readers.
It’s interesting that most economists and financial professionals don’t trully understand money.
Do people, the users of money, understand money?
How many things are there in life that we don’t understand but still use them anyway?
Are we a big danger to nature, to the world, as we go through doing things and using things we don’t truly understand?
Even if something is the best explanation we currently have, whatever it is explaining is still an entity or a phenomenon we don’t truly understanding.
Here we may wonder if every citizen or most citizens must know what democracy is before they can participate in one?
Does buyer and seller or do most buyers and sellers must know what free market is before they can help achieve price-discovery?
Perhaps, better education is the answer, from the time of Pericles to now, we are in constant need of more and better education.
But the vote is in, the market is done for the day, and we proceed.
Do we really know what we are doing, with all our lives and the rest of nature at stake here?
Experience has shown that the answer to that question is no. It would be refreshing to see some humility in our current crop of leaders but what force in nature will hold them responsible for their errors? We- the fellow citizens- must hold them accountable and we have been found lacking in that job.
We muddle along. Hubris is the watchword of our time.
I am no phycologist, but this blindspot in human nature must be connected to our evolutionary derived tools for dealing with our own mortality. Throughout our short lives, contemplation of our impending death takes up very little time. It seems we are wired to just get on with living- reflection and contemplation must be learned and developed through practice. Our current culture places little value on reflection. Only things or activities that can be monetized are deemed of value.
The creativity of the human mind has produced many beautiful outcomes. The James Webb Space Telescope will soon be launched enabling humans to glimpse the early formation of the universe. It will no doubt produce stunning images of phenomena challenging the ability of the human mind to comprehend its place in this universe.
The narrative is key. Storytelling is a foundational element in the human soul. It provides the impetus for human action in the world. The story of the nobel entrepreneur developing the resources of the world for the betterment of humankind is a narrative that has reached its limit of usefulness. We need a new story. A new understanding.
“Price discovery” is a bullsh!t notion where Bernays and other players rule. Nice idealization but where the biggest part of the political economy is based on fraud and non-survival behaviors, like destabilization and volatility and derivatives and pick your own Madoff, the notion that there is some “efficient price discovery” that ineluctably leads to Market Equilibrium Whatever is just profitable species- and planet- killing BS.
I’ve sat in small silence in meeting in Retail-land where marketing types play a kind of game of chicken with each other, bidding up the “price point” of some object the corporation wants sold “at a huge markup.” Highest price point wins points ( are they ” money”?) in the performance evaluation “market.”
One blind philosopher, feeling the elephant’s leg, says definitively, ” the beast is like a tree.” The next, feeling the tail, says it is like a snake. And so on for ears and trunk and tusks and belly. Untill the elephant gets angry and tramples all of them…
“The value of assets, as designated in a unit of account.”
Why be bloodless and technical? And wrong?
First, the value of assets is the price! of something of interest or use between humans, not its use-value to an individual (from Marx). Second, money has the property of flow – a ‘value’ does not have this property so it is not money.
Money is, to recast the author’s definition, the amount of something that it takes for one human to ‘give’ to another human what the first human wants, needs, or desires, with the following most important boundaries. 1. the ‘amount’ must be expressed in a number, 2. the ‘something’ is a pre-set value, set outside of the two humans involved (usually and especially now, the pre-setter is a recognized government – hence your air miles is not money), with examples being US dollars or Japnese Yen, and 3. the ‘give’ means there is an exchange involved.
You wrote: “First, the value of assets is the price! of something of interest or use between humans[.]”
You are merely further defining terms used in the definition, and doing it incorrectly. The value of an asset is the price times the quantity in arbitrary units of account. Price is not value. A price may represent an asset’s value in discrete units (and it may not), but does not encompass value, although like value it is relative (different people value assets using differing prices, hence markets).
“Value” ~ price ~ is in the eye of the beholder.
The pricing of Sovaldi, the Hep. C blockbuster miracle drug, was based on its valuation compared to inferior and expensive drug combinations–and worse, a liver transplant with life-long immunosuppressants. The estimated returns on investment for different pricing schemes were based on predictions of how payers (especially the government) would react.
Sovaldi’s price was set at $84,000 after payers were consulted and and big data analyzed (IMS Health). States reacted by rationing a drug that cost $1000 per pill.
And yet Gilead prevailed, churning huge profits that far exceeded the costs of R&D, mergers and acquisitions and their marketing blitz.
Subsequent to the Senate Finance Committee’s investigation, Senators Wyden and Grassley have asked the health care and patient community for responses to five questions by March 4th. (Send to Report_Feedback@finance.senate.gov)
What role does the concept of “value” play in this debate, and how should an innovative therapy’s value be represented in its price?
There is no value for the patients who die because they cannot afford an essential medicine.
A values reflects principles or standards of behavior.
Can money evolve to reflect that?
I use the word value in the sense of Marx – two sides of one coin. One side of value is the use-value. Use-value can not be expressed in units of measure (money or price). The other side of value is exchange-price, which is precisely expressed in units of measure. The units of measure is called money.
Re: (2) the something does have a value independent of the individual exchange but it is not “set”. The notion of gouging illustrates this indeterminancy of the “value” of money.
OK, it’s at times like this that I get frustrated. All of this — all of it — is in my introductory macro textbook. It starts with gift exchange then moves to credit, out of which money emerges. The advantage of money is that it economizes on trust in a credit economy: you don’t have to trust lots of different individuals, just their money. And money is defined simply as a highly liquid asset. (The capital chapter in the micro text is also free of cant; it recognizes that financial capital can’t be reduced to an aggregate of capital goods.) I wouldn’t claim that these are the best texts for anyone’s classroom use, but when we hear complaints about how “economists” don’t get the basics of anthro, history or whatever, I would like a bit of acknowledgment. End of rant.
It may be in your textbook, but it’s not in Samuelson’s or now Mankiw’s, which were and are the mainstream.
My textbooks also have it all. And I was never told the examples were historically accurate… They were to explain the abstractions… But then again, I studied in Canada, maybe the propaganda machine spared me?
Damn, I’m dying to read that. It’s darned expensive…
Just to say: from your description it sounds like your textbook is responding to the same frustrations I feel about the almost universal misunderstandings out there. Maybe not responding identically or even close, but still.
plus never overlook the value of magic – money has the mervin-like capacity to hold time in check because it controls exchange… crazy useful… and your point about conflating, erroneously, money with currency-like credit (?) and ownership rights (?) is similar to a comment here a few weeks ago that money is dynamic and other forms of exchange are more static. If we were all reduced to reinventing language we would probably agree with you and decline the diversification of money (not the evolution of the idea) as the explosion of economix. Because money seems to be more like a law of nature: keeping score.. It accounts for value which is a derivative of the instinct for fairness and the sole purpose of money is to maintain the value of money to maintain cooperation… regardless of the medium. The idea is the medium. Is that what marshal Mccluhan meant? :-)
that’s Merlin, not to be confused with melvin or mervin.
and here’s another thought… the instinct for fairness is based on people getting at least a minimum of what they need and economix transmogrifies that into a thing called “demand” which is way off the mark because it analyzes only a level of demand based on a level of wealth and anything below that doesn’t even register. economix does not address human society because it is too in love with money. I think the word might be ‘delusional’.
Will this delusional misallocation of resources have an end? Will the dissatisfaction of the masses finally reach some critical point and change will ensue? When will the externalities of the current system finally make that system unworkable from a societal standpoint?
We are back to the worldview question. When it finally sinks in, and you realize the organizing principle of society is delusional, change becomes possible for the simple reason that you don’t adhere to the current norms. The stage of replacing those beliefs with something else is what we are struggling with.
… since Peter Dorman seems to be too modest (given the text of his comment). He’s a professor at Evergreen State College, Olympia, WA. He’s team teaching ” Watersheds: People, Rivers, and Change in Cascadia” that should truly challenge the mind. Assessing the economic value of natural systems is always fraught with difficulty.
If the corporation “legally owns” the “asset” (aquifer, rooftop rainfall, old- growth forest, lead or oil or methane “deposits” e.g.) and commands the social- legal structures that the mopes by their passivity grant legitimacy and “legality” to, so the Corp can write the laws and direct the monopoly on violence to protect and enforce that ownership, it doesn’t matter what a vulnerable professorial set and their students come up with in the way of understanding and alternatives. The Corp does all the “assessing of values of natural systems.” Which comes out, near as I can see, to however much hedonism the corporate rulers can extract by looting, since they have minimal personal vulnerability to the “change” and “innovation and disruption” they collectively impose on everything, and are all perfectly infused with the awareness that IBG-YBG and “After us, the great destruction.” And there’s hot a lot of homeostatic reserve stability left in the biosphere to support a “recovery” and the world of “Soylent Green” is looking more and more like the endpoint. Is great sex with hot bodies, perfect food, mutli-mansions, private jets, all that, a “store of value, medium of exchange, etc.”?
I am not familiar with you textbook but it sounds good and very different from most. If you are frustrated you should be frustrated with your profession and colleagues who have done a very poor job of explaining money the last hundred years or so. Most people have been mis-educated on this subject.
I am the first to admit that I didn’t truly understand money until I set out and read ten books on the subject. The motivation for doing so was QE. I couldn’t get my head around the idea that the Fed could gin up so much monetary stimulus without causing all kinds of consequences and that led me to a deep exploration of the subject of money.
In any case we are in the midst of a great monetary disaster which will all become painfully clear in due time.
My book was written by my Prof… And here I was ticked because I thought he was just trying to get more money from us students… Now I’m seeing that he probably wrote it because he could not find a good one… Lol!
If we don’t know what money, should we be allowed to use money?
Alternatively, we can ask, should we come up with another form of money that the us,rs can all understand?
Or maybe just more education, perhaps in grade school, before one is allowed to use it.
It’s also very helpful to think about what money is not. It cannot both be a store of value and simultaneously the unit of measure of that value. Using your energy example, an erg would be a unit of energy, while a battery or capacitor would be a store of energy. No physicist could ever get away with describing an erg as a store of energy, but economists are apparently unconcerned with basic category errors.
Money, as a unit of account, is an abstraction. Thus, it cannot have any inherent value, only a relation to the goods it can purchase. This relation is always contingent and changing.
There is an even deeper category error at the heart of economics. Economics does not study objective phenomena at all. It studies a virtual construct, created by humans for human purposes. In no way is it comparable to the study of the dynamics of bodies, the biology of animals and plants, or atmospheric physics – phenomena that would continue to obey timeless laws if the human race disappeared tomorrow. Economics, as a category, is much closer to literary criticism than physics: they both study creations of the human mind. Economics can never be an empirical science, any more than literary criticism.
Mind you, there’s nothing wrong with literary criticism – but then again, we rarely see literary criticism employed as a justification for labor flexibility, do we?
Well, if you’re a literary critic, you’d better be flexible with your labor (points to self).
. . . It cannot both be a store of value and simultaneously the unit of measure of that value.
Yes it can.
. . . an erg would be a unit of energy, while a battery or capacitor would be a store of energy
How many ergs you got in that container now?
. . . In no way is it comparable to the study of the dynamics of bodies, the biology of animals and plants, or atmospheric physics – phenomena that would continue to obey timeless laws if the human race disappeared tomorrow. Economics, as a category, is much closer to literary criticism than physics: they both study creations of the human mind.
Confusion abounds. Physics is discovered. Economics is made up as we go along.
Sorry, but no you can’t. This is simply not logically consistent. Tell me, how long is a foot – in feet? And can you build my a house using only feet, and not something like wood, brick, or steel?
At best, money can give us an approximation of value at any given point and time, but it can not “store” value in any objective sense. Just like how a blue print for a house is a representation of a real house. The mere fact that we even have inflation and deflation proves that money does not and can not store any thing.
The value of money (debt) is relative to the prices of the assets, and products and services is continuely changing over time. This change in value is what determines people’s desire to maintain possession of the money (debt). The rate at which money changes hands is called the velocity of money. The velocity of money can tell you if the economy is in balance. If the velocity of money is too fast, the economy is in a expansive cycle, or a boom cycle. If the boom last too long, and involves a large portion of the population, the boom cycle ends in a bust, when nobody wants to hold the debt as an asset any more. The primary home bubble is a good example. The velocity of money almost completely stopped, and asset prices fell dramatically when the primary home bubble imploded.
To help prevent the next boom/bust cycle we must understand why people get caught up in the psychology of paper profit creation, and how to help prevent it without raising the cost of the medium of exchange (debt,) thus allowing consumption and employment to be maintained.
The value of money (debt) is relative to the prices of the assets, and products and services is continually changing over time.
Depends on you frame of reference
Classic Economics states the value of money is based on a undefined basked of goods and services (and that assertion is not provable, because the contents of the basked are undefined).
Assertions not provable have another name: Dogma.
Modern Monetary theory states that money is settlement for tax debt, which is denominated in fixed numbers, and it is the basket of goods and services which varies in value against taxation, based on their relative desirability, scarcity or abundance.
I agree with the critique, but not completely with the conclusion that economics can never be an empirical science.
If we conclude that, then we must also be saying that economies are utterly haphazard as well; and if this were the case, they wouldn’t work well enough to be the coordinating mechanism which we have used to considerable effect (you don’t get populations like this without some kind of mechanism).
We may not be getting the performance we expect or desire simply because we are not using its features correctly. I don’ think that indicates that empirical economics is impossible, simply that’ we’re doing it wrong.
Let’s look at some of the reasons economics fails: social behaviors and conventions produce several kinds of opacity that impair measurement, or that lead economists to over-estimate or ignore relevant factors. From overt fraud, to incidental error, to semantic confusion, to the idea (irrational, as you point out) that economics operates somehow discretely from external realities.
Some of the problems do not originate in economics itself, or even in economies. Empirical truths may not satisfy our conceits. If we’re going to cling to conceits, without even acknowledging the penalties of such choices, the conceits become that much more hollow.
“No physicist could ever get away with describing an erg as a store of energy, but economists are apparently unconcerned with basic category errors.”
What basis is there to apply physics to money? Is there any evidence to support that money behaves like energy? Because it’s the law?
Apply any “law” to something it doesn’t purport to describe, and you get the same problem.
“your planetary orbits don’t follow the laws of quantum mechanics. They are therefore wrong, and anyone who tries to predict when Mars will rise is unconcerned with basic category errors”
Yes, yes, darn yes! That is the heart of it! Quit confusing ‘money’ (an erg) with its storage (a battery). I quite agree (obviously) with Richard, and respectfully disagree with Peter’s assertion that economists (as a group) understand and use the term money correctly. If the text book is correctly paraphrased (“…moves to credit, out of which money emerges. The advantage of money is that it economizes on trust in a credit economy: you don’t have to trust lots of different individuals, just their money. And money is defined simply as a highly liquid asset.”), then the book falls into the trap discussed by Richard – confusing the thing with something that holds the thing.
To nitpick: money does not arise from credit, money and credit are the same thing. The book means that the form of money that first arose was credit, then later, coins and paper ‘money’ forms arose. Second, there is no ‘advantage’ to money, what advantage is there to energy? Energy in the form of coal has advantage over the energy in the form of a AAA battery, but it is still energy. Third, it isn’t trust to different individuals that is of concern here, it is trust in the numeric amount that the money storage may actually have, that is the concern here. Is the AAA battery fully charged, only half charged, or completely dead?. Who can say? For ‘money’, a government can say, so you and I don’t have to. And lastly, money is not simple – it is not terribly complex, 6 year olds understand the basics quite well, but money has certain, essential, properties. Properties that economists, as a group, really refuse to define and work within.
ps. love the analogy of economics to literary criticism. Well said!
I have to wonder if even this is actually true. What is the point of “credit” in a gifting economy? What is the point of credit if you do not have the notion of property or ownership?
I have read opinions that suggested that earliest forms of “accounting” were probably used more for inventory management. We know that a city would have to store food over the winter months. Accounting was probably used as an alternative to having to go back and measure the food stores each time food was extracted from inventory. Thus you could simply estimate how much food remained in inventory and better manage its consumption to insure it would last as long as needed. There was also a pressing need to maintain a reserve of seed in order to insure enough was retained for planting the next year. To not eat the next years seed corn as it were.
Just me thinking out loud.
A physical unit of money was very early. Cowrie shells were a medium of exchange up and down east Africa.
Your wondering is very limited, and absolute, at the same time.
“I have to wonder if even this is actually true. What is the point of “credit” in a gifting economy? What is the point of credit if you do not have the notion of property or ownership? ”
You assume a lot, culturally. That everyone spoke english, to begin with.
*shrugs* I am just asking questions here.
In Federalist 30, Alexander Hamilton discussed the general power of taxation, and he correctly described the proper and indispensable role of money in the operations of the state and in the lives of the people. He did not realize that he was prescribing a process of money management that the ancient Athenians had followed. They used an unexpected, rich silver strike to invest in a large shipbuilding project that was for the benefit of all Athenians, they gave money to the poor to compensate them for income lost when they went to the Assembly, and they paid citizens who were chosen by lot for long-term adminis-trative duties. Hamilton hated the Athenians, but he unconsciously endorsed their ideas. He said:
As it turns out, things are even worse than Hamilton feared—our Madisonian republic has failed to provide “a regular and adequate supply” of money, the people have been “subjected to continual plunder,” the “public wants” have not been satisfied, and our government has fallen into “a fatal atrophy” which prevents us from maintaining and improving our infrastructure, and which blocks the prudent, aggressive, large-scale, time-sensitive actions needed to deal with the adverse effects of global warming. Last, but not least, the tyranni who control our government and our economy have created an artificial shortage of money in order to increase their personal power at the expense of the people.
Tyranno-capitalism’s approach to money management is to keep the people from ever having “a regular and adequate supply.” It uses five basic techniques to keep the people in a permanent state of financial privation:
• First, it pays very low wages in order to maximize the profits of the tyranno-capitalists.
• Second, it loans money to the people at a high price so they can temporarily make ends meet.
• Third, if the people fail to repay their loans on time the tyranno-capitalists can seize their assets and often force them out of their homes or off their farms.
• Fourth, it does not pay the full cost of doing business but leaves it to the people to pay through higher taxes, an unsafe workplace, a hostile and unhealthy environment, and fewer government services while the tyranno-capitalists get whatever they want from the government and pay relatively low taxes, if they pay any at all.
• Fifth, when economic downturns occur, such as the Great Depression or the Great Recession, the tyranni who control our government do all they can to deny or minimize financial assistance to the people. They restrict the duration of unemployment insurance, they forbid giving money directly to the people, and they cut back on food stamps and other such assistance. They punish the people for the failure of tyranno-capitalism.
The foregoing is an excerpt from my soon-to-be published book, “Faction-Free Democracy.”
If you want to read the Introduction to the book search on “faction-free democracy.”
Looking at factions is a useful framework for understanding the power dynamics now and at the start of the Republic. I find your blog good reading, Jerry. Defining absolute factions of ‘tyranni’ and ‘democratii’ may be a little too reductive, but I’m not arguing your positions and look forward to reading more.
Regarding the federalist period, I recommend examining the critical period of Massachusetts history immediately before the US Constitution and the federalist papers. There are new interpretations derived from deeper investigations of primary materials on the “plunder” of the yeomanry within the Commonwealth. Specifically speaks to the role of speculation and aggrandizement by the seaboard elite in notes and letters of credit. We’re talking private armies and such.
See “A Yankee Rebellion? The Regulators, New England, and the New Nation” by Robert A. Gross 2009; and “Shays’s Rebellion The American Revolution’s Final Battle” by Leonard L. Richards 2002.
Thanks Crank3yFrank3y, for the kind words and references. I will follow up.
I devote a chapter to tyranni and democrati. People who have recognized these varieties tend to be wary of giving them names, but Jimmy Carter called them “fundamentalists,” George Washington called them “cunning, ambitious, and unprincipled men.” Carter in his book, Our Endangered Values, and Washington in his Farewell Address. There are many others. I first defined their characteristics in 1969. I did it to help me in my work. I dealt with a lot of people, strangers usually, in high pressure situations, and I needed to be able to identify who could be trusted and who could not. My list of characteristics had value to me and I have refined it over the years. It has been a kick to classify the current presidential candidates. Donald Trump is definitely a tyrannus and Bernie Sanders is a democratus. Jimmy Carter was a democratus as well.
Each variety of humankind grows up and goes to work in some profession. Some of them become elite economists, and others become Supreme Court Justices. It is easy to identify which variety applies by looking at what they do. Most institutions reflect the variety of the humans who control them. The Pope was mistaken, in my parlance, when he said that Donald Trump was not a Christian. He should have said that Donald Trump was not a democrato-Christian, but was a tyranno-Christian.
Our system has no mechanism for keeping tyranni from gaining power in government, business and almost everything else, and that is where trouble begins. We can’t keep tyranni out of power but we can keep them from doing harm and that is what Faction-Free Democracy is all about.
– So the need for social accounting may even explain the invention of writing.
Mid-last-century, Charles E. Osgood developed an empirical approach to meaning which resonates with this social accounting, the semantic differential. After factoring surveys, there were two primary factors, termed evaluation and dynamism, and dynamism could be split into power and activity. For example, a judge would be good, strong, and slow/old; a punch is bad, strong, and fast.
The notion of good/bad in older languages seems more associated with weal, and subsequent research using the semantic differential is quantifiable for emotional response. For example, Good onto Good is Good, and Bad onto Bad is Good. Variations in social definition account for some misunderstandings. For example, ‘mother’ is universally Good, but ‘child’ is Good in the U.S., not so much in Japan. ‘Punch a hippie’ is good if hippie is bad.
A couple of aspects may be worth exploring. There are indications that Good and Bad are evaluated in different loci in the brain. This helps account for loss aversion, in that we could think of the Bad loci as being twice as sensitive as the Good loci (B = -2G). Something can be both good and bad (‘hurt so good’). The deprivation inherent in ‘wants it Precious’ is usually ‘wants it bad’ but motivates behavior. But the loss (debt) associated with getting it may overwhelm the plus side, leading to buyers remorse. To what degree is this associated with the cash value of depreciation, where the new car instantly drops in value when it’s driven off the lot?
If goods are Good, does that make the debt associated with them Bad? If all assets are also debits on the ledger, are there twice as much bads in the economy? For myself, debt is a stressor in the sense Sapolsky studied. But so is a debt owed to me, though that may be my own particular quirk. For flexians, owed favors seems to be the operating paradigm. But uncertainty in collecting may be the distinguishing factor between organisms and banks, where organisms use hyperbolic discounting while banks go with exponential. I would suggest this means banks believe they will make gains on what looks like a tally loss.
Steve H, that is darned interesting thinking! Added Osgood to the (very long) list, though you know how it is, hard to say when it will float up… Thanks. Have you written about all this more elsewhere?
Only what has been tolerated in comments here. My main framework is ecology and evolution, particularly selection for bias. Naked Capitalism was one of two sites that, when I tested the predictive quality of their explanations, came up positive far more than alternatives. That coincided with my accepting what appeared to be, uh, non-intuitive assertions that I continue to try to understand.
Warren Mosler is next up on my reading list. If I may offer one paper that has been a very fertile seed in my thinking, it is this, which can be mostly understood while ignoring the equations:
On hyperbolic discounting and uncertain hazard rates
FYI, I have read Warren Mosler’s Seven Deadly Innocent Frauds and don’t think much of it. For one thing it desperately needs editing. Careful use of language is critical to explaining things and it’s extra critical when discussing somewhat abstract concepts. His use of language is loose and sloppy. The number of times he uses “we” or “they” in contexts where the pronouns could refer to two or more different parties makes following his arguments tedious and confusing. If he is such a great monetary thinker, one would hope that he would want to take the time to express himself more clearly.
His main ideas are that governments spend money into existence and that an issuer of its own currency can never default, rather they can debase their currencies by causing inflation and devaluations. Duh, reallly? Sorry, but I fail to see what is so novel about these MMT guys.
If the book were more carefully written it would have greater value.
Do you think if money can be created by someone spending it into existence, should that burden be placed on the people?
Congress shall coin money.
For itself to spend, or on behalf of the owners of the country, the Little People, who shall decide on their own to either spend or save?
Is the answer to the question obvious and etched in stone, but to be decided by the Supreme Court?
People are busy. He’s a banker who figured this stuff out on the job. He continues to work in finance and to fund much more carefully written material on this subject.
See UMKC and the Levy Institute at Bard for more technical material. Also the “required readings” links at Mosler’s “Center Of The Universe” are good and more technical materials.
Do you think an act of doing good is the same of an act of refraining from bad?
That is, saving a life from being hit by a truck = refraining from killing an unarmed civilian?
Save = -(Not Kill)
The former is visible; the latter is usually not visible (Many times, the thought of killing my tomato plant goes through my head, but I convince myself not to).
No, I don’t. However, I think that’s an ethical question, and contains implicit abstractions that I’m cautious of.
As humans, we have a profoundly complex understanding of good and bad. However, the evaluative function doesn’t need a nervous system to implement. For a plant, light is good, and growing towards it is a reinforced behavior. Plants also send poison gas at each other at the root level, doing bad things to their competition. They can even show bias, as a plant that has a quicker response in growing towards the light may be able to shade competitors, but at the risk of using up its gained resources too quickly.
I can’t make a case for plants using money or having debts. Monkeys maybe, at least training them to what appears to be using them. Talleys and debits seem to need more brain power than lizards can generate.
The case you use isn’t just good/bad, there’s an implicit dimension of omission/commission in a social situation. What is a good behavior can be considered what is reinforced for an individual, or selected for at a greater than individual level, but that’s not sufficient for what you’re trying to get at.
Pulling in the dynamic dimension helps a lot. Saving a life is very dynamic, as is killing someone. Both are very active. But the power factor can vary by the subject of the sentence.
For example, killing a baby could be considered to be bad and active, but weak. A neutral subject of ‘someone’ casts some light. Saving someone is still good and dynamic, not killing someone is more neutral or normal. Saving your own child is more normal, and not saving your own child would be bad and weak.
To really get at the abstract nature of the ethical question, go all Godwin and substitute Hitler into the sentence. Suddenly refraining from killing could be arguably weak. Saving Hitler from being hit by a truck might be taken very poorly. Doing good onto bad isn’t so simple, with those antagonistic loci going at each other. Cognitive dissonance is not a problem plants seem to have to deal with.
It’s confusing to refer to these behavioral strategies as traits, and money as somehow special because it’s a social construct. To me, you seem to imply these non-human animal strategies are more or less due to specific genetic traits, while being very much socially determined in humans.
Behavioral strategies of these non-human animals are probably as much a social construct as money is for us, the major difference being the way these different social realities are constructed -which can be more abstract in humans because of our enormous capacity for- and dependency on the use of external memory; speech, drawings and writing eliminating the need for direct behavioral demonstration of such strategies.
Humans are not as special regarding their social strategies as you’d like to believe. Deception as well as cooperation are normal in all social species. Dolphins have been documented to engage in multi-level cooperation (groups within larger groups) for the purpose of raiding for females.
Dawkins had a notion of the extended phenotype, with a particular case of a critter, I think an arthropod, gluing stones to strengthen its shell. When glass beads are in the water, in incorporates that environmental condition in its physical structure. The behavior is genetically determined but conditionally implemented. This conditional aspect of that part of the behavior that we see runs deeper than a learned conditional response.
Concerning money, humans seem prone to self-deception, particularly in abstract matters, as in economic frames that reinforce cognitive capture. However, even if ‘reason evolved to win arguments, not seek truth,’ what’re we going to do, we’ve got to try. So is money what NC says it is, or is that a frame imposed by an accounting paradigm?
Kahneman’s “Thinking Fast and Slow” is a detailed study of why/how we do this to ourselves.
It has to do with the differences between what we choose consciously to create around ourselves and how profoundly different those things are to what we evolved for over several hundred thousand years.
Money is simply one of our recent abstract inventions that tricks our heuristic thinking with its apparent reality while doing something entirely different and on a different, super human scale.
You don’t need physics envy when chemistry envy is enough:
Money is a Catalyst
A catalyst is a compound that participates in a reaction to facilitate and accelerate that reaction while leaving itself unchanged. The reaction is accelerated with more of the catalyst, and retarded with less of it. (The quantification of ‘too much’ catalyst depends on the particular catalyst and elements involved).
Now substitute money and resources for ‘compounds’ and ‘economic exchange’ for ‘reaction’, and you have a definition with a lot of explanatory power for market and economic phenomena, without resorting to tautological definition.
Resources can be a valid substitute, but not money. Chemistry demands mass balance, which includes ‘waste’ products. Somehow, those are zeroed out and called externalities, and evaporate from the money balance sheet.
Is there any evidence at all that ‘money’ behaves in the same manner as chemistry?
It’s trying to science up something that has no relation to science, or in this particular case, a branch of science– chemistry.
Why not try to use newtons laws for atoms? Because it doesn’t work there. Quantum mechanics does. A whole new set of rules….
Breaking the law!
The abstract content in money seems to me to be numbers. 1s, 5s, 10s, 20s, 50s, 100s is the basic set of USD currency denominations. And of course, there can not be just a “one”, there has to be a “one” of something, tangible or intangible. The abstract concept is the number, which is not independent by itself, the more explicit social construct is not in the denomination, but in the use among people, its social use. So money has an abstract element that is dependent for its expression as a number and a social use, combining the abstract number and the social expectation of the use of the currency, making it money. A “one” printed on a flash card to teach children to read does not make the flash card money, even though it shares carrying the dependent concept of “one”, the number, it is not enough for anyone to expect to use the flash card for cash.
Money, like language, has to be taught, making it a part of the socialization process, where commonly accepted, mutual, expectations are internalized by individuals and used socially. If you where to drop a teenager from Philadelphia into Hong Kong, not only would the language be a barrier, but even presenting him with a stack of Chinese money would also be a problem, as the teenager has not been socialized, has not been taught how to think, speak and behave as a citizen in Hong Kong. Money, no matter what it was in the prehistoric past or now in the electronic Check21 Era, is a cultural artifact and outside of that context has little to no meaning, because of our lack of the socialization to understand its meaning.
Hence, the mystification of money in the past in controversies over cave painting or other symbols, or the in the pain staking scholarship to reconstruct the Sumerian clay writing records going on at the University Of Pennsylvania. And even the argumentation over defining your terms, is part of the socialization process. So money can have a floating, relative meaning because of the fluid nature of scholarship assigning, not uncovering meaning. Money as I am saying now, does not have a fixed, independent existence to be uncovered objectively, as if through analysis an unchanging phenomena is discovered. Instead, through advancing technology, changing capitalism, and the intellectual give and take of social science and the humanities scholarship, money is changing but always seems to carry with it the dependent abstract counting numbers.
Other than that, the social use and expectations for money can change with changing social relationships and how civil society functions. And in the case of civil society collapsing, money can be meaningless or more specifically, worthless. The rise and fall of Confederate money is an example of a very short lived money which came to be worthless as the society which used it did not disappear from the face of the earth, gone with the wind, but radically changed its social relationship within a larger civil society that defeated it by military power and then re-imposed the previously used money, which was well understood due to previous socialization. People knew what confederate money was, it was not a mystery, it was just worthless as legal tender for debts public and private. Confederate money was clearly socially constructed, then deconstructed as illegal currency. So, the social relationship is a necessary, if not complete part of what makes money, money.
In the end, it all comes down to what type of society you wish to have and maintain. Money is just one small aspect of that formulation as your Confederate example illustrates.
When the society collapses or is conquered by an opposing group, all is lost. That very fact makes a strong argument for the notion of a hard fall to come. The current elite have demonstrated time and again their only concern is for themselves and their narrow interests. Compassion, corporation, and equality seem not to interest them as a way to shape the world- they see those terms as only means to dupe the naive.
Creating a new feudal order doesn’t seem like a possible alternative either, however diligently the powerful work toward that end. There are too many powerful tools and advanced technology available for resistance. Fracture and dismemberment seems more likely.
The value of money (debt) is relative to the prices of the assets, and products and services, and is continuely changing over time. This change in value is what determines people’s desire to maintain possession of the money (debt). The rate at which money changes hands is called the velocity of money. The velocity of money can tell you if the economy is in balance. If the velocity of money is too fast, the economy is in a expansive cycle, or a boom cycle. If the boom last too long, and involves a large portion of the population, the boom cycle ends in a bust, when nobody wants to hold the debt as an asset any more. The primary home bubble is a good example. The velocity of money almost completely stopped, and asset prices fell dramatically when the primary home bubble imploded.
To help prevent the next boom/bust cycle we must understand why people get caught up in the psychology of paper profit creation, and how to help prevent it without raising the cost of the medium of exchange (debt,) thus allowing consumption and employment to be maintained.
The Effect of Language on Economic Behavior: Evidence from Savings Rates, Health Behaviors, and Retirement Assets
M. Keith Chen
Yale University, School of Management and Cowles Foundation
Status: Published, American Economic Review 2013, 103(2): 690-731
Editor’s choice, Science Magazine, Vol 339(4)
Permanent address: http://dx.doi.org/10.1257/aer.103.2.690
“Languages differ widely in the ways they encode time. I test the hypothesis that languages that
grammatically associate the future and the present, foster future-oriented behavior. This prediction arises naturally when well-documented effects of language structure are merged with models of intertemporal choice. Empirically, I find that speakers of such languages: save more, retire with more wealth, smoke less, practice safer sex, and are less obese. This holds both across countries and within countries when comparing demographically similar native households.
‘Confederate money was clearly socially constructed, then deconstructed as illegal currency.’
Confederate money was irredeemable scrip. Although the Confederate gov’t perished, 106 years after Appomattox the U.S. converted to Union scrip on 15 Aug 1971.
Today’s Union scrip has 17% of the purchasing power it had in 1971. Pretty good, huh? :-)
putting money in the mattress isn’t the appropriate benchmark
it somebody had invested their money in the market and gotten a 10-bagger every 5 years since ’71 they’d have a about 8 or 9 10 baggers in a row by now. wow. that would be alot of scrip
you can’t do that putting your scrip in a piggy bank and hoping there’s no inflation! :)
If a man sits at home and fondles his scrip with his bare hands — or even hands it to his wife so she can fondle it –, they’ll both be out looking for a job pretty soon when they should be laying around wasting time with all their 10-bagger money
The idea that ordinary people just can’t get a grasp on is that money is a social construct. Money is used in an abstract way to structure how people interact between one another. It is an efficient way for those in power to direct the actions of individuals they wish to control or influence. Its such a powerful idea to explain the relations between human beings as Political Economy- and why the elite made sure the term political was dropped from the description of economy. It obfuscates their true goal and social purpose- control and domination. They are the elite not by merit or social acceptance, but by guile and subterfuge.
In the end, all contemplation of money is about how society determines the distribution of the worlds bounty and to harness human labor. Only the society, or civilization, can adopt a coherent system to place value on the physical world and human work. Money is the tool of social control- not its end or goal.
The elite, the powerful, issue tokens to their subjects that are “assigned” a “value” for services rendered. Special subjects- courtiers- are issued tokens and special privileges of land grants, monopoly powers, and special contracts guaranteed by military force. Conquest and taxes keep the system circulating. The character and nature of the elite currently making system policy decisions determine the “equality” and “fairness” of the distribution. If they are driven by greed and competition, the distribution will be unequal. If they are driven by compassion and a vision of a better world, more equality will ensue.
Human relations are complicated and difficult to control. We all have ideas on how we and the world should be. Add to the mix our relationship to the environment and the possibilities compound. Not seeing money and debt as the social constructs that they are can lead to total destruction of both the society and environment. You don’t do a debt jubilee gradually. It is announced and informed by the ruling class. You reset the social balance to begin anew. If a reset is not implemented by the ruling class- inequality remains. Your society is dominated by poverty, despair, and uncertainty.
Money, like Capitalism, is seen as a natural phenomena. The physical impact of this social relationship is misunderstood as a unalterable natural occurrence. We need to talk about these things a path chosen- not as divine.
In the beginning, The Monkey God created the Tally Stick and the Tally Stick grew on trees. The Monkey God commanded Adam Alpha Ape, “The Tally Stick shall not fall from the tree, does not mature, has no time value, has no risk, we have naught inflation or deflation, and the Tally Stick can be used to keep track of who’s turn it is to do the dishes.”
But one sad night the wily snake spaketh in Eve Ape’s ear whilst Eve slept. “You would look hot wearing furs and matching alligator shoes and handbag.”
The next morning Eve Ape awoke and broke the Tally Stick from the tree and commandeth Adam Ape, “If we don’t go shopping today, you are never getting any ever again.”
Adam Ape had a bad feeling about this, and the wily snake hissed to himself, “Hahaha. The stupid apes won’t be after my skin for a stupid handbag.” But verily, Adam decided he did want it again and Adam Ape and Eve left Eden and headed to the Shopping Mall.
God left all manner of temptations in the Shopping Mall and Adam and Eve rapidly used up all their ten unit of account fingers and recorded their transactions on the Tally Stick. “My God!
“, spaketh Adam, “There is so much more to buy! But my Tally Stick is full at 20 unit of account fingers.”
“Use your toes.”, commandeth God.
Adam and Eve Ape obeyed and soon the Tally Stick was full at 40 unit of account fingers and toes. “Holy Sale, God! Now what?”
God spaketh in a low voice, “I suspend mark to market pricing. Therefore , your Tally Stick empowers you to be a Banker! Furthermore, I make you the issuer of newly harvested Tally Sticks! They will call you King Adam, The Alpha Ape! Go forth, populate your world and send it straight to Hell!”
The snake lived happily ever after.
that’s kind of cynical!
All Adam & Eve need is a 10 bagger and they can reload the tally stick
if that doesn’t work, Eve can prostitute herself and Adam can become a security guard and bust heads. Then they can both afford tatoos.
See, to get money usually people have to do something for it. And if that’s the condition in which they find themselves, it’s usually not up to them what it is they have to do. That’s why you need to get lucky with a 10 bagger.
Money can’t buy luck but if you have money already you can get lucky every day
It’s a crazy question but maybe all of us here can work something craazy out:
Is money like pornography – you know it when you see it?
10 baggers came much, much later in the evolution of Money.
What happened first is Adam and Eve Ape had lots of kids. The kids all choose to be Bankers and Kings, because that sounded like a pretty cool job. A few questioned the Tally Stick. They wanted to know what the difference is between a Tally Stick and an Antelope Thigh Bone.
The old and wise King Adam, Alpha Ape, carefully considered this question. After a year and a day of deep thought, He replied, “Nothing, really.”
A large Black Monolith appeared and the brass section of a symphony orchestra began to play in the background.
The First Evolution of Money had transpired!
Outside the walls of the compound, the Beta Apes thought they were all Alpha, and broke the tally sticks into smaller parts which became irrational.
And the Beta Apes said, ‘I will bet five tally sticks you won’t give him a tally stick next Tuesday,’ and the tally sticks became imaginary.
Finally! A definition of money that merges all of Western Christian history into the tribulations of everyday life in the USA. Although I do agree that the .01% are sitting in the trees eating ripe fruit while the 99.9% are milling around in the forest floor looking for grubs with little thought of cutting down the trees to get at the fruit.
Holy myth-making, craazyboy! And all was well until over the hill came a tribe of polydactyls…
Wow, after reading the comments and this article which, I think, was a definition of money, I have great sympathy for the economists who keep getting things wrong or who make up stuff that they can’t support with evidence. I do like the ape story, though, but would like it to proceed to our present day with the 1% sitting in the trees with all the sticks and the 99% starving below but planning on cutting down all the trees in order to get their share of the sticks.
Thank you! Thank you! Thank you! I have been arguing for a few months now that “money” is poorly, or even incoherently defined. (Meaning that the definition is not even consistent with itself. For example; how can money be a “medium of exchange” AND “a store of wealth” at the same time?) It’s nice to be vindicated by at least one academically qualified opinion.
If anything, this article shows that I was STILL to generous. I had always assumed that “medium of exchange” was the strongest part of the definition. It never accrued to me to challenge “medium” in the definition.
I can still add my own observation – money is “Platonist”. “Platonism” is a term in philosophy which argues that concepts are some how real things. Numbers, math, and logic are commonly described as “necessarily existing” objects or concepts. That the number “2” is a real thing that humans “discovered”. Here is a link where Platonism is discussed in greater detail https://youtu.be/XMAypyKqVKE (13 minutes long).
Clearly, money is also treated as platonisic, treating it is a real thing when reality the money is just a concept and that bills and coins are really just tokens representing money. Money is in truth an artifact of language, rather than an emergent property of an economy or trade. As a result, there is a severe mismatch between how money actually performs and how economists think it should or must perform.
If money is not properly defined – then the entirety of academic level economic is in a lot worse shape than even the heterodox economist suspect. It also makes conducting any “science” into economics virtually impossible. And as the heterodox economists are starting to pick up genuine science degrees are starting to realize, even the epistemology of economics is in sever need of overhaul.
“The value of assets, as designated in a unit of account.”
One thing that even this article misses is the slipperyness of the concept of “value”. Some times the unit of account is given its “value” by the assets it will buy. In times of inflation and deflation, the “value” of the unit of account changes drastically. So it is rather circular to say that the value of assets is designated by the unit of account whose value is designated by the amount of assets it represents.
How does this statement supposedly attributed to J.P. Morgan fit into the picture?
“Gold is money, everything else is credit.”
Lets just boil it down to the unit of account and leave it at that.
Frankly it is hair raising to see how vigorously mainstream economics have stripped their trade of any accounting influences.
I thought this was very clear, concise, and easy to understand. I had absolutely no trouble at all following the authors chain of thought. And I have very much enjoyed reading the comments.
Now having said that, I feel an obligation to admit that I am not an economist, a businessman, a banker, or an accountant so maybe that helps.
Steve, I read this and I don’t know if i have missed something.
All that says is the a long time ago, we tallied and kept track of who owed whom…that there were tally sticks.
Did those people think of it as money?
Maybe they didn’t think of it as money, because the ‘concept of money’ did not exist then.
That’s fine, for our discussion, if they traded favors, though you did not mention this.
Or if they traded debts.
Like, Joe owes me 3 chickens and 4 slaves, and I also owe you 2 chickens and 2 slaves, so we will go before the king, residing next to the temple and the marketplace, and transfer my debt to you to those owed to me by Joe.
Did they use it that way? That’s the only connection I can imagine having to do with our modern concept of money.
And in what units were those tallies, the physical objects (number of cows, etc) or a financial representation of those physical objects (money).
If physical objects then there have to be conversion tables, for example One Cow = 95 Chickens, and it is a small step to money as a unit of measure to replace complex conversions.
That’s a good point.
Do we have evidence of such conversions?
And more crucially, for anthropologists talk about missing links, do we have evidence of when coins that first arrived to specifically replace such tally sticks?
“This coin is struck to replace all tally sticks.” – that would be evidence of evolution.
A tool for recording credit and debts becomes a (rather arbitrary) tool for measuring the relative worth of two or more completely dissimilar items (like, I dunno, a wood chopping axe and a cow). The unit of worth then is the measuring tool itself.
I think it’s safe to say that Gödel’s first incompleteness theorem applies to any fixed definition for “money”. A uniform and “complete” definition of money is simply not possible without addition definitions of, and references to, the contexts in which it occurs (note the plural for contexts). I think Steve Roth gets this, at least in principle. I look forward to his next column.
So why does it never seem to occur to economists to confer with other fields? Curious about money? Forget the textbook, why not go over to the archaeology, anthropology, or history department and ask the guys there what they have on the subject? It’s literally just the next building over from you!
It’s a lot easier to get to Davos than it is to walk next door. There’s much more money in Davos too.
Your geography is all wrong. /sarc
I find it curious that not one commenter uses the word repeatedly stressed by the author, reciprocity, except by way of quoted excerpt. If I may, since all accounting ledgers from the ancient tally sticks to the current binary 1s and 0s are formalizations of this built-in expectation of reciprocity, one cannot understate its importance. For money to work as intended it is not enough for it to be backed by the ‘full faith and credit’ of its issuer — that faith and credit must be seen as credible by the users. Currency crises are invariably at their root collective losses of belief in said credibility, that is, loss of belief in the implied reciprocity of the underlying accounting system. And since reciprocity – whether money-mediated or not – underlies all human societies – it is no accident that there is a frequent linkage between societal/governmental collapse and currency crises, from the rampant coin-debasement of the late Roman empire to the Weimar hyperinflation and the rise of Nazism. I see ZH has another of their pet mentions of the former coin-debasement up today, “Currency and the Collapse of the Roman Empire” — they are correct in the importance of the episode, but I believe they have a symptom of the disease confused with the underlying malaise, which is loss of credibility of the government in terms of it being seen as representing the interests of its citizens.
When long-term mutually beneficial, i.e. reciprocal arrangements come to be seen overwhelmingly as one-sidedly beneficial to a narrow class of parasitical elites, that is when bad things are bound to happen, either in form of long-term malaise (typically marked by a large ‘underground’ economy) or a rapid collapse via revolutionary overthrow from within or via outside forces taking advantage of the weakness of the state and the popular discontent. Or, as often happens, a long period of the former culminating in the “…and then suddenly” of the latter. The death throes of the Roman Empire, after all, lasted for several centuries (even longer in its Eastern extensions).
Those passages in the U.S. Declaration of Independence and Constitution about “taxation without representation”, “the common defense” and “the general welfare”? They are at their heart expressions about expectations of reciprocity, or in the former case, the perception of a lack thereof. You states cede some of your sovereign rights to the new federal government, in exchange you will all benefit from the latter’s ability to provide for the common defense and the increased commerce that comes with that, common infrastructure of roads and post offices, and international trade agreements. You citizens allow us to levy taxes to pay for the aforementioned common goods and submit to a shared Rule of Law, and you will similarly benefit thereby. (The MMTers may quibble here, but whether the state explicitly takes in taxes or ex nihilo conjures up fiat and thus creates new claims on The People’s labors and goods is immaterial in my mind — the only salient question is whether those claims are fairly repaid in some broadly beneficial fashion.)
So, turning to our current state of recurring crises briefly papered over with monetary manipulations and confidence-asserting propaganda: The governments of the world collectively conjured up roughly a global GDP’s worth of full-faith-and-credit-creation and various wealth transfers (e.g. ZIRP/NIRP, central-bank asset-purchase programs, reflation of another global asset bubble) from hoi polloi to the corrupt banking cartels, and not one top-level crook was held to account. Where is the reciprocity in that?
Legitimate is another word and concept that needs closer scrutiny in todays world. When we reach the point of institutional illegitimacy we must be prepared for the next steps.
A strong case can be made that we are already well along the path of general decline and collapse, but fail to recognize the implications before us. The precariousness of our current situation masked by all the doubling down strategies implemented by the elites. The slow poisoning of the environment is probably one of the main characteristics that future generations- if around- will view with bewilderment. Similar to the reaction of people today viewing with distain the ancient practice of dumping human excrement in the gutters of early cities.
How a society deals with waste- how the term is defined and utilized reveals a great deal. The true measure of how “advanced” a society is how these problems are dealt with.
It seems to me we have yet to develop a strategy to effectively deal with our waste problem. We have just developed more complicated ways of dumping our waste directly into the environment.
Reciprocity toward nature is a practice that needs strengthening. It is placing social value on stewardship and penalizing abusers, not rewarding them.
The problem with money is the auditors can always be bought…there has never been an actual gold standard as it was always gamed or diluted…paper money is easier to analyze than gold for forgery…the ones who count the votes decide the elections…with only a few major firms blocking any real competition in auditing and all now doung the swiss association shuffle to avoid any cognitive liability…well it has always been this way..anyone who questioned the “rey” had better have an army behind them…otherwise they would be walked down to the special audit rooms in the cellar.
He who has the guns or goods(or in times of economic devolution…gold) gets to make up the rules this quarter…gold had some value as travel up until the last century was not easy…now it is valuable for those easily convinced theirs is the worst govt in the world and if they could only get to america…
The medium is not as important as the medium(mesmer)…that townhouse in manhattan is worth 200 times that same exact townhouse in bal’more because…
Marketing…salt was valuable and very few economic treatise take a moment to explain how gold replaced salt…
“Tally sticks go back twenty-five or thirty thousand years.”
And where were these tally sticks used 25,000 years ago?
As I understand it, every U.S. dollar in existence was brought into existence as a loan. When the principal of that dollar loan is paid back, those dollars are extinguished.
So all dollars currently in existence (whether electronic or in paper form) represent debts still owed. If you owe a dollar, you owe a debt. If you own a dollar, you own an asset.
The fact that someone’s debt is another person’s asset shows just how impossible it would be to actually have a debt jubilee.
Going off in another direction, loans require payback with interest. Where do the dollars come from to pay that interest? In a similar vein, where do profits come from? When you sell something for more than you buy it for, where does that profit come from? It has to be “created” somewhere else in the economy. Either the economy must be expanded to create it, or new markets must be found, or debt must be created to pay for it. That’s the basic fundamental flaw with the “capitalist” system.
I do not believe that if the monetary system was “reformed” that somehow all our troubles would go away. Debt is part and parcel of an economic system based on unequal ownership of private property and the rent extraction that results from that unequal ownership.
You still seem to be captured by gold standard like thinking.
This might help-
Stocks and flows.
I find it interesting that in the workplace, owners are constantly engaged in schemes to make employees more “productive”. Yes, new tools are purchased to increase production and efficiency, but implementing and problem solving the new equipment into existing production falls onto workers with little or no compensation.
Integration problems are masked by fixes developed through worker knowledge and ingenuity.
The value of this effort is highly discounted by owners- as is their nature- and interest.
An economics profession that fails to quantify this worker effort in any meaningful way reveals itself as a tool for owners and their drive to obtain something for nothing. Training your own replacement is another variation of this theme.
It seems the modern economy has evolved into a massive conjurors trick where one abstraction builds on another. The desire for a simpler and local economy are response to this phenomenon. The human psyche can deal with only so much abstraction until it cracks. Reality is healthy for a reason.
-Gertrude Stein – All About Money
As far as I can tell, about 1% of us believe that money is not money, and the rest of us believe that money is money.
Most of us believe that money is money because as Gertrude Stein said:
So here’s the problem: the 1% of the people, the ones who believe that money is not money, are in charge of everything.
It’s not natural that so few people should be in charge of so much, and that they should be in charge of ‘everything’ is truly crazy. (Please excuse the slight digression)
The people who are in charge of everything believe that it’s right, proper, indeed ‘natural’ that they be in charge of everything because they believe that no one could do as good a job of being in charge of everything because they think they are smarter than everybody else.
The reason that the 1% of people believe they are smarter than everybody else is rooted largely in what they believe is their self-evident, superior understanding of money; that is to say, the understanding that money is not money.
The trouble is, the difference between the 1%’s understanding of money, and the common man’s understanding of money is not evidence of the 1%’s superior intellect, so much as of their lack of a moral compass and their ability to rationalize the depraved indifference they show to their fellow man.
You’ve all heard the old saw:
Money isn’t important, it’s just a way of keeping score.
Most of us understand that’s not true, money is very important; but for the 1% who believe that money is not money, it’s a rationalization that explains/excuses their psychopathic behavior, the manipulation, and control of the systems of finance and commerce exclusively to their own benefit, at the expense of, and to the detriment of, everybody else.
All the manipulations, and game playing, and ‘score-keeping’ done by the 1%, who do not believe that money is money, make the lives of the rest of us much more difficult and precarious because it distorts the worth of the money we trade for our labor, and the cost of the things we must pay for in order to maintain our well-being.
It’s time to talk about gambling.
People who believe that money is money tend to be careful when they gamble, they only wager what they can afford to lose. They never bet the rent-money for instance, rather, they save up some ‘mad-money’, so-called because it is intended to be spent in a ‘crazy’ manner, and its loss will not result in eviction.
OTOH, people who believe that money is not money tend to gamble with any funds that they can lay their hands on, including not only their own rent-money, but other people’s rent-money as well.
This fact is so well known, or at least it used to be, that our country enacted laws to keep those who do not believe that money is money from gambling with other people’s money.
This of course was back in the days when at least some of the people we sent to Washington still believed that money is money.
Anyway, I’m tired of going crazy, I think Gertrude Stein is right, it’s time for us to make up our minds: is money money, or is money not money?
If money is money, then there should be clawbacks of bailout funds on a grand scale, and there should be a lot of bankers going to jail; if money is not money, then a lot of us deserve mortgage modifications, and to get bailed-out of our credit-card and student loan debt.
For starters anyway.
It’s a very important choice, why aren’t we making it?
It is striking how your conclusion clarifies your definition.
This is a very well-written persuasive argument. Does it meet the standard that the post sets?
Well, it seems to be an operational definition that demands action. And I like your conclusions. So, yeah, and thanks for posting.
Thank you for your consideration.
Reminds me of one of my favorite trick questions;
In the water, no that was after he jumped off the bridge.
On the bridge, no, that was before he jumped off the bridge.
In the air, no, that was after he jumped off the bridge….
You get the idea.
Framing is so important to this discussion, and most of us are frozen out of the conversation, and have no ability to modify the framing.
For the last fifty years or so, we haven’t had a representative at the table, for the last thirty years or so we haven’t had a witness, and lately they have been trying to make it illegal to know who is at the table, or what they’re doing.
The most powerful memes used to obfuscate the issue are;
1. ‘Entitlements’ amount to taking money from the hard workers who earned it, and giving it to lazy ‘takers’ who didn’t.
2. Government should live within it’s means like the rest of us have to.
We are invited to believe these are fare and just explanations of our economic problems, when the people pushing them clearing understand they are false.
It’s very hard to say exactly how this meets the standard of the post, but I believe it does, and if it wasn’t so hard to explain in simple terms, then most of us wouldn’t be so completely ignorant of the reality of the situation.
For a time, I worked with a guy who was an amateur magician. Card tricks and disappearing stuff found in others pockets and across rooms and such. Really good guy, very talented and entertaining. It was something to behold, up close and personal- knowing that it was some sort of trick- but not being able to detect the deception and method to the madness. A delight for all.
When trying to make sense of our economy and the role of money, I can’t help but relate the experience of the magicians art with that of our financial elite. When you merge speculation with common banking and societal needs for everyday financing, you enter a magically dysfunctional world. I would give more credit to the magician because his motivation is to entertain where more often than not the financier is motivated by graft and thievery.
Magic tricks all the same.
Just remembered also, my amateur magician coworker would never disclose how the tricks were done. First, we thought he was modest- but he was adamant about his nondisclosure stance. Under no circumstance would he reveal the secret to his art.
Secrecy, another clue that ones motivations might not be all that they appear.
Yes, I like that Norb,
There’s an ethical spectrum if you will, between the white magicians, and the black magicians.
Your friend’s style of magic surprised and delighted, whereas Jamie Dimon’s style of magic is macabre and leaves people homeless.
One is priceless.
My understanding ( following Wray) is that debt preceded money by a very long time. Money, as a unit of account designated by the King (sovereign), enabled debts (taxes and such) to the King to be satisfied and became used by others since the King used it and accepted it. Money was first a debt of the King, since he had to accept it in payment of his own tax. Others counted it as an asset. It came into existence before taxes when the King used it to ” buy” things. Sort of convenient too to satisfy debts as opposed to delivering a cow or half a cow in payment.
Another early use of money: to settle lawsuits–and so keep the peace and order in the city–by compelling an aggrieved party to accept payment of money in satisfaction for an injury, and so refrain from taking revenge. Money was therefore valuable to buy defendants out of trouble, and to redeem (there’s that word again) them (the individual, not the money) from servitude to make good on their obligations.
I find it hard to believe this article didn’t state the obvious. Money is a subset of property.
I’m late to the party, Steve, and you’re probably done monitoring this post, but if not, you might want to check out my earlier post here:http://www.nakedcapitalism.com/2015/06/the-standard-definition-of-money-is-in-error.html