There are two ways to increase your stock of money: 1. increase the flow in; 2. reduce the flow out.
There is only one way to increase your stock of any other asset: 1. increase the flow in.
(Unless you are a producer of that other asset. Or unless you are a dealer in that other asset, who both buys and sells and holds a buffer stock of inventory. But we are all dealers in money.)
Money is different because it circulates. That difference matters. If I want to increase my flow in, I must find some other individual who is willing to increase his flow out. Because trade is by mutual consent. And if everybody else is trying to do the same thing as me, I won't be able to find some other individual who wants to increase his flow out. But if I want to decrease my flow out, I can do it unilaterally. Quantity traded is whichever is less: the quantity buyers want to buy; the quantity sellers want to sell.
There is no circular flow of income; there is a circular flow of money. People in a barter economy still have income, when they trade the apples they produce for the bananas they consume, but nothing flows in a circle. And when money flows one way, something else flows the other way. That something else could be anything: newly-produced final goods; inputs like labour land and machine services; intermediate goods; or non-money real and financial assets. And if barter is too difficult, nothing else can flow unless money flows in the opposite direction.
If we observe a buyers' market for one good, it makes sense to ask what has happened to increase the supply or reduce the demand for that particular good. If we observe a buyers' market for lots of goods, it makes sense to ask what has happened to reduce the supply or increase the demand for money. Because every market is a money market: the demand for apples is a supply of money; the supply of apples is a demand for money.
If everyone wants to increase their stock of land, and the aggregate stock of land does not increase to satisfy their desire, there is nothing they can do in aggregate, and there is nothing they can do as individuals. They cannot buy more land (increase the flow in) because nobody is willing to take the other side of the trade.
If everyone wants to increase their stock of money, and the aggregate stock of money does not increase to satisfy their desire, there is nothing they can do in aggregate, but there is something they can do as individuals. They cannot buy more money (increase the flow in); but they can sell less money (decrease the flow out). And as individuals they will do what is individually rational, even though the outcome, like Prisoners' Dilemma, is collectively irrational. So the circular flow of money falls, and the flow of everything else in the opposite direction falls too. And since exchange makes people better off, that reduction in the volume of exchange makes people worse off. We call that a recession.
I've said all this before (and it's all in Yeager and Clower and others). But maybe I've said it clearer this time.
Thank you for this. Clearest expression of the link between demand shock and money supply. Does that mean then that excess money supply would cause a supply side recession. If not, why is the argument not symmetric?
Posted by: Yoms | June 25, 2018 at 11:59 AM
I would say there is something they can do. They can direct more of their income, add more debt, and sell other assets to pay higher prices for it. They can't acquire more in aggregate, but they can value it more highly until they don't, and when that happens, prices fall. Bubbles grow and bubbles burst, though at a cost to the rest of the economy unless fed with money. It is under those circumstances, a burst, they want to increase their stock of money. Money is still unique in that it can delay or prevent the return flow after a burst, though the loss of wealth effect plays a role, it is the result of not being able to liquidate those assets and increase their stock of money at previous levels.
Posted by: Lord | June 25, 2018 at 01:24 PM
It has been said before but economists still don’t get it
Comment on Nick Rowe’s ‘Hydraulic Monetarism’
Nick Rowe concludes: “I’ve said all this before (and it’s all in Yeager and Clower and others). But maybe I’ve said it clearer this time.”
It has been said before: microfounded economics from utility maximization to supply-demand-equilibrium is false for 140+ years but one fraction of economists does not grasp it (= Orthodoxy) and the other fraction has never come forward with a superior alternative (= Heterodoxy). The theory of money circles in the endless loop of repetition ― except for MMT.
MMT has made the valid point that orthodox monetary theory is stuck with ridiculous barter stories and entirely misses the reality of fiat money. Fiat money does not circulate but is permanently created and destroyed. So, there is no fixed stock of money to begin with. Let us call this lethal blunder of Orthodoxy the Moneybag Fallacy.
The Moneybag Fallacy was rectified by Wicksell and his giro system but for some reason, the news never illuminated the mental darkness of the Quantity Theory folks.
In the monetary economy, there is no direct barter, i.e. part of the stock of good 1 against part of the stock of good 2, but indirect barter, i.e. flow of labor time against flow of goods. Money is created by wage payments and destroyed by consumption expenditures. In the most elementary case C=Yw, that is, consumption expenditures are equal to wage income, that is, money is zero at the beginning of the period under consideration, is then created and destroyed through the transactions between the business and the household sector, and is zero at the end of the period. NO moneybag there! No circulation there! NO hydraulics there!
In the elementary production-consumption economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.
• In case (i) the monetary saving of the household sector Sm≡Yw−C is zero and the monetary profit of the business sector Qm≡C−Yw, too, is zero. The product market is cleared, i.e. X=O, in all three cases.
• In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
• In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.#1
It always holds Qm+Sm=0 or Qm=−Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law.
In case (ii)
• the household sector ends up with a stock of money = deposits at the central bank and the business sector ends up with overdrafts,
• the change of the household sector’s stock is given by ΔM=Yw−C,
• the economy falls into recession.
In case (iii) it is just the other way round.
The household sector’s stock at the end of period t is given as the numerical integral Mt=∑ΔM+M0 with M0 = zero.
Both the commonplace Quantity Theory and Hydraulic Monetarism is proto-scientific garbage.
Egmont Kakarot-Handtke
#1 Money and time
https://axecorg.blogspot.com/2017/07/money-and-time.html
Posted by: Egmont Kakarot-Handtke | June 25, 2018 at 01:56 PM
I think you are making a valid micro-economic argument here. You set the supply of money into the same category (fixed) as the supply of land. Individuals cannot change the supply of either money or land.
Still on the micro-economic level, this rigidity of supply creates a precondition that requires barter-like trade in every monetary exchange. Every trade is an asset (land, labor, product) traded for another asset (money).
Moving to the macro-level, money supply is not fixed. Banks are seen to create money as they create deposits accessible by borrowers.
In contrast to the micro-economic level where every trade is asset-for-asset, the borrower-from-a-bank has the opportunity to trade a newly created asset. This lucky borrower is trading a right-to-an-asset for a real asset.
Of course, a right-to-an-asset looks exactly like money. Effectively, the money supply has increased and the borrower gets an asset by offering nothing more than a promise to repay.
Recessions follow prolonged reductions in the average volume of borrowing.
Posted by: Roger Sparks | June 25, 2018 at 02:58 PM
"If everyone wants to increase their stock of money, and the aggregate stock of money does not increase to satisfy their desire, there is nothing they can do in aggregate..". That is true of base money but not of commercial bank money. I.e. (and contrary to the latter quote), it is perfectly possible for anyone to increase their stock of commercial bank created money anytime, while at the same time, no one else reduces their stock: all they need do is apply to their bank for a loan, and assuming the bank thinks they are credit-worthy, or if they can produce enough collateral, the bank will immediately credit $1,000, $1,000,000 or whatever amount the borrower wants to the borrower's account.
Posted by: Ralph Musgrave | June 25, 2018 at 03:47 PM
To add to what Roger and Ralph said above -
It seems this model needs to grapple with credit. Spending doesn't just come out of a stock of existing money, it can also come from credit secured against existing assets, or even against the idea to build a new asset. So if everyone wants to increase their stock of money, including me, but I also want to maintain my spending, I can borrow against my long lived assets even as my money income falls. So for a recession to happen, either banks need to be more tight-fisted when others want to increase money stocks, or economic agents need to be averse to taking on debt at a time that they also seek more liquidity.
Posted by: louis | June 25, 2018 at 04:10 PM
Ralph,
And likewise, someone that wishes to reduce their stock of money need not do it by buying goods from another person. They can retire that existing $1,000, $1,000,000, or whatever amount was borrowed.
Going further, in two party credit arrangements, the choice of when to take on a loan and when to repay it is left primarily to the borrower.
With triparty arrangements, that may not be the case. Simple triparty arrangement:
Party #1 - Borrower
Party #2 - Lender
Party #3 - Collateral issuer
A loan is approved whenever two of the three parties agree that the loan should be made (voting majority).
Notice that a loan may be "forced" onto a borrower even though he / she voted against it.
Likewise, payments on the loan are accepted, rejected based upon a voting majority.
If a borrower tries to make a payment and both the lender and the collateral issuer vote against it, then the payment is rejected.
Nick, this is related to your post from a while back regarding "The market for Lemons (vehicles not the fruit)".
Posted by: Frank Restly | June 25, 2018 at 04:24 PM
Frank, It's unusual for a loan to be forced on a borrower isn't it? That would be possible if the lender and collateral issuer had some sort of hold over the borrower, e.g. if the borrower was already in debt to the lender and the lender was already in a position to force the borrower into bankruptcy.
That sort of thing took place in the recent crisis when the Fed (as I understand it) forced some banks to borrow from the Fed. Presumably the Fed was able to do that because of laws which are peculiar to banks, i.e. which do not apply to normal creditor/debtor relationships.
Posted by: Ralph Musgrave | June 25, 2018 at 04:38 PM
Yoms: thanks.
"Does that mean then that excess money supply would cause a supply side recession. If not, why is the argument not symmetric?"
You get it. Yes, it is symmetric, but only in a competitive economy that starts out (in full equilibrium) where demand=supply. If sellers have market power, so set price above the competitive equilibrium even in normal times, the quantity of goods traded is demand-constrained at that price (at a given price above Marginal Cost, sellers always want to sell more taking that price as given). So if money supply increases, quantity of goods traded can increase a "small" amount, before it hits the MC curve and symmetry kicks in. That was one of the insights of New Keynesian macro, when they switched to monopolistic competition.
Roger (and Ralph and louis): "Moving to the macro-level, money supply is not fixed. Banks are seen to create money as they create deposits accessible by borrowers."
True. The money supply is not fixed. But will it always respond by exactly the right amount if demand for money increases, and never fall more than exactly the right amount if demand for money decreases? That depends. It depends inter especially on what the central bank is doing.
Posted by: Nick Rowe | June 25, 2018 at 04:49 PM
Ralph,
"That would be possible if the lender and collateral issuer had some sort of hold over the borrower, e.g. if the borrower was already in debt to the lender and the lender was already in a position to force the borrower into bankruptcy."
Not necessarily. The tri-party arrangement could be created on a whim to serve the interests of all three parties.
Obviously a bank needs a steady stream of borrowers to stay in business and so a bank would surely like to have someone lined up ready to borrow in the event of an economic downturn.
Obviously an individual would like to have ready access to credit whenever the need arises and so that access would be worthwhile to have.
The collateral issuer's needs are a bit more convoluted - we can presume that he / she is carrying some of the credit risk normally assigned to the borrower only and that he / she is also reaping a portion of the income that the bank receives. And so, the collateral provide gives him / her a means of creating a cash flow from that collateral.
The problem for the collateral provider is that the market value of most assets (houses, machinery, etc.) fall during a recession - when the bank is looking hard for potential borrowers and potential borrowers are struggling to obtain loans.
What is needed is a countercyclical form of collateral. I can think of only one entity that could successfully offer such a thing.
Posted by: Frank Restly | June 25, 2018 at 04:51 PM
Ralph,
Consider that with two party credit creation there are four possible voting outcomes:
Borrower - Yes, Lender - Yes
Borrower - No, Lender - Yes
Borrower - Yes, Lender - No
Borrower - No, Lender - No
It can be seen that only 1/4 (25%) of situations will a loan be approved. Now consider the tri-party arrangement voting outcomes:
1. Borrower - Yes, Collateral Issuer - Yes, Lender - Yes
2. Borrower - Yes, Collateral Issuer - Yes, Lender - No
3. Borrower - Yes, Collateral Issuer - No, Lender - Yes
4. Borrower - Yes, Collateral Issuer - No, Lender - No
5. Borrower - No, Collateral Issuer - Yes, Lender - Yes
6. Borrower - No, Collateral Issuer - No, Lender - Yes
7. Borrower - No, Collateral Issuer - Yes, Lender - No
8. Borrower - No, Collateral Issuer - No, Lender - No
Here, a loan is approved for voting outcomes 1, 2, 3, and 5 (4/8 or 50% of the time).
The presumption is that in as much as a the central bank should be the lender of last resort, the federal government should be the borrower of last resort.
That need not be the case.
Posted by: Frank Restly | June 25, 2018 at 05:14 PM
Apologies for the off-topic comment: it was funny to read this post as an ecologist, because we also deal with stuff that only has a unidirectional flow, and other stuff that circulates. Ecosystem ecologists will tell you that "energy flows, materials cycle", where by "cycle" we mean what Nick means by "circulates" or "flows in a circle".
For instance, when a predator eats a prey, there's some loss of energy involved in the transfer, if only because of the laws of thermodynamics. It's only ongoing inputs of solar energy (or in a few cases, inputs from other sources like deep sea hydrothermal vents) that keep the biosphere going. But there's no loss of materials--atoms of carbon or nitrogen or whatever don't vanish. Rather, materials circulate.
In economics, money is unique because it circulates. In ecosystem ecology, energy is unique because it flows. I doubt this indicates some interesting or profound contrast between ecosystems and economies; I think it's just a funny coincidence. After all, in ecology, much of the flow and much of the cycling isn't to do with trade in the economic sense.
Posted by: Jeremy Fox | June 25, 2018 at 05:47 PM
Anyone can issue a dollar just by writing "IOU $1" on a piece of paper and finding someone who will accept that IOU for goods. Anyone can retire a dollar just by canceling one of those IOU's. Both the supply of dollars and the demand for dollars are horizontal lines, with a height equal to the value of a dollar. A slight change in that value, and the "flow in" or "flow out" can go from zero to infinity instantly.
Posted by: Mike Sproul | June 25, 2018 at 07:08 PM
Jeremy: it's always interesting to compare the two. You presumably also have a stock/flow distinction in predator-prey models? A stock number of each animal, and a flow of births and deaths per year.
Mike: If I can write "IOU $1 signed Nick Rowe" and get it accepted at my local pub in exchange for cider, *and* if my local pub can in turn use it to pay wages to its workers, who in turn use it to pay rent, etc., because everyone in the village recognises my signature and trusts my promise, and this is common knowledge, then I can produce money. But they all seem to prefer IOUs from the banks.
Posted by: Nick Rowe | June 25, 2018 at 08:33 PM
Nick:
Yes, any predator-prey model or other similar model will make that stock-flow distinction, just as you describe.
As an even more off-topic aside, one of the toughest challenges in teaching ecology is getting students to think in terms of flows, not stocks. Not everyone takes that flow-based perspective to heart; many ecologists think in terms of stocks (and statistical predictors of stocks): https://dynamicecology.wordpress.com/2017/11/16/the-two-kinds-of-ecologists/
Posted by: Jeremy Fox | June 25, 2018 at 09:30 PM
Nick
Of course people prefer IOUs from well known issuers like banks, but those issuers have horizontal money supply curves, and we are back in the world where money demand curves and money supply curves are horizontal lines, with a height equal to the value of money.
Posted by: Mike sproul | June 25, 2018 at 10:01 PM
Jeremy Fox raises an interesting point, especially regarding crypto-currencies.
Also food stamps. And counterfeit money.
Also: given the premise of this post, should governments go to money-financed fisxal programs for stimulus, rather than QE?
Posted by: Benjamin Cole | June 26, 2018 at 02:29 AM
Mike: A central bank with a price level target would try to make the money supply curve horizontal at a fixed CPI. But that is a price of $1 *in terms of a specified basket of real goods*. Saying the money supply curve is horizontal at a price of $1 doesn't tell us much.
Posted by: Nick Rowe | June 26, 2018 at 07:56 AM
Nick Rowe asks whether commercial bank issued money will “always respond by exactly the right amount if demand for money increases, and never fall more than exactly the right amount if demand for money decreases?”
My answer to that is that commercial banks always lend to anyone who is credit-worthy and wants a loan, so to that extent my answer to Nick’s question is “yes”.
Another interpretation of Nick’s question is whether commercial banks expand and contract the total amount of their lending by the right amount to deal with booms and slumps. The answer is pretty obviously not: commercial banks take part in the “tulip mania” that drives booms. Then they have a fit of depression when the slump hits, and call in loans, which exacerbates the slump. The latter “yes and no” answers clash a bit of course, but do not amount to a flat self-contradiction.
And finally I’m pleased to see Nick’s retirement does not mean retiring from posting on this blog.
Posted by: Ralph Musgrave | June 26, 2018 at 08:07 AM
Nick: If I can write "IOU $1 signed Nick Rowe" and get it accepted at my local pub in exchange for cider, *and* if my local pub can in turn use it to pay wages to its workers, who in turn use it to pay rent, etc., because everyone in the village recognises my signature and trusts my promise, and this is common knowledge, then I can produce money. But they all seem to prefer IOUs from the banks.
But transactions don't need bank IOUs to rise above barter. If you lack bank IOUs (b/c for whatever exogenous reason they have gone scarce economywide, or because you forgot your wallet at home), then you can ask your local pub to run up a tab for you. The transaction still happens. The pub can in turn tell its distributor that it needs 30 days to pay on its next delivery of kegs. The delivery still happens. Unless you grapple with debt and changes in the desire to provide credit or take on debt, you can't get a full picture of the business cycle.
Posted by: louis | June 26, 2018 at 09:14 AM
There's an important distinction between classic monies and implied credit like the bar tab: the latter has credit risk.
The bar does not carry my tab on its books as an asset like cash, it's instead an asset with a term structure and nonzero risk. It can't directly use those tabs to pay its suppliers and workers, it needs to wait for their repayments; that affects the bar's business practices. Mostover, a bar's behaviour can change _now_ because of new information it learns about my creditworthiness with respect to my already-existing tab, whereas there is no such link if I paid in cash.
I do think that many general equilibrium stories pay too little attention to debt and risk, but I also think that these factors are usually moderate corrections to a background that looks very much like Nick's story.
In particular, we have the empirical observation that debt levels (and M2 levels, for that matter) respond with the proper sign to central bank actions that target base money. That means that as long as risks remain constant, every one of the above informal-monies looks like real money (potentially at a discount) for the purposes of Nick's cartoon.
Posted by: Majromax | June 26, 2018 at 01:31 PM
Nick Rowe
You said in the intro: “If everyone wants to increase their stock of land, and the aggregate stock of land does not increase to satisfy their desire, there is nothing they can do in aggregate, and there is nothing they can do as individuals.”
To compare money with land is as gaga as it gets. MMTers don’t get tired of shouting from every rooftop that money is produced out of nothing at almost no costs. As a matter of principle, the economy NEVER runs out of transaction money if the central bank understands what their primary task is.#1, #2
The apparatus of supply-demand-equilibrium is inapplicable to fiat money. To speak of a money “supply” is the Moneybag Fallacy all over again.
If every household “wants to increase their stock of money” they reduce their consumption expenditures. In this case, C is less than Yw and the deposits of the household sector (= money) increase and the overdrafts of the business sector increase also because the business sector makes a loss and both sides of the central bank’s balance sheet are always equal.
The same holds for a gold-coin economy. If the business sector pays the workers in gold coins and they fully spend their income, i.e. C=Yw, then the coins return to the business sector. If the households save, i.e. C less than Yw, then the household sector’s stock of coins increases until the end of the period under consideration and the business sector’s stock decreases. The business sector makes a macroeconomic loss and this triggers a recession.
In the elementary production-consumption economy, nobody can stop the households from increasing their stocks of money as long as they receive a wage income. The form of money, fiat money or gold coins, is irrelevant.
The household sector’s stock of money develops according to the discrete numerical integral Mt=∑ΔM+M0, and the business sector’s stock is the exact mirror image except for the initial stock which, however, is zero in a fiat money system.#3
Economists never got the relationship between macroeconomic flows, differences of flows, change of stocks, and stocks straight.
Egmont Kakarot-Handtke
#1 The creation and value of money and near-monies
https://axecorg.blogspot.com/2017/12/the-creation-and-value-of-money-and.html
#2 MMT: Richard Murphy’s battle-for-money hoax
https://axecorg.blogspot.com/2018/06/mmt-richard-murphys-battle-for-money.html
#3 Reconstructing the Quantity Theory
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1895268
Posted by: Egmont Kakarot-Handtke | June 26, 2018 at 01:34 PM
LOL. The demand for money has its finite limits. The 1-2 qtrs. of 1981 is documentary proof.
Posted by: Spencer | June 26, 2018 at 05:29 PM
Nick:
"Saying the money supply curve is horizontal at a price of $1 doesn't tell us much."
True, but saying it's horizontal at 1 ounce per $ tells us a lot. Specifically, it tells us that the value of money is not determined by "flow in" and "flow out".
Posted by: Mike Sproul | June 26, 2018 at 06:40 PM
Majro -
I get that a bar tab is an imperfect substitute for hard cash. Money is useful for all the reasons you describe, and if the CB decides to capriciously decrease the supply of money, the effects will be felt in trade activity.
That said, there is a qualitative difference between currency and credit. Currency, as Nick decribed it in the scaled down model of the OP, is exogenous and a hard constraint. If I don't have cash flow in, I cannot send cash out. In a world of credit, these constraints are a lot softer.
Posted by: louis | June 26, 2018 at 10:55 PM
I have seen casino chips used for cash in Las Vegas.
Posted by: Benjamin Cole | June 27, 2018 at 12:27 AM
Benjamin Cole, louis, Majromax, Jeremy Fox, Frank Restly, Roger Sparks
The history of money from the cowrie shell to bullion to coins to notes and to the credit card shows a clear tendency of progressive abstraction. The conclusion of the history of money is that money is information and that the concrete forms of monies are nothing but different data carriers. In the monetary economy of the digital age, the ultimate data carrier is the server at the central bank.
The pathetic blunder of monetary theory is the Fallacy of Insufficient Abstraction. Your idiocy consists of getting caught by the numerous outer forms of money. The abstract essence of the phenomenon is this: Money = Information. There is no ambiguity about money. Money is deposits at the central bank. Bank deposits are near money, not money.#2 And all other historical forms have to be treated as surrogates/substitutes/prefigurations of the real thing.
The theory of money is macro. Some people have realized this: “However, Post Keynesians and Circuitists both hold strongly to the view that the orthodox approach of firstly analyzing a barter economy, and then adding on money as an afterthought, is unhelpful as a foundation for any economic analysis.” (Fontana)
So you are way behind the curve. The theory of money has to be built upon macrofoundations and not upon silly microeconomic barter or casino stories. The analytical framework is given by the ‘monetary theory of production’ (Keynes).
The remark “I have seen casino chips used for cash in Las Vegas” is not a contribution to the theory of money but proof that the representative economist has no idea about how the monetary economy works and how money functions.
It is a wonder of Nature that a dead brain does not impair the faculty of blathering in the econoblogosphere.
Egmont Kakarot-Handtke
#1 Money: from silly stories to the true theory
https://axecorg.blogspot.com/2017/07/money-from-silly-stories-to-true-theory.html
#2 Basics of monetary theory: the two monies
https://axecorg.blogspot.com/2017/10/basics-of-monetary-theory-two-monies.html
Posted by: Egmont Kakarot-Handtke | June 27, 2018 at 04:44 AM
Quite correct Egmont;and this information represents and has always represented nothing more than legal rights and duties. This is why those who harp on about cryptocurrencies as being some sort of solution have no idea what they are trying to solve
Posted by: Dean | June 27, 2018 at 09:48 AM
"If everyone wants to increase their stock of money, and the aggregate stock of money does not increase to satisfy their desire, there is nothing they can do in aggregate"
Everyone owns the currency issuer, so turn up the loss knob. Call it an opportunistic devaluation, losses by the currency issuer. The devaluation soon halted when the consensus lost.
This is incompressible hydraulics, information instantly transmitted relative to trade, the billiards model.
Posted by: Matthew Young | June 27, 2018 at 02:10 PM
Sorry, Egmont, I don't follow.
If money matters, it is because it facilitates transactions. That was embedded in Nick's fable above, where the consequence of insufficient money in the system is the failure to consummate economically rational transactions to be consummated. And to the extent that agents in the economy are not fully dependent on central bank money to transact, that matters.
Also, I want to know what's added by saying "everyone wants to increase their holdings of money" against "everyone wants to increase their net creditor position" (i.e. the paradox of thrift).
From a financial markets perspective I understand a run to safe assets or to liquidity can have spiraling, damaging effects, but that's not exactly what is being discussed here.
Maybe it's just been too long since Nick last posted and his lessons have gone stale in my mond.
Posted by: louis | June 27, 2018 at 06:22 PM
Egmont,
Regarding this:
"However, Post Keynesians and Circuitists both hold strongly to the view that the orthodox approach of firstly analyzing a barter economy, and then adding on money as an afterthought, is unhelpful as a foundation for any economic analysis."
Simplistic stripped down models can aid in understanding - it all depends on your audience.
Also, barter models are helpful (to me at least) in that credit can existing in those models.
This is illustrative in showing that on a high level of abstraction, an interest rate is not the cost of money but rather the cost of time - time being a precious resource that is fixed for each of us.
Posted by: Frank Restly | June 27, 2018 at 08:52 PM
Frank,
I agree that simplistic stripped down models can aid in understanding, but starting with barter is fraught with danger, because no where in any barter models I have seen is the cost of ownership of both the thing being bartered and the means of producing that thing, factored in to the models. It's treated as if basic exchange/barter is immune from costs of ownership. A recent illustration of using three fruits trees did not factor in the cost of owning those trees, which need to be passed on otherwise the owners will eventually face bankruptcy. Those costs cannot be paid in basic one on one exchanges (i.e. apples for bananas).
I find it much easier to explain the monetary economy as it stands today by first taking people back to feudal times, when the owners were the King, the Barons, Churches etc, and the peasants worked for all the heirarchy above and taxes/homage/tithes/rents etc were originally paid in real goods and services. The costs of ownership were both to pay homage to the class above (such as a Baron to the King), and to ensure workers had what they needed to work the land etc so that the goods produced by peasants could be passed up the chain. Whenever rulers/lords etc wanted to stock up to prepare for wars, or they needed extra provisions for emergencies/disasters etc, they could 'pre-purchase' these taxes/rents etc by issuing tokens which acted as 'proof of payment' when tax/rent collectors made their periodical collections. Before tax time these tokens could be circulated and exchanged for goods and services. As soon as the ban on charging interest was lifted, these same tokens then became a source of profit, i.e. lent at interest. Banks opened up and could lend out credit based on certain amount of deposits and away we went and here we are today.
We basically operate under a feudalistic system today, where debtors must work to pay creditors. Creditors are the modern day feudal lords. They must pay taxes/rents etc and they must also ensure workers can work, all of which will be passed on to consumers. The monetary economy is merely the means by which all of this is played out. There is no economic activity that takes place within the primary markets which is immune from the costs of property ownership.
Posted by: Dean | June 30, 2018 at 07:09 PM
Dean,
I understand that "token money" preceded bank credit.
However, that doesn't mean that credit failed to exist prior to the creation of banks.
In the simplest instance, I pledge to help you plant corn this week if you help me pick apples next week.
This is just my opinion of course, but I believe that in teaching economics - starting with barter, then money (tokens), and finally credit - gives the false impression the existence of credit is predicated on the existence of money and that credit interest is by definition "the cost of money".
Posted by: Frank Restly | July 02, 2018 at 06:00 PM
Money, cowrie shells or script, was formalized when the village grew too big and exceeded the Dunbar limit.
Posted by: Jacques René Giguère | July 03, 2018 at 10:23 PM
Jacques René Giguère
You say: “Money, cowrie shells or script, was formalized when the village grew too big and exceeded the Dunbar limit.”
You confound historical storytelling with scientific theory. A historical account of the various forms of money is NO substitute for the theory of money, just as the history of the burning of Rome, London, San Francisco etcetera is no substitute for the theory of thermodynamics.
The theory of money has to be embedded in a consistent macroeconomic framework or in what Keynes called the ‘monetary theory of production’.#1, #2
The subject matter of economics is how the actual monetary economy works and NOT historical storytelling.#3
Egmont Kakarot-Handtke
#1 The ultimate ― analytical ― origin of money
https://axecorg.blogspot.com/2017/07/the-ultimate-analytical-origin-of-money.html
#2 How money emerges out of nothing ― the functional account
https://axecorg.blogspot.com/2017/07/how-money-emerges-out-of-nothing.html
#3 It has been said before but economists still don’t get it
https://axecorg.blogspot.com/2018/06/it-has-been-said-before-but-economists.html
Posted by: Egmont Kakarot-Handtke | July 04, 2018 at 04:35 AM
Hi Frank,
My point had little to do with whether or not credit preceded token money or the other way around. My illustration was however aimed at demonstrating that exchange of any sort requires ownership first.
Your example of pledging to help me in exchange for helping you has not factored in that both of us must own the fields and groves and that this ownership has costs. We cannot just ignore these taxes when modelling the effects. Because property ownership has costs we must do more than just barter. Bartering does not provide the means to pay these costs.
Posted by: Dean | July 05, 2018 at 01:44 AM