The problem with Money in economics
by Benjamin on April 10, 2010
I spent yesterday at a workshop on “The Origin of Paper Money in Theory and Practice” which was thoroughly enjoyable, looking at how paper money had emerged, failed, succeeded and generally impacted people and economies in the past and today. Some consensus seemed to emerge that ‘paper’ money – unlike money on paper, which was missing the point – could emerge privately and publicly but its successful widespread use required some systemic / macro factors to be in place: Particularly the credibility of the issuer was paramount if they were to guarantee the value of the fiat, but there also had to be a social acceptance of instability. This was an interesting point I thought, and the argument was made that we can’t forget the issue of deception, if you trust someone 100% economic logic dictates that they will try to deceive you… This was attributed to Hegel and Adam Smith’s “Deception of Nature”, and the point was that people knew there was some risk in attributing value to a fiat, and they have to accepted this to have a widely used fiat money.
Some of the papers had stock-flow consistent models or purely theoretical models built around the quantity theory of money and similar devices and this led to some debate after the issue of a standard fiat money was raised. The argument was made that any fiat money needed a denominator, be it a price level, gold ingots, goods bundle or something which it could base its value on. I suggested that this was not the case, and there were several cases where paper money had been based on ability to pay taxes in that currency. The Maryland Dollar (1720-70) and French Asignat (1790s) were both examples of this, and papers presented by Farley Grubb and Patrice Baubeau had earlier talked about them, so it seemed an obvious thing to say. The problem is that economists don’t like modelling, or thinking about, money not based on a common denominator. “It feels wrong” was a comment made. The irony is that not only does it feel wrong, but in set theory, which all our economic modelling in this field is based on, it is wrong. Ben Fine has made the point in a paper well worth reading that money as a variable ‘M’ would be mathematically inconsistent if it values itself and stood as a measure of value for all other goods. Ironically that is exactly what fiat money does, and to avoid that in modelling we use M/x, where x is some denominator which, sadly, makes the money a relative price and not money at all. Funny thing money…
Tags: Asignat, Ben Fine, Economics, Farley Grubb, Maryland Dollar, money, Patrice Baubeau, Theory
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Robbin smith