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Post by JP (admin) on Feb 16, 2019 12:57:27 GMT
In the comments section to a JP's blog a couple of months ago, I suggested something along these lines: There should be no Theory of Money, but a Theory of Exchange. This theory of exchange should explain how people, either as individuals or as members of an institution, exchange goods and services with each other. In our Theory of Exchange, we will use language that doesn't include the word 'money'. Roughly speaking, there are at least two main ways we can exchange goods in (I leave gifting away, as it's not really an exchange -- quid pro quo; many of the so called "gift economies" fall under option 2b below): 1. Barter on the spot 2. Delayed barter (2a. Delayed bilateral barter) (2b. Delayed multilateral barter)Option 2 involves uncertainty due to the delay. There's debt. We call it debt on the debtor's side and credit on the creditor's side; a debtor has made a promise to deliver goods later, while a creditor has accepted that he will be provided with goods later. We should probably start by looking at actual exchanges of goods, and see what is going on. Amos meets Daniel. Amos gives Daniel a banana. If Daniel is giving a good in return, and the intrinsic values of both goods seem to more or less match, then we are probably witnessing barter. Both parties are at the same time buyers and sellers. If this is not the case, so that one of the goods is generally recognized as inferior when it comes to intrinsic value, or, even more so, if there is no good at all delivered by one of the parties, then we must be witnessing delayed barter. All financial instruments, "paper wealth", are part of category 2, delayed barter. Do you find anything controversial in this? I mean, if I'm paying Amos with a banknote and he's giving me a banana, then I think it's a case of 1, barter on the spot. There is no delay involved in the transaction. The moment the banknote passes between our hands and the banana is rendered, our commercial relationship is over. That's one of the nice advantages of paying with banknotes rather than store credit; it provides finality.
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Post by Antti Jokinen on Feb 17, 2019 9:00:07 GMT
Well, lack of credits (again, money) in hand results in a lack of buying choices. Conversely, If you have money in hand, you can buy anything for sale that carries a price less than your available money. More money-in-hand results in more choices. Money has an enabling characteristic. This is simply not true. Often you have more or less the same choices even if your account balance is zero, as long as your bank is OK with you overdrawing your account. The seller will never know you didn't have credits, or money. He probably assumes that you did. How could you otherwise "transfer" credits to him? Well, you didn't. The bank just credited his account.
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Post by Antti Jokinen on Feb 17, 2019 9:36:07 GMT
JP said: Yes, your (direct) commercial relationship is over. And that can usually be considered an advantage. But that's true for multilateral delayed barter, too, right? (If you don't agree, I need to elaborate on the definition of multilateral delayed barter.)
The banknote you talk about has nearly no intrinsic value. How could it be barter on the spot? To retain at least some continuity in the terminology, I think 'barter' should be an exchange of goods.
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Post by Roger Sparks on Feb 17, 2019 15:11:16 GMT
Your truth denying explanation contains a hidden enabling assumption. The hidden assumption is that "your bank" has the ability to provide credit/money to you. Lacking this ability to provide money, the bank would be unable to allow you to overdraw your account. I am surprised that you don't agree with me in-that money has an enabling characteristic.
(While your bank may provide you credit, it must be ready to provide actual money to the people you transact with, who likely have a not-your-bank account system.)
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Post by Antti Jokinen on Feb 18, 2019 9:52:48 GMT
I guess what I say sounds somewhat like mainstream macro? As far as I know (and I could be wrong), the difference is this: Mainstream macroeconomists don't seem to understand how currencies like the dollar and the euro function as abstract units of account. And (again, to my knowledge) they seem to think that people are lending and borrowing goods to and from each other, while the banks keep records of these loans. In real life, people are giving goods to, and accepting goods from, each other. These are no loans. Could you explain this to me, I don't quite follow. I start with a disclaimer: I'm still trying to figure out how various theories, ours included, differ from each other. As you know, I'm an accountant, not an economist. I should probably be more careful with what I label as "mainstream macro". Here I was thinking about the Arrow-Debreu model which is a (perfect/efficient) barter model, and has no place for money. Superficially that sounds similar to me saying that trade is all about barter, exchanging goods for goods (with the implicit assumption of a lifetime budget constraint), while saying that "money doesn't exist". Also, as you might remember from our earlier discussions, JP thought that in my insistence on "making money disappear" I sounded like Michael Woodford. Here's Stan Fischer analysing Woodford's Interest and Prices: "One of Woodford's most interesting results is that it is often possible to study monetary policy without having money in the model. In these cases, monetary policy is conducted using the interest rate as the monetary policy instrument." As you well know, any resemblance is just superficial. I'm trying to describe the world as it is, so that every phenomena related to what has earlier been called 'money' is described. But it is described from a different angle; so different, that one can quite reasonably claim that "money disappears". Within that description, it ultimately doesn't make sense to say that banks create money or, for instance, that banks transfer funds from one account to another or that the seller receives money from the buyer (outside the special case of using cash). The abstract units of account claim I made I'm not so sure about. We can perhaps discuss it later. The lending and borrowing goods part was mainly a reference to loanable funds models. Here's BoE's Jakab and Kumhof on those models: By "real savings" they mean existing goods that are not consumed. (You might notice that Jakab's and Kumhof's description of the real world in their paper is not too useful from my vantage point either.)
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Post by JP (admin) on Feb 18, 2019 22:12:26 GMT
JP said: Yes, your (direct) commercial relationship is over. And that can usually be considered an advantage. But that's true for multilateral delayed barter, too, right? (If you don't agree, I need to elaborate on the definition of multilateral delayed barter.) The banknote you talk about has nearly no intrinsic value. How could it be barter on the spot? To retain at least some continuity in the terminology, I think 'barter' should be an exchange of goods. Could just be a definitional thing. How do you classify a banknote transaction between me and Amos versus one where I give him my 30-day IOU? In the first, there is no uncertainty between us, no delay. The trade is final. But in the second, Amos has to hope that in 30-days I settle with him. If I skip town or go bankrupt, then my IOU is worthless and he's lost a banana.
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Post by Antti Jokinen on Feb 19, 2019 9:48:50 GMT
Could just be a definitional thing. How do you classify a banknote transaction between me and Amos versus one where I give him my 30-day IOU? In the first, there is no uncertainty between us, no delay. The trade is final. But in the second, Amos has to hope that in 30-days I settle with him. If I skip town or go bankrupt, then my IOU is worthless and he's lost a banana. This seems to hang on the definition of 'barter'. Yes, when you give Amos a banknote, there's no uncertainty or delay between you two. But giving up a banknote for a banana is not a barter transaction, is it? From your point of view, there must a be another leg to this exchange, a transaction where you provide goods or services to someone else. The underlying assumption here is a lifetime budget balance, meaning that you must provide an equal (nominal) amount of goods and services to others compared to the (nominal) amount of goods and services you receive from others. A reasonable assumption? You probably understand the basics of an Arrow-Debreu-type of model as well if not better than me. As I mentioned in my comment above, it is considered a barter model. I simplify: Agents exchange goods for other goods. At time zero, some mysterious auctioneer calculates prices for all goods and then all participants engage in trading, still at time zero. Amos sells a banana to you, you sell apples to Daniel, and so forth. Everyone's total sales must equal their total purchases, but there's no constraint on bilateral balance. Once time finally starts running, all that is left to do is for all the participants to deliver the goods they have promised, at an agreed point in time (there's delay). In the model there's no uncertainty related to these deliveries. But even if there was, the transaction where you buy a banana from Amos is final once he has delivered the banana -- there's no debt between you two. The model is obviously not an accurate description of reality. But I do accept the starting point which is that trade is ultimately about exchanging goods for other goods (ie. bartering). Do you? And if neither of us considers a banknote a good (I think many mainstream economists do, but we don't, right?), then we must by definition be witnessing delayed barter when there's a banknote, or a bank ledger, involved in the transaction. A more general rule (excluding gift-giving and theft): It is a sign of delayed barter when goods flow only in one direction, from a seller to a buyer. To answer your question above: If your IOU to Amos is about you delivering goods to him in 30 days' time, then I'd classify it as delayed bilateral barter. Anything involving banknotes is delayed multilateral barter, because, as you point out, you don't owe the seller anything when you give him a banknote and he accepts it.
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Post by oliver on Feb 19, 2019 9:49:52 GMT
I should probably be more careful with what I label as "mainstream macro". Here I was thinking about the Arrow-Debreu model which is a (perfect/efficient) barter model, and has no place for money. Superficially that sounds similar to me saying that trade is all about barter, exchanging goods for goods (with the implicit assumption of a lifetime budget constraint), while saying that "money doesn't exist". Also, as you might remember from our earlier discussions, JP thought that in my insistence on "making money disappear" I sounded like Michael Woodford. Here's Stan Fischer analysing Woodford's Interest and Prices: "One of Woodford's most interesting results is that it is often possible to study monetary policy without having money in the model. In these cases, monetary policy is conducted using the interest rate as the monetary policy instrument." As you well know, any resemblance is just superficial. I'm trying to describe the world as it is, so that every phenomena related to what has earlier been called 'money' is described. But it is described from a different angle; so different, that one can quite reasonably claim that "money disappears". Within that description, it ultimately doesn't make sense to say that banks create money or, for instance, that banks transfer funds from one account to another or that the seller receives money from the buyer (outside the special case of using cash). I've never thought of loanable funds in that way, but then maybe I've never really thought about loanable funds or I used funds and financing interchangeably. In any case, I can follow your argument. That's a good paper!
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Post by Antti Jokinen on Feb 19, 2019 10:00:39 GMT
I've never thought of loanable funds in that way, but then maybe I've never really thought about loanable funds or I used funds and financing interchangeably. In any case, I can follow your argument. The reason why you didn't think of loanable funds in that way is probably because you've been reading too much MMT and stuff I think they often misrepresent the mainstream theories. Of course, it seems (without knowing the origin of the term) quite idiotic from the mainstream to talk about 'funds' when they really are talking about goods. Here's from the abstract of that paper: No sane macroeconomist thinks that banks actually deal with real resources in the described way. They just model banking in that way, because they try to see, correctly in my opinion, behind 'money'. But they get it wrong. These are no loans. To focus on "money creation" is in many ways more realistic, but then you risk not seeing the forest for the trees. I think I can show how both are at the same time both right and wrong have arrived at a synthesis of these two views. That could be a big deal, I suppose.
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Post by oliver on Feb 19, 2019 10:15:36 GMT
JP said: Yes, your (direct) commercial relationship is over. And that can usually be considered an advantage. But that's true for multilateral delayed barter, too, right? (If you don't agree, I need to elaborate on the definition of multilateral delayed barter.) The banknote you talk about has nearly no intrinsic value. How could it be barter on the spot? To retain at least some continuity in the terminology, I think 'barter' should be an exchange of goods. Could just be a definitional thing. How do you classify a banknote transaction between me and Amos versus one where I give him my 30-day IOU? In the first, there is no uncertainty between us, no delay. The trade is final. But in the second, Amos has to hope that in 30-days I settle with him. If I skip town or go bankrupt, then my IOU is worthless and he's lost a banana. Finality is reached when all claims have been satisfied or declared void or anything in between (in a macroeconomic sense that rarely ever happens and is not desirable). The question of whether it is you that Amos has a claim on or whether he receives a general claim on goods within the economy (aka money) is secondary. If you give Amos a bank note and the bank goes bankrupt, what then? His claim will have turned out to be worthless just as if you had skipped town. The chance of that happening is obviously much slimmer, which is why Amos is more willing to hold the bank's note than your IOU. But him holding a note does not constitute finality in the sense of all claims having been satisfied. The note is still a claim on goods.
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Post by oliver on Feb 19, 2019 10:16:34 GMT
I've never thought of loanable funds in that way, but then maybe I've never really thought about loanable funds or I used funds and financing interchangeably. In any case, I can follow your argument. The reason why you didn't think of loanable funds in that way is probably because you've been reading too much MMT and stuff I think they often misrepresent the mainstream theories. Of course, it seems (without knowing the origin of the term) quite idiotic from the mainstream to talk about 'funds' when they really are talking about goods. Caught me there .
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Post by Roger Sparks on Feb 19, 2019 20:36:38 GMT
I can certainly understand the temptation to think of trade which uses money as vehicle to delayed exchange. After all, we can't eat money, can't wear money, nor do with money any of the things we can do with other things. So we introduce a theory that delays actual trade of goods until money has been exchanged for goods. To express the concept semi-mathematically, we write
(1) Goods -> money coupled with passage of time -> goods equals(=) a complete delayed exchange.
The problem with this approach is that money can (and should) be considered as a actual end good (a product, a real object, an asset in it's own right). Money becomes a proxy for every possible other asset. Ownership of money enables purchase of any other asset. And, (importantly) money, having traded hands in an exchange of assets, continues alive under new ownership as an existing asset.
This continuing life is easily seen when we show the other half of a complete delayed exchange. The second half holds money at trade beginning, relinquishes money for the time period, and recovers money at the end of the exchange. For this half of the comprehensive entire delayed exchange dual event, we can express the concept semi-mathematically, by writing
(2) money -> goods coupled with the passage of time -> money equals(=) complete delayed exchange
You see, the complete delayed exchange actually involves three holding periods and two exchanges. The initial holding period begins with one person holding money, a second person holding goods. They trade, thereby reversing roles. A second holding period passes, then both trade with (presumably) third parties. This second trade starts the third and final holding period of the complete delayed exchange.
Does this make sense? Perhaps readers can now see why I place so much emphasis on the asset and enabling characters of money.
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Post by Antti Jokinen on Feb 20, 2019 10:06:31 GMT
I just found an updated version of the Jakab & Kumhof paper I linked to above. Here.
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Post by Roger Sparks on Feb 21, 2019 16:33:00 GMT
Thanks for the new link.
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Post by JP (admin) on Feb 23, 2019 12:33:27 GMT
Ok. So Option 2 involves uncertainty due to the delay, and the reason that there is a delay is because from the moment that Amos accepts the banknote, he still has to spend that banknote. And something could happen in between that prevents that, or makes it difficult. Say prices change, or there is a shortage of goods for him to purchase.
What if Amos gives Daniel a banana, and Daniel gives Amos an orange. But Amos hates oranges. But he takes it anyways because he thinks he can trade it on for an apple, which he likes? Is that 1 or 2? As in the above example (banknotes for a banana) Amos will have to deal with the uncertainty of not being sure if he can on-sell the orange for an apple.
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