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Post by Antti Jokinen on Feb 10, 2019 19:44:14 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? |
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Post by Roger Sparks on Feb 10, 2019 23:02:09 GMT
There is a current Reuters article, How Venezuela turns its useless bank notes into gold, that seems to fit into this venture (developing a Theory of Exchange). Ultimately, labor is exchanged for goods but only after several processes accompanied by unavoidable delays. Alas, money plays a role here but only as an initial exchange commodity. Could it be that a Theory of Exchange would need to embrace 'money' as being an exchangeable physical commodity? |
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Post by Antti Jokinen on Feb 11, 2019 10:14:58 GMT
Could it be that a Theory of Exchange would need to embrace 'money' as being an exchangeable physical commodity? A physical commodity is a physical commodity. If people trade physical gold for food, and the gold is appraised based on its weight, then we are witnessing barter on the spot (option 1). Now, it might be that most people accept gold because they think it is easy to trade for other goods later, in what I'd call 'two-step barter'. That would make gold, as a commodity, a convenient store of value, if you will. In an economy where there's not enough trust to establish delayed barter and the debt that comes with it, gold could be seen as "greasing the wheels of commerce". I see no need to call it 'money', though. |
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Post by Roger Sparks on Feb 11, 2019 15:11:52 GMT
Toward a 'Theory of Exchange'
A proposed list of exchange commodities: gold, food of any variety, metals of any variety, real property of any variety, and (controversially) any tradable instrument issued by a central bank in exchange for a promise to return the instrument.
I propose that the common element shared by each item in the list is a human willingness to trade hours of labor for any item.
Once we have a list of exchangeable items, we need to develop a logic of value. What would be the relationship between hours of labor and any item on the list? The variables that I see are: Skill of labor hours. number of labor hours. quality of exchangeable item, quantity of exchangeable item, and (controversially) relative value judgement of trading partners.
I fear that inclusion of "relative value judgement of trading partners" would cause value to be a fuzzy concept in our Theory of Exchange. Maybe that would reflect correctly the variety of human judgement possibilities, including the ability to 'group think'.
Our Theory of Exchange needs a starting point. What conditions are offered as drivers to make an exchange occur? Humans need food and shelter for basic survival, and better quality of food and shelter once basic needs are achieved. I think I would weave that sequence into theory.
Turning to the Venezuela gold trade, it seems to me that each step depends upon conditions that exist as 'expected reality'. The gold miners labor expecting eventual sale to someone. The Venezuela Central Bank is identified as the major top bidder with expected ownership of purchased gold transferred to the Venezuela government. Government then exchanges gold for Turkish products and makes the products available to the Venezuelan people.
Thinking of the gold trade from a macro economic perspective, Turkey has traded perishable products for gold, Venezuela has traded a renewable resource (labor) and an exhaustible resource (native gold reserves) for perishable products.
Antti, I think you are right. We need to focus less on a 'Theory of Money' and more upon a Theory of Exchange.
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Post by Antti Jokinen on Feb 12, 2019 20:57:32 GMT
Roger, I'm not after a general theory, but just a partial theory of exchange. There are many things I take as granted, like relative price formation. That means I'm not interested in what happens in on-the-spot barter exchanges (option 1). I'm interested in delayed barter exchanges. Of course, the latter needs to be distinguished from the former, and it's only there that on-the-spot barter comes in --we need to be able to tell one from the other.
You mentioned tradable instruments issued by central banks. The use of those is a sign of delayed barter, right? The instrument has a very low intrinsic value.
I should probably explain what I mean with 'delayed barter'. It's an exchange of a good to another good, but with a lag, so that I give up/receive a good first, and only later receive/give up another good. In multilateral exchange we need to adopt an individual's point of view: (1) I sell my labor services and later buy food from the grocery store, while (2) my employer buys my labor services and sells goods or services (not to me) and (3) the shopkeeper buys the food from producers/wholesalers and sells it to me. So we have four transactions and three different cases of delayed barter.
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Post by Roger Sparks on Feb 13, 2019 4:04:24 GMT
"You mentioned tradable instruments issued by central banks. The use of those is a sign of delayed barter, right? The instrument has a very low intrinsic value."
I don't think that the cost of writing the tradable instrument usually plays a role in deciding the value of the instrument. Instead, for the prospective owner, the expected value when used in future trade motivates current value.
I mentioned 'tradable instruments' as being a (controversial) commodity. This designation follows the observation that humans seem to be willing to expend time and labor seeking tradable instruments in the same fashion as if they were seeking any other commodity. (The similarity is a result of the easy conversion of instruments into anything that is for sale.)
I guess some folks might think of an exchange of labor for tradable instruments as being barter. I am in that camp. Perhaps assigning a label of 'delayed barter' to the transaction is a gentle way of bridging the gap between mainstream economic lingo and the rougher relabeling of a 'monetary exchange' as 'really barter'.
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Post by oliver on Feb 13, 2019 13:38:42 GMT
Could it be that a Theory of Exchange would need to embrace 'money' as being an exchangeable physical commodity? A physical commodity is a physical commodity. If people trade physical gold for food, and the gold is appraised based on its weight, then we are witnessing barter on the spot (option 1). Now, it might be that most people accept gold because they think it is easy to trade for other goods later, in what I'd call 'two-step barter'. That would make gold, as a commodity, a convenient store of value, if you will. In an economy where there's not enough trust to establish delayed barter and the debt that comes with it, gold could be seen as "greasing the wheels of commerce". I see no need to call it 'money', though. I think this is quite interesting and I may have to shed some long held beliefs about the differences between barter and exchange. Ot at least be more careful about how I describe them. You are arguing (and I would agree) that there is a deep, ontological difference between exchanges where one receives an object with intrinsic value for another and exchanges where one receives 'nothing' in return. The reason anyone would engage in the latter can be put down to trust. Trust that I will receive something (some thing) of similar value to me in future. The prospect of and trust in my ability to exchange a promise for goods is what lends the promise value. Whereas in the prior case I need no trust at all since I have already received something that I value. I think we have to be careful not to argue along lines of physical attributes to distinguish the two, though. As a thought experiment, imagine that e.g. gold had no intrinsic value (say it was dog ugly, smelly, and mechanically useless, so no one would want it as jewellery or as a filling etc.), but it did not corrode and could be easily melted / divided etc. and its production was managed by a trusted (!) authority. I say, that although it is still unmistakably an object, i.e. it has physical presence, its value in commerce would be determined exactly as if it were only a credit / debit entry. The two would be indistinguishable. Not a particularly shocking observation yet, I suppose. But I think it begs the pertinent question of what or who it is that creates trust? Can a central bank print trust? Can it issue trust? Can it control trust? If so, how and to what degree? Is trust a function of the amount of gold / credit extant? I say, the answer to all of the above questions is: no. And it is this distinction that we must focus on to keep the two concepts apart. Are we dealing with an object whose value is a direct function of supply and demand for that object, or is its value actually determined by trust in the availability of some other object in the future? Today's credits will keep their value if the promises attached to them are kept so that there are goods in the future which I can trade them in for. The time factor is what distinguishes barter form delayed barter and trust in future exchangeability for goods is what generates the current value of credit. Also, we must keep an eye on the parties involved in a credit transaction. Neither banks nor the central banks produce goods. So when we trust the credits we receive, we are not actually trusting the bank to make good on the promise! In a bilateral credit agreement it is the counter party we trust. In a multilateral credit arrangement the counter party is everyone who produces goods, aka the economy. The bank has a very limited function in such a deal. If anything, it controls the quality of the deals (goods given for credits / debits received for goods) that individuals within the economy make. It controls the quality form the perspective of the system, aka the economy. |
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Post by Antti Jokinen on Feb 14, 2019 10:32:21 GMT
Oliver, thanks for the reply. I think you raise many important questions.
You made me think about the vocabulary I've chosen. As you know, I find vocabulary important, especially if we are to think of familiar phenomena in a new way. And I like to keep the language as simple as possible.
For example, is there a difference between 'barter' and 'exchange'? For our purposes, probably not?
'Barter' is usually understood as an exchange of goods (incl. services) without the use of money. But in our theory there's no money, so 'barter' can be understood as an exchange of goods. The word 'exchange', too, suggests a quid pro quo: one good is exchanged for another.
By using the word 'barter' I wanted to stress the fact that we are talking about exchanging goods. So I guess we can continue to talk about 'on-the-spot' or 'immediate barter' as opposed to 'delayed barter', as long as we keep in mind that the latter includes basically all trading we engage in nowadays (ie. it doesn't need to be between two parties).
I would like to call a typical situation where there's one seller and one buyer, so that goods move only one way between these, a 'transaction', to distinguish it from an exchange (of goods). Does this sound right?
You correctly identified the deep, ontological difference between quid pro quo and "receiving nothing in return" that I want to stress. That's at the same time both obvious and overlooked. All credits in our economy are records that tell us that their holder is walking around without goods he could have possessed, often goods he himself has given away.
I'll continue later.
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Post by Antti Jokinen on Feb 14, 2019 12:59:59 GMT
Oliver said: Yes, the two would be indistinguishable. And what is true for this ugly gold, is also true for Roger's tradable instruments. All tokens (ie. physical recordkeeping devices), when stripped to their essence, must be considered immaterial, incorporeal. Once we accept that, there's nothing but goods left to be exchanged. As a buyer, you receive goods, and some records pertaining to delayed barter are updated. I explained this in a blog post a while ago (the only commenters: Roger and Oliver!): Green Stones Don't Reside on Accounts. In the story, it might look like a dinner is exchanged for a green stone, but that's not what really happens. A dinner now is exchanged for a dinner later. It's delayed barter. The use of the green stone is just a special case, just like the use of paper currency. Once we look at the records, we see that there's nothing on the bookkeeping side that is transferred from a person to another. Paper currency exists, but money in general doesn't. To take one step further: in law, a verbal agreement is usually considered as binding as a written agreement. It's just that the existence of the former is much harder to prove. |
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Post by Roger Sparks on Feb 14, 2019 20:14:08 GMT
Antti writes
I think we could equate 'Paper currency' to my use (previously) of 'negotiable instruments'. On the other hand, "money in general doesn't (exist)". Now I find myself searching for logical mapping to other known facts.
One logical story that seems to fit fact and assumption is that my bank has no money (like a central bank) but is able to create a negotiable note in the form of paper currency. Once created, this CB could give currency to government, allowing government to spend currency into the private sector. Government would give the CB a promise to return the currency, presumably to be regathered by taxation.
In this logical story, money never exists. Instead, we only have paper currency that has been created as if it were just another commodity, albeit a convenient commodity, useful in trade if properly managed (and usually called 'money').
I don't think that an electronic storage of paper currency would destroy the commodity aspects of the actual paper product.
That would be one story that seems to map correctly with your quote.
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Post by oliver on Feb 15, 2019 8:47:57 GMT
Antti writes I think we could equate 'Paper currency' to my use (previously) of 'negotiable instruments'. On the other hand, "money in general doesn't (exist)". Now I find myself searching for logical mapping to other known facts. One logical story that seems to fit fact and assumption is that my bank has no money (like a central bank) but is able to create a negotiable note in the form of paper currency. Once created, this CB could give currency to government, allowing government to spend currency into the private sector. Government would give the CB a promise to return the currency, presumably to be regathered by taxation. In this logical story, money never exists. Instead, we only have paper currency that has been created as if it were just another commodity, albeit a convenient commodity, useful in trade if properly managed (and usually called 'money'). I don't think that an electronic storage of paper currency would destroy the commodity aspects of the actual paper product. That would be one story that seems to map correctly with your quote.
Another way of saying that 'money does not exist' (I've never been quite comfortable with that term), is that the money, regardless of how its credits present themselves (paper, gold, bits & bytes), and regardless of which name one attaches to it, has no overall positive value because there is aways a unit of debt attached to each unit of credit.
In that sense, I would rephrase the following:
CB could give currency to government, allowing government to spend currency into the private sector. Government would give the CB a promise to return the currency, presumably to be regathered by taxation
Government can take on debt from the public in order to procure goods, presumably for public use. The producers of these goods are credited in a standardised way (say in paper, gold or bits and bytes) and in standardised Units (the official unit of account), giving them the opportunity to receive other goods of equal value in future.
The whole operation can then be reversed to neutralise the credit / debt relationship. For that to happen, the receivers of the goods (the public) must themselves sell goods for which they receive credits. These credits and the corresponding public debt are then netted against one another through the acts of taxation and debt repayment.
In any case, I think it is more precise to think of the borrower (in this case the government / public) receiving debt + goods, whereas the seller (the producer of the goods) receives credits. You can skip the part where the bank produces money, gives it to the borrower who then spends it. In accounting terms, those events are irrelevant and in most cases the borrower will never actually see the money, so it isn't even a precise depiction of the process. And once you drop that part, the illusion that (modern) money is a commodity disappears, too.
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Post by Antti Jokinen on Feb 15, 2019 13:23:35 GMT
My bad. I should not have mentioned 'money'.
My point was that in the story behind the link, the green stone is somewhat comparable to money (as commonly understood), but once you stop using it and instead rely on ledger entries, it disappears. Even 'credits' as some kind of a transferable object do not exist. No credits are moved from one account to another.
I agree with Oliver. We could think of government acquisitions and taxation in this way:
Somewhere in the world, in the 18th century, there's a war. The army needs horses. The government asks each citizen to donate a horse for the common good. The ones who don't have horses to spare need to get one, so they go to people with an excess of horses and trade with them. For example, a baker might exchange (a lot of) bread for a horse, while a blacksmith might trade a bunch of axes for a horse. Once they are done with trading, they hand over the horses to the army. End of story.
The nation, represented by the government, requisitioned horses from its citizens; alternatively we can say that it set a tax of one horse on each if its citizens. An acquisition = taxation. You give a horse to the government, for public use, and you get nothing (but public goods) in return.
The same outcome, horses for the army, can be achieved in various ways, most of them more efficient than the one described above. For instance, the government could ask the baker to deliver bread and the blacksmith axes, and so on, as taxes, and then a government representative would go to horse-breeders and trade these various goods for horses, while requesting an extra horse as a tax from the horse-breeders themselves. Or the government could collect lumps of gold from everyone and trade that gold for horses.
With the use of delayed barter, the baker will usually still give up bread and the blacksmith axes, without getting anything in return (that's what they essentially did in the first example, too, even if they held a horse for some fleeting moment before they gave it to the army). The difference is that the government gives its citizens more freedom of choice and time to accomplish this.
What is common for all these ways is that the citizens give up some goods without getting anything (but public goods) in return. That's called taxation, now and then. There's no taxing of 'credits'. What Oliver is talking about is how we achieve this outcome by updates on the recordkeeping side.
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Post by Antti Jokinen on Feb 15, 2019 21:06:56 GMT
I admit I'm a purist. We shouldn't deny the existence of credit balances, and we can call those 'credits', as in "I have $100 worth of credits on my account". I can get rid of the credits, too. But I can't give them to anyone -- not in the general case. Think of my balance, +$100, and my grocer's balance, -$200. I have credits on my account, he has debits on his account. Now I buy stuff worth $50 from him. Do I transfer $50 of credits to him? Or does he transfer $50 of debits to me? (Nick Rowe's " red money", anyone? *) We can't tell. It's just arithmetic. My account is debited, his is credited. Feel free to prove me wrong. To just point this out would perhaps be interesting, but it wouldn't be that constructive. In order to be constructive, we need to be able to answer the obvious question: "OK, no money nor credits are transferred between accounts. Then what is going on here?" The short answer: This is bookkeeping related to delayed barter. * In the comments to his post, Nick writes (I saw this for the first time now): We can now answer his question: No, it isn't. 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. |
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Post by Roger Sparks on Feb 16, 2019 1:35:02 GMT
I seem to be unsatisfied with an 'accounting theory' of exchange by credits but not entirely sure of why I feel incomplete. I have the same problem with mainstream economics. I was driving today, thinking about our blog comments, and came up with the idea that both the accounting approach and mainstream approach do not include the 'enabling' aspects of credit ownership (money ownership).
What in the world do I mean by that?
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.
My (previous) story which had government borrowing from the central bank had a hidden assumption. I didn't realize it until I puzzled through why we seem to have quite a distance between descriptions of money. The hidden assumption is that government HAD A NEED to borrow from the central bank. Government could not pay it's bills until it had credits (again money) in hand. Of course, this sequence of borrowing from the central bank BEFORE government can pay places the bank in control of government (to the extent that this limitation applies).
In the real economy, government could borrow from the private sector just as easily as from the central bank. Of course, that option presupposes that the private sector has money to lend. For the second time, we have found a time based sequence in the macro economy.
Now maybe your introduction of 'delayed exchange' speaks to this sequence of timed events but it seems (to me) to be mixed with the need to consider the debt situation of a second exchange member. What I am suggesting is that with credits (money) in hand, the owner has the ability to exchange with any willing seller, no third party OK needed.
When we allow an enabling element into monetary theory, the amount of money in the hands of potential buyers becomes important. No longer can we narrowly look at the potential of exchanges between money holders. We need to look at the way that money is created to learn how the initial exchange (at moment of money creation) interacts with previously created money. As you might guess, I think the creation of new money adds to the existing pool of money. It is now a simple step to begin thinking that money is basically like other commodities in that it is produced, used, inventoried, and potentially destroyed.
Going further, when we allow an enabling element into monetary theory, the distribution of existing money becomes important. It becomes easy to distinguish between holders of money and want-to-be-holders. The economic pathway between the two positions becomes important.
Enough for this comment. I'll close by repeating that I think we need to include an enabling function for money when we design an exchange theory.
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Post by oliver on Feb 16, 2019 12:09:28 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. |
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