The Peristaltic Testator (peristaltor) wrote in talk_politics,
The Peristaltic Testator

Taking Stick of Money Today, Again

I need to open this long, long post with a correction, one I should have issued some time ago. I wrote the last posts, Taking Stick of Money Yesterday and Today, without correcting immediately a misconception about the nature of what money is. By not jumping on that with jack-booted gusto, I failed to correct what I'm sensing must be one of the most outrageous lies in economic thought, a lie that leads to all sorts of following lies that in accumulation clutter the average head with complete nonsense.

In short, money is not "a marker of value" or "a claim on production." It is, rather, a claim on future money. When The Wife™ and I took out our mortgage, the bank holding our note created the dollars and explicitly demanded dollars as repayment. No where in the paperwork is there a clause allowing us to make our monthly payment over the next thirty years in anything but a quantity of dollars issued by the United States Federal Reserve. Half that amount, but with a set of snow tires (valued at exactly half our mortgage payment)? Not an option.

I've noticed more and more economists do not understand this concept, simple and provable as it may be. It might stem from those college courses where the prof used a conditional modifier designed to impart a complex concept in simpler terms: "As if." "Money works as if it is a claim on production." "Money facilitates wealth transfers as if it marked the value of the transferred commodities." Over time, maybe some economists (as people are wont) just dropped the conditional modifier and gave the lectures straight. Once "as if" were out of the picture, our brains molded compliantly to accept the new conceptual understanding of money.

Then again, it might not have. I'm not sure. The conflation might go even farther back to the beginnings of economics as a discipline. In his book Debt: The First 5,000 Years, David Graeber notes that many economists assume that when people exchange things without money, they use barter. He notes excerpts from college econ texts dating back hundreds of years, all of which note the difficulty of trading apples for nails or gunpowder, and all assuming that's how it was done in the distant past.

He then explores the founding book on economics, Adam Smith's The Wealth of Nations, and finds passages outlining the development of civilization from wandering bands of hunters needing weapons, to small villages, to cities, all the while money as we know it today developing along the way. To recap that progression from Hartley Withers:

  • Barter trade
  • Commodity money
  • Symbolic money
  • Credit money
  • Credit clearing

Graeber sums it up, with a twist:

Tellingly, this story played a crucial role not only in founding the discipline of economics, but in the very idea that there was something called "the economy," which operated by its own rules, separate from moral or political life, that economists could take as their field of study. "The economy" is where we indulge in our natural propensity to truck and barter. We are still trucking and bartering. We always will be. Money is simply the most efficient means. . . .

The story [of barter], then, is everywhere. It is the founding myth of our system of economic relations. It is so deeply established in common sense . . . that most people on earth couldn't imagine any other way that money possibly could have come about.

The problem is there's no evidence that it ever happened, and an enormous amount of evidence suggesting that it did not.

(David Graeber, Debt: The First 5,000 Years, Melville House Printing, 2011, p. 28. Yeah, I emphasized. Wouldn't you?)

Okay, so why was this barter myth perpetuated to this day? Graeber isn't sure himself. He does note that Smith was trying to do something quite ambitious with Wealth of Nations.

Above all, the book was an attempt to establish the newfound discipline of economics as a science. This meant that not only did economics have its own peculiar domain of study—what we now call "the economy," though the idea that there even was something called an "economy" was very new in Smith's day—but that this economy operated according to laws of much the same sort as Sir Isaac Newton had so recently identified as governing the physical world. Newton had represented God as a cosmic watchmaker who had created the physical machinery of the universe in such a way that it would operate for the ultimate benefit of humans, and then let it run on its own. Smith was trying to make a similar, Newtonian argument. God—or Divine Providence, as he put it—had arranged matters in such a way that our pursuit of self-interest would nonetheless, given an unfettered market, be guided "as if by an invisible hand" to promote the general welfare. Smith's famous invisible hand was, as he says in his Theory of Moral Sentiments, the agent of Divine Providence. It was literally the hand of God.

(p. 44.)

And the hand of God does not concern itself with the quaint quirks of people. When Smith established the market as an efficient means to transfer wealth, "it must assume that the exchange of such goods need have nothing to do with war, passion, adventure, mystery, sex, or death." (Ibid, p. 33.) This gives economists a clean sheet of paper uncluttered by actual people and ripe for theorizing.

So, if barter hasn't been the preceding means for exchanging value, what has? It turns out that economists have got the list of what came first exactly wrong, according to the anthropologists.

In fact, our standard account of monetary history is precisely backwards. We did not begin with barter, discover money, and then eventually develop credit systems. it happened precisely the other way around. What we now call virtual money came first. Coins came much later, and their use spread only unevenly, never completely replacing credit systems. Barter, in turn, appears to be largely a kind of accidental byproduct of the use of coinage or paper money: historically, it has mainly been what people who are used to cash transaction do when for one reason or another they have no access to currency.

(Ibid, p. 40.)

Economists, therefore, have put the cart before the horse in considering credit a system too complex for primitive people to understand. Barter proved too complex, and for exactly the same reasons the economists suggest (double coincidence of individuals meeting with stuff that fulfills immediate needs). Why then would people need to settle each and every exchange of physical goods with a good of immediate equal value? I think the answer can be found not in people, but in economic theory and what it demands logically. Getting back to my post on myths and how they work on our brains, I think the reason barter is preferred as a historical exchange practice over credit has to do with the "core belief" of market equilibrium held by most practicing economists today. that, as Irving Fisher put it in my last post, requires:

(A) The market must be cleared—and cleared with respect to every interval of time.
(B) The debts must be paid. (Fisher 1930, p.495)

If people engage in credit with one another, a debt may be carried, perhaps for years. If I give someone a meal when I have food and that someone doesn't, and that someone can't pay me back for maybe a decade, don't I distort the market horribly? Yes, I do. The fact that the someone is my child should have nothing to do with it, according to the economist.

I don't use this example loosely. Every one of us binds ourselves to complex relationships with others that involve the exchange of goods and services without recompense by traditional currency of market value. Yet when we enter the economics classrooms, we are asked to forget everything we know first hand about the outside world and imagine that we are all of us simple efficiency-seeking automatons who coincidentally can correctly gauge the exact value of each and every purchase and sale we need encounter. Jeremy Bentham called the action of the actor in the economy of life his Hedonic Calculus, a philosophy which breaks every human action down to a binary value, either the pursuit of pleasure or the avoidance of pain. Economists, especially of the neoclassical variety, have been making a dog's breakfast of motivation ever since, conforming their observations of people strictly to Bentham's ideas and in the process reducing humanity to a cartoon of reality:

Another part of the neoclassical construct that breaks down upon further inspection is the concept of utility. Recall Bentham's notion of seeking pleasure and avoiding pain. Utility, as originally conceived, is a hedonistic construct.

But economists have noticed that humans are sometimes altruistic, and have struggled to incorporate this into neoclassical theory. For instance, going to church cannot be explained by "the expected stream of benefits," so one finesse was to posit "afterlife consumption." Similar contortions justify saving rather than consuming (a "bequest motive") or generosity ("a taste for the perception of the welfare of others"). Gifts are even more problematic. Neoclassical writers suggest that the present is not genuine (as in the donor wants to burnish his image) or that he derives pleasure from the enjoyment of the recipient.

Another vexing problem is when consumers spend money to improve their self-control. Diet support groups like Weight Watchers or clinics to help people quit smoking don't fit at all well with utility theory. Effectively, the individual has two sets of preferences that are in conflict (in these cases, pleasure now versus health later).

(Yves Smith, Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Captialism, St. Martin's Press, 2010, p. 98.)

Anthropologists and psychologists have been making better observations about people for about as long as anthropologists and psychologists have been professions. Longer, even. Empirical evidence that threatens core beliefs, though, is not allowed in the economic theoretical sphere.

Which brings us back to money. Commercial banks create the money they lend us; let's never forget that. As far as that money being tied to a physical value, yes, it is in a specific way, but only in regard to collateralized, or secured debt. A house or car listed as collateral on the loan will be checked as to its market value when the papers are drawn up, so it should maintain its value, if only to secure the loan.

But let's further remember that the only time banks get their grubby little hands on that collateral is if the loan defaults. For that to happen, the borrower has to stop paying, leading to a legal foreclosure and eventual physical seizure of the asset. After that, the bank has to further sell the asset to retire the loan, so even if a loan goes bad the asset is not tied directly to the cash created by the loan that it secured.

It only seems that way, as if it reflected the value of the asset. As if.

So let's get these various myths out of our heads right away, shall we? They are distorting the discussions about money entirely too much.
Tags: finance
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