Saturday, May 15, 2010

A Final (?) Look at Modern Money

H. L. Mencken: “For every problem there is a solution which is simple, elegant and wrong.”

We must always be wary of sellers of snake oil, regardless of what form the snake oil takes. Similarly, we must always remember that theories are theories, and that the scientific method is a process of constantly testing falsifiable theories to be sure of their validity. I have been leaping in and out of MMT waters of late, but, unable to set up a nation of my own to run on MMT principles, my testing of its ideas can only be rational and logical, thought-probings to seek out potential weak spots.

At first I felt the “net to zero” pronouncement of private sector credit-based money creation was fallacious, then I looked again and thought it an accurate statement, and now – oh vacillating me! – I think it false again. My efforts to look at money in an economy as a component of a system has led to a new way of seeing debt and wealth (wealth here meaning ‘real’ money).

This post represents somewhat of a negation of my sketches of various, crude monetary systems. The problem of interest those drawings were supposed to address is not accurately presented. The reason is that my starting points were too unrealistic, the systems too crude. Sometimes it helps to simplify, sometimes you lose too much information and your conclusions turn out wrong. However, recognising mistakes is part of learning, so I try to be happy to admit my own.

There has never been an economy that began utterly without money or trade, which was then kicked deliberately into economic life by a government creating fiat money. Likewise, there has never been a situation of zero wealth being turned into wealth by the creating of money. There has always been something there to monetize, some exchange or barter system to simplify. Money emerges in its various forms in stages, from barter to fiat. There is always an economy of some sort in operation, though they do change over time, as governments change, as money changes.

On to my new take. Loans do not net to zero, because they are not paid back symmetrically. In amongst the messy forward momentum of banking and money creation, economic growth and technological developments, loans are made in various forms by various entities to various entities, all in different states of economic health. In that melee some do well and others do not. So, a more realistic scenario than the one I presented a few days ago would be this:

10 banks each issue loans of $100 to ten businesses. Each business owes back $110 to each bank. Of that total $1,000 loan pool the ten businesses compete for as large a share as possible. Maybe four businesses fail, three do badly, two just about OK, and one very well indeed. Perhaps the most successful business accrues from the pool $500, of which it pays pack $110. That business is now the proud owner of $390 that it owes to nobody. That money was initially created as loans, but is now real, owned money. And where is it kept? In one of those banks as a deposit. That deposit gives the lucky bank more leverage to loan new money to the not quite failing businesses. Thus is money created from ‘nothing’, and despite interest owed, and banks having to compete with one another, there is a kind of Baron von Münchhausen ‘pulling oneself up by one’s own hair’ happening here, that ‘netting to zero’ fails to explain. We start with ‘nothing’, create $1,000 in loans, and have, in this crude example, $390 left over, not zero. Banks and businesses may die in the process, but that’s life.

Curiously, what we have is ‘wealth’ creation as a direct consequence of money pooling unevenly throughout the economy. Were this uneven pooling not to happen, there would be no wealth creation. Should, for example, but one business fail in the scrabble to survive, and the nine others do equally well, each of the nine could pay back its owed $110 and have nothing left. There would be $10 unaccounted for, which maybe the issuing bank received as a monthly payment from the failed business. That would be netting to zero, as all debts bar one would be neatly expunged/repaid. An even flow of money has, therefore, the ‘detrimental’ effect of creating no new ‘wealth.’ But this is highly unlikely to happen. Real life is messy and unpredictable. Also note that failure is a precondition for success elsewhere – in this model, if all do equally well, none do well.

But, because money is sticky and coagulates (“being rich is better than being poor” is a logical consequence of scarce money), this ‘successful’ money-creation has long term costs, such as entrenched social divisions. Even longer term it becomes a ponzi-like situation, as more and more non-monetary wealth is monetized into debt in the endless pursuit of eternal growth, and banks, as Corporations in pursuit of profit, seek new customers to fuel the growing debt-pyramid. The amount of debt we are weighed down by today is likely a direct consequence of the scarcity of money (a scarcity which interest/usury necessarily creates), and, more abstractly, of the deeper presumption of scarcity itself, which leads to flawed notions of surplus, deficit, credit and debt which dissonate with what we see occurring in the wider ecosystem.

This unevenness, though, seems to be a vital part of creativity. Smooth-and-featureless is without character, without challenge. It is mistakes, bumps and oddities that call for adaptation, and ‘successfully’ adapting to the unexpected calls for creativity. Furthermore, all problems ‘solved’ generate new problems to be ‘solved.’ That process is probably what progress is, and will make demands of us humans for as long as we are around. Nevertheless, monetary ‘unevenness’ does, in time, lead to gross imbalances, as witnessed in the widening wealth gap. And systems are leaky too, not closed. As we creatively deal with the challenges we face, we set up new challenges down the road. The two key challenges we face today are establishing a sustainable relationship with the planet we live on (part of which is transitioning from fossil fuels), and finding a new way of doing economics, since automation and technological unemployment are going to interfere increasingly disruptively with our current methods of circulating money.


Debra said...

Interesting, Toby.
I got all blue in the face trying to "explain" to some people why zero sums were NOT the way things panned out, and it LOOKS like you have got to that point too, if I am reading you correctly.
Some points : NO grace without inequality.
That SHOULD set off loud warning bells in our heads...
I would like to take a look at Jesus' parable of the talents, because believe it or not, Jesus was VERY INTERESTED in money... (how could he NOT be interested in money, since it materializes many of our human exchanges where we find MEANING in our lives...) It is rough going though...
On the Ponzi scheme..
For quite some time now, I have been wondering just WHAT EXACTLY is the difference between... what is rapidly referred to as a Ponzi scheme and... credit/money creation/investment in the economy.
How does.. FAITH tie into all of this, Toby ?
There has to be faith in order for exchange/investment to be possible, right ?
What happens in Ponzi is that... all of a sudden, somebody/ some people LOSE(S) faith, and the whole thing goes kaput.
But... if people lose faith in TRADITIONAL investment, REGARDLESS OF WHETHER OR NOT the people they are supposed to have faith in/the process they are supposed to have faith in are above board, then the system goes caput.
And... don't tell me that the difference is JUST that the people behind are.. INTERESTED...
We have been running for a long time on the idea that... business only gets done with honest people...Rather.. naïve of us, don't you think ?
Now... if we are exclusively involved in INVESTING IN MONEY, then... the whole thing tends to go out of control anyway, doesn't it ?
What could EVER keep THAT kind of a process from going out of control ?
On money being scarce..
look at the ATM machines. You would NEVER KNOW that money was scarce from looking at them, would you ?
Anybody looking at the ATM machines is going to think that... money has no limits.

Toby said...

No grace without inequality. Exactly.

But there is health, poor health, sickness, ways to improve health and so on. And there is grace with health.

Then there are systems which operate 'healthily' within a particular band, and should a system's operation exceed for too long this healthy range of functioning, it will break down. Our socioeconomic system is unhealthy and breaking down. In the muck of this unraveling their will be grace and depravity. And then something new will emerge. Then we will have new parameters and a new paradigm within which to find new expressions of grace and depravity. And there will and must always be inequality.

Out of the old way arose, organically, our myths, which are representations of our, and life's, inner workings to ourselves in story form. These myths cover the whole gamut of what we can perceive, from the utterly mundane to the wildly bizarre, and they contain much truth. But our powers of perception change and as a consequence new myths will emerge. I believe they are emerging already. Money is, in part, a myth we will have to rewrite as part of the process we are going through.

I agree with everything you say about ponzi and faith. Faith holds things together. Then, suddenly, it doesn't. Then something new arises. Have you read "The Origin of Consciousness in the Breakdown of the Bicameral Mind" by Julian Jaynes? An exceptionally fascinating book which describes change at a biological level within the human brain that led to great changes of culture and civilization.

I think you're wrong about ATM machines though. I never got the idea that money was infinite or even unscarce because of them. When you take money out, should you be rich enough, it disappears from your account!

Debra said...

Euh... Toby, you are a rather exceptional person...
I have seen people use their credit cards, and throw away all paper traces of their purchases, as though... they didn't matter.
And there are a lot more of these people than you think. AND... they are neither rich nor poor.
They are people who have enough money to have credit cards.
Think about the way this works.
France now has a plastic computer card that you hand over to doctors and pharmacies for your health care.
In the pharmacies, in most cases, you never... take a red cent out of your pocket, and business is done virtually from a to z.
Costs tend to explode when money is dematerialized. Money becomes monopoly money when it is dematerialized. AND when it is no longer... SCARCE.
It's extremely logical, don't you think ?
And it DOES work this way.
The government wants CONTROL over everybody, hence the cards, which are a civil libertarian's nightmare. (Remember that hackers exist, and that people SELL lists...)
And the cards give the government CONTROL AND INFORMATION about its citizens.
The result ? Costs explode...
On the rational way of doing things.
There is a wonderful line in the Merchant of Venice which sums it up rather well.
At the moment when Shylock's servant is deserting ship and leaving him, he enlists with Bassanio, who is taking off for Belmont.
And when Bassanio tells him that he doesn't have a penny to his name, and that HE WON'T BE ABLE TO PAY HIM, the guy says...
No matter. YOU have the grace of God.
HE has... ENOUGH.
In life you gotta choose between.. the grace of God or enough.
The problem being that when we choose "enough", unfortunately we risk losing everything...
This is what you call abundance economics, I think, isn't it ?
It is ENTIRELY a question of point of view, isn't it ?
But... in a fiat economy (and we have ALWAYS been in a fiat economy anyway, some day I will do a post to illustrate this...) point of view is everything.

Toby said...

I see what you're saying. You meant electronic money being quick and easy, and lulling us consumers into a sense of wealth. Yes, this is of course happening.

However, money is still scarce, based on scarcity, and as such encourages greed. The opposite of scarcity, abundance, which means more than enough for everyone, like air, encourages sharing. Like we share language and do not hoard it. The attitude to electronic money, being so greedy and 'driven', arises directly from money's logical bond with scarcity.

I've written much on this in my long essay (and others) called "Is Money the Problem?" If my take interests you, you can find the essay at my website: (follow link to "better world"). Probably my thoughts have evolved since my last edit of it, but not that much.

Debra said...

I will TRY to read you essay, Toby. Promise..
On abundance encouraging sharing...
I am not sure this is true, Toby.
I think that abundance encourages us to devalue "things", but not necessarily to share.
I think we are able to share when we have the SUBJECTIVE feeling of being wealthy. And the feeling of being wealthy does not necessarily derive from... monetary wealth. In fact, it often does NOT derive at all from monetary wealth.
But you will grant me that some of the RICHEST people do not FEEL wealthy ?
Look at... Shylock, for instance...
We are not able to SEE these problems because in recent... decades we have been doing our damnedest to EVACUATE the subjective point of view on these subjects. Our... loss, Toby. Our loss.

Toby said...

Monetary wealth is irrelevant in the final analysis. What matters is the 'wealth' (however we end up defining it) that arises organically from a healthy environment and community.

The perception of abundance does encourage sharing. You can have conditions of scarcity and sharing as long as the basic attitude to environment is one of provision and abundance. But this sharing attitude to what we have around us to draw on and consume needs this fundamental sense of abundance at a deep cultural level. I'm not talking about kids in a sweet shop here, let loose and devouring all in sight, I'm talking about the deeper structure of societal myths.

Check out "St Kilda, Island at the Edge of the World" for an example of a people who shared everything (more or less), but lived in harsh conditions on an island off the north west coast of Scotland, right up to the early 1900s. Hunter gatherers share when they have plenty AND when they struggle together through the hard times. I think they have exclusively egalitarian societies. Experiments done on young children show sharing emerges when there are enough toys for all, and hoarding behaviours set in in the opposite conditions.

Think of the way the society we have is utterly shaped around ownership and scarcity, for example the ritual of giving birthday presents in shiny paper, and our constant insistence on 'yours' and 'mine' boundaries (though sometimes necessary, we do overdo it). We are so surrounded by the presumption of scarcity we can't even see it any more. It's like the smell of our nostrils; always there yet impossible to distinguish.

Abundance leads to devaluation in an economic sense -- air has no economic value -- but this reinforces my point. It is because of the underlying presumption of scarcity that we have the value system we do. But this presumption is an exception in human history. Typically, for the vast majority of our time on earth, we have not had this relationship with our environment. This period is an aberration presented as The Natural Way. Bullshit, and it's changing too.

Debra said...

The "recent" perception of abundance that dates from the end of WW2, basically, and that we call the consumer society is also really hooked in to WASTE.
I think that we have become very disconnected to our "natural" environment and that this disconnection has created the extremely addictive approach to consumption that we have now.
Addictive behavior is everywhere. It is basically a mode of functioning for THIS society.
It is the way that we have framed our... DESIRE.
For an object that we consume, and then throw away to go after the object we see in our... neighbor's hands. An endless substitution of desirable objects that breed our... insatisfaction.

Rupert said...

Desire is manufactured.

Toby said...

Yes, never underestimate the power of advertising. A book that changed my perception of advertising forever was "The Hidden Persuaders" by Vance Packard (if memory serves). It was written in the 1950s I think. What they could do then knocked my socks off. We are a highly manipulatable animal.

And yes, there was a sense of abundance as possible after WWII, reading Buckminster Fuller makes one well aware of that. But conspicuous consumption had already laid down firm roots in the 1920s, so the abundance the world was capable of pursuing was understood in the context of monetary systems, all of which are logically bound to scarcity and eternal GDP growth (so far). Hence the unhealthy relationship we still have with our environment. Greed combined with the pursuit of consumerism-abundance on top of a scarcity-based paradigm is of course a terrible mix. We desperately need a new one.

Debra said...

Not all desire is manufactured.
Look at that word... "manufactured"...
But the desire that our consumer society has put into place is manufactured.
That is part of the BIG LIES we keep telling ourselves...

Calgacus said...

There has never been an economy that began utterly without money or trade, which was then kicked deliberately into economic life by a government creating fiat money. Likewise, there has never been a situation of zero wealth being turned into wealth by the creating of money. There has always been something there to monetize, some exchange or barter system to simplify. Money emerges in its various forms in stages, from barter to fiat.

Quite wrong. The historical progression in fact always was the "has never been" story. Fiat/credit money was not a late development, but was the intrinsic essence and nature of money since its invention in the ancient middle east, and its even earlier roots. Barter economies, if they ever exist anywhere, are a late development, only seen at the collapse of empires. The state and its credit/fiat money came first, then markets and widespread trade. (Then coinage, the confused illusion of "commodity money" etc)

Like it or not, for all its defects, the social technology of the monetary economy spread and dominated the prior non-monetary, non-market, non-barter economies by facilitating more real wealth creation.

Toby said...

Hi Calgacus,

thanks for your comment.

(Since writing this my thinking has changed quite a bit. I would not write this article today.)

"Fiat/credit money was not a late development, but was the intrinsic essence and nature of money since its invention in the ancient middle east, and its even earlier roots."

This is probably quite a subtle point. Money is by its nature a consensus tool, but fiat is decree. Theoretically you could have the market, in some Darwinian fashion, selecting the most effective money type, and creating it too. Would that be decree? Or, alternatively, some governmental, centralized power decrees that X will serve as money.

Now, I'm no believer in the myth of market processes, because such can never be some amoral, value-free, natural force always selecting the 'best' solutions when left alone. Nevertheless, the distinction between ways in which consensus is reached is probably important, especially as State is a monopoly on power.

I think too you've slightly misread the paragraph of mine you quote, though I can see that what I wrote suggests your interpretation. There are two distinct points here. One is that money, markets, states and governments arise out of different circumstances, and follow different 'progressions' through their developing, and never emerge from a vacuum. The other point, and where I was wrong, I think, was to suggest that 'barter' is 'primitive' and 'fiat' modern. The truth is far more subtle, more subtle than you suggest.

"Barter economies, if they ever exist anywhere, are a late development, only seen at the collapse of empires. The state and its credit/fiat money came first, then markets and widespread trade. (Then coinage, the confused illusion of "commodity money" etc)"

Actually, today I would say we have 'advanced barter', that is, barter made convenient by fixed prices (ignoring inflation/deflation for a moment) in the sense of price tags we accept without bargaining when we shop. Until we have money that does not (appear to) 'store' value, we will have barter and commodity money. You can trade money, thus money is indeed a commodity, whether gold or 'fiat'. But, it is a commodity we happen to use as a 'measure of value' (via archaic accountancy practices) for establishing price, in a system where the State/Banking Sector has a monopoly on money creation. The underlying thinking here is covered in my latest posting, that is, by an excerpt from Franz Hoermann's "Das Ende des Geldes":

So I would say there are only barter economies, and also that empires are late developments in our time on earth. 'Wealth creation' is made explicit by money processes, brought into cultural focus if you like, but is still subjective and not without considerable costs seen over the long term. Perpetual growth, for example, is a dangerous paradigm to be glued to.

Finally, if you are saying the state always comes before market trading, that is not true. Sometimes it worked out that way, other times not. See for example "The Art of Not Being Governed" by James C Scott, or, "The Early State" edited by Claessen and Skalnik.