By Sell on News, a global macro equities analyst. Cross-posted from Macrobusiness.
One of the consequences of economics pretending to be a science, when it is not, is the tendency to attempt to explain financial behaviour from its base constituent parts, rather as a physicist might build up a picture of a compound from its molecules. This repeatedly results in observations that are either banal or based on circular arguments. And once those observations are generalised, taken beyond their thought experiment circularity, they become consistently misleading.
There was an example of this in an article in The Economist that discusses the origin of money, or specie. Money, we are told, is “perhaps the most basic building block in economics”. Well, yes. Painters use paint, too. But money, unlike paint, is a little harder to define:
“It is clear what it does, but its origins are a mystery. Some argue that money has its roots in the power of the state. Others claim the origin of money is a purely private matter: it would exist even if governments did not. This debate is long-running but it informs some of the most pressing monetary questions of today. Money fulfils three main functions. First, it must be a medium of exchange, easily traded for goods and services. Second, it must be a store of value, so that it can be saved and used for consumption in the future. Third, it must be a unit of account, a useful measuring-stick. Lots of things can do these jobs. Tea, salt and cattle have all been used as money. In Britain’s prisons, inmates currently favour shower-gel capsules or rosary beads.”
It is interesting how this argument develops. There is no real definition of what it is other than it is a “mystery”, then we return to what money does, its functions. As Nobel laureate Sir James Mirrlees commented, traditional economic theory has no explanation for the existence of money. Not a small gap, to say the least. Then the article goes on to look at historical types of money, including barter at which point it has safely departed from any relevance to the meta money world that has developed in the global capital markets.
Taking a building block approach, in other words, gets pretty much nowhere. The quasi-science defeats itself readily enough.
Money, it seems to me, is rules. Rules about value and obligation. The rules can be enforced or overseen by government or they can be loosely enforced through private self organisation. The opposing arguments about money being from the state or private sources is really a non-argument. They are just different kinds of rules. What we are seeing in the global capital market is the shifting of the rule making away from governments and towards private actors, but both are typically involved. It is just that the balance over the last decade has been skewed towards traders, leaving governments to fix the mess when it all inevitably went wrong.
The article also makes the mistake of looking at money as a tangible thing, which is a blind alley. Rules are intangible:
“But the story just doesn’t match the facts in most monetary economies, according to a 1998 paper** by Charles Goodhart of the London School of Economics. Take the widespread use of precious metals as money. A Mengerian would say that this happens because metals are durable, divisible and portable: that makes them an ideal medium of exchange. But it is incredibly hard to value raw metals, Mr Goodhart argued, so the cost of using them in trade is high. It is much easier to assess the value of a bag of salt or a cow than a lump of metal. Raw metals fail Menger’s own saleableness test.
This problem explains why metal money has circulated not in lumps but as coins, with a regulated amount of metal in each coin. But history shows that minting developed not as a private-sector attempt to minimise the costs of trading, but as a government operation. It was state intervention, not the private market, that made metal specie work as money. “
I would say that the physical version of money — and almost all money these days is blips on a computer screen, almost none physical coinage — was developed to be a store of rules (and only secondarily a store of value).
Whatever, the building block approach to understanding money is arid. It ends up only telling us what money does, not what it is. A much better approach is, having defined money as rules, to then ask how human beings create, and are affected by, the rules. An excellent starting point for that is the anthropologist George Simmel, who links it with the rise of individuality. Money allows an individual to define his or herself:
“Money furthers differentiation not only as a by product of of differentiation in society but within the individual directly. It does this by providing an effective means of distinguising between the subjective centre and the objective achievement of a person. The individual’s performance may be paid for while the person remains outside the transaction..”
But Simmel says the individualising power of money has another side. Group membership can either enhance or reduce individuality: investment bankers are all alike except for the differences in their bank balances. And it has an effect on how we conceive others:
“Such power is achieved at the cost of de-individualizing other beings whom one tends to evaluate in monetary terms. Here we confront the Neitzschean belief that there is a world economy of individuality, with the result that its increase in the few takes place at the expense of the depersonalised many.”
It is worth remembering, especially at a time when neo-liberal ideas of the worth of the individual and limitless virtues of markets abound, that the word “individual” once had the opposite meaning: “indivisible from”. That reflects the ambiguity, even paradox, of the idea. One is reminded of the Monty Python film Life of Brian:
Brian: You are all individuals
Crowd: We are all individuals
Some guy: I’m not.
Money is rules, and the patterns of individuality and co-operation or colectivism are revealed in relation to those rules. The question should be in this current bizarre world of meta-money: “What rules are good and what rules are either bad or dangerous?”
The answer will be found in looking at the balance between individual rights and freedoms and the collective good.
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Lambert here: Well, gosh, I don’t know. Smarter people than me: “Money is power”; “Money, then, is credit and nothing but credit.” Then again, “money is rules” appeals to me, because it makes money seem subject to the taboos (rules) that fetishes are subject too. Readers? How do you answer Sell on New’s question, do you agree or disagree with Sell on News, and if so, why? Here’s another question: Are different forms of money appropriate to different constitutional orders? That is, would a city-state like Florence or Athens necessarily have different forms of money from an empire like Rome or the United States? Let’s have a good clean fight here….