Thursday, December 31, 2009

some notes about money

1. I want to start with the conventional theory of money. Actually, the use of words like "orthodox" and "conventional" in relation to economic theory is misleading, as Maurice Dobb demonstrates in his classic Theories of Value, the orthodox economic theory at any point in time is whatever is politically efficacious, hence the history of the orthodox theory is a zig-zag between bad ideas that are politically expedient at a particular moment, to shore up an unpopular existing policy; and this is right up to the present day. Anyway, the conventional theory of money has "narrow money": cash in circulation plus central bank liabilities, serving as a basis for "broad money": bank credits. The supply of "narrow money" is thought to be fixed at any particular time, as is the commercial banks' reserve ratio (by custom or law). Consequently "broad money" ought to be fixed. According to this way of looking at the problem of money, money would be "exogenous", a fixed amount, depending on variables amenable to control by the authorities (cash in circulation, central bank deposits, reserve ratio).

2. exogenous money is logically presupposed by the "Cambridge equation", which is meant to establish the relationship between prices and the money supply, and hence inflation and the money supply:

Mv = Y

or, the amount of money multiplied by its velocity of circulation equals income, for any particular period. Since "v" is immeasurable unless we know the other variables, the usefulness of this expression might be thought rather limited. The Cambridge equation is true in as much as it's a tautology, but it certainly isn't proof of the independence of M from Y.

3. Nevertheless, social systems that used a genuine commodity money, such as gold or silver pieces, and had no credit money, have certainly existed. The sort of "monetarist" argument put forward by Ricardo, for instance, sees paper money representing a more or less good claim to the commodity that serves as real money, e.g. gold. The argument that the value of paper money isn't increased by the multiplication of paper in excess of the gold it represents is essentially the same as the argument that the value of gold coins isn't increased by clipping the coins and adding the clipped gold to the clipped coins. Anyway, Geoffrey Ingham's book The Nature of Money clearly establishes that the development of credit money is coextensive with the development of paper money, so the whole school of monetarism is based on a misconception, insofar as it only understands paper-commodity-money, or exogenous paper money. The real thing is capitalist credit money.

4. Marx says somewhere that any attempt to analyse money invariably falls back on the idea that money might as well be thought of as gold. Suppose we tried to analyse inflation in a simple economy where all income is consumed, workers are paid a conventional minimum real wage and paper money is used. If the monetary authority takes it upon itself to print a certain amount of money to finance, say, pyramid building, the final result, after all adjustments have been made will be the same the same commodities in the same proportions being received by workers and capitalists, but higher prices. If the workers are able to continue to claim their minimum wage throughout the period of rising prices, they will suffer no ill effect from it. The cost of the labour appropriated by the monetary authority will fall wholly on the capitalists, who will have to increase their monetary capital, instead of distibuting profits, in order to pay increased money wages.

5. Hence we can see that inflation might appear as a social cost for the capitalist class as a whole, though the effects of inflation would really affect different capitalists or capitalist blocs differently, and some might actually benefit.

6. So, we can situate, as it were, Nicholas Kaldor's concept of endogenous credit money (which does represent a genuine theoretical advance), in the factional squabbles between sections of the western ruling class. The followers of Friedman wanted to end hyperinflation. Kaldor was involved in a sort of rearguard defence of social democracy.

This isn't the whole story though, and if I return to this theme, I might say something completely different about inflation and its causes and consequences.

Thursday, December 10, 2009

more about money

I had pulled out my gold teeth...

is this another contrived dialogue about money?

I had pulled out my gold teeth, and placed them, along with my wedding ring, in the bag provided by Cash4Gold, the internet gold purchasers, because the frightening analyses on this page had convinced me that the economy was in real peril. But on checking your analysis of Keynes, I've noticed some discrepencies, and this leads me to doubt the whole thing. According to what you wrote earlier, Keynes sees "savings" and "investments" as disarticulated processes, leading to inflationary or deflationary pressure when they fail to balance. In fact, in Keynes' chapter seven, Keynes insists that they are equal, or at least that the theory that they are always equal is "sounder" then the theory that they aren't. Doesn't this invalidate what you wrote before?

If you look at the summary of Keynes' book (chapter eighteen), the model described is pretty much the same as I put forward. It's such an intuitively appealing model, with the disarticulated monetary flows, and their tendency to self correct, I still feel like it's central to Keynes' approach. It's a perfectly reasonable model of an economy without reserve banking, or at least in this case it would only commit the errors of any economic model. Maybe Keynes set up his model this way and then wrote chapter four after being criticised for not developing a theory that's able to deal with reserve banking. In other places Keynes seems to think his theory is transhistorical. In that case, his insistance that "savings" equals "investments" would be absurd, because it would not apply to a money economy without reserve banking. The very terms "savings" and "investments" are suggestive of such an economy. If he wanted to talk about modern fractional reserve banking, surely "savings and investments", necessarily equal, should be shown as "debt contracted" a double entry added to a bank's assets and liabilities, the schedule that may or may not meet it could then be "debt serviced", a double entry in the opposite direction.

Are you saying now that Keynes' theory is a theory of commerce in the ancient world, with a few contemporary bourgeois trappings pasted on? Because before, I seem to remember you said the supposedly historical part of Keynes' book described bourgeois England but dressed it up in period costume.

I think the methods I've used were entirely suitable to the things I was looking at before, the ideological apparatus of capitalist society, basically, and these issues around authority etc. Money evidently requires a different approach. I haven't read the secondary literature on Keynes, but anyone who wants an authoritative view could look at Skidelsky's or Harrod's biographies, or the reinterpretations of Keynes by Minsky, Harcourt, Tarshis and Leijonhufvud.

The reinterpretation I read on this site seemed more along the lines of Milton Friedman.

maybe, but this follows logically from the assumption of indestructible money, gold or whatever, which follows logically from the pure model with "savings" and "investments" and the downard sloping schedule of the marginal efficiency of capital. I don't think this theory is right anyway, but the orthodox theory of money doesn't seem to have got much further than where Keynes was in the thirties.

Monday, December 07, 2009

the mysteries of money

I feel like, last month's entry was just a garbled dialogue about money. Was there any point to it?

yes, the point is, the Conservative party are probably coming back in the next year, and, even though I'm not exactly in love with New Labour, the present time offers an opportunity to give a verdict on the effects of previous Tory economic policy. I mean the effects in a technical sense. Everyone remembers the rotten social consequences of their policies: thousands made homeless, the destruction of UK manufacturing, virtually a state of depression in the North for years, McDonalds jobs, fucking Sky. But, the whole thing was, that they were meant to be benefitting the economy as a whole, admittedly at the expense of the greater part of the population. This is the ideological line that they were happy to defend, and which has carried over into popular culture. They were "tuff choices", to sack binmen and rehire them on two thirds salary, or to sell off the utilities at a discount , and in effect hand the banks a sack full of public money. But these "tuff choices" were meant to have benefitted total output and total income. I think we could prove that these choices actually harmed the economy, and that this was done quite deliberately.

Doesn't Naomi Klein prove this in "the Shock Doctrine"?

Maybe. Maybe David Harvey does, or even Francis Wheen.

But this isn't "official" enough, in some way?

The whole question of what's authoritative and what's heterodox is played out in a peculiar way in a culture dominated by neoliberalism, in which operative political science hides, as it were, behind the constructs of an ersatz popular culture. I think it was right to see neoliberalism as having three aspects: practical policy, theory, popular appearance. It's fairly easy to get value out of attacking the "popular" aspect of the "trinity": to demonstrate the absurd consequences of the popular forms. This can even be extended to attack the theory itself in some places, and attack it effectively, as in Linder's Anti-Samuelson, but this doesn't effectively refute it.

the popular aspect?

Like, Glenn Beck appears in the Observer, here with this

"I am the most enthusiastic capitalist since Adam Smith," he said on one recent show, "If I could sell sponsorship on this chin right here, I would. It would say: 'third chin sponsored by Goodyear'

Glenn Beck does not know what a capitalist is. What he actually wants to be, according to his speech, is not so much a capitalist as a commodity, or more realistically he wants to feel that his existance as a commodity is vindicated by a theory he has never read. Also, he seems to think that capitalists make money by accepting sponsorship from eachother. Even Adam Smith himself, assuming he could make time away from supervising his factory hands, would struggle to explain how such an arrangement could possibly generate profit systemically.

So, the thing would be to look at the theory and practice of modern capitalism in a more direct way, without such comic asides?

yes, probably. And this is why it's crucial to get to the bottom of the mysteries of money.