Ideal Money and Asymptotically Ideal Money
Ideal Money
The special commodity
or medium that we call money has a long and interesting history. And since
we are so dependent on our use of it and so much controlled and motivated
by the wish to have more of it or not to lose what we have we may become
irrational in thinking about it and fail to be able to reason about it
like about a technology, such as radio, to be used more or less efficiently.
So I wish to present
the argument that various interests and groups, notably including "Keynesian"
economists, have sold to the public a "quasi-doctrine" which teaches, in
effect, that "less is more" or that (in other words) "bad money is better
than good money". Here we can remember the classic ancient economics saying
called "Gresham's law" which was "The bad money drives out the good". The
saying of Gresham's is mostly of interest here because it illustrates the
"old" or "classical" concept of "bad money" and this can be contrasted
with more recent attitudes which have been very much influenced by the
Keynesians and by the results of their influence on
government policies since the 30’s.
Money, Utility, and Game Theory
In the sort of game
theory that is studied and applied by economists
the concept of "utility" is very fundamental
and essential. Von Neumann
and Morgenstern give a notably good
and thorough treatment of utility in their book (on game theory and economic
behavior). The concept of utility (mathematical) does indeed predate the
book of Von Neumann and Morgenstern. And for example, as a concept, mathematical
utility can be traced back
to a paper published in 1886 in Pisa
by G. B. Antonelli.
When one studies
what are called "cooperative games", which in economic terms include mergers
and acquisitions or cartel formation, it is found to be appropriate and
is standard to form two basic classifications:
(1): Games with transferable utility.
(and)
(2): Games without transferable utility
(or "NTU" games).
In the world
of practical realities it is money which typically causes
the existence of a game of type (1)
rather than of type (2); money is the "lubrication" which enables the efficient
"transfer of utility". And generally if games can be transformed from type
(2) to type (1) there is a gain, on average, to all the players in terms
of whatever might be expected to be the outcome.
But this
function of money in generally facilitating the transfer of utility would
seem to be as well performed by the currency of Thailand as by that of
Switzerland. Or the question can be asked "How do 'good money' and 'bad
money' differ, if at all, for the valuable function of facilitating utility
transfer?". But if we consider contracts having a relatively long
time axis then the difference can
be seen clearly.
Consider
a society where the money in use is subject to a rapid and unpredictable
rate of inflation so that money worth 100 now might be worth from 50 to
10 by a year from now. Who would want to lend money for the term
of a year?
In this context
we can see how the "quality" of a money standard can strongly influence
areas of the economy involving financing with longer-term credits.
"Keynesians"
The thinking
of J. M. Keynes was actually multi-dimensional and consequently there are
quite different varieties of persons at the present time who follow, in
one way or another, some of the thinking of Keynes.
And of course SOME of his thinking
was scientifically accurate and thus
not disputable. For example, an early
book written by Keynes was the mathematical text "A Treatise on Probability".
The label
"Keynesian" is convenient, but to be safe we should have a defined meaning
for this as a party that can be criticized and contrasted
with other parties.
So let us define
"Keynesian" to be descriptive of a "school of thought" that originated
at the time of the devaluations of the pound and the dollar
in the early 30's of the 20th century.
Then, more specifically, a "Keynesian" would favor the existence of a "manipulative"
state establishment of central bank and treasury which would continuously
seek to achieve "economic welfare" objectives with comparatively little
regard for the long term reputation of the national currency and the associated
effects of that on the reputation of financial enterprises domestic to
the state.
And indeed a very
famous saying of Keynes was "... in the long run we will all be dead ...".
Historical Observations
{Originally, these remarks were mostly made
with the aid of a blackboard (or some sort of a
board for writing display).}
The history
of the "gold standard" is rather interesting. It can be traced back to
1717 when Isaac Newton, as "Master of the Mint" in London, set a standard
quantum of gold to correspond to the currency called the "'pound' sterling".
And in 1931 this standard finally failed to be supported any longer, and
that was at a time when the London government had shifted to the left politically
and a time also of global economic stresses.
The US dollar
had itself been imitatively put on a fixed relation to gold, like various
other currencies at various times. That relation was not supported after
1933, similarly to the case of the British pound. And another similarly
linked currency was the Swiss franc. In its case the original standard
relation to gold was discontinued in 1936.
And in later
times, viewed retrospectively, it could be said that there were times and
places where it perhaps SEEMED as if there were a "gold standard" but that
there really wasn't that. In 1971 there came, under
the presidency of Nixon in Washington,
the final complete disavowal of the concept of a linkage between the US
dollar and gold. This was naturally also the beginning of a period of strong
inflation in terms of dollar prices.
Central Banks as "Pardoners" and
as Printers of Money
A debt-pardoner
is an agency or authority that can pardon the "sins"
of the over-indebted or of those who
otherwise would go bankrupt. Banks can thus sometimes be saved from failing.
The government, of a country where it issues the locally accepted currency,
also thus pardons its own "sins".
If the "euro"
currency becomes established then Rome and Paris will no longer be able
to play the same ro^les as "pardoners" as they have in the past. National
"pardoners" will become ineffective, within the area of the "euro", unless
they secede from the eurocurrency bloc. Instead pardoning will depend on
the actions of a sort of "Holy Roman Emperor" in Frankfurt, which would
be able to pardon ensemble all the debt-sinners of the euromoney bloc.
The British and the "Euro"
The inhabitants
of the UK, having in the past had the best and most dominant of all currencies,
as well as the biggest colonial "empire", may
feel so much reluctant to accept the
"come down" that agreeing to the rule
of a (collective) Holy Roman Emperor
in Frankfurt would entail that they will decline to accept membership in
the euromoney bloc.
Technically,
it would be possible for them to arrange to have a money
of their own that would be of quality
not less than that of the "euro". (Presumably this would be the Swiss strategy.)
Ideal Money
So the euromoney
prospect opens up many interesting potentialities of games of alignment.
In general, membership in a "social club" is desirable only if there are
non-members. A good alliance can be reduced to an absurdity by becoming
too broadly inclusive. But a global money standard could have a value similar
to that of standard measures such as those of the "metric system".
There is a tremendous
value in simply having prices quoted conveniently. With an euro-money standard
a manufacturer in Spain can give information simply to prospective customers
in France or Germany. That would be comparable to conditions in the USA
where items can be ordered from catalogs and shipped interstate with only
the complication of the state retail sales taxes sometimes being involved.
States Without Sin
(This was originally presented in "blackboard display"
format, rather than in verbal lecture style.)
It was observed
that the states listed: Luxembourg, Andorra, Liechtenstein, San Marino,
Monaco, and the Vatican City; have been constitutionally without "sin",
in the sense of the defaulting of bankrupts, and they have also not themselves
"pardoned" any money debtors. This is simply because they have not printed
any money for which they would also determine the value. Each of these
would either issue a currency with value defined by the value of the currency
issued by some larger state or simply not issue any currency.
And outside of
Europe there are Panama and Liberia which can be named as examples of the
same category.
Economics and Money Quality
How does the traditional
quality of a state's currency correlate with
the typical level of economic advancement
and the "standard of living"? The correlation seems to be positive since
Switzerland has a notably high standard of prosperity and notably "good"
money, and of course the whole spectrum of prosperity and money quality
of states must be studied for a scientific conclusion.
How Could "Good Money" Become a Standard?
The historical
fact seems to be that the "gold standard" was, in its time, a basis that
favored the prosperity of the U.K. and of other states like the USA and
Switzerland that adopted the concept of the standard. But nowadays few
would propose a return to the actual use simply of the metal gold as a
standard. Several factors can be mentioned: (1) The cost of mining gold
effectively does depend on the technology. Recent cyanide leaching techniques
have made it again possible to profitably mine gold at formerly abandoned
sites in the USA so that the USA is now a big producer. But the unpredictability
of the cost is a negative factor. (2) The location of potential gold mining
places may not be "politically appealing" so that it would seem undesirable
to make a political choice to enhance the economic importance of those
particular areas. (3) There is some negative psychology about gold so that
even if it were the most logical choice, after all, still the unpopularity
of the idea could be very obstructive. And (4) It can be recognized as
wasteful of labor if gold is accumulated much beyond its various uses and
put into storage vaults like in Fort Knox in the USA.
But a modern
alternative is possible, one that would provide a good standard independent
of state "pardoners". This idea occurred to me comparatively recently.
But the possibilities
with regard to actually establishing a norm of money systems which could
qualify as of "ideal" type are dependent on the political circumstances
of the world. If the world had in fact become a single empire with a central
government for the whole world then what is now international trade, with
shipping on the oceans through areas considered to be the property of no
state, would be replaced by the equivalent of domestic commerce within
the USA.
And this
would profoundly modify the circumstances relevant to the establishing
of "good" or "bad" systems of money. What I have to suggest on the topic
of "ideal money" is not viewed as appropriate for the world empire context,
however the alternative concept of "asymptotically ideal money" could be
useful in the world empire context. The citizens or inhabitants of such
an empire would not be able to compare their empire’s money with that of
another empire but they would be able to approve or disapprove of the stability
or instability of prices and costs resulting from the nature of the money
used in the empire.
It can also
be observed that "bad" money, or the inverse of "good" or "ideal" money
is frequently or typically a consequence of deficiencies on the part of
governments and politicians of a sort relating to morals, virtue, or ethics.
So it is arguable that the phenomena of "bad money" are in those cases
understandable via Machiavellian studies. And "rational expectations" and
games of deception are relevant here. If the inhabitants of the principality
of a Machiavellian prince can well understand the prince’s schemes relating
to the issuance of money then they can strategically adapt optimally to
the circumstances.
Natural Comparisons of Value
In most states having
an "advanced economy" there are statistics prepared by the authorities
that are comparable to the U.S. "consumer price index". (In the U.S. this
statistic goes back to times when the dollar was indeed a gold standard
currency.) As inflation has become more of a standard and expected phenomenon
the CPI has been used and interpreted as the most realistic and practical
measure of the actual rate of the inflation. When
it is at the 2% or 3% level it is
currently fashionable for all economic
and financial commentators to say
that "inflation is not a problem" or "inflation is under control". This
of course involves a sort of psychology. Over the current expected human
lifetime of 70 years one unit of currency of the value at the time of a
person's birth would be worth 4 or more units of it of the value at the
time of that person's expiration.
A Non-Political Value Standard
A possible
non-political basis for a value standard which could be used for money
would be a good "ICPI" statistic where this acronym refers to "industrial
consumption price index". That could be calculated from the international
prices of commodities, such as copper, silver, tungsten, etc. that are
used in industrial activities.
Here we can
return to the understanding that money has the practical value of creating
games for traders that are games with transferable utility when without
the money being available the game of the traders would be
a game without transferable utility
and thus naturally a game with less efficiency in relation to the possibilities
for the participants of maximizing their combined situation of gains.
And then
if we consider which commodities would be optimally suitable to provide
a basis for a means of transferring utility then, if we specifically consider
the possibility that the trading partners may be located in different nations
and perhaps on different continents then the suitability of such commodities,
in relation to the ideal function of facilitating utility transfer, depends
on the extent such a commodity can seem to have a value independent of
its geographical location.
Clearly,
in terms of this geographical perspective, gold has been historically optimal
and that largely because the labor cost of moving it over great distances
is so small in relation to the value of what is transported. Thus it formed
a very efficiently movable medium for the transportation of a value exchangeable
for other values ultimately deriving, in one way or another, from human
labor (with the achievements of warriors here also viewed as involving
labor). But right now platinum would be even better than gold because of
having more value per unit of weight.
Crude petroleum
could also be used for barter transactions, and in relation to the present
state of the global economy it would seem a proper component of an index
of prices of internationally traded commodities that enter into the costs
of industrial consumption. We can see that times could change, especially
if a "miracle energy source" were found, and thus if a good ICPI index
is constructed it should not be expected to be valid, as initially defined,
into all eternity. It would instead be appropriate for it to be regularly
readjusted depending on how the patterns of international trade would actually
evolve. Here, evidently, politicians in control of the authority behind
standards COULD corrupt the continuity of a good standard, but depending
on how things were fundamentally arranged, the probabilities
of serious damage through "political
corruption" might become as small as
the probabilities that the values
of the standard meter and kilogram will
be corrupted through the actions of
politicians.
Also, commodities
with easily and reliably calculable prices are most suitable, and relatively
stable prices are very desirable.
Another basic
cost that could be used would be a standard transportation cost, the cost
of shipping a unit quantity of something over long international distances.
So it seems that
such an ICPI index could be calculated in an essentially "scientific" fashion,
after some practical initial choices were made. And this standard, as a
basis for the standardization of the value of the international money unit,
would remove, where it would be used, the political ro^les of the "grand
pardoners", the state authorities that can forgive the debts of debtors
including, particularly, those of themselves. (The "national debt" of a
state can, in principle, be "trivialized" by a sufficient amount of inflation.)
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Conclusion of First Part
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Asymptotically Ideal Money
One cannot
logically feel confident of the adoption internationally
of an ideal system of currency or
currencies in an achievement analogous to
the achievement of the metric system
or of "the euro". Such a result would necessarily have a political content
since it is the states that control
and supply the various currencies
that are in use at the present time.
And projects requiring political support
may be difficult to achieve or comparatively easy to achieve depending
on elements of "political reality" which may differ considerably from the
actual merits or lack of merits of
the projects (as evaluated from, say,
a scientific or economic or medical viewpoint).
So it occurred
to me to think that the improvement in the quality of forms of money or
currency being used in the world might result by a process of evolution
instead of as a result of an analogue of the adoption of the metric system
or of the "euro". And of course, after a certain degree of progress by
evolution the rest of the progress could possibly be realized
by a convention thus, in effect, by
"fiat" of some sort.
And there
was a specific development observable in the actual behavior
of "central bankers" and/or "money
managers" that suggested some interesting possibilities.
A Symptom of Current Attitudes Towards Inflation
In relatively quite
recent times a scheme, or perhaps a "line" (analogous to a "political line"),
has emerged which is called "inflation targeting". Although of course this
doctrine, if honestly used as a program, naturally tends to comparatively
restrain the inflationary options of central bankers and treasuries, yet
it is popular with many of them. This "line" seems to have originated in
New Zealand where it is observable that their dollar is the most depreciated
of all national dollar-named currencies.
(It seems
conceivable to me that the very fact of the maximally depreciated value
of the NZ$ put political and psychological pressure on the state authorities
there so as to force them towards a modest degree of reform. Clearly, New
Zealand is not an impoverished "3rd world" country.)
To me it
seems a striking paradox that central bankers and their economist advisers
can think in terms of having a "targeted" rate for inflation without realizing
that that rate should be zero!
This paradox,
or my perception of it, was what led me to the concept
of "Asymptotically Ideal Money". Suppose
that there were, formerly, "free Keynesians" and then, later, there came
to be "restrained Keynesians" whose freedom to freely issue additional
money and credits however they might please to do so would have become
a bit restrained by the need to support a doctrine of targeted inflation.
Then the "customers" (as it were) of the treasury and central bankers would
become in a position to ask, seeing the program of "inflation targeting"
in operation, "Why should not the target rate be set lower so that we would
have more stable prices?". And I ask, rhetorically, "Why, indeed? That
seems like a good question."
So it seems
to me that no actual target rate for inflation could be justified for an
indefinite length of time. Perhaps if the managers could replace the word
"inflation" with an euphemism of politically correct appearances they might
more easily maintain the scheme or "line" of justification for inflation.
And I have
made also the observation that among the assortment of states where already
there has been, to some extent, the adoption of the use of a "line" of
inflation targeting, that the rates chosen for the targeting have, perhaps
unsurprisingly, simply varied with the "common sense" external or international
appraisal of the historical quality of the money of each of those states.
And thus to pretend to be a state with high quality money a state would
need to choose a comparatively lower rate for its inflation rate target.
Political Evolution
There perhaps will
always be "politics", like also "death and taxes". But it is sometimes
remarkable how political contexts can evolve. And in relation to that I
think that it is possible that "the Keynesians" are like a political faction
and that they may become less influential as a result of political evolution.
The "Keynesian" view of things did not come into existence until after
the time when what we can call "bolshevik communism" had become established
in Russia. And by this label we wish to differentiate between any theoretical
or ideal concept of communism and the actual form of governing regime structure
that came to exercise state power in Moscow. (All over the world varieties
of states make claims to have governments very properly or even ideally
devoted to the interests of the citizens or nationals of those states and
always an externally located critic can argue that the government is actually
a sort of despotism.)
The Keynesians
implicitly always have the argument that some good managers can do things
of beneficial value, operating with the treasury and the central bank,
and that it is not needed or appropriate for the citizenry
or the "customers" of the currency
supplied by the state to actually understand, while the managers are managing,
what exactly they are doing
and how it will affect the "pocketbook"
circumstances of these customers.
I see this
as analogous to how the "bolshevik communists" were claiming to provide
something much better than the "bourgeois democracy" that they could not
deny existed in some other countries. But in the end the "dictatorship
of the proletariat" seemed to become rather exposed as simply the dictatorship
of the regime. So there may be an analogy to this as regards those called
"the Keynesians" in that while they have claimed to be operating for high
and noble objectives of general welfare what is clearly true is that they
have made it easier for governments to "print money".
So I see
the Keynesians as in a weak sense comparable to the "bolsheviks" because
of the support of both parties for a certain "lack of transparency" relating
to the functions of government as seen by the citizenry. And for both of
them it can be said that they tend to think in terms of government agencies
operating in a benevolent fashion that is, however, beyond the comprehension
of the citizens of the state. And this parallel makes it seem not implausible
that a process of political evolution might lead to the expectation on
the part of citizens in the "great democracies" that they should be better
situated to be able to understand whatever will be the monetary policies
which, indeed, are typically of great importance to citizens who may have
alternative options for where to place their "savings".
Possible Evolution of the Quality of Currencies
It seems possible
and not implausible that leading currencies in the future will evolve in
such a way as to become of improved quality with regard to inflation. Here
we use the "common sense" viewpoint of an observer located in a land politically
independent of the country issuing the currency that is appraised. Thus
less inflation corresponds directly with higher quality.
There may
be a time of wide usage of the "line" of inflation targeting. And there
may be a comparatively small number of "leading" currencies, such
as the US dollar, the "euro", the
Japanese and Chinese currencies, and the British pound. If in each of the
corresponding states the authorities were using, in some sense, "inflation
targeting" then necessarily they would have some sort of a price index
that could be related to their issued currency.
But it would ALSO be very natural
for each state to look at the comparative behavior, in terms of value,
of the other leading currencies.
Thus second
order index comparisons become possible where the authorities in a state
would look not only at domestic prices but also
at international value comparisons.
And now we
have only to imagine that a "groundswell" of "popular demand" for minimal
inflation (and thus for money that would be viewed by foreign observers
as of higher quality) could sufficiently influence the responsible authorities
and governments so that they would so control the "supply side" of their
money management activities so as to achieve that (supposed to be popularly
desired) result.
Here we can
look at the early behavior of the "euro" as an example. It came out as
a unit having unit value less than that of a British pound unit but worth
more than a dollar. It would SEEM that in Frankfurt they EXPECTED that
it would simply "float" at a value level above that of the US dollar unit.
This did not occur, and it then began to seem as if it might be drifting
relentlessly downward, like with the history of the old Italian lira. But
then, after a time, for various reasons, presumably including supply restraint
controls directed from Frankfurt, the decline was reversed and the euro
regained enough value to have a respectable appearance. So we can see examples
where the "asymptotic" behavior of a value under comparison can be different
from an earlier apparent pattern.
Thus I think
that "asymptotically ideal money" is a real possibility and that problems
of political coordination do not make this very difficult to be achieved.
But also, if there is in the first stage of progress the advent of "asymptotically
ideal" currencies then after that level of what might be called "rationalization"
is achieved there would be the possibility of an international collaboration
to set up value standards analogous to the standard measures used in the
internationally accepted "metric system".
And here
a side remark can be made, partially humorously, and just for illustration,
that a POSSIBLE standard of value would be simply the cost of making a
duplicate, of precisely the same composition and weight, of the "standard
kilogram" located at Sevres near Paris.
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Opening for Questions or Debate
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(The talk text,
just for the "ideal money" topic, originally derives
from my outline for the lectures given
at various specific locations of the "European School of Economics" in
Italy during October 1997. Subsequent to that time, after consulting with
some of the economics faculty at Princeton,
I learned of the work and publications
of Friedrich von Hayek. I must say that my thinking is apparently quite
parallel to his thinking in relation to money and particularly with regard
to the non-typical viewpoint in relation to the functions of the authorities
which in recent times have been the sources of currencies (earlier "coinage").)
(There have been
some later revisions and expansions of the text and
I subsequently also spoke on this
topic at Northwestern, at Yale, in Athens, Greece, at a meeting in Tampa,
Florida, USA and most recently at Peking University in Beijing, China.
And then my lecture at the Tampa meeting was published in the SEJ journal.)
And the portion
specifically concerned with "asymptotically ideal" currencies is added
first for the talk in Amherst.