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 euro-money 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.)
# Conclusion of First Part # # #
# The presentation on the topic of
“ideal money” itself is being #
# abbreviated from the full length of the
discussion that could be given #
# in a lecture but we can now refer to the
published paper on "Ideal #
# Money" that was in the July 2002 issue of the
Southern Economic Journal.# # #
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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.