What is money? A rabid free marketeer puts his foot in lots of notes

Several of you have asked for the skinny on what money actually is. So, here's the full fat Worstall take on cold, hard cash. Answer: It's a way of keeping score. Who has the right to call upon the resources of others in that same society? And that, other than a couple of footnotes which we'll deal with overleaf, is pretty …

[Anonymous Coward]

Re: Smoke and Mirrors

"Err, no."

Quite, and a very succinct explanation of where the fallacy lies. Arguments like the above are a great example of the perpetual motion machine.

Even though you *can* conjure monetary units out of thin air (create credit - banks, print money - govts) you *can't* somehow fix the value of those units. I think that is where many people get unstuck when commenting on economics: they get confused about what money actually represents. That's quite easy to do when you have a wallet with cash in it that seems to somehow magically turn into "stuff" (beer, fags, food or whatever.) It seems that the cash itself has a tangible value rather than being part of a bloody complicated negotiation system.

Now, if you don't even know what money is, then GDP is unlikely to be your forte either.

[dcluley]

Re: Smoke and Mirrors

"Now, if you don't even know what money is, then GDP is unlikely to be your forte either."

Well certain it is that economists can't actually agree on it either; otherwise they wouldn't need so many different measures for it.

[dcluley]

Re: Smoke and Mirrors

"So, in scenario 1) GDP is final sales minus imports, £10k, in scenario 2) GDP is final sales minus imports: £10k."

No - if your arithmetic method is right the only available figure for scenario 1 was £100k which, by your reckoning must be the GDP figure. And did you not understand what the G in GDP stands for. Gross product not Net

[Tim Worstal]

Re: Smoke and Mirrors

The reason we're subtracting the imports is the "domestic" bit.

[John Savard]

Discipline

The gold standard did have the virtue that it prevented the sort of thing Zimbabwe or Weimar Germany did - whereas fiat money, even when handled carefully, did not inspire confidence, hence the failure of the Continental Currency and the Assignats.

Some people have a thing about how banks are allowed to create money when they make loans. But they forget that it is licensed and supervised check-kiting. Yes, the banks are making up money - but they have to get collateral covering every cent of the money they lend (as well as having fractional reserves of deposits so that the proportion of their loans that actually gets spent as physical currency at any one time causes no problems).

So the system should work perfectly; but the collateral is often real estate, and real estate values can collapse for various reasons. Thus, a house in Russia or China costs less than one in Sweden or the United States... because of where people would rather live. And then there are problems with unwise mortgage loans.

If banks are properly regulated, though, they allow the country's currency to be backed not just by gold bullion, but by all the valuable assets in the nation that can be used as collateral for a bank loan. The ideal would be for the value of a dollar or a pound to be as constant as the mass of a kilogram or the length of a metre - that goal, though, has only been approached when the gold standard was in effect.

But unemployment wastes potential productivity. Can another way be found to maintain full employment at all times, regardless of economic conditions, without reckless inflation? How about a second currency, in which people who would otherwise be unemployed are given work paid in that second currency? (The landlords would probably be the ones to end up badly under such a scheme, as they'd likely be required to accept the badly managed currency at par.)

[Mage]

Re: Discipline

French reparation etc imposed on Germans after WWI was real cause of German banking / Currency collapse and then this caused the US depression. The US President Wilson knew the French were wrong, but was able to intervene.

[Tim Worstal]

Re: Discipline

Germn banking collapse was 1923/4. US Depression was 1930 onwards. And got really bad in 1931.....about the time of the collapse of the *Austrian* bank, Creditanstalt

[Mage]

Re: Discipline

Well, it wasn't instant. It takes time to suck the value out of an economy, or for the effects to ripple through. I don't see how the French asset stripping (railway rolling stock) and punitive reparations wasn't the root of it. Obviously other stupidities compounded it. Today global interactions are faster. After WWII there was a different approach.

Certainly Germany / Austria / USA involved more than one issue. It's supposed to have started in USA 1929, but people seem to have many reasons / explanations as to why it happened.

Monetarists claim caused by the banking crisis that caused 1/3 of all banks to vanish, starting with failure of the "New York Bank of the United States" Why did these banks fail? Was any factor bad debts in Europe? Was the Gold Standard the reason the Feds didn't intervene?

Was the "free market" believers (esp Austrians) position really that intervention was evil and the "depression" would be good for the market?

Or were the debts that caused the initial banks in USA to fail purely domestic? (nearly 1000 USA banks failed in first 18 months?).

Certainly 2008 in Ireland was a mix of unsustainable property speculation, the Anglo Irish Bank, a Ponzi scheme getting nod from Regulator and thus other banks copying their unsustainable lending, I don't know how much USA Sub prime debt reselling was involved. Irish Nationwide was worst offender after Anglo Irish. It seems incredible that the Irish Government at first was only going to guarantee the Anglo Irish and Irish Nationwide, that would have destroyed all the "better" banks. As it was it should have been the other way round, rather than including them.

[Neil Barnes]

...the right to call upon the resources...

And by logical extension, since every resource is in the end the manipulation and control of energy, we should be paid in megawatt-hours.

[graeme leggett]

Re: ...the right to call upon the resources...

Or given the author's description of money, "obligations"

'how much did it cost you to repair your car ?'

'250 obligations'

Sharp intake of breath

[Yet Another Anonymous coward]

Re: ...the right to call upon the resources...

Lots of science fiction writers, but very few economists, have written about what happens to money if you have essentially unlimited free energy

[Tim Worstal]

Re: ...the right to call upon the resources...

Dunno really. Marx's idea of true communism was pretty much "unlimited free energy". He's assuming the end of scarcity at least, which is consistent with the free energy bit.

And if you really, really, pressed an economist he'd probably tell you that unlimited free energy would mean the end of economics. Because there would be no scarcity and economics is about the allocation of scarce resources.

[Squander Two]

Re: ...the right to call upon the resources...

> And if you really, really, pressed an economist he'd probably tell you that unlimited free energy would mean the end of economics. Because there would be no scarcity and economics is about the allocation of scarce resources.

I can't agree with that. I don't believe that, given unlimited free energy, everyone will be content to just go on using all the already existing technology as much as they want forever. People will want new things that work in new ways. Which means that ingenuity will still be required, and ingenuity is a scarce resource. Also, one of the reasons that people will want new tech is that they will want to be able to do the same things more quickly. And that is because time is a scarce resource.

[auburnman]

Re: ...the right to call upon the resources...

Pretty much what squander two said. Land, food (possibly only high quality delicacies), Labour, experiences etc. would still all be scarce resources that someone somewhere will chase.

Unlimited Free Energy would open up tons of opportunities that people would throw money at - e.g. California could build desalination plants like there's no tomorrow and run them at full tilt. That's construction, design and plant maintenance jobs (and associated economic stuff) right there.

[LucreLout]

Re: ...the right to call upon the resources...

@Tim

And if you really, really, pressed an economist he'd probably tell you that unlimited free energy would mean the end of economics.

Reducing this to a very base level, how much unlimited free energy would it require to persuade a young lass looking like Taylor Swift to hop in the sack, on demand, with a fat man twice her age, say Johnny Vegas? I think, perhaps, while free energy would be a game changer, it'd not be the final whistle for economics.

[Mage]

Money: 2nd Oldest thing.

As soon as you have agriculture, you have villages and towns. Trading between farmers. You then have specialisation (potters, bakers, millers, fletchers, butchers, weavers, cordwainers, whatever and later smiths. The weaver, (or prostitute) may not want to be paid in goat and what would the change be? So money and then writing and book keepers are invented as soon as you have villages and towns. No surprise the oldest surviving clay tablets are accounts. Unlike later papyrus, parchment or paper the air dried tablets become preserved when the town is inevitably burn down (by bandits, stupidity/accident or due to insurance?)

Thanks for another good article, Tim.

[Trollslayer]

The British economy is not an island

So if our economy goes through high inflation and we need to borrow money (e.g. government bonds/gilts) what rate will lenders/investors charge?

Or I could say the economy doesn't exist in a bubble yet Corbyn seems to.

[Chris Miller]

@Arnaut

"the EU imposes tariffs"

You've heard of the WTO, I assume? And if Europe wanted to start a trade war following a Brexit (cutting off your nose to spite your face being a long-standing French tradition, admittedly), given the current balance of trade, German car manufacturers are going to find themselves with a lot of unsellable product.

I think it may be possible that Nigel Lawson understands more about such matters than you do.

[Yet Another Anonymous coward]

Re: @Arnaut

Is Britain going to be in a position to impose tarrifs?

Helo mr car worker, you are now unemployed because Nissan shut down their factory now that we can't export to europe - but we have made it up to you by making that new VW cost 30k by adding our own 50% duty

[Squander Two]

Re: The British economy is not an island

One of the things I find odd about the EU's enthusiasts is their conviction that the EU is the only possible set of international treaties available to European countries. If the UK were to leave the EU, both sides would immediately set about negotiating a bunch of treaties. OBVIOUSLY. I mean, what bizarre universe do you need to live in not to realise that?

Even Schengen wasn't an EU agreement at the start. A bunch of member states just negotiated their own treaty on their own accord, without the EU's help, and the EU later adopted it. This was not a strange event. It's what countries do.

[Yet Another Anonymous coward]

Re: The British economy is not an island

Yes Britain would be free to negotiate with each european country separately

But it would be up to France to allow the free movement of goods and people through its country on the way to the UK.

Fortunately we can rely on the historical mutual love and respect between France and the UK, to prevent France deciding on Visas for English truck drivers using the tunnel or a duty on Dutchy Oatcakes passing through France on their way to the Anglophile cookie eaters of Europe

[Squander Two]

Re: The British economy is not an island

> Fortunately we can rely on the historical mutual love and respect between France and the UK

Well, I suppose we could try that. Or we could be cynical and use the fact that London is now something like the third-largest French city as a bargaining chip.

Nice diaspora you've got there. Shame if something were to happen to it. Like if it suddenly all went home.

[Yet Another Anonymous coward]

Re: The British economy is not an island

It isn't. It was a textbook example of a tabloid blowing up a story from an incorrect statistic - "more or less" did an entire episode on it.

[DaveDaveDave]

Re: The British economy is not an island

"One of the things I find odd about the EU's enthusiasts is their conviction that the EU is the only possible set of international treaties available to European countries."

One of the things I find odd about this whole debate is that it seems like just about everybody agrees that we should have some kind of European union, and also that the EU is a monstrosity, and yet we're still arguing.

[rob miller]

So what will you do about it?

Pardon my utopian fantasy that follows, but my engineering approach is to imagine what the optimal solution looks like and then work out how to get there.

I find that the people I hang out with don't actually do what they do for money. They work for positive feedback from improving their corner of the world, fundamentally some kind of geeky 'flow' thing that comes from making things work better. As a software developer it's the most simplistic: to elegantly do more in fewer lines, and see it work. At a higher level there's some coolness that others enjoy using the software, and more ephemeral than that is if it can put some 0s in my ledger. For the others it's perhaps harder to quantify than LOC, but they say "I love my job". You may think I work for a salary, but in reality that just keeps my family off my back while I get on and do something I love.

Clearly there are jobs people do not love. You can't pay me enough to work on Windows nowadays, although I may decide to do so if it's an unavoidable part of a bigger problem that takes my interest. Garbage collection and rush work in hot, sweaty shops and kitchens seem like unpleasant examples (perhaps as bad as dealing with your boss), but I suspect most still take some pleasure in 'a job well done'. Not sure what solution works in this space, short of robotics.

The problem now is that we use the count of 'who gets to ask for what' as an end in itself, and use this to drive the allocation of resources. Changing the 0s in Larry and Sergey's ledgers won't affect their daily lives any more, and Bill's biggest problem is reallocating his 0s in the time he has left (barring life extension and nanotech armour). We scientists are perfectly happy working on new antibiotics, but the drug companies won't allocate us to that project because the accountants say the doctors won't prescribe capsules that cost £100 each for the 10 day course, and in the end I can't buy the petrol to get to work to do the job I love. Guess I work on more Viagra and Lipitor instead then.

So how can we keep the 'invisible hand' mechanism, but get off the hedonic treadmill of working for 'stuff' and allocate our resources more intelligently? Just askin'...

[DropBear]

Re: So what will you do about it?

If you can do work you actually enjoy then you are vastly more fortunate than most and if you can afford to treat 0s in your income so chivalrously then you clearly aren't affected by the more gruesome ways money makes the world go round for people who can barely afford to pay for their continued existence even when they do still have a job. And no, you don't have to go to Asia or Africa to find armies of them. One could argue you seem to be ill-equipped to try solving their financial problems I'd say...

[rob miller]

Re: So what will you do about it?

I live in Tanzania now; I see the poverty you are talking about every day. This is one of the many fucked up things that the current system is not fixing, and does not look like it will fix any time soon. Instead we continue shifting 0s to a tiny fraction of the population that are completely desensitised to the benefit by now. You have no idea what has affected me to the point that no amount of money can solve my problems.

I don't claim to be able to solve anything; I am exploring alternatives to, and variations on, the mechanism which has powered progress and generated so much for so long, but now seems to have evolved into (or simply achieved a logical outcome as) some sort of greed machine.

And indeed you are missing my point entirely when you frame these problems as 'financial'.

[Yet Another Anonymous coward]

Re: So what will you do about it?

Somebody already thought about it and came up with a solution.

You take all the money, and factories and farms away from the rich people.

You then put the people who scored highest marks in debating class in charge of the farms and move all the people from the cities out to work on them.

Then if you are a bad guy - you kill the majority of the people for being the wrong tribe, singing the party song wrong or looking like they might be better at debating class than you.

Or if you are a good guy - create a famine by putting the person who produces the best revolutionary poetry in charge of the irrigation system, wait for the majority to starve and survive on aid.

[rob miller]

Re: So what will you do about it?

Yes, there was a crap solution imposed some time ago which purported to address some of the issues I am exploring. It does not follow that all solutions in this space are crap; thank you for playing.

[Chris Miller]

@rob

You live in Tanzania and I don't, so it's hard to argue with the local system you see. But globally, the stats tell us that the proportion of mankind living in real poverty (less than $1.25 a day) has fallen drastically over the last 50 years - in large part due to that system of moving 0s about. If some people become ludicrously wealthy as a result, that seems like a price worth paying; and it makes no difference to my life how many superyachts Sergey Brin chooses to buy.

We're now at the point where we can meaningfully talk about creating a world in which no-one has to be dirt poor - and that would arguably be one of the greatest human achievements ever, given that just a few centuries ago almost everyone was dirt poor except for a tiny number of local warlords.

[rob miller]

Re: @rob

Yes, this is exactly my point about the mechanism that has created so much. We are now getting truly global though, and the money equation is instead allocating some of our best compute minds and resources to faster financial transactions. My research passion is protein folding, a 'funding black hole' as one advisor put it. Arguably the most significant result in the field in the last decade was made by D. Shaw, who apparently made enough money in financial markets to subsequently be able to 'do what he wants' now.

I think that most of the people reading these pages are no longer working for money. Are you aware of any daily impact whatsoever from your 2% inflation matching raise last year? Would you shovel shit outside for the same salary but a shorter commute? Do you hardcode everything in quick-to-deliver brittle code without caring that it will break next year after your part is signed off? Would you -really- rather be an Eloi and surf the web all day?

While not in the article, someone once defined money to me as 'a mechanism for allocating resources'. The question I pose, with no answer, is how can we harness the contributions that people no longer working for subsistence want to make? Money / capitalism / whatever has indeed worked very well for us up to this point, but I now suspect that its efficiency is declining with our global networks.

Put another way: whom should we be rewarding and supporting more -- teachers or bankers?

[DaveDaveDave]

Re: @rob

"Put another way: whom should we be rewarding and supporting more -- teachers or bankers?"

I think the fundamental problem here is that you don't understand what bankers actually do, so you can't see why they're getting more money than teachers. The 'moving zeros around' you refer to above isn't actually that at all: they're (among other things) using abstract concepts to transport physical, real objects* through time to where they're needed.

*Not via a time portal, obviously. Often not the same physical objects, but ones which are fungible.

It's probably easiest to understand on a very small scale. Imagine Ug the caveman has a pot of mastodon soup today, far more than he can eat, and Og, the occupant of the cave just down the ravine, has been busy chipping out some odd stone disc with a hole in the middle and has no food. Ug gives Og a bowl of soup, in exchange for a promise to get a bowl of soup back tomorrow. The next day, Og goes hunting and pays his debt.

From Ug's perspective, he's moved a bowl of soup through time from today to tomorrow, from a time of excess to a time of scarcity. Og's done the same thing, but the other way around. Oh, and by working together, they've used their time more efficiently and now have time to notice that Og's round rock is much easier to move if you roll it along the ground than if you carry it.

Banks are largely just doing that kind of thing, but on a much bigger, vastly more complex scale.

[Squander Two]

Re: @rob

> whom should we be rewarding and supporting more -- teachers or bankers?

Humanity keeps getting richer and education standards plummet. Is that a trick question?

[Ken Hagan]

Whose fiat?

Government may be able to print more of their own money whenever it suits them, but they can't print anyone else's and sooner or later have to buy stuff from overseas. So your fears about modern monetary theory surely only apply once we have a World Government.

And then ... Nature typically has pretty rigid ideas about the cost of doing something and all sorts of activities (even those confined within a single currency zone) have to deal with her, so we're back to money being a measure of how much work you are owed. (On which note, I applaud Neil Barnes sentiment, but would point out that debt obligations are generally accepted to fade away with time (is that inflation?) whereas the good lady Emmy Noether tells us that the failure of physical laws to do so results in the conservation of the quantity measured in MWh.)

[Nick Kew]

Re: Whose fiat?

Um, they can print someone else's. Google for "Operation Bernhard". Or consider regular forgery.

As for world government, we have dollar hegemony distorting the modern world economy. But that's a whole nother argument.

[Nick Kew]

The Devil's Work

In Goethe's Faust (published 1831), one sub-plot is about the emperor's troubles with the economy. Mephistopheles saves the day with promissary notes on future wealth. Result: big boom, leading to bigger bust when people realise there simply isn't the wealth to meet the promises.

For the classic example affecting us today - pension promises from 1945 to the Equitable bust in 2000.

Corbyn's "peoples QE" is another manifestation of that. But then, so was its predecessor PFI, especially when taken to vast excess by NuLab. If you're the government and can print yourself money for free, it's not long before you yield to temptation to upgrade the palace to marble and solid gold, and use real diamonds for the chandeliers. Regardless of good intentions, jobs administering such pots of money are naturally huge corruption-magnets.

Applies also when the private sector is given licence to print. Hence what's happened in the banks, and doubly so when underwritten by taxpayers.

[Nick Kew]

Flawed Premise

Your very first premise is flawed. Money in the real world is a medium of exchange, but can only ever be a short-term store of value. In the medium to longer term, debasement means you can save more yet buy less.

I use "debasement" rather than "inflation" here, because the latter word has itself been corrupted by association with meaningless price indexes, and esoteric arguments over different but equally-meaningless indexes. In a world where the only Big Thing you expect to save up for is a house, the kind of massive debasement we saw in about 2000-2005 or 1983-89 (and apparently right now in London) simply robs you of those savings and hands them to people richer than you, while not even showing up in the price indexes.

[Frenchie Lad]

Gold Standard

Looks to me like an apology for bringing in the Gold Standard. We would be able to see at a glance how prudent governments are.

[Paul Crawford]

Re: Gold Standard

Sensibly used fiat money allows for better management of the economy as Tim points out, but if gov are stupid then gold is a buffer to stop that.

So what is best? Maybe if we stopped any index-linking of politicians pensions, or better still linked them to the economy as a whole, we would see a bit more prudence...

[Turtle]

Money Is...

I often think of "money" as general-purpose, freely-transferable ration coupons.

[Tim Worstal]

Re: Money Is...

Nice analogy, might well steal it.

[Turtle]

@Tim Worstal Re: Money Is...

"Nice analogy, might well steal it."

Makes me burst with pride!

[LucreLout]

Re: Money Is...

@Turtle

general-purpose, freely-transferable ration coupons

General-purpose, freely-transferable beer coupons, and we'd be in agreement.

[Anonymous Coward]

On the subject of money, It seems to me that as we have an ever increasing pot, who actually has it?

It's a bit like every country being in debt, which planet do we owe it to? and also who controls it? Some institution must have some control over it otherwise it would just spiral into madness or is that the plan? Are we going to let everyone get into extreme easy debt and ramp up interest rates so everyone loses their houses like the 80's? Right to buy is a ploy to get people that can't afford houses to buy them so they get in debt and lose the houses.

Call me cynical and you would be right, lets see how this all plays out and in a few years I'll be happy to post on here and either eat my hat or stand triumphant.

[Nick Kew]

Claims

Methinks we're straying off the topic, but the big debts that matter are claims.

The big one for all of us is our claim to a state pension one day (or even many years, if you're lucky). That alone is worth quarter of a million in today's market. Arguably much more, if you treat the state's promise as better security (and therefore worth more) than an equivalent promise from a private-sector provider like the Equitable.

You have other entitlements, which will depend more on your circumstances. Which ones involve a chunk of someone's debt can be left as an exercise.

[Tim Worstal]

"It's a bit like every country being in debt"

Sure. Every country is in debt. Or rather, the government of every country is in debt. Who to? Peeps, that's who. Sometimes it's to the peeps of that country (largely so for Italy and Japan), sometimes it's to other governments (Greece) and sometimes it's to foreign private people (some portion of everyone).

We're not "all in debt" because that's impossible. In the end, all of that debt is held by some humans, owed to some humans. Might be as individuals, might be as their pension fund, to their government, to a company that they own stock in, but all the debt is owed to peeps.

The government sector is in a net debt position because that's just what politicians do, spend the shit out of the tax revenues and borrow more. But the world ain't in a net debt position.

[BoldMan]

Most of the holders of that debt are us - people who have pensions!

[LucreLout]

@AC

On the subject of money, It seems to me that as we have an ever increasing pot, who actually has it?

Your granny, mostly. Well, not yours specifically, but the elderly - its tied up in houses, pensions, etc. That's not a criticism, it's what you'd expect if people save/invest some of their income every year, then those with the most years will typically have the most assets.

Are we going to let everyone get into extreme easy debt and ramp up interest rates so everyone loses their houses like the 80's?

No. All governments since the 80s have actively worked to prevent that at pretty much all costs, because there are simply no votes in it. Homeless families have generationally long memories.

Debt, much like pain killers, can be a wonderful tool when used sensibly and in moderation. Used for kicks or in vast quantities, and it can do a lot of damage. I'm in debt, I owe well into 6 figures. But the house the debt was used to buy nets off against that. Sure, prices may fall for a while, but with a 2% inflation target, the chances are good the house will be worth the sum of the repayments over the medium term and more than that over the long term (it will still accrue about 2-3% per year once the mortgage is finished).