Saturday, May 7, 2011

Money as rules and meta-money

Sell on News posted a very interesting piece at MacroBusiness. Overruled is short and worth reading in its entirety. (h/t) Yves Smith)

Here is a teaser.

... let’s start with a definition of what money is. It is rules. Rules about value and obligation. Those rules are usually based on legally enforced structures, although that need not be the case. In the case of cross border capital markets, the enforcement is informal because there is no supranational government to impose penalties. Disputes are resolved by a handful of law firms, the main penalty is to be prevented from participating for a period....

Sell on News develops the idea of money as rules to include "meta-money," the result of financial innovation such as derivates.

That is the world we are now in. It is why such huge distortions are appearing in areas like quantitative easing, extremely low interest rates, an ailing cost of capital, the hankering after something solid in precious metals like gold and silver, equity markets whose pricing seems strange. Governments have given up oversight of the financial markets, handing it over to the traders. We must now suffer the consequences as the traders try to outdo each other in an infinite game of pass the parcel. Or, more accurately, taking out bets on who will pass the parcel to whom.

The conclusion?

That is the world we are now in. It is why such huge distortions are appearing in areas like quantitative easing, extremely low interest rates, an ailing cost of capital, the hankering after something solid in precious metals like gold and silver, equity markets whose pricing seems strange. Governments have given up oversight of the financial markets, handing it over to the traders. We must now suffer the consequences as the traders try to outdo each other in an infinite game of pass the parcel. Or, more accurately, taking out bets on who will pass the parcel to whom.

Eventually, I suspect, GFC version 2 will come along, and the rules will finally collapse. Governments will have to come in and re-set them. There will be a huge re-regulation backlash. But how is it that governments allowed it to get to this stage? What ever happened to governing?

I agree with the notion that money is rules. Money is not a thing or a set of things, it is essentially an idea. This idea is one of the greatest intangible inventions of humankind, like markets. Money and markets go together like horse and carriage or ox and plow. Once there was a domesticated horse, it was a simple step to the carriage. Same goes for ox and plow. But horses, oxen, carriages and plows are real things. Money and markets are not. Automobiles are horseless carriages, and tractors are ox-less plows. No great imaginative jump. But money and markets have evolved in ways that could never be imagined or anticipated, and only on the basis of transforming rules.

Money and markets just took a fiant step as ideas and the global financial crisis was the result of an failure to harness those ideas sufficiently. The question is now that the genie is out of the bottle, whether it can be controlled.

26 comments:

Laura said...

Money and markets go together, but without commodities you have no market!

Does MMT have any position vis a vis usury?

Clonal said...

The problem has been the deregulation of the banking industry. In an article at Econ intersect -
Is Asymmetric Greed Driving Commodity Prices? by Dirk Ehnts, Ehnts cites an article by Frederick Kaufman -

"Not only does the world's food supply have to contend with constricted supply and increased demand for real grain, but investment bankers have engineered an artificial upward pull on the price of grain futures. The result: Imaginary wheat dominates the price of real wheat, as speculators (traditionally one-fifth of the market) now outnumber bona-fide hedgers four-to-one."

Ehnts concludes

This is either a failure of the financial market and/or a problem that there are too many people who want to save and not enough people who either want to go into debt or are allowed to.

STF said...

Money is rules, absolutely, but it's also closely related to the technologies of payment settlement and double-entry accounting, which weren't mentioned (and which are also strongly influenced by rules).

Matt Franko said...

Laura,

How about Warren's "the natural rate of interest is zero"? This is what I always think of vis a vis "usury".

Matt Franko said...

Yes Tom I have to agree with Prof Scott, it's perhaps a bit more than what Macrobusiness says, but the post is thought provoking..

And I like Scott's focus on information technology. Back in Rome, I believe metallurgy was truly high tech, and they used coins and jars (see the archeological record in Brittania). Today with modern IT, it is basically the same thing here in the west but with truly real time information systems that keep track of balances and settle things out every day. The ability to provide true daily settlements is probably not that old in the overall scheme of things.

I view that the 1972 Olympics from Munich was the first broadcast live in color via satellite and that Nixon went off the gold standard at about the same time as no coincidence.

Resp.

Tom Hickey said...

Agree, Matt, but its only a blog post and short one that they. Whoever "Selll on News" is, he or she has obviously though about money as rules.

This is what I mean when I say that something is an idea. Complex ideas are constructed of semiotic rules. It is the interpretation of these rules semantically and applied in context that we see made manifest as phenomena such in the things we associate with money and markets.

Laura, there are three factors in a simple commodity non-barter market exchange: money, commodities (goods produced for exchange) and the marketplace where buyers (bidders) and sellers (offerers) meet. But markets include financial markets as well, where financial assets are traded. That was a big step forward from commodity markets alone. I assume the earliest financial markets were for factoring accounts receivable.

AS far as MMT and usury goes, there are three aspects of MMT, fiscal, monetary, and regulation. MMT posits that government has control over interest rates as the currency monopolist. It also has control over markets through its regulatory power. If MMT proposals were put in place, interest rates would be lower, the financial sector would be smaller and well supervised, and economic rent would be taxed to mitigate the potential for asset bubbles forming. Most asset bubbles are the result of excessive leverage and rent-seeking.

Calgacus said...

Have to disagree somewhat, especially about the manner of expression. Money is not rules, it is what the rules apply to.

Money is a social/economic institution. Specifically, money is a type of credit/debt. Assignable, standardized credit/debt, whose manipulation follows the usual rules of arithmetic, whose development in turn were dependent on the development of money, debt and accounting.

According to Michael Hudson, shortly before the ancient dark age that started around 1250 BC, the financial instruments of the Ancient Near East reached complexity comparable to derivatives. So perhaps it has happened before, contrary to Sell on News. Hudson clearly exaggerates for emphasis, but a point he makes is that the ancient world in some ways never recovered. The cities of classical antiquity - except maybe Rome - did not reach the size and complexity of the more ancient ones.

Tom Hickey said...

Calgacus, I would agree that specific manifestations of money are institutional arrangements, just as markets. But the generic concept of money and market are rule-based, just like all concepts. The differences in monies and markets is determined by difference in rules. Some of these institutions are real and some imaginary. Monopoly™ is a game that elucidates simple rules of money, for instance. As a game, it has assumed the status of an institution.

See Ludwig Wittgenstein, Philosophical Investigations for the concept as rule view, and Douglass C. North's, "Economics and Cognitive Science," for meme (concept) > convention > institution for application to economics. His point is that ideas, expressed through brain function as "memes" (neural pathways), lead to forming social conventions, and conventions may then get concretized as social institutions.

This is a fruitful subject worth pursuing. Of course, Wittgenstein and North are just two views, but I like both of them. Others here may have different ideas about it.

Laura said...
This comment has been removed by the author.
Laura said...

But markets include financial markets as well, where financial assets are traded. That was a big step forward from commodity markets alone. I assume the earliest financial markets were for factoring accounts receivable.
Commodities are financial assets. Without commodities, there is no purpose in having a financial market. Having a proxy for the exchange of commodities is an improvement in terms of convenience and velocity of exchange. Yet it is not integral to a 'market' (C-C or C-M-C). It is integral to capitalism (M-C-M').

100 trillion dollars in an economy that produces 10 trillion dollars worth in goods and services can mean two things: that 90 trillion dollars are worthless, or that the medium of exchange is worth 10% of its face value. Money can never be worth more or less than the commodities available for exchange at any given moment. This is just common sense.

So many abhor inflation, which is the mechanism by which money is made commensurate with what is available for purchase. Why abhor what is inevitable, given the obsession with accumulating 'wealth'?

Clearly the 'store of value' that money represents is tied to the continuing productivity of the economy, which is tied to the health of its resources. Degrade the environment on which we depend and the societies in which we live and you degrade this store of value.

Thanks Tom and Matt for your replies on 'usury', namely the cost of money when borrowed. I wish that it would tend towards zero in private transactions as well. Lending and investing have strings attached, while spending does not.

Tom Hickey said...

Money can never be worth more or less than the commodities available for exchange at any given moment.

What about the value of real assets?

Matt Franko said...

"The massive volume of meta money, the ever expanding hall of mirrors,"

This is interesting: 'hall of mirrors'.

All of this accounting and 'money' could be considered an irresistible 'image' of what is real. To the point where people lose track of reality, and even high ranking people can be led to say things like "we're out of money".

Tom, what is the lesson of the secular story of Narcissus from the Greek myths? This from Wiki: "Nemesis saw this and attracted Narcissus to a pool where he saw his own reflection in the waters and fell in love with it, not realizing it was merely an image. Unable to leave the beauty of his reflection, Narcissus died.[1]"

Most are preoccupied with the image of transactions, money and the ex post accounting is just an 'image' of what has really happened, not the reality. Money and accounting help us perform, document and keep track of real transactions, clear thinking people understand this.

But all of this can be taken too far led by people of lesser intellect (derivatives positions exceeding the physical for instance, here we have an image of real commodities trading more than the ACTUAL commodity: is this not deranged behavior if you really think about it?) and obsession about these 'images' can become a self destructive force.

Tom Hickey said...

Matt, The Greek work nemesis signifies justice or retribution — giving and getting one's due. Narcissus is a name that seems to stem from the Greek word for sleep.

According to perennial wisdom, the embodied soul is asleep until it wakes up to its real nature as immortal spirit. Being asleep to the real, the embodied soul pursues the unreal, and it is fascinated with its embodiment, even though the body is the prison of the soul in reality as long as the soul remains oblivious of its true nature.

The way the soul awakens to its true nature as divine is through self-knowledge, which is the meaning of the inscription over the Delphic Oracle, "Know thy self." The way that one turns within is through meditation.

In the myth, Narcissus reflects on the body (material) rather than the spiritual on turning attention to self and perishes because of this mistake. The myth is a caution against egoism.

This myth is usually understood only at a superficial level, but it contains a deep spiritual truth. The love of money is bound up in making ego the center of one's life, and it is a caution to those that think self-interest is the invisible hand that manages the world.

Similarly, in the biblical myth, Satan is the symbol of ego run amok. In Hebrew ha-satan means "the adversary." The adversary is "the evil inclination," that is serving self rather than serving God. The struggle of self-cultivation is with the adversary within, which says, "I will not serve." This is also the inner meaning of Arabic jihad.

It is written that God is love. Those who serve self-interest cut themselves off from universal love and miss what it means to be really human. Their love is the love of Narcissus (the one who is asleep) and they perish as he did by missing out on life, since they are absorbed in the trivial.

Is this a story about religion? No. Religion does not imply spirituality and often militates against it. Spirituality is about what mystics report, genuine masters teach, artists celebrate, and true lovers experience.

Egoists need not apply, because they exclude themselves. this is "the sin against the spirit which cannot be forgiven" because it denies the spirit. One chooses to exclude oneself from love, which is the life of the spirit.

OK, that my Sunday sermon.

Matt Franko said...

Great stuff Tom,

I never interpret such writings of yours as "pontificating" on a Sunday or any day ;)

"a caution to those that think self-interest is the invisible hand that manages the world."

Then we're in BIG trouble as you know self-interest is Ayn Rand 101. And the 'invisible hand' is probably Libertarianism 101. Right now on the political right we are being governed by these types of depraved souls that think self-interest works. So I can see where the problems are coming from spiritually on that side of the political spectrum.

I'm still not sure where the left is getting it's depravity and unintelligence though. Maybe atheism? I know more about the right than I do the left.

It's like the old Gerry Rafferty song: "Clowns to the Left of me and Jokers to the Right"....


Resp,

Laura said...

What about the value of real assets?
Assets have use value. If you offer them for sale, they have exchange value.

googleheim said...

who deleted my post ?

googleheim said...

ok found it

wrong thread

mcdonalds pepsi coke levis ford etc are all going to repat money for earnings as the euro slides to help boost eu exports

more rotation back and forth across the pond as each side takes turns paying things and slaying the dragons of deficit illusions

STF said...

Tom,

Institutional arrangements are always rule-based. You're right, though, to use "institutional arrangement" and not "institution" alone when describing money.

I need to write an Institutionalist definition of money sometime from the Social Fabric Matrix (SFM) perspective. This post and discussion is utilizing basic terms from systems theory, hierarchy theory, anthropology, sociology, etc., but they could be organized into a bit more coherent framework that the SFM would provide.

Tom Hickey said...

Hi Scott, look forward to your working that up.

My take on this comes from semiotics. Wittenstein make the point in the Investigations that the language is rule-based through the use of what he called "language-games." Playing these games, even simple one's like pointing, requires being able to follow a rule. Animals can be trained to follow very simple rules, but animals don't get simple language games like pointing.

Human are not only able to follow complex rules, which use of any human language requires, but we are also capable of constructing systems of rules to meet specific purposes and designed to produce desired outcomes.

Institutional arrangements are an example of the latter. Institutional arrangements are based on underlying layers of rule-based behavior and rule construction, and they presuppose those rules. In this sense, language is an institution based on the patterned way the brain functions. This is the direction of cognitive research.

Cognitive scientists are now in the process of discovering how the brain operates organically in rule formation and rule use. Richard Dawson came up with the term "meme" as a cognate of "gene" to explain cultural legacy as similar to genetic inheritance.

Cultures transmit memes across time embedded in language and context based on CNS function, especially the distinctive characteristics of the human brain that give rise to language. It is through language that complex rule-based behavior that we call "communication" is possible.

Memes are the cognitive basis of the rule-based behavior we call convention. Language is a complex system of conventions for the use of signs in context. Virtually all significant human activity is based on language-use for communication of memes.

STF said...

That's great stuff, Tom. Maybe we should write it together.

googleheim said...

Tom

You're not referring to the same Richard Dawson who commanded the Family Feud, right ?

Thanks

Tom Hickey said...

Richard Dawson the biologist not the actor. He surfaced the notion of gene-meme in The Selfish Gene (1976), and it caught on.

Tom Hickey said...

@STF

OK. Sounds like an interesting and timely project.

Laura said...

Richard Dawkins

Tom Hickey said...

"Richard Dawkins."

Oops.

Matt Franko said...

recent Pub by Prof Fullwiler utitilizing this framework:

link_http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1825303

Resp,