Post-Keynesian free banking – or towards a string theory of money
from Merijn Knibbe
Arjo Klamer has long been ridiculed. Fellow economists did not take him serious – as he was not only against the Euro back in the nineties but also predicted Euro doom and Euro gloom. One year ago, the Euro was still hailed as a spectacular succes. But the world changes. Klamer was right. But what’s his alternative? As I read in the newspaper, he proposes a whole variety of moneys: special money for transactions between certain companies, special kinds of money for specific regions – just imagine. Should we ridicule him for this? Probably not – the very thing is already happening. We just don’t see it – as we use the wrong, orthodox, mythical definition of money. This definition can be found in, for instance, the Abel, Bernanke (that’s Ben Bernanke) and Croushore textbook (p237-p239) – but it’s all over the place.
Herewith goes a modest proposal for a more specific, demystified definition of money. The background of this proposal is, in the end, economic history: any economic historian who looks at money will find that the thing changes and that modern definitions of money do capture some aspects of historical money (including present day money) but that other aspects are left aside. The petty debts at the grocers or the crooked debit and credit at the company store are not counted as money – while they should. That’s a definition of money past. A good definition should also cover present money and future money. The present: look at food stamps: 64 billion of (limited) spending power in 2010. For the future of money: just look at http://www.groupon.com/. That’s money: a means of exchange, a store of value and a unit of acount - but it’s not seen and, worse, counted as money by many economists. A definition of real world money should actively cover such kinds of money – as people do use those kinds of means of payment. Any definition of money should, therefore, be specific enough to describe the present state of affairs but general enough capture past and future changes, from indeed the days of the Greek to the future development of Groupons. It should also enable a more thorough analysis of the use of money be real people and real companies. My modest proposal is as follows:
First, money is often defined as a unit of account, a store of value and a means of exchange. I accept this. I do not acccept the idea that only banks and comparable institutions are money-creating entities. Many companies and even households can, and do, create money – not euro’ or renminbi’s but surely some kind of means of exchange, store of value and unit of account. But different kinds of money do not have the same propensities as store of value, unit of account or means of exchange – which gives rise to large problems when you do not acknowledge this but still try to estimate the amont of money (Burgess and Janssen, 2007). Food stamps (Food debit cards, I should write) are, for instance, only a limited means of exchange. I call this: local money). The guilder of 20 stuivers was, for a very long time in a very large region in northern Europe, the preferred unit of account. The actual means of exchange were however all kinds of petty debts and a bewildering array of coins (petty debts as a kind of money: that’s 100% consistent with the ideas of the classicals: Nijstad, 2005). During the first decades of Kaapstad (Cape Town in South Africa), in the seventeenth century, the indigenous San people were not paid with ‘a general means of exchange’ as they did not live in an exchange economy and had not use for a general means of exchange – they were paid with, of course, tobacco and gin (soon, the Dutch and Flemish settlers started to use slaves from Mozambique or Madagaskar as they needed more labor and there was no real labor market).
Second, many money’s have strings attached: you can’t buy groceries with a mortgage – we might call this the M-string. Ireland will get a Euro loan with a German string attached: the lenders have to take a hit too (thanks, many thanks, Mrs. Merkel). And even the petty debts mentioned above (a kind of money superseded by credit cards, which unlike the petty debts do charge interest) had strings attached – the grocer or the carpenter knew you, and there was only so much debt you could acquire (oops, what went wrong in the USA mortgage market?). This leads to the next table: money as a historical entity – it gives bit of order to at least my understanding of the shape shifting we call money. I mean, we do need to have a definition of money which can be used by for instance economic historians like me, Post Keynesians like Klamer and Austrians inspired economists alike. I hope this modest proposal will be a small step towards this (and yes, I do exclude neo classicals as their General Equilibrium models are non-monetary models of trade – that’s just beyond me. All evidence we have on non-monetary societies shows that barter is a side show at best. Without money, (almost) no trade.
|Universal means of||Store of||Unit of||Strings|
|Euro’s on a checking account||++++||++++||++++||+|
|Debit on a food debit card||++||+++||+++||++++|
|Mortgage money debit||+||+||++++||++++|
|Tobacco on a Cape town farm, 1673||+||++||++++||+++|
|18-th century petty debts debit||+++||+++||+++||+++|
|Debit at the company shop||++||++||+++||++++|
Addendum: debit means: rights to pay, based upon reputation or an account of money. Means of exchange: how many different items can be paid with a specific kind of money. Store of value: how long does a certain kind of money last (Groupons: 6 months). Unit of account: is it difficult to estimate the value in a balance sheet? Strings attached: is there a person or institution which limits transactions? For instance: I can’t draw more than 500,– per day in cash from my regular checking account, the bank (in fact: the government) forbids larger amounts.
Summarazing: Abel, Bernanke and Croushore define money as: ‘assets that are widely used and accepted as payment’. That’s so wrong. Money ’stringed’ to a mortgage is only accepted as payment for a specific house. Money consists of assets that are accepted as payment, widely or local. There’s not just one kind of money. Acceptance rests on all kinds of cultural, local, political and economic specifics.
P.S. – on the orthodox definition of money: money is supposed to solve the ‘mutual coincidence of wants’ problem. However, as money enables markets to grow, it’s money which gives rise to this problem. Non-monetary economies do not know this problem, as they do not know trade and have other means to regulate exchange. See the Abel, Bernanke and Croushore textbook, p. 239 on this fable. There is of course some mathematics to this madness. Brunner and Meltzer (1971) have provided a mathematical version of this fable – but a fable mathematical told still is a fable.
Abel, A.B., B. Bernanke and D. Croushore (2011), Macroeconomics, Boston.
Brunner, K. and A.H. Meltzer, ‘The uses of money: money in the theory of an exchange economy’ in: The American Economic Review 61-5 pp. 784-805.
Burgess, S. and N. Janssen (2007), ‘Proposals to modify the measurement of broad money in the United Kingdom: a user cosultation’ in: Bank of England Quarterly Bulletin 2007-III, pp. 402-416.
Nijboer, H. (2005), ‘Fashion and the early modern consumer revolution. A theoretical explortation and some evidence from seventeenth century Leeuwarden” in: Blonde, B e.a. (eds.) Retailers and consumer changes in early modern Europe, England, France, Italy and the low countries (Tour), pp 21-36.
The Cape town information is obtained from:http://www.tanap.net/content/activities/documents/Orphan_Chamber-Cape_of_Good_Hope/index.htm
The earliest accounts and probate inventories in this database show some glimpses how the most advanced market economy of the time – The Dutch and flemish farmers in combination with the Dutch East Indian company settled in a stone age economy (cause of death: ‘slain by a Lion’, ’killed by the San’). Some of the ninenteenth century ones are in english, all of them show how much material culture as well as much of economic life resembled life resembled life around the Norht Sea (except for the slaves and the large amount of stock per farm). The slaves more or less occupied the place of boarding labor on the farms around the Norht Sea (including Scotland), as there was no labor market, money wages could not buy labor. The settlers had to find a non-market, non monetary solution (which, alas, consisted of slavery).