Home > Uncategorized > Robert Lucas and his non-definition of non-money

Robert Lucas and his non-definition of non-money

Daft. The definition of money by the influential neo-classical economist Robert E. Lucas, jr. finally starts to make sense to me. Really. What he in fact does in his models is creating a, literally, childish monetary world:

* First, he supposes that real markets do not use money but are organized by an all-knowing, all-mighty auctioneer – he assumes ‘money as you and I know it’ away. And therewith skips our entire, deeply financial, market economy…

* Afther doing this he introduces an ill-defined entity, a kind of social security grant, which he, confusingly, also calls ‘money’. Update: the ‘money’ in the title of his article, ‘Expectations and the neutrality of money’, does therewith not refer to anything (anything!) identifiable as money in the real world!
* Transactions are, somehow, taken care off by the ‘auctioneer’. They are not an act of will of the people.
* He introduces a younger generation which does not own his so-called ‘money’ and which is not allowed to have it unless they do some serious, older generation financed, work and study.
* The older generation does own his so-called ‘money’. It’s granted to them by a the government which ‘has no other function’. Now, he hasn’t only defined away real money as well as ‘the market’ but also the entire government. Wow.
* Within the economy no ‘monetary’ exchanges take place
* ‘Endogenous money’ is ruled out

It is the family-centered world of a child. Parents do have money and children don’t and the only visible sign of the government are the heads of state on these mysterious monetary bills and coins. Within the family no monetary exchange takes place or is even supposed to exist. It’s a modernist version of a Norman Rockwell drawing, a save haven were all the disquieting aspects of money (debts, unemployment, bankruptcies, fraud, deflation, banks, whatever) and the deeply financial nature of our economy are, by definition, ruled out and rationalized away (see, about this Lucas-habit, also this post). It’s the world of a child who grew up in the thirties and forties and who tries to make sense of a world in which monetary markets made his parents loose their lifelihood in the thirties and in which the government provided money and jobs in the Second World War.

Sideline: the word ‘modernism’ is not used loosely in this post (I’m clearly not a Lucas student!) – his method is eerily consistent with the eight characteristics of modernism as stated by Klamer (p. 242-243). Take the second characteristic : “Exploration of the invariant structure of reality while recognizing its ephemeral appearance” – and compare it with the Lucas-critique….

But let’s give the floor to Robert himself and quote from what he considers to be his most influential article:

“In addition to labor-output, there is one other good: fiat money, issued by a government which has no other function. This money enters the economy by means of a beginning-of-period transfer to the members of the older generation… No inheritance is possible, so that unspent cash balances revert, at the death of the holder, to the monetary authority… Within this framework, the only exchange which can occur will involve a surrender of output by the young, in exchange for money held over from the preceding period, and altered by transfer, by the old.”

He goes on to state that all transactions take place in a single instance, without the use of money and organized by ‘the auctioneer’. And he explicitly rules out endogenous money:

“If members of the younger generation were risk preferrers they could and would exchange claims on future consumption among themselves so as to increase variance. This possibility will be ruled out in the next section”.

And this auctioneer? That’s mum, of course…

(source)

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Categories: Uncategorized
  1. Podargus
    November 21, 2012 at 6:33 pm

    It sounds like little Bobby Lucas needs to be put away somewhere for his own protection.
    Oh,sorry, asylums were abolished years ago so the community now has the responsibility for caring for the mentally infirm directly.

  2. November 22, 2012 at 10:41 am

    “… fiat money, issued by a government which has no other function”. So Lucas is admitting the government is the bank?

    At note 6 in his paper: “ALL motives for using money require that it he held for a positive time interval before being spent: there is no reason to use money (as opposed to barter) if it is to be received for goods and then INSTANTANEOUSLY exchanged for other goods”.

    On the contrary, the MAIN reason for using money is that goods are specific whereas the money is returned to a communal pool from which it may be used by unspecified sellers to buy unspecified goods. In other words, it is a means of providing freedom of choice.
    The moral of this is the same as in my “hitch-hiker” analogy. A benefactor having credited me with goods in the form of a lift, I don’t have to repay him but I do need to replenish the communal pool of goodwill by giving lifts in my turn (accepting “nothing” money in exchange for goods).

  3. November 23, 2012 at 5:34 pm

    Hmmm… At least, in his possibly cynical way, RL admits that money is not any actual “thing” that can be exchanged or taken or returned either from or to anyone or anywhere. The only real/virtually real thing money is is a system of exchange. Confusing the system with the abstracted representations of arbitrary value and/or tokens of value is the root cause of money’s historic susceptibility to corruption and systematic abuse by the cunning and ruthless exploiters of money (the system). Right?

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