PCT basis for Economics (was Economics (was Why ...)

[Martin Taylor 2015.07.022.17.33]

···

This thread subject line should have
been changed long ago. I’m changing it now to distinguish it from
the increasingly strange and by mutual agreement terminated thread
about collective control. I hope this thread can be about PCT and
economics. I’m not adding anything technical with this
subject-line change, just hoping that any further discussion uses
the new subject line.

  Martin

[Martin Taylor 2015.07.22.13.43]

[From Frank Lenk 2015.07.21.0832 CDT]

      Martin - you are right I was not precise in my statement

about what gives money its value. As you state, the value
given goods, services and money is determined by our
perception of their ability to help us control other
perceptions to references that may be more important or
intrinsic.

      The question I was really answering is why the money we end

up holding and using in transactions and savings is the
government’s money (or money denominated in the government’s
money, which is what bank money is, i.e., checking and savings
accounts) rather than your money or my money or Wal-Mart’s
money or Microsoft’s money.

  Yes, but is it? For example, is the Euro the money of the European

Parliament’s majority party? If not, of what government is it the
money? Is the money of the Scottish and Northern Irish banks,
denominated in Pounds Sterling, government money? Is the “Haweater
Dollar” (a coin the size of a Canadian dollar, interchangeable
with a loonie on Manitoulin Island) government money?

      Our use of government money is cl early not based on

trust of the government. Neither are legal tender laws
sufficient, as evidenced by periods and countries where
residents refuse to hold their government’s money due to its
perceived worthlessness.

  Yes, as an example, when I was on a tour in Turkey in 2000, many

people preferred to use US$ cash in place of Turkish Lire (it was
kind of fun to pay a cool million for a cup of Turkish coffee),
and a lot of shops would accept either currency equally happily.

      And it is not due to backing the currency by gold since

the US dollar remains in high demand despite being off the
gold standard since 1973. MMT’s answer - that it is because
the government alone has the ability to name the unit of
account and the power to collect a tax in that account from
its citizens and firms under penalty of loss of a considerable
amount of control (fines or jail) – is the one that makes the
most sense to me. The government’s money becomes what is used
in private transactions as well because virtually everyone has
to use it to at least determine their tax obligation to the
government, even if by virtue of tax credits (also denominated
in the government’s money) they end up paying nothing. ;

See in particular blogs #6, 7 and 8 here:

      You may also be interested in the (somewhat speculative)

history of money in blogs #12 and 13.

  These are very long blogs, and I haven't read past the first few

paragraphs of blog 1, so forgive me if what I say seems irrelevant
or is refuted by later portions of the blog series.

  I (MMT) didn't, and don't claim or believe that the government

alone has the ability to name a unit of account. I would argue
that anything, cowrie shells, bitcoins, gold dust, bolts of linen
(Ebla ca 2200 B.C.E), millstones too heavy for one person to move,
can be a unit of account if people perceive it as having a value
stable enough that its acquisition in one transaction allows the
acquirer to expect to be able to give it to someone else in a
later trade in order to get some good or service of what is now
seen as being of comparable value.

  It's true that if the government has declared a tax of 10 bushels

of barley on every farmer, the farmer either has to grow barley or
be able to trade for 10 bushels, and barley thereby acquires a tax
value. The tax value also propagates into general trade, because
the farmer who doesn’t grow it has to exchange some good or
service to get the barley, perhaps for 2 bushels in one trade, 7
in another, and 5 in a third trade, leaving him with 4 bushels
that he could trade with anyone else for something he wants. By
these trades, barley does get matched against the value of a range
of goods and services, and acquires for itself a value beyond its
value as food, which seems to put a floor on its value per bushel.
But the tax in itself seems to leave the value of barley floating
until the government uses that barley to get people to perform
services such as infrastructure construction and maintenance. If
the government prudently stores the barley as a hedge against
years of drought and poor crops, it doesn’t even acquire trade
value at all.

  Even if the barley tax requires all farmers to have some barley on

hand at tax time, nothing about it says that barley would become
THE currency in general use. Non-farmers don’t need to have barley
to pay tax, as the tax for non-farmers might be in the form of 40
hours per year of work on infrastructure projects or on clerical
work to keep track of the farmers’ barley payments.

  Barley is heavy to cart around, so if it were to be a currency,

trades would presumably be preferentially conducted as paper
transaction, IOUs for so many bushels, to be paid only when
someone wanted to eat the barley. But the government might not
accept the IOUs in place of the barley, because it wants to store
real, edible barley against times of famine. If the government
would not accept barley IOUs, then the barley could not be used as
money by the government. All the same, the IOUs might still be
used as money by the general public.

  If this way of looking at the situation makes any sense, then the

value of money is independent of its use for paying taxes. But if
so, we must ask why it is usually true that government denominated
money is what most people use as money. My answer to this is quite
simple: it’s convenient. It’s convenient because the government is
an organization with which everyone has dealings of some kind,
whether it’s a dictatorship or a democracy, a monarchy or a
republic (that is 2x2 matrix of possibilities). Not everyone has
dealings with the Gargantuan Bank of Central Fiscomania, so
Gargantuan Bank money would be useful only among people who trust
that they will be able to use the money in future trades, at
something like the same value per unit as in the current trade.
Nobody pays taxes to the Gargantuan Bank, unless you count their
profits as taxes. But if they are widely trusted, their money
would be good.

  Maybe I'll find this is all discussed and refuted in the blogs. If

so, I apologise for answering prematurely, but even so, maybe you
can comment on how the refutation would proceed.

  Martin
      On 7/18/15, 8:26 PM, "Martin Taylor" <>

wrote:

[Martin Taylor 2015.07.18.22.40]

On 2015/07/18 2:01 PM, Franklin Lenk wrote:

[From Frank Lenk 2015.07.18.1009 PDT]

            Martin – I have only briefly read the intros to both

papers, but I

            would agree they are on the right track.  First,

Keynes was concerned

            about a lack of effective demand from the private

sector and viewed

            private sector savings as a leakage from the

spending that keeps the

            economy going, recognizing that one person’s

spending becomes another

            person’s (or firm’s) income.  If savings keeps

leaking out and is not

            accompanied by an increase in spending elsewhere,

then the economy

            starts shrinking.  Since we want the private sector

to run a surplus

            (spending less than inco me), then the public sector

must run a deficit

            even for a stable economy, let alone one that is

growing.

          You touch on something that has long been a puzzle for

me. In the

          popular press discussions of economics, it is always

considered a good

          thing for a person's savings to increase year over

year, for a business

          to make an annual profit, and for a government to run

an annual surplus

          on average. It is considered a bad thing to have

inflation. However, if

          every sector of the economy has more money at the end

of the year than

          at the beginning, and inflation has been held in check,

where did all

          the extra money come from? Why is it considered good

for governments to

run surpluses rather than deficits?

          < div> Also, your insight that money is debt is also

correct. As you

        highlight, anyone can emit money – the trouble is in

getting your

        money accepted by others.  That is why, in general,

money emission

        falls to government, which can create the demand for its

money by

        requiring it as the only thing that will satisfy the

government’s

        imposed obligation of paying taxes.  It is this

obligation that gives

        money its value, not anything backing it. It is an

obligation that is

imposed by the Sovereign.

      If you have read the rest of my "PCT View of Money" you

will know that I

      disagree with the last part of that paragraph -- or at

least I think

      it's overspecialized if not contradictory to my argument.

Could you

      offer reasons why I am wrong, or why my proposals and the

above are

actu ally consistent with each other?

      I have a quite different reason (not in the Web document

but in the part

      of my chapter for LCS IV that is based on the Web document)

why

      Government money is often but not always preferred to

private money. In

      my chapter I have a picture of UK banknotes issued by eight

different

      banks, only one of which is Government backed (Bank of

England), but all

      of which are accepted as being of equal value, pound for

pound, where

      they are accepted at all (Scottish note are not usually

accepted far

from the Scottish border, for example).

      In the chapter, I have this short passage in a long

discussion of the

      gradual creation of private money, just before the pictures

of the seven

      kinds of private banknotes and a fleeting discussion of the

need to

      reduce uncertainty by regulating private money exchang e

rates:


      "To allow any single private bank a monopoly on the

provision of generic

      IOUs — which we can now call tokens of “money” — is to

unfairly enrich

      that bank. So if the decision is to have only one source of

money

      tokens, the issuer should be a collectively controlled

institution.

Typically, such an issuer is a national treasury."


      By the way, to offer my suggested answer to the question I

posed to Rick in

[Martin Taylor 2015.07.15.17.45]

[From Rick Marken (2015.07.15.1335)]

          RM: I think what economics needs is a better model of

how an economy

          works. And having a better model starts (as it does in

psychology)

          with having the correct understanding of the

phenomenon to be explained.

        Do you have any description of the phenomenon to be

explained might be

in economics?

      If we take "control" or "the control loop" to be the

phenomenon to be

      explained in individual psychology, I would say that "the

trade

      protocol" is the basic phenomenon in economics. (See

[Martin Taylor

      2014.11.26.16.45] for a brief introduction to the concept

of a

      protocol). Any other answers would be interesting to

contemplate.

Martin

http://neweconomicperspectives.org/modern-monetary-theory-primer.htmlmmt-csg@mmtaylor.net

[From Frank Lenk 2015.08.15.11:29 CDT]

Martin -

I am sorry it has taken me so long to get back to you. Both work and my dissertation are taking all my available time.

First, I would say we are in agreement that what what gives money value is same thing that gives anything value – that it helps us control perceptions to important references (e.g., enough food on the table for my family to avoid being hungry).

However, we disagree on the likely order of events concerning how money came into being and what it was used for. The standard theory is that we humans first traded goods by barter, but found that inconvenient. So we defined one type of good (which as you state, may vary over time) as the numeraire in which all other goods were valued. Eventually, we hit upon metal – usually gold – as the numeraire because it was easier to carry around than bushels of grain. Paper money was even easier, but we needed to “back it up” by gold reserves for it to retain its value.

Modern monetary theory’s analysis of the history of money is different. It really starts from your insight that money is debt, an IOU. It appears that some of the earliest forms of writing were ways of keeping track of the kinds of credit and debt relationships you hypothesize – promises to pay later (e.g., fruits of a harvest) for help (oxen, implements) today. They were kept track of by notches in clay tablets or tally sticks or even bar tabs, not metalic money. Metalic money is just a different form, a different “money thing”, used to keep track
of the same kind of credit and debit relationships in a more asynchronous way. Today, the most common “money thing” is simply electronic debits and credits to bank accounts, which at least has the virtue of making more apparent the debt/credit nature of money.

If money is an IOU, then what gives it value is the strength of the promise that that IOU will be paid back directly, or that that IOU can itself be exchanged for something of value. So this brings us to why we end up using the government’s money (or more generally, bank money denominated in the government’s money) rather than IOUs we generate ourselves. You say it is because it is convenient. But why is it convenient? If money is an IOU, then what is it the government is promising to deliver?

Modern monetary theory suggests that government (historically, the Sovereign) promises to protect us in return for pa
ying taxes. An obligation is imposed that can only be redeemed by paying taxes in the money the government says can be used for this purpose. Because everyone must pay taxes, everyone must use the government’s money at some point. This is what makes it convenient to carry out private transactions using money denominated in the government’s money (regardless of what money-thing is used in the transaction itself.) We use the government’s IOU as the medium of exchange even in things not related to the government.

How do private actors obtain government money to satisfy this obligation? Modern monetary theory says that, typically, the national government purchases goods and services it needs to govern – roads, bridges, equipment, etc. — from private actors by paying them in money it creates by fiat. Note that the government spends first, then later receives some of that money back in taxes, making deficits the normal state of affairs. Note also the government does not need our taxes to spend. It needs to tax us to generate a demand for its money so that it can obtain the things it needs by paying us rather than having to rely at all times on outright coercion (the police powers of the state), which would be a much less efficient process.

You may or may not believe any of the above. I know the first time I heard the government doesn’t need my taxes in order to spend my jaw dropped and I thought it couldn’t possibly be true. I tried very hard to pick the theory apart, and found I couldn’t. I don’t at all consider myself an expert at it. At the very least, it is an interesting point of view. It has also had more success in explaining recent economic events than the standard neoclassical view. See here for example: http://www.bloomberg.com/news/articles/2015-07-15/nine-people-who-saw-the-greek-crisis-coming-years-before-everyone-else-did. Five of the nine people mentioned are those who have contributed to modern monetary theory, and three are current members of my school’s economics department (Wray, Kelton and Forstater) at the University of Missouri–Kansas City.

So speaking of school, back to my dissertation…

Frank

···

This thread subject line should have
been changed long ago. I’m changing it now to distinguish it from
the increasingly strange and by mutual agreement terminated thread
about collective control. I hope this thread can be about PCT and
economics. I’m not adding anything technical with this
subject-line change, just hoping that any further discussion uses
the new subject line.

  Martin

[Martin Taylor 2015.07.22.13.43]

[From Frank Lenk 2015.07.21.0832 CDT]

      Martin - you are right I was not precise in my statement

about what gives money its value. As you state, the value
given goods, services and money is determined by our
perception of their ability to help us control other
perceptions to references that may be more important or
intrinsic.

      The question I was really answering is why the money we end

up holding and using in transactions and savings is the
government’s money (or money denominated in the government’s
money, which is what bank money is, i.e., checking and savings
accounts) rather than your money or my money or Wal-Mart’s
money or Microsoft’s money.

  Yes, but is it? For example, is the Euro the money of the European

Parliament’s majority party? If not, of what government is it the
money? Is the money of the Scottish and Northern Irish banks,
denominated in Pounds Sterling, government money? Is the “Haweater
Dollar” (a coin the size of a Canadian dollar, interchangeable
with a loonie on Manitoulin Island) government money?

      Our use of government money is cl early not based on

trust of the government. Neither are legal tender laws
sufficient, as evidenced by periods and countries where
residents refuse to hold their government’s money due to its
perceived worthlessness.

  Yes, as an example, when I was on a tour in Turkey in 2000, many

people preferred to use US$ cash in place of Turkish Lire (it was
kind of fun to pay a cool million for a cup of Turkish coffee),
and a lot of shops would accept either currency equally happily.

      And it is not due to backing the currency by gold since

the US dollar remains in high demand despite being off the
gold standard since 1973. MMT’s answer - that it is because
the government alone has the ability to name the unit of
account and the power to collect a tax in that account from
its citizens and firms under penalty of loss of a considerable
amount of control (fines or jail) – is the one that makes the
most sense to me. The government’s money becomes what is used
in private transactions as well because virtually everyone has
to use it to at least determine their tax obligation to the
government, even if by virtue of tax credits (also denominated
in the government’s money) they end up paying nothing. ;

See in particular blogs #6, 7 and 8 here:

      You may also be interested in the (somewhat speculative)

history of money in blogs #12 and 13.

  These are very long blogs, and I haven't read past the first few

paragraphs of blog 1, so forgive me if what I say seems irrelevant
or is refuted by later portions of the blog series.

  I (MMT) didn't, and don't claim or believe that the government

alone has the ability to name a unit of account. I would argue
that anything, cowrie shells, bitcoins, gold dust, bolts of linen
(Ebla ca 2200 B.C.E), millstones too heavy for one person to move,
can be a unit of account if people perceive it as having a value
stable enough that its acquisition in one transaction allows the
acquirer to expect to be able to give it to someone else in a
later trade in order to get some good or service of what is now
seen as being of comparable value.

  It's true that if the government has declared a tax of 10 bushels

of barley on every farmer, the farmer either has to grow barley or
be able to trade for 10 bushels, and barley thereby acquires a tax
value. The tax value also propagates into general trade, because
the farmer who doesn’t grow it has to exchange some good or
service to get the barley, perhaps for 2 bushels in one trade, 7
in another, and 5 in a third trade, leaving him with 4 bushels
that he could trade with anyone else for something he wants. By
these trades, barley does get matched against the value of a range
of goods and services, and acquires for itself a value beyond its
value as food, which seems to put a floor on its value per bushel.
But the tax in itself seems to leave the value of barley floating
until the government uses that barley to get people to perform
services such as infrastructure construction and maintenance. If
the government prudently stores the barley as a hedge against
years of drought and poor crops, it doesn’t even acquire trade
value at all.

  Even if the barley tax requires all farmers to have some barley on

hand at tax time, nothing about it says that barley would become
THE currency in general use. Non-farmers don’t need to have barley
to pay tax, as the tax for non-farmers might be in the form of 40
hours per year of work on infrastructure projects or on clerical
work to keep track of the farmers’ barley payments.

  Barley is heavy to cart around, so if it were to be a currency,

trades would presumably be preferentially conducted as paper
transaction, IOUs for so many bushels, to be paid only when
someone wanted to eat the barley. But the government might not
accept the IOUs in place of the barley, because it wants to store
real, edible barley against times of famine. If the government
would not accept barley IOUs, then the barley could not be used as
money by the government. All the same, the IOUs might still be
used as money by the general public.

  If this way of looking at the situation makes any sense, then the

value of money is independent of its use for paying taxes. But if
so, we must ask why it is usually true that government denominated
money is what most people use as money. My answer to this is quite
simple: it’s convenient. It’s convenient because the government is
an organization with which everyone has dealings of some kind,
whether it’s a dictatorship or a democracy, a monarchy or a
republic (that is 2x2 matrix of possibilities). Not everyone has
dealings with the Gargantuan Bank of Central Fiscomania, so
Gargantuan Bank money would be useful only among people who trust
that they will be able to use the money in future trades, at
something like the same value per unit as in the current trade.
Nobody pays taxes to the Gargantuan Bank, unless you count their
profits as taxes. But if they are widely trusted, their money
would be good.

  Maybe I'll find this is all discussed and refuted in the blogs. If

so, I apologise for answering prematurely, but even so, maybe you
can comment on how the refutation would proceed.

  Martin
      On 7/18/15, 8:26 PM, "Martin Taylor" <>

wrote:

[Martin Taylor 2015.07.18.22.40]

On 2015/07/18 2:01 PM, Franklin Lenk wrote:

[From Frank Lenk 2015.07.18.1009 PDT]

            Martin – I have only briefly read the intros to both

papers, but I

            would agree they are on the right track.  First,

Keynes was concerned

            about a lack of effective demand from the private

sector and viewed

            private sector savings as a leakage from the

spending that keeps the

            economy going, recognizing that one person’s

spending becomes another

            person’s (or firm’s) income.  If savings keeps

leaking out and is not

            accompanied by an increase in spending elsewhere,

then the economy

            starts shrinking.  Since we want the private sector

to run a surplus

            (spending less than inco me), then the public sector

must run a deficit

            even for a stable economy, let alone one that is

growing.

          You touch on something that has long been a puzzle for

me. In the

          popular press discussions of economics, it is always

considered a good

          thing for a person's savings to increase year over

year, for a business

          to make an annual profit, and for a government to run

an annual surplus

          on average. It is considered a bad thing to have

inflation. However, if

          every sector of the economy has more money at the end

of the year than

          at the beginning, and inflation has been held in check,

where did all

          the extra money come from? Why is it considered good

for governments to

run surpluses rather than deficits?

          < div> Also, your insight that money is debt is also

correct. As you

        highlight, anyone can emit money – the trouble is in

getting your

        money accepted by others.  That is why, in general,

money emission

        falls to government, which can create the demand for its

money by

        requiring it as the only thing that will satisfy the

government’s

        imposed obligation of paying taxes.  It is this

obligation that gives

        money its value, not anything backing it. It is an

obligation that is

imposed by the Sovereign.

      If you have read the rest of my "PCT View of Money" you

will know that I

      disagree with the last part of that paragraph -- or at

least I think

      it's overspecialized if not contradictory to my argument.

Could you

      offer reasons why I am wrong, or why my proposals and the

above are

actu ally consistent with each other?

      I have a quite different reason (not in the Web document

but in the part

      of my chapter for LCS IV that is based on the Web document)

why

      Government money is often but not always preferred to

private money. In

      my chapter I have a picture of UK banknotes issued by eight

different

      banks, only one of which is Government backed (Bank of

England), but all

      of which are accepted as being of equal value, pound for

pound, where

      they are accepted at all (Scottish note are not usually

accepted far

from the Scottish border, for example).

      In the chapter, I have this short passage in a long

discussion of the

      gradual creation of private money, just before the pictures

of the seven

      kinds of private banknotes and a fleeting discussion of the

need to

      reduce uncertainty by regulating private money exchang e

rates:


      "To allow any single private bank a monopoly on the

provision of generic

      IOUs — which we can now call tokens of “money” — is to

unfairly enrich

      that bank. So if the decision is to have only one source of

money

      tokens, the issuer should be a collectively controlled

institution.

Typically, such an issuer is a national treasury."


      By the way, to offer my suggested answer to the question I

posed to Rick in

[Martin Taylor 2015.07.15.17.45]

[From Rick Marken (2015.07.15.1335)]

          RM: I think what economics needs is a better model of

how an economy

          works. And having a better model starts (as it does in

psychology)

          with having the correct understanding of the

phenomenon to be explained.

        Do you have any description of the phenomenon to be

explained might be

in economics?

      If we take "control" or "the control loop" to be the

phenomenon to be

      explained in individual psychology, I would say that "the

trade

      protocol" is the basic phenomenon in economics. (See

[Martin Taylor

      2014.11.26.16.45] for a brief introduction to the concept

of a

      protocol). Any other answers would be interesting to

contemplate.

Martin

http://neweconomicperspectives.org/modern-monetary-theory-primer.htmlmmt-csg@mmtaylor.net