Money in Star Trek

Rick Webb constructs money in Star Trek. Not "Federation credits", which can be explained simply as a plot device, but honest-to-god money.

Although Webb posits that there's more than enough for everyone, he believes the Federation carefully accounts for every citizen's consumption.

The amount of welfare benefits available to all citizens is in excess of the needs of the citizens. Therefore, money is irrelevant to the lives of the citizenry, whether it exists or not. Resources are still accounted for and allocated in some manner, presumably by the amount of energy required to produce them (say Joules). And they are indeed credited to and debited from each citizen’s “account.” However, the average citizen doesn’t even notice it, though the government does, and again, it is not measured in currency units — definitely not Federation Credits. . . . This massive accounting is done by the Federation government in the background.

But why would the Federation do such a thing? It makes zero sense to account for something that's not scarce. We account for scarce things, like the social product of others, because it's important to use every little bit wisely. But Webb assumes that there are excess welfare benefits: under ordinary circumstances everyone can use as much energy (or whatever) as they want. So why account for it in detail.

Webb continues,

So, behind the scenes there is a massive internal accounting and calculation going on — the economics still happen. They just aren’t based on a currency unit, and people don’t acquire things based upon a currency value. People just acquire things from replicators, from restaurants such as Sisko’s or coffee shops like Cosimo’s, or, presumably, get larger things from dealerships or (more likely) factories. This could still be called “buying,” as a throwback.

This activity is buying. And if you keep accounts, your unit of account is currency by definition, even if that unit represents a physical quantity. Webb sees the contradiction, but doesn't resolve it:

It is tempting to argue here that the massive accounting system uses a unit called the Federation Credit, but i don’t believe that’s the case. If it were, the credit would be too much like money because a) accounting is done in it, b) it is issued by a governing body (like a fiat currency) and c) it is fungible, i.e. you can already buy things with it and if you could buy things with it AND a and b were true, it would pretty much be a currency. This would fly in the face of Roddenberry’s absolute diktat that the Federation has no currency.

It doesn't matter whether we call it Federation Credits, if we're accounting in it, it's money. Even if the money in some sense represents energy, it's still money. Accounting is done in it. It's a fiat unit issued by the government, i.e. each citizen's welfare benefit. Citizens can "buy" things with it: when they use energy, Webb assumes their account is drawn down. Furthermore, Webb assumes that this money is an incentive, that people will do "menial jobs that cannot be done in an automated manner ... [because] there is some small, incremental increase in your hypothetical maximum consumption, thus appealing to the subconscious in some primal way." This is money. Currency. Moolah. Cash.

Whatever we call it, Webb posits something that works exactly like money in a market economy, except for one crucial feature: Webb's money does not ration consumption. Webb thinks the Federation is doing all the work of managing a currency for literally nothing but some sort of subconscious appeal. It makes absolutely no sense. Just accounting for everything doesn't mean the "economics still happen." For the economics to actually happen, there has to be people optimizing the use of scarce resources. The citizens of even a proto-post scarcity society do not, under ordinary circumstances, optimize the use of scarce resources, so there's no economics.

It's all about the Benjamins

In The Red and The Black, Seth Ackerman (2012) notes that a key feature of capitalism is that firms are autonomous. True: in a capitalist economy, both firms and households are autonomous in the sense that they need not ask permission of anyone outside the firm before taking economic action. However, to coordinate the vast, global machine of capitalist production, there must be a constraint on this autonomy, a severe constraint; otherwise, firms and households would just do things willy-nilly, and there would be no coordination.

I will let Herr Marx do the heavy lifting on the critique of capitalism, but I will observe that the severe constraint is that everyone needs money: yes, anyone can do whatever they like, but if they don't bring in the money, they are well and truly fucked.

Capitalism needs every household, every firm, thinking about money every waking moment. Everyone has to be trying to get their hands on as much money as possible all the time and and all the time spending all of the money as usefully to themselves as possible.

The capitalist system needs money to be constantly moving: it's bad if households or firms hold onto large stacks of actual money for a long time; Thus, for "keeping score" in the long term, instead of accumulating money itself, people accumulate wealth, legal ownership of streams of money. To use a biological metaphor, money is blood, wealth is blood vessels, the supply of blood.

Workers need money, so they work for wages. They need more money, so they work harder and try to find better paying work. Firms need money, and more money, so they please their customers and are always trying, even absent direct pressure, to increase revenue and cut costs (or increase market share). Similarly, the bourgeoisie, the legal owners of streams of money — profits, interest, rent — are always trying to increase their wealth, accumulating more and bigger streams of money.

"Markets", at least capitalist markets, work only to the degree that everyone is motivated to get and spend money and accumulate wealth. Take out this pillar, remove the constant and desperate need of every individual to get and spend every possible dollar, and capitalist markets collapse.

A corollary to this money motive is that money as a product of wealth requires no work, so it is absolutely necessary that only a few have real wealth; if everyone had wealth, no one would, because no one would be working to produce stuff (goods and services), which is finally what money is about.

Capitalism requires a great deal of "central planning". First, a capitalist society must have a legal regime to make people always desperately need money and have to work to acquire it but keep them from just shooting each other for it. This legal regime requires central planning: there must be no "market" alternative to markets.

Furthermore, there must also be centrally planned international force used to shut down socialist alternatives. It is instructive to note that although capitalists proclaim the inherent superiority of capitalism over socialism, capitalist powers are quick to use every means at their disposal, not only military force but also torture and terrorism, to instantly destroy any attempt at socialism. If socialism is so inferior, would it not be better to simply say, "Y'all want socialism? Go for it; we won't interfere. When you start starving, come talk to us, and we'll fix you back up." Ain't gonna happen.

More importantly, because of the critical importance of money, the money itself must be carefully centrally planned and managed. "Free banking" is up there with the stupidest, anti-capitalist Libertarian and right-anarchist ideas. If a capitalist society fucks up the money itself, the drive to acquire money and streams of money collapses, and the economy collapses. When capitalist economies lose a big chunk of physical productive capability, in earthquakes and other natural disasters, the economy quickly recovers. When the money gets fucked up, such as in the Long Depression, the Great Depression, or the current Great Recession (a.k.a. the Lesser Depression), the effects are severe, and it takes a long time to recover. Whether it's a carefully curated private banking system or a state-regulated central bank, a capitalist society must keep careful track of the money itself.

I will examine Ackerman (2012) in more detail later, but the centrality of the money motive to capitalist markets is a severe defect in Ackerman's market socialism. Markets don't work by magic, and labeling some system as a "market" doesn't make it one. Matthijs Krul (2013) correctly uncovers the contradiction: "Ackerman’s solution is to propose a market socialist alternative, which would have prices (and thereby evade the calculation problem), but not profits — a handy solution if ever there was one, having one’s cake and eating it too."

I won't say that one cannot use the word "market" and "prices" except in the context of the capitalist central money motive, but as I noted, for some number to be a "price", the number has to matter, it has to in some way affect people's economic behavior. Take out the constant, desperate, and urgent need for money, and you have to give some alternative account of how prices affect behavior.


References

Ackerman, Seth. December 2012. The red and the black. Jacobin 8. Retrieved August 13, 2016 from jacobinmag.com/2012/12/the-red-and-the-black

Krul, Matthijs. 2013. On communism and markets. Notes & Commentaries. Retrieved August 14, 2016 from http://mccaine.org/2013/01/30/on-communism-and-markets-a-reply-to-seth-ackerman/

Currency, anonymity, privacy, and the state

I've been reading a lot about bitcoin lately, and I just heard about Ripple. (Click on Buce's other link too.)

I might or might not post something more coherent and elaborate, but for now, I have a few random thoughts on the subject of stateless/anonymous currency.

First, it should be obvious any means of payment that can be used privately can be used illegally, i.e. for fraud, money laundering, and payment for illegal goods and services. The only reason to avoid the scrutiny of the state is do something the state considers objectionable. Obviously, there's no guarantee that what the state considers objectionable is something that the people consider objectionable. However, unless you're an anarchist, the solution is not better money but a better state.

Nothing is truly anonymous, and, as Karl Denninger, BitCoin is not anonymous. If we grant the state any legitimacy, then it has the power to defeat any attempt at anonymous transactions, including transactions in physical cash. All we can do is make it more difficult to ascertain the identity of those involved in certain kinds of transactions. Cash or BitCoins, you oppose the state at your own risk.

If you don't like state currency, and you have no intention to do anything objectionable to the state, it is legal in most countries to hold physical gold. Nothing stops you from holding your wealth in gold if you believe gold is a more stable store of value than currency, private or public bonds, equities, or other socially-constructed contracts.

Money is the relationship of the state to the economy. Money is the fundamental public good that the state provides, and only a state can provide money as money. (People can, of course, still barter, but even gold-as-commodity is, by definition, a commodity, not a money-thing. It is only by the action of the state that anything, including gold, can serve as a money-thing.

Money is a tool; it is an instrument of the will of individuals, groups, organizations, and institutions. One of those institutions is the state. It is nonsense to assert that anyone or any institution, the state included, has an a priori or objective "obligation" to use a tool in a particular way. If you want me to do something, you waste your time asserting I have moral obligation; you can succeed only by making it somehow in my interest to do what you want me to do. Likewise with the state. If you, like Denninger, want the state to contract the money supply in an economic contraction, you must show that it is in the interest of the state, or in the public interest, to do so. (I'm not sure that Denninger is substantively wrong: it might be the case that it is in the interest of the state or public to stabilize the currency in some sense. His moral argument, however, that the state has an obligation to do so in return for its privilege of seigniorage during an expansion, fails to be persuasive.)

As I've noted before, I don't think anarchism in the literal sense of "no state", is possible or desirable. In the sense that it means "no relations of subordination," I also disagree; I think that in many (but not all) things, the individual should be subordinate to the majority, because, paradoxically, it is in the broad interest of most individuals to subordinate themselves to the majority. Needless to say, this idea requires more elaboration. Money represents the ability for an individual to demand goods and services from the society, therefore for it to be money-as-money (and not merely barter, which is not demand), money has to be socially constructed. Because money is the quintessential non-excludable, non-rival public good, it requires the use of violence to marginalize free riders.

Quantity and quality of money

In his comment, Ralph Benko, editor of the website The Gold Standard Now, defends the gold standard, or at least alludes to defenses. One argument is that, historically, use of the gold standard correlates to economic growth. Benko and his unnamed advocates "suspect, with good reason, that there is more than a coincidental correlation." Benko also asserts that my criticism of the gold standard as limiting economic growth "conflates quantity and quality theory of money." Benko compares the gold standard to abstract units of measure, and implies that holding money to a gold standard does not affect economic growth any more than holding the definition of a yard constant affects the production of yardsticks. These defenses, however, are facially thin.

A suspicion of causation is not very impressive. Correlation is evidence of causation, but it is at best only preliminary evidence, and tells us nothing about the direction of causation. For example, if changing economic conditions caused the gold standard to begin to limit economic growth, or if some underlying change in economic conditions caused both slower economic growth and the inefficiency of the gold standard, then we would expect to see the same correlation: declining economic growth at the same time the gold standard was being eroded. Benko suggests that the correlation might have something to do with Total Factor Productivity, but I can't seen any plausible connection. Benko admits this defense is just a suspicion, so I think it's justified to not take it too seriously.

The more substantive objection is that I'm conflating quality with quality. But this objection at least needs more elaboration. Money is not an abstract unit of measure, it's a reified social construction that we pretend has actual existence; we actually pretend to store and move money in time and space like we move physical objects in space. There's nothing wrong with that pretense; pretending to store and move money around is just a way of modeling and representing the storage and movement of real goods and services.

In one sense, the quantity of money doesn't matter to money as a representation of transactions of real goods and services, only its quality. If we could move money arbitrarily quickly, then one unit of money would suffice, so long as that unit had a consistent representation. "Wealthy" or "poor" people would just be those through whose hands the unit of money passed relatively more or less often. But money cannot move arbitrarily quickly, for two reasons. First is just physics: it takes time, energy, and effort to move money, even by computer; doubling the actual units of money in use halves that effort, because moving two units in one transaction has about the same cost as moving one unit.

The second reason is because of money's other use: as a liquid store of value. We don't just move money around to represent the movement of goods and services, we store money to virtually transfer consumption in time (by actually transferring it in space between different people: my saving must be your excess spending, and vice versa).

Because money must be stored, the quantity of money is directly related to its quality. Indeed, as we know, Y * P = M * V: real GDP (Y) times the price level (P) is, by definition, equal to the quantity of money (M) times the average velocity of money (V). Everything else being equal*, increasing the quantity of money increases the price level in the short term, as more M is chasing the same amount of Y. But the price level is the "quality" of money. Thus (under ordinary circumstances) there is a direct relationship between the quantity and quality of money.

*Which is sometimes not the case: when interest rates are near the zero lower bound, for example, the velocity of money just decreases when the money supply increases, without changing GDP or the price level.

There is, however, a third issue: socially constructed agreements directly denominated in money, i.e. purely financial agreements. When I borrow money, I both borrow and agree to repay only money, not any actual goods and services that money represents. Financial agreements must involve positive nominal interest rates: no one would ever loan money at a zero or negative rate; they would just hold the cash. This means that if the price level decreases, people who owe money would owe more goods and services than they originally borrowed. Since interest rates cannot be negative, there is no easy way to reflect expectations of future deflation in interest rates. This is why real economists fear deflation more than (modest) inflation: deflation — or even just the expectation of deflation — causes money to stop moving, and the way our system is presently set up, money in motion is economic activity. Deflation causes a decline in real GDP. Because inflation can be easily reflected in interest rates, modest inflation does not affect real GDP in as dramatic a way as does even the smallest deflation.

What does all this have to do with the gold standard? Under the gold standard, M is the physical quantity of processed gold in the hands of the government and private individuals, and its increase (or decrease) cannot be socially constructed. (If Benko means something else by a gold standard, he will have to explicitly describe it.) Assuming the velocity (V) doesn't change (under ordinary circumstances it doesn't), the quantity of gold (M) must represent all the real goods and services we're capable of producing (divided by a constant V) plus all the real goods and services people want to store. Given that there's no particular reason to believe that real GDP will increase at the same rate that the quantity of gold increases, then either P or Y must change. But P, the price level, is the "quality" of money. It is how much goods and services a unit of currency will produce. So, if we let price levels float, the quality of gold will vary just as does the quality of a fiat currency; it's not fixed objectively. Alternatively, if we demand price stability, then we must match real GDP to increases in the money supply, which is just having the tail wag the dog. Either gold doesn't actually do anything macroeconomically significant, or it does exactly the wrong thing.

Not only does a gold standard have zero or negative macroeconomic effects, it also cannot limit government spending. The government can effectively create a monopoly on gold, simply by demanding whatever taxes it wants in gold, and paying for goods and services in gold. By changing the ratio of the two, the government can set the price level to whatever it wants: an ounce of gold is "worth" whatever the government will pay an ounce of gold for, which people will provide because they need the gold to pay their taxes.

So, demanding a gold standard seems as weird and arbitrary as demanding that all legal documents should change to using the Courier font for all legal documents or declaring that a court does not have jurisdiction because the flag in the room has a fringe. It really doesn't matter if our price levels are arbitrarily denominated in ounces of gold or simply fiat dollars. The demand for a gold standard, therefore, is disingenuous. It has nothing to do with "sound" money, since gold is just a slightly less efficient way of doing what fiat currency already does. It is, instead, aimed at delegitimizing the democratic republic, in favor of placing political power in the hands of the people who happen to own a lot of gold right now.

What is money?

In a capitalist economy, money is the accounting identity Y * P = M * V, which is true by definition; in English, the real Gross Domestic Product (Y) times the price level (P) equals the quantity of money (M) times the velocity of money (V). By definition, then, all economic activity (worth counting) involves the transfer of money. There must be a finite, measurable amount of money in existence. Money must move; money that doesn't move isn't really there; if the velocity of money were zero, then M * V = 0 for any quantity of money, even an infinite amount. As a corollary, the amount of money by itself doesn't determine anything; what matters is how much money is actually moving. On the other hand, because there are physical limits on how fast money can move, and because there are physical limits on how much the price level can change, economic activity can be limited by just the quantity of money.

With a little algebra, we can say that Y = (M * V) / P; real Gross Domestic Product is money in motion (M * V) divided by the price level. We can arbitrarily choose a unit of measure in which P = 1, therefore Y = M * V: money in motion is therefore a symbolic representation of real productivity, which is just labor, energy, and matter in motion.

At the macroeconomic level (the economy as a whole), what is produced must, for the most part, be consumed; actually producing goods and storing them in a warehouse is a tremendously inefficient activity. It is much more efficient to simply not produce goods that won't be immediately consumed: we could use the resources to produce something that would be consumed, or we could just produce less and have more leisure.

Similarly, human labor, the sine qua non of productivity (we have free energy from the sun, and anything can be produced given enough human labor) must be used or wasted: the hour of labor lost by some individual who could work for an hour but doesn't cannot be stored and used later.

All three of these observations entail that saving money is, in general, if not an entirely bad idea, then a fairly limited one. We cannot save what is produced, and we cannot save potential labor that is not used, so saved money doesn't symbolize anything actually being saved. Money saved is money that is not in motion, and thus not "really" money.

Saving money can (and does) symbolize is virtually shifting consumption in time by physically shifting consumption in space. If I want to spend a lot of money next year, I let someone else spend my money this year, and I spend her money next year. If I just save my money and don't let someone else spend it this year, then we simply reduce real productivity, since there's no reason to produce something this year that will not be consumed this year. And that lost productivity is really lost: If we can produce 100 cars a year, but only produce 99 this year, we cannot therefore produce 101 cars next year*. Indeed, if we lower productivity enough in amount and time, then we can actually lose the capacity to produce: if we can produce 100 cars a year, but we only produce 50 cars per year for a few years, then we might find that we can produce only 90 cars per year. And now because my money is still there in some sense, we have more money chasing fewer goods, which is the definition of inflation.

Instead of saving money, I can invest money: instead of using labor (and energy and matter) to produce goods for consumption, I can allocate my money to produce goods for increased efficiency of production. In exchange for not consuming the 100th car (which is the most expensive car to produce), I can build a car factory, which will allow us to produce 110 cars per year, and I get to keep or trade 10 cars per year. Win all around!

But there's a catch, of course. Obviously, in a large economy with many goods, investment is both risky and uncertain. I might build a car factory only to have it burn down or get hit by a meteor (risk). I might build a car factory only to find out that people don't want that 110th car enough to justify its production (uncertainty).

But there's another, subtler, catch. Increased consumption lags economic growth by a considerable margin, and the effects of any one factory on wages diffuses through the whole economy. If I build a car factory, I will produce my 110th car before the workers who actually built the cars receive their wages. Furthermore, these workers aren't going to actually buy all ten cars: they will buy more shirts, shoes, dishwashers, movie tickets, lattes and yoga lessons. I have to hope that the shirt makers, shoe manufacturers, etc. have also increased production and wages so that my workers can buy more shirts, etc., and their workers can buy my extra cars.

There's yet another, even subtler catch. Capital costs are sunk costs. If I have a car factory that produces 10 cars per year, I can sell all ten cars only for what it costs me to produce the tenth car. The cost of the factory is embodied only in the cost of the first car. As Michael Perelman describes at length in Railroading Economics, capital as a sunk cost (mostly building railroad tracks and steam engines) was the primary cause of the Long Depression of 1873-1879. In a pure free market with perfect competition, capital costs cannot be recovered.

Because of these catches, a complex industrial economy requires a degree of coordination impossible in a free market with perfect competition. If we're going to increase production, we have to increase production across the board, so there's more of everything. If we're going to increase production, we need to make sure that consumers have the money ahead of time, so they can buy the products. We must make sure that sunk capital costs are included in the marginal costs of all the goods. By definition, the institution that provides this coordination is the government; in other words, if we look around and we see that some institution is coordinating investment and consumption, we slap the label "government" on that institution.

A coordinating institution, a "government" in the above sense, must exist for an industrial economy at a technological level greater than that of the early 19th century to exist. Without this coordinating institution, there's just no reason to invest in steam railroad or higher levels of capital; doing so at best pays off more for everyone other than the actual investors and at worst pays off for no one.

There are, at least superficially, four ways of coordinating investment and consumption, corresponding to the four terms of the fundamental equation of money, YP=MV. We can try to directly control production, by just having the government build and operate factories. We can try to directly control the price level by having the government set prices. We can try to affect the velocity of money, making money move faster or slower. And finally, we can try to affect the quantity of money.

The government concentrates its actions on directly affecting Y, real GDP and M, the quantity of money; P and V change indirectly.

A government changes Y and M in tandem in two ways. First, the government creates new money, changing M, and spends that money directly for public works, directly changing Y. Second, the government creates new money, changing M, and loans it to businesses for investment, changing Y. Both measures overcome diffusion, because investment is spread across industries. Creating new money to loan also overcomes the capital as sunk cost problem, because the "sunk" cost is virtual, and becomes baked into the marginal cost of all the products through periodic loan payments. Finally, consumer lending, again creating new money, changing M, and loaning it to consumers who buy things with it, changing Y, overcomes the lag problem. To offset all this creation of new money, money must also be destroyed, so the government destroys money by collecting taxes and loan payments. It's tricky, but with only four major variables, keeping everything in balance is a tractable problem. Fundamentally, then all coordination of an industrial economy requires the targeted creation and destruction of money, so that money can lead productivity rather than follow it.

It doesn't matter what we call the institutions that create and destroy money: they act like a government, therefore they are a government even if we call them a "private" banking system. Because it is impossible to maintain cooperation in a purely uncoercive competitive environment, cooperation must have some coercion built into it. Again, calling coercion by another name, like the justified enforcement of contracts, doesn't make it any less coercive. And if we went on a pure gold standard, we would just create some other virtual something which would fulfill the same role as money does.

The question is not whether we have a government, but who gets to be the government. And the only options are monarchy, oligarchy, or democracy, or some mixture of the three; no political philosopher has found an alternative that is more than a renaming of one of those three.

Reflections on money

I'm taking a couple days off my analysis of Wenzel's 30 Day Reading List for Christmas, but I want to write a brief reflection about money and the State.

Money, as I've written before, is really hard to understand. Indeed, no one really understands money, in the sense that scientists really understand evolution, relativity, or even quantum mechanics. Everyone has different theories, but no theory has gained the kind of wide acceptance that good scientific theories gain. There are a couple of reasons for this. First, the problem is complicated. Second, money, considered as a "thing," is an inherently political instrument. Money is not something that just is; money is political, ideological, social, cultural: money is what we think it is. So different kinds of people think about money in the same terms they think about politics and social institutions in general. Socialists construct socialist money. Libertarians construct Libertarian money. Capitalists, fascists, mercantilists, feudalists, and slave-owners construct capitalist, fascist, mercantilist, feudalist, and slave-society money. Money is, in essence, a political institution just as are a congress, a president, a judiciary, a dictator, a ruling elite, a body of law, and a constitution.

Money differs from other political institutions because money seems objective, because money seems to reside not in our minds but in the pictures of dead presidents printed on paper or stamped on metal, bars of silver and gold, bank accounts, etc. Money is, first and foremost, countable, and we're conditioned to believe that countable means scientific and objective. But money is, essentially, the pure abstraction of counting: money doesn't actually count anything; it's just, in a sense, a Platonic ideal of counting itself. It's a curious inversion: in science, we count actual physical things; in economics, we instantiate physical things such as dollar bills to concretize the abstraction. But it is clear: despite appearances to the contrary, money is a pure political, social, and cultural construct, symbolizing nothing but itself.

Thus we have the curious fusion and tension of money and stuff in economics. To the extent that economics is about real stuff, physical things that take labor to produce (goods), or labor traded directly (services), economics is a science, a study of objective reality indifferent to our preferences. Regardless of now much pizza and beer we want, if we want more pizza, we have to settle for less beer. As a scientific economist, based on your subjective preferences, I can tell you the optimum amount of beer and pizza to produce. If you want more of both pizza and beer, I can tell you the optimum amount of both you should forego today to invest in making both pizza and beer more efficiently to have more tomorrow. Classical economics seems (at least so far) to be quite sophisticated and effective at answering these sorts of questions.

Although there's a subjective component, our preferences, these are questions and answers about purely physical things like pizza and beer (and human labor). Economics, however, is really confused, when it is not silent, about money itself. Half the time money is simply abstracted away, as when we divide out by the price level to get "real" quantities, such as real gross domestic product or real income. Half the time, money is itself real: private and government debts, which are just money, are ardently proclaimed by some to have a crippling effect on the economy, and just as ardently proclaimed by others to have a salutatory effect on the economy. Both are, or can be, right, because money itself is not a physical thing like a hat, a haberdasher, or a hat factory: money is an idea. If we believe that debt will cripple the economy, then it will; if we believe that debt will improve the economy, then it will. This is not superstition, just political psychology: economics is, fundamentally, about what people choose to do, and people really do choose based on what they believe.

Marx introduced to economics an interesting term derived from primitive sexology*: fetishization, an attitude towards an object that is substantially at odds with its real nature or intended purpose. Marx referred to "commodity fetishization," by which he means valuing a commodity not for its use value but for its ability to gather more money. But I think Marx's notion is more powerfully expressed as money fetishization: instead of money's true or intended purpose of optimizing the production, distribution, and consumption of commodities to maximize use value, we see money as an end in itself, which subsumes the production of commodities.

*I use "primitive" advisedly here. Early sexologists considered reproduction to be the real nature and intended purpose of sexual activity; sexualization of non-reproductive activity was therefore pejoratively referred to as a "fetish." More objective modern notions of scientific sexuality largely abandon the term.

In an emerging capitalist economy with expensive labor, the fetishization of money seems an inevitable side-effect of the high social value of investment, the reallocation of labor from the satisfaction of desires to consume today to the development of more efficient production to satisfy the desire to consume more tomorrow. People act on what they want today; we cannot, I think, really act on what we want tomorrow without translating that desire into wanting something, such as money, today. (It's an obvious truth of psychology that to construct a long-term goal, it is crucial to construct short-term goals and rewards that will lead to that long-term goal.) Money fetishization, then, is the result of wanting to build an industrial infrastructure: it is the short-term goal and reward pointing to the long-term goal of making our productive society vastly more efficient.

There's another psychological tendency, though, that works to our disadvantage: moral inversion. We construct short-term goals and rewards to instrumentally achieve a long-term goal, but then we assign an intrinsic good to the short-term goals directly, which often inverts our judgment of the long term goal. In Zen and the Art of Motorcycle Maintenance, Robert M. Pirsig explains the concept in his (probably apocryphal) story about the sacralization of cows in India: these cows are incredibly useful, therefore they must be gifts from the gods, therefore they are sacred, therefore we must not use them. The moral value of the cow has been inverted from valuable because they're useful to useless because they're valuable.

Similarly, we value money instrumentally because valuing money helps us build an industrial economy. Then we start valuing money intrinsically, and sometimes, to preserve the money, we must sacrifice the industrial economy. At a more sinister level, consider material immiseration to be intrinsically bad. We value sacrificing some consumption today to build an industrial economy because it will relieve material immiseration. We start valuing building an industrial economy intrinsically. Therefore come to believe preserve, rather than relieve, material immiseration, because immiseration is the justification for the intrinsic good of building an industrial economy.

Moral inversion is not always so malignant. For example, we might start off deprecating theft to preserve property, but after not stealing has become habitual, we start disliking theft intrinsically, and simply become a society of people who do not typically steal, not directly because of the broader social and economic consequences, and not even directly just because we might get caught and be humiliated or imprisoned, but because we are just not the sort of people who steal. In essence, we have fetishized not stealing. It is arguable that all our social and cultural conventions (that are not pure accidents) come about due to moral inversion. So moral inversion is by itself neither good nor bad, but we have to carefully and skeptically examine instances of moral inversion to determine their value.

So what can we say about the fetishization of money? Is it a case of irrational attachment to an ad hoc instrumental goal that has outlived its usefulness, or is it the kind of cultural norm like not stealing that fundamentally makes our society better? To a certain extent, it's a little of both, but more the former, irrational, than the latter. And when taken to Libertarian "gold standard" extremes, it is much more irrational.

Indeed, the fetishization of money is very similar to the fetishization of religion. Religion used to be the basis around which we built social trust; its actual truth was not really relevant. Now, we build social trust economically, politically, and socially; religion is no longer necessary and useful for social cohesion, and attachment to its superstitious and arbitrary claims to truth are without any value. Similarly, the fetishization of money, once useful for building an industrial economy, is no longer necessary or useful. And, like religious apologetics, the defense of money is becoming, as we're already seeing in the examination of Wenzel's canon of Libertarian thought, just as bizarre and dishonest.

Day 2: Jackbooted thugs (response)

Jackbooted thugs (summary) (response)
The Fascist Threat, by Llewellyn H. Rockwell, Jr.
Day 2 of Robert Wenzel's 30 Day Reading List on Libertarianism

Day 0: The Libertarian catechism

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On the one hand, a lot of the same things that concern Llewellyn H. Rockwell, Jr. concern me as well. Like Rockwell, I'm concerned about poverty, and stagnating incomes of the lower and middle classes. Like Rockwell, I'm worried by our crumbling infrastructure. Like Rockwell, I'm appalled the increasing militarism of the police. Like Rockwell, I'm outraged at our nation's murderous imperialism. I don't endorse his wording, and I do believe that most police are sincere, dedicated professionals (one problem is lack of institutional control over the minority of police who aren't professionals), but I share Rockwell's dislike of the "the bullet-proof-vest wearing, heavily armed, jackbooted thugs" patrolling our borders for drugs. And, like Rockwell, I believe these trends can and should be opposed, and I see that people are beginning to oppose them.

On the other hand, Rockwell sounds like, and I can put it no more charitably, a complete lunatic. He is a man who observes the nasty cut on your finger, diagnoses cancer, and recommends the amputation of both arms and both legs. I cannot determine if his lunacy is sincere, if he actually believes what he says, or is simply some sort of cynical calculation to appeal to those in arrested adolescence, but this work is simple craziness.

Rockwell's definition of fascism is at least partially correct: what distinguishes fascism from other objectionable forms of government really is that fascism "exalts the police State as the source of order . . . and makes the executive State the unlimited master of society." Fascism is the location of all civic and public life within the state, which is absolutely controlled by its executive. But fascism requires not just that the state be large, but that the state control, or assert control, over everything, and that those individuals who are members of the executive assert their independence in principle from any restraint. And clearly by this definition, the United States government is not fascist. The government controls a lot, perhaps too much, but not only does it not control everything, it also does not even assert control over everything. The executive branch is very powerful, but not only is our executive not absolutely unrestrained, it also does not assert that it is in principle absolutely unrestrained. Not even Nixon or Bush fils asserted that the President can legitimately override an election. Fascism requires that civic life be explicitly and intentionally rooted exclusively in a state under the absolute control of an oligarchy or dictator, and this is simply not the case anywhere in the industrialized West.

Indeed, Rockwell does not even try to prove that the United States is really fascist. Instead, he names a laundry list of things he doesn't like, names them "marks" of fascism, and then tries to shoehorn modern events into these artificial markers. While his first two markers, unrestrained government power and de facto dictatorship, really are inherently fascistic, and his final two, militarism and imperialism, while hardly exclusively fascist, are at least objectionable, the three more, "immense bureaucracy," cartelism, autarky (economic self-sufficiency) have at best only an accidental resemblance to fascism. The sixth marker in Rockwell's list, government spending and borrowing, is a necessary function of any industrialized economy.

Where his markers are legitimate, Rockwell's case that the United States government actually fits these markers is contradictory and incoherent. For example, Rockwell says that most people would reject the characterization of the United States government as totalitarian "so long as they happen not to be directly ensnared in the State’s web." But the very definition of totalitarianism is that it that even the smallest act is "ensnared in the State’s web"; a totalitarian state is omnipresent and inescapable. Similarly, on the one hand, Rockwell asserts that fascism requires a dictatorship based on the leadership principle. But then he says, "The president is only the veneer, and the elections are only the tribal rituals we undergo to confer some legitimacy on the institution [of the executive branch]." If the president is not actually a "messiah," if he is only a figurehead, then where is the leadership principle? If the people really do consider the president du jour a messiah, then why does he content himself with a subordinate role? Rockwell is trying to have his cake and eat it too.

Rockwell's cure for our "fascism," a simple-minded anarchism that could appeal only to the ignorant and deluded person stuck in the mindless, aimless rebelliousness of arrested adolescence, is even more nonsensical. According to Rockwell, "No constitution, no election, no social contract will check" the power of the man with the guns. The only remedy is for "his powers distributed within and among the whole population." By "powers," Rockwell presumably means the actual guns, tanks, artillery, fighters, bombers, battleships, aircraft carriers, cruise missiles, and nuclear weapons that the government actually wields. No sane person could endorse such an obviously unrealistic proposal in reality. And Rockwell believes that the whole population "should be governed by the same forces that bring us all the blessings the material world affords us." Other than human beings with guns, he only "forces" we're governed by are physical laws, which we observe permit tyranny, oppression, slavery, imperialism, famine, plague, war, death, mopery on the high seas, and the Ice Capades.

When responding to literature this obviously unrealistic, it's difficult to determine the most charitable assumption about the authors intentions. If we presume Rockwell is sincere, then he must be so profoundly deluded as to approach actual clinical insanity. If he's sane, then he must be intentionally insincere. I'm not a psychiatrist, so if he's insane, there's nothing I can do. On the chance that he's simply insincere, I can at least speculate on his hidden motivation.

Rockwell is explicitly attempting to delegitimize the United States government at the institutional and constitutional level. As a revolutionary communist, I'm sympathetic to that position; although for reasons probably very different from Rockwell's, I consider our present government, while not precisely illegitimate, certainly far from ideal. On the other hand, what precisely does Rockwell want to delegitimize? One clue is the persistent Libertarian fetishization of money. Rockwell's article is the text of a talk delivered at the 2011 conference, "When Money Dies." In the article, Rockwell bemoans the end of the gold standard in 1973, with the result that "the money was destroyed and American savings were wiped out and the capital base of the economy was devastated. Rockwell denounces "the rise of fiat money that depreciated the currency, robbed savings, and shoved people into the workforce* as taxpayers." Indeed, Rockwell claims that fiat money is the foundation of fascism, it is

the wicked power to create the money necessary to fund this executive rule. . . . No government in the history of the world has spent as much, borrowed as much, and created as much fake money as the US. If the US doesn’t qualify as a fascist State in this sense, no government ever has.

All the other ills are incidental, what matters to Rockwell is money.

*I don't understand why a Libertarian would deprecate more people working as being "shoved into the workforce"; I suspect Rockwell is just chalking up talking points without being too worried about internal consistency.

But money requires government. Without government, money is both unnecessary and untenable. Without money, people can operate in quite sophisticated ways* using only social credit, which is, ironically enough, the fundamental example of a fiat currency: Any individual with social credit can create locally circulatable currency by simply signing an IOU. Indeed, this sort of ad hoc private fiat money resting on nothing but the good faith of the issuer was the primary medium of exchange during the height of the Islamic commercial empire (and the origin of the word, "check"). But circulating IOUs are not money in the sense of the gold standard that Rockwell refers to.

*Probably not sophisticated enough, however, to support a modern industrialized economy.

For money to be money in the gold standard sense, it must be be ubiquitous. If someone is going to pay me in seashells (or feathers, glass beads, portraits of dead presidents, or hunks of metal), I want to be absolutely certain that I can then use those seashells or whatever to pay the grocery, the hardware store, the lumberyard, the shoe store, and all the people I rely on to survive. (Remember that self-sufficiency, i.e. autarky, is a mark of fascism.) If I personally know them and they know me, then I don't need seashells; I need the seashells only if we don't personally know and trust each other. Thus I need someone I trust to make sure my seashells are good everywhere I go. Governments implement this ubiquity to some extent by legal tender laws, declaring that all debts may be satisfied by seashells. To a greater extent, governments implement ubiquity by collecting taxes in seashells. If (most) everyone needs to pay taxes in seashells, then they have an obvious motive to accept my seashells for food, nails, wood, shoes, etc. I have no need of seashells with people I know and trust, and without a government, I have no reason to believe that people I don't know and don't trust will accept my seashells. There's absolutely nothing about gold that magically makes it ubiquitous; a gold standard is a gold standard only if a government enforces legal tender laws coercing me into accepting gold in payment and enforcing taxation in gold.

Furthermore, for money to be money in the gold standard sense, debts in money must not only be enforceable but also differentially enforceable. Again, the whole issue with money is that it allows me to trade with people I don't personally know and trust. If I loan someone money, and he refuses to pay me back, I need to be able to send some "jackbooted thugs" over to his house and collect my money. Without the jackbooted thugs, I won't lend to anyone I don't know and trust, and I don't need money to lend to people I do know and trust: I'll lend them what they need directly, and trust them to give me what I need. On the other side, if I can simply arbitrarily enforce my will, I don't need actual money: I'll just send over the jackbooted thugs to enslave people directly. If there are jackbooted thugs collecting debts, I need to know they will only enforce their will only to collect money. Thus to have money we need to have coercion moderated by a social process, i.e. a government.

Even a more-or-less democratic republic such as the present-day United States doesn't need a "hard" currency; we've been doing well enough for about forty years on an explicitly fiat currency, about eighty years on a de facto fiat currency, and several centuries on private fiat currency, i.e. fractional reserve banking. There's only one kind of government that needs the appearance of a hard currency, and that's a plutocracy. They need it both to legitimize their own rule, and manage conflicts within the ruling class of the owners of money: instead of counting votes, they count gold bars.

Thus, if Rockwell is not simply deranged, we have to see his underlying motivation not as delegitimizing "the State" in general but rather delegitimizing the democratic foundation of the current state, even in its primitive, superficial form. As with Hazlitt, the foundation of Libertarianism is plutocracy.

Understanding Modern Money: Introduction.

Understanding Modern Money: The Key to Full Employment and Price Stability. L. Randall Wray. Cheltenham, UK: 1998. Pp. x + 198.

Chapter 1: Introduction
Chapter 2: Money and Taxes: The Chartalist Approach (coming soon)
Chapter 3: An Introduction to a History of Money (coming soon)

His phrasing is more scholarly, but in his introduction, University of Missouri, Kansas City professor of economics L. Randall Wray begins Understanding Modern Money by claiming that everything we know about money is wrong*. According to Wray, Governments can run a balanced budget only in the perfectly ideal case; in practice, a government must run a deficit, and there is no a priori optimal deficit or debt limit (1). It is not the monetary policy of the central bank but the fiscal policy of the Treasury that determines the value of money (1-2). The central bank does not determine the inflation rate by controlling the amount of money in circulation; indeed the central bank cannot control the money supply; the only effective tool the central bank has is determining the interest rate at which it supplies short-term bank reserves (2). The Treasury need not "finance" government operations with bond sales; bond sales serve only to "drain" excess bank reserves and the central bank effectively determines the bond interest rate (2). Just as Marx did to Hegel, Wray and the Modern Monetary Theorists want to turn our upside-down understanding of money back on its feet.

*with apologies to Firesign Theater

With this new understanding of money, Wray offers some alternatives to present economic and political policy. Rather than trying to manage incentives to achieve full or nearly full employment in the private sector (and provide welfare, because the private sector never actually manage to achieve high employment), the government can act as "'employer of last resort' by offering a job to anyone who wants to work at a nominal wage fixed by the government" (2-3). Instead of fixing the quantity of government purchases by direct policy and paying market rates for those purchases, the government can fix the anchor price of a key commodity, i.e. labor, and let the quantity consumed float, thus maintaining a "buffer stock" to maintain overall price stability (3). Wray believes this approach would deliver price stability and zero involuntary unemployment (3).

Wray continues by sketching a simple model. A government enforces a tax liability on its citizens, and determines "that which is necessary to pay taxes, (twintopt)." All governments today use "money" as twintopt; the terms are interchangeable. The government then purchases goods and services from its citizens in exchange for money, and the citizens supply goods and services so they can pay their taxes. People must receive enough money to have enough to pay their taxes, so total government purchases must at minimum equal the tax liability; in the long run, the government must at least operate a balanced budget and cannot operate a long-run surplus. Even if the government were the only consumer of goods and services, people would probably want to hoard some money, so they could be assured of paying future taxes, and some money will probably be "lost in the wash", so realistically, the government ought to operate a long-run deficit (4). The key points here are that tax liability precedes government purchases, and payment of money by the government precedes the collection of taxes.

The government can adjust the value of money in two ways: changing the nominal amount it demands in taxes and changing the nominal amount it pays for goods and services. If the government were to double its prices, while holding the tax liability constant, it should see a reduction in supply, as people would then be required to work half as hard to fulfill their tax liability. We would see a similar effect if the government held prices constant while halving the tax liability. Changing prices or liabilities in this way would generate "inflation" instead of increasing the quantity supplied (Wray 5). Fundamentally, the value of money is the relation between the tax liability and the prices paid by the government.

Of course, the government is not the only consumer of goods and services. Not everyone will need to pay taxes, and not everyone who needs to pay taxes will have goods and services the government wants. So people will also exchange money for goods and services among themselves (hence, as noted earlier, it behooves the government to supply more money by purchases than it demands in taxes, so they will have the money to do so). There can even be other forms of money (bank money), but there must be some correspondence between bank money and government money, i.e. twintopt (Wray 5). Even if the government is only a small part of the economy, its purchases and taxes will have an direct effect on the value of all kinds of money, bank money as well as twintopt (6). It is the special nature of government, its exogenous supply of money in exchange for goods and services to satisfy its exogenous imposition of tax liabilities that fundamentally sets the value of money.

The government can use its exogenous pricing power to control the aggregate price level. Wray argues that the government should not set the money price of each and every good independently; unless it matches those prices perfectly to the private market, private prices will have to deflate every time the private sector switches from the most efficient product to the next most efficient. But neither should the government accept market prices for everything; it can then control the price level only indirectly, by creating unemployment and underutilization of capital (7). Instead, governments can set the "anchor" price of one good and maintain a "buffer stock" of that good to support the price, and let other prices adjust around the anchor price. Historically, governments have used gold as the anchor price, but Wray argues that the poor substitutability and limited industrial use of gold renders it an inferior choice. A better choice would be oil; an even better choice would be unskilled labor (8-9).

Maintaining a buffer stock of unskilled labor to establish an anchor price has many benefits. All economic activities use some sort of labor, and even unskilled labor has high substitutability: unskilled labor can be trained, or processes using skilled labor can be reworked to use unskilled labor (9); rather than adjust aggregate price levels, the private economy can change how it uses labor. Unemployment by itself causes a number of social problems, and using unskilled labor as an anchor directly creates "full employment" (9): everyone who wants to work at the anchor price can do so; someone who can work but chooses not to is by definition not unemployed. Using unskilled labor will act as a "powerful 'automatic stabilizer'" (10). In recessions, more people would be employed by the government, pushing more money into the overall economy; during boom times, fewer people would be employed by the government, reducing the money the government pushes into the system (10-11). No system would be perfect (and the gold standard was so imperfect it was completely abandoned in 1971), but if Wray is correct, using unskilled labor would give us a satisfactory level of price and business-cycle stability while having many beneficial and few negative side effects.


You can read L. Randal Wray and other Modern Monetary Theorists at their blog, New Economic Perspectives

Money as electricity: an economic metaphor

It's tough to wrap your head around economics. The Infamous Brad does a better job than most, and he gets it way more right than a lot of professional economists, when he asserts that the government should act like a household with intermittent income. Basically, when your income comes in widely-spaced chunks, you should be frugal (spend less than you earn) when times are good so you can be profligate (spend more than you earn) during the lean times. This approach entails acting counter-cyclically. The alternative, acting cyclically, would be disastrous: when you have a lot of income, you spend it all (and maybe even more, because you expect you'll getting another windfall each month like clockwork, n'est pas); between paydays, you don't spend anything, letting your income-generating infrastructure decay. Brad describes the perfect way to manage a household with an intermittent income stream. If you think about government as such a household, you will be an adequate citizen and voter: when spending is put to a vote, you will almost always vote in such a way that the national economy does not collapse. You will not, however, actually understand how the national economy works, and managing the national economy like any kind of household, even a counter-cyclical intermittent-income household, is extremely limited. The government is fundamentally unlike a household.

A better metaphor — still imperfect, but closer to the truth — is to look at money like electricity, and the government like a nuclear power plant. Households have to allocate the supply of electricity amongst themselves, but the government is not part of that allocation, it is the ultimate supplier of electricity. Thus the financial wealth of a household is like its share of the supply of electricity, but the government is, by definition, "maximally wealthy", it has all the electricity.

Of course, you can't actually do anything with only electricity. Without toasters, refrigerators, stoves, electric cars, etc., a supply of electricity would be completely useless. So we have to use electricity and human time and energy, i.e. labor, to build toasters, refrigerators, etc., and then we have to use electricity and labor to operate those devices. And again, since there is a limited supply of electricity (and labor), we want to somehow allocate how much electricity each household uses. Households "spend" by actually using the electricity they're allocated to make toast, keep food cold, make dinner, or drive to the park, or to make toasters, refrigerators, stoves, or cars. Households can "save" electricity by not actually using some or all of the electricity they're allocated.

The analogy to a "depressed" economy is when people aren't using very much electricity; the analogy to an "overheated" economy is when people are using every kilowatt-hour the power plant can produce and wanting more. The question then becomes: how do we manage the nuclear power plant? As the administrators, we can either encourage people in general or specifically chosen people to use more or less electricity. We can also decide when to use electricity and labor to increase the capacity of the power plant: should we do so when people aren't using much electricity or when people are using a lot of electricity?

One feature of modern economics that this metaphor illustrates accurately is the nature of savings. It's very difficult and inefficient to physically save electricity: batteries are heavy, expensive, leaky, and they have very limited storage space relative to generating capacity. We can and should save physically save some electricity (the power plant tends to wear out faster if it's constantly changing the amount of electricity generated minute-by-minute, and there's a considerable time lag between the decision to increase or decrease the supply of electricity and the actual appearance of electricity on the grid). A much easier way to "save", however, is for one household to let another household physically use the first household's allocation of electricity for a month or so; in return, the second household will let the first use the second's allocation in some later month. From the perspective of the power plant, there's no change in the net usage of electricity, but from the households' perspective, the first has saved electricity one month and withdrawn their savings in the later month; the second has borrowed electricity from the first and paid it back later.

The power plant cannot itself save in this manner. It can, however, use the same sort of tools to help encourage or discourage electricity use among households. If some household has an allocation it doesn't want to use, and no one else wants to use it, the power plant can (if it chooses) "borrow" the allocation; there's never any problem with "paying it back," because of course the power plant generates electricity.

The metaphor makes counter-cyclical policy clearer.

When the economy is "overheated", when people are using as much electricity as the plant can produce, we want to strictly allocate who gets how much electricity. If one household can turn a kilowatt-hour of electricity into 2 toasters, and another can turn a kilowatt-hour into 2.1 toasters, we want to move the allocation of electricity from the first household to the second. When the economy is good, electricity should be in some sense "expensive".

It's tempting to say that when people are using all the electricity we have and are yelling for more, we should increase the capacity of the power plant. However, a couple of severe practical problems arise. First, it uses up a lot of electricity now to make all the things necessary to increase the production of electricity later. That means that to improve the plant when times are good means that everyone has to use less electricity, for quite a while, precisely at the time when they want more. No individual household wants to cut its own electrical usage; they all want those guys over there to cut theirs. Trying to negotiate an agreement to cut everyone's usage "fairly" is an exercise in herding cats. Besides, when electricity is "expensive", everyone will be trying individually to be more efficient in their use of electricity, which increases the effective amount of electricity, i.e. the number of toasters (and number of pieces of toast) per kilowatt-hour of electricity.

What does it mean to say the economy is "depressed"? It's not that people don't want to use electricity — we assume that people as a whole want as much electricity as they can get, up to infinity — it's that the people who have been allocated the use of electricity are trying to "save" it, but no one is "borrowing" it. (I think the money as electricity metaphor can illuminate why this state of affairs can happen, but it will require a whole 'nother post.) This is the time to make electricity "cheap". So you only make 1 toaster per kilowatt-hour; better to make the toaster than let the kilowatt-hour go to waste. Additionally, this is the perfect time to increase the capacity of the power plant: no private household is actually using the excess capacity, so no one will miss it when the power plant appropriates it to increase capacity. And sooner or later, when people start using a lot of electricity again, they'll welcome the increased capacity.

Like all metaphors, the money as electricity metaphor is inexact. We can make it correspond to economic reality a little more closely by adjusting our terms a little bit. "Electricity" corresponds more closely to labor power, the capacity to turn human time and energy into goods for consumption; using electricity is analogous to performing labor, transforming labor power into commodities. The power plant is more like a coal- or oil-fired plant: it takes considerable effort to generate electricity, corresponding to the effort it takes to feed, house, clothe, and otherwise provide for human workers; power plants wear out and need to be periodically reproduced, just as human beings age and die and we need to have and rear children to replace them. Money is the allocation or social permission to use electricity. When firms compete, they are competing (in part) to use electricity (turn labor power into commodities) more efficiently. Increasing the total amount of electricity is analogous to making labor power more efficient overall, with no one firm becoming "specially" efficient.