Money and Things – J. W. Mason

Taking Money Seriously

(Text of a talk I delivered at the Watson Institute for International and Public Affairs at Brown University on June 17, 2024.)

There is an odd dual quality to the world around us.

Consider a building. It has one, two or many stories; it’s made of wood, brick or steel; heated with oil or gas; with doors, windows and so on. If you could disassemble the building you could make a precise quantitative description of it — so many bricks, so much length of wire and pipe, so many tiles and panes of glass.

A building also has a second set of characteristics, that are not visible to the senses. Every building has an owner, who has more or less exclusive rights to the use of it. It has a price, reflected in some past or prospective sale and recorded on a balance sheet. It generates a stream of money payments. To the owner from tenants to whom the owner delegated som of their rights. From the owner to mortgage lenders and tax authorities, and to the people whose labor keeps them operating — or to the businesses that command that labor. Like the bricks in the building’s walls or the water flowing through its pipes, these can be expressed as numbers. But unlike those physical quantities, all of these can be expressed in the same way, as dollars or other units of currency.

What is the relationship between these two sets of characteristics? Do the prices and payments simply describe the or reflect the physical qualities? Or do they have their own independent existence?

My starting point is that this is a problem — that the answer is not obvious.

The relationship between money-world and the concrete social and material world is long-standing, though not always explicit, question in the history of economic thought. A central strand in that history is the search for an answer that unifies these two worlds into one.

From the beginnings of economics down to today’s textbooks, you can find variations on the argument that money quantities and money payments are just shorthand for the characteristics and use of concrete material objects. They are neutral — mere descriptions, which can’t change the underlying things.

In 1752, we find David Hume writing that “Money is nothing but the representation of labour and commodities… Where coin is in greater plenty; as a greater quantity of it is required to represent the same quantity of goods; it can have no effect, either good or bad.”

And at the turn of the 21st century, we hear the same thing from FOMC member Lawrence Meyer: “Monetary policy cannot influence real variables–such as output and employment.” Money, he says, only affects “inflation in the long run. This immediately makes price stability … the direct, unequivocal, and singular long-term objective of monetary policy.”

We could add endless examples in between.

This view profoundly shapes most of our thinking about the economy.

We’ve all heard that money is neutral — that changes in the supply or availability of money only affect the price level while leaving relative prices and real activity unchanged. We’ve probably encountered the Coase Theorem, which says that the way goods are allocated to meet real human needs should be independent of who holds the associated property rights. We are used to talking about “real” output and “real “ interest rates without worrying too much about what they refer to.

There is, of course, also a long history of arguments on the other side — that money is autonomous, that money and credit are active forces shaping the concrete world of production and exchange, that there is no underlying value to which money-prices refer. But for the most part, these counter-perspectives occupy marginal or subterranean positions in economic theory, though they may have been influential in other domains.

The great exception is, of course, Keynes. Indeed, there is an argument that what was revolutionary about the Keynesian revolution was his break with orthodoxy on precisely this point. In the period leading up to the General Theory, he explained that the difference between the economic orthodoxy and the new theory he was seeking to develop was fundamentally the difference between the dominant vision of the economy in terms of what he called “real exchange,” and an alternative he vision he described as “monetary production.”

The orthodox theory (in our day as well as his) started from an economy in which commodities exchanged for other commodities, and then brought money in at a later stage, if at all, without changing the fundamental material tradeoffs on which exchange was based. His theory, by contrast, would describe an economy in which money is not neutral, and in which the organization of production cannot be understood in nonmonetary terms. Or in his words, it is the theory of “an economy in which money plays a part of its own and affects motives and decisions and is … so that the course of events cannot predicted, either in the long period or in the short, without a knowledge of the behavior of money.”

If you are fortunate enough to have been educated in the Keynesian tradition, then it’s easy enough to reject the idea that money is neutral. But figuring out how money world and concrete social reality do connect — that is not so straightforward.

I’m currently in the final stages of writing a book with Arjun Jayadev, Money and Things, that is about exactly this question — the interface of money world with the social and material world outside of it.

Starting from Keynes monetary-production vision, we explore question of how money matters in four settings.

First, the determination of the interest rate. There is, we argue, a basic incompatibility between a theory of the interest rate as price of saving or of time, and of the monetary interest rate we observe in the real world. And once we take seriously the idea of interest as the price of liquidity, we see why money cannot be neutral — why financial conditions invariably influence the composition as well as the level of expenditure.

Second, price indexes and “real” quantities. The ubiquitous “real” quantities constructed by economists are, we suggest, at best phantom images of monetary quantities. Human productive activity is not in itself describable in terms of aggregate quantities. Obviously particular physical quantities, like the materials in this building, do exist. But there is no way to make a quantitative comparison between these heterogeneous things except on the basis of money prices — prices are not measuring any preexisting value. Prices within an exchange community are objective, from the point of view of those within the community. But there is no logically consistent procedure for comparing “real” output once you leave boundaries of a given exchange community, whether across time or between countries

The third area we look at the interface of money world and social reality is corporate finance and governance. We see the corporation as a central site of tension between the distinct social logics of money and production. Corporations are the central institutions of monetary production, but they are not themselves organized on market principles. In effect, the pursuit of profit pushes wealth owners to accept a temporary suspension of the logic of market – but this can only be carried so far.

The fourth area is debt and capital. These two central aggregates of money-world are generally understood to reflect “real,” nonmonetary facts about the world — a mass of means of production in the case of capital, cumulated spending relative to income in the case of debt. But the actual historical evolution of these aggregates cannot, we show, be understood in this way in either case. The evolution of capital as we observe it, in the form of wealth, is driven by changes in the value of existing claims on production, rather than the accumulation of new capital goods. These valuation changes in turn reflect, first, social factors influencing division of income between workers and owners and, second, financial factors influencing valuations of future income streams. Debt is indeed related to borrowing, in a way that capital is not related to accumulation. But changes in indebtedness over time owe as much to interest, income and price-level changes that affect burden of existing debt stock as they do to new borrowing. And in any case borrowing mainly finances asset ownership, as opposed to the dissaving that the real-excahnge vision imagines it as.

Even with the generous time allotted to me, I can’t discuss all four of those areas. So in this talk I will focus on the interest rate.

Some of what I am going to say here may seem familiar, or obvious.

But I think it’s important to start here because it is so central to debates about money and macroeconomics. Axel Leijonhufvud long ago argued that the theory of the interest rate was at the heart of the confusion in modern macroeconomics. “The inconclusive quarrels … that drag on because the contending parties cannot agree what the issue is, largely stem from this source.” I think this is still largely true.

Orthodoxy thinks of the interest rate as the price of savings, or loanable funds, or alternatively, as the tradeoff between consumption in the future and consumption in the present.

Interest in this sense is a fundamentally non-monetary concept. It is a price of two commodities, based on the same balance of scarcity and human needs that are the basis of other prices. The tradeoff between a shirt today and a shirt next year, expressed in the interest rate, is no different between the tradeoff between a cotton shirt and a linen one, or one with short versus long sleeves. The commodities just happen to be distinguished by time, rather than some other quality.

Monetary loans, in this view, are just like a loan of a tangible object. I have a some sugar, let’s say. My neighbor knocks on the door, and asks to borrow it. If I lend it to them, I give up the use of it today. Tomorrow, the neighbor will return the same amount of sugar to me, plus something extra – perhaps one of the cookies they baked with it. Whatever income you receive from ownership of an asset — whether we call it interest, profit or cookies — is a reward for deferring your use of the concrete services that the asset provides.

This way of thinking about interest is ubiquitous in economics. In the early 19th century Nassau Senior described interest as the reward for abstinence, which gives it a nice air of Protestant morality. In a current textbook, in this case Gregory Mankiw’s, you can find the same idea expressed in more neutral language: “Saving and investment can be interpreted in terms of supply and demand … of loanable funds — households lend their savings to investors or deposit their savings in a bank that then loans the funds out.”

It’s a little ambiguous exactly how we are supposed to imagine these funds, but clearly they are something that already exists before the bank comes into the picture. Just as with the sugar, if their owner is not currently using them, they can lend them to someone else, and get a reward for doing so.

If you’ve studied macroeconomics at the graduate level, you probably spent much of the semester thinking about variations on this story of tradeoffs between stuff today and stuff in the future, in the form of an Euler equation equating marginal costs and benefits across time. It’s not much of an exaggeration to say that mathematically elaborated versions of this story are the contemporary macro curriculum.

Money and finance don’t come into this story. As Mankiw says, investors can borrow from the public directly or indirectly via banks – the economic logic is the same either way.

We might challenge this story from a couple of directions.

One criticism — first made by Piero Sraffa, in a famous debate with Friedrich Hayek about 100 years ago — is that in a non monetary world each commodity will have its own distinct rate of interest. Let’s say a pound of flour trades for 1.1 pounds (or kilograms) of flour a year from now. What will a pound or kilo of sugar today trade for? If, over the intervening year, the price of usage rises relative to the price of flour, then a given quantity of sugar today will trade for a smaller amount of sugar a year from now, than the same quantity of flour will. Unless the relative price of flour and sugar are fixed, their interest rates will be different. Flour today will trade at one rate for flour in the future, sugar at a different rate; the use of a car or a house, a kilowatt of electricity, and so on will each trade with the same thing in the future at their own rates, reflecting actual and expected conditions in the markets for each of these commodities. There’s no way to say that any one of these myriad own-rates is “the” rate of interest.

Careful discussions of the natural rate of interest will acknowledge that it is only defined under the assumption that relative prices never change.

Another problem is that the savings story assumes that the thing to be loaned — whether it is a specific commodity or generic funds — already exists. But in the monetary economy we live in, production is carried out for sale. Things that are not purchased, will not be produced. When you decide not to consume something, you don’t make that thing available for someone else. Rather, you reduce the output of it, and the income of the producers of it, by the same amount as you reduce your own consumption.

Saving, remember, is the difference between income and consumption. For you as an individual, you can take my income as given when deciding how much to consume. So consuming less means saving more. But at the level of the economy as a whole, income is not independent of consumption. A decision to consume less does not raise aggregate saving, it lowers aggregate income. This is the fallacy of consumption emphasized by Keynes: individual decisions about consumption and saving have no effect on aggregate saving.

So the question of how the interest rate is determined, is linked directly to the idea of demand constraints.

Alternatively, rather than criticizing the loanable-funds story, we can start from the other direction, from the monetary world we actually live in. Then we’ll see that credit transactions don’t involve the sort of tradeoff between present and future that orthodoxy focuses on.

Let’s say you are buying a home.

On the day that you settle , you visit the bank to finalize your mortgage. The bank manager puts in two ledger entries: One is a credit to your account, and a liability to the bank, which we call the deposit. The other, equal and offsetting entry is a credit to the bank’s own account, and a liability for you. This is what we call the loan. The first is an IOU from the bank to you, payable at any time. The second is an IOU from you to the bank, with specified payments every month, typically, in the US, for the next 30 years. Like ordinary IOUs, these ledger entries are created simply by recording them — in earlier times it was called “fountain pen” money.

The deposit is then immediately transferred to the seller, in return for the title to the house. For the bank, this simply means changing the name on the deposit — in effect, you communicate to the bank that their debt that was payable to you, is now payable to the seller. On your balance sheet, one asset has been swapped for another — the $250,000 deposit, in this case, for a house worth $250,000. The seller makes the opposite swap, of the title to a house for an equal value IOU from the bank.

As we can see, there is no saving or dissaving here. Everyone has just swapped assets of equal value.

This mortgage is not a loan of preexisting funds or of anything else. No one had to first make a deposit at the bank in order to allow them to make this loan. The deposit — the money — was created in the process of making the loan itself. Banking does not channel saving to borrowing as in the loanable-funds view, but allows a swap of promises.

One thing I always emphasize to my students: You should not talk about putting money in the bank. The bank’s record is the money.

On one level this is common knowledge. I am sure almost everyone in this room could explain how banks create money. But the larger implications are seldom thought through.

What did this transaction consist of? A set of promises. The bank made a promise to the borrowers, and the borrowers made a promise to the bank. And then the bank’s promise was transferred to the sellers, who can transfer it to some third party in turn.

The reason that the bank is needed here is because you cannot directly make a promise to the seller.

You are willing to make a promise of future payments whose present value is worth more than the value the seller puts on their house. Accepting that deal will make both sides better off. But you can’t close that deal, because your promise of payments over the next 30 years is not credible. They don’t know if you are good for it. They don’t have the ability to enforce it. And even they trust you, maybe because you’re related or have some other relationship, other people do not. So the seller can’t turn your promise of payment into an immediate claim on other things they might want.

Orthodox theory starts from assumption that everyone can freely contract over income and commodities at any date in the future. That familiar Euler equation is based on the idea that you can allocate your income from any future period to consumption in the present, or vice versa. That is the framework within which the interest rate looks like a tradeoff between present and future. But you can’t understand interest in a framework that abstracts away from precisely the function that money and credit play in real economies.

The fundamental role of a bank, as Hyman Minsky emphasized, is not intermediation but acceptance. Banks function as third parties who broaden the range of transactions that can take place on the basis of promises. You are willing to commit to a flow of money payments to gain legal rights to the house. But that is not enough to acquire the house. The bank, on the other hand, precisely because its own promises are widely trusted, is in a position to accept a promise from you.

Interest is not paid because consumption today is more desirable than consumption in the future. Interest is paid because credible promises about the future are hard to make.

The cost of the mortgage loan is not that anyone had to postpone their spending. The cost is that the balance sheets of both transactors have become less liquid.

We can think of liquidity in terms of flexibility — an asset or a balance sheet position is liquid insofar as it broadens your range of options. Less liquidity, means fewer options.

For you as a homebuyer, the result of the transaction is that you have committed yourself to a set of fixed money payments over the next 30 years, and acquired the legal rights associated with ownership of a home. These rights are presumably worth more to you than the rental housing you could acquire with a similar flow of money payments. But title to the house cannot easily be turned back into money and thereby to claims on other parts of the social product. Home ownership involves — for better or worse — a long-term commitment to live in a particular place. The tradeoff the homebuyer makes by borrowing is not more consumption today in exchange for less consumption tomorrow. It is a higher level of consumption today and tomorrow, in exchange for reduced flexibility in their budget and where they will live. Both the commitment to make the mortgage payments and the non-fungibility of home ownership leave less leeway to adapt to unexpected future developments.

On the other side, the bank has added a deposit liability, which requires payment at any time, and a mortgage asset which in itself promises payment only on a fixed schedule in the future. This likewise reduces the bank’s freedom of maneuver. They are exposed not only to the risk that the borrower will not make payments, but also to the risk of capital loss if interest rates rise during the period they hold the mortgage, and to the risk that the mortgage will not be saleable in an emergency, or only at an unexpectedly low price. As real world examples like, recently, Silicon Valley Bank show, these latter risks may in practice be much more serious than the default risk. The cost to the bank making the loan is that its balance sheet becomes more fragile.

Or as Keynes put it in a 1937 article, “The interest rate … can be regarded as being determined by the interplay of the terms on which the public desires to become more or less liquid and those on which the banking system is ready to become more or less unliquid.”

Of course in the real world things are more complicated. The bank does not need to wait for the mortgage payments to be made at the scheduled time. It can transfer the mortgage to a third party, trading off some of the income it expected for a more liquid position. The buyer might be some other financial institution looking for a position farther toward the income end of the liquidity-income tradeoff, perhaps with multiple layers of balance sheets in between. Or the buyer might be the professional liquidity-providers at the central bank.

Incidentally, this is an answer to a question that people don’t ask often enough: How is it that the central bank is able to set the interest rate at all? The central bank plays no part in the market for loanable funds. But central banks are very much in the liquidity business.

It is monetary policy, after all, not savings policy.

One thing this points to is that there is no fundamental difference between routine monetary policy and the central bank’s role as a lender of last resort and a regulator. All of these activities are about managing the level of liquidity within the financial system. How easy is it to meet your obligations. Too hard, and the web of obligations breaks. Too easy, and the web of money obligations loses its ability to shape our activity, and no longer serves as an effective coordination device.

As the price of money — the price for flexibility in making payments as opposed to fixed commitments — the interest rate is a central parameter of any monetary economy. The metaphor of “tight” or “loose” conditions for high or low interest rates captures an important truth about the connection between interest and the flexibility or rigidity of the financial system. High interest rates correspond to a situation in which promises of future payment are worth less in terms of command over resources today. When it’s harder to gain control over real resources with promises of future payment, the pattern of today’s payments is more tightly linked to yesterday’s income. Conversely, low interest rates mean that a promise of future payments goes a long way in securing resources today. That means that claims on real resources therefore depend less on incomes in the past, and more on beliefs about the future. And because interest rate changes always come in an environment of preexisting money commitments, interest also acts as a scaling variable, reweighting the claims of creditors against the income of debtors.

In addition to credit transactions, the other setting in which interest appears in the real world is in the price of existing assets.

A promise of money payments in the future becomes an object in its own right, distinct from those payments themselves. I started out by saying that all sorts of tangible objects have a shadowy double in money-world. But a flow of money payments can also acquire a phantom double. A promise of future payment creates a new property right, with its owner and market price.

When we focus on that fact, we see an important role for convention in the determination of interest. To some important extent, bond prices – and therefore interest rates – are what they are, because that is what market participants expect them to be.

A corporate bond promises a set of future payments. It’s easy in a theoretical world of certainty, to talk as if the bond just is those future payments. But it is not.

This is not just because it might default, which is easy to incorporate into the model. It’s not just because any real bond was issued in a certain jurisdiction, and conveys rights and obligations beyond payment of interest — though these other characteristics always exist and can sometimes be important. It’s because the bond can be traded, and has a price which can change independent of the stream of future payments.

If interest rates fall, your bond’s price will rise — and that possibility itself is a factor in the price of the bond.

This helps explain a widely acknowledged anomaly in financial markets. The expectation hypothesis says that the interest rate on a longer bond should be the same as the average of shorter rates over the same period, or at least that they should be related by a stable term premium. This seems like a straightforward arbitrage, but it fails completely, even in its weaker form.

The answer to this puzzle is an important part of Keynes’ argument in The General Theory. Market participants are not just interested in the two payment streams. They are interested in the price of the long bond itself.

Remember, the price of an asset always moves inversely with its yield. When rates on a given type of credit instrument go up, the price of that instrument falls. Now let’s say it’s widely believed that a 10 year bond is unlikely to trade below 2 percent for very long. Then you would be foolish to buy it at a yield much below 2 percent, because you are going to face a capital loss when yields return to their normal level. And if most people believe this, then the yield never will fall below 2 percent, no matter what happens with short rates.

In a real world where the future is uncertain and monetary commitments have their own independent existence, there is an important sense in which interest rates, especially longer ones, are what they are because that’s what people expect them to be.

One important implication of this is that we cannot think of various market interest rates as simply “the” interest rate, plus a risk premium. Different interest rates can move independently for reasons that have nothing to do with credit risk.

On the one hand, we have a body of theory built up on the idea of “the” interest rate as a tradeoff between present and future consumption. On the other, we have actual interest rates, set in the financial system in quite different ways.

People sometimes try to square the circle with the idea of a natural rate. Yes, they say, we know about liquidity and the term premium and the importance of different kinds of financial intermediaries and regulation and so on. But we still want to use the intertemporal model we were taught in graduate school. We reconcile this by treating the model as an analysis of what the interest rate ought to be. Yes, banks set interest rates in all kinds of ways, but there is only one interest rate consistent with stable prices and, more broadly, appropriate use of society’s resources. We call this the natural rate.

This idea was first formulated around the turn of the 20th century by Swedish economist Knut Wicksell. But the most influential modern statement comes from Milton Friedman. He introduces the natural rate of interest, along with its close cousin the natural rate of unemployment, in his 1968 Presidential Address to the American Economics Association, which has been described as the most influential paper in economics since World War II. The natural rates there correspond to the rates that would be “ground out by the Walrasian system of general equilibrium equations, provided there is imbedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demands and supplies, the cost of gathering information … and so on.”

The appeal of the concept is clear: It provides a bridge between the nonmonetary world of intertemporal exchange of economic theory, and the monetary world of credit contracts in which we actually live. In so doing, it turns the intertemporal story from a descriptive one to a prescriptive one — from an account of how interest rates are determined, to a story about how central banks should conduct monetary policy.

Fed Chair Jerome Powell gave a nice example of how central bankers think of the natural rate in a speech a few years ago. He introduces the natural interest rate R* with the statement that “In conventional models of the economy, major economic quantities … fluctuate around values that are considered ‘normal,’ or ‘natural,’ or ‘desired.’” R* reflects “views on the longer-run normal values for … the federal funds rate” which are based on “ fundamental structural features of the economy.”

Notice the confusion here between the terms normal, natural and desired, three words with quite different meanings. R* is apparently supposed to be the long-term average interest rate, and the interest rate that we would see in a world governed only fundamentals and the interest rate that delvers the best policy outcomes.

This conflation is a ubiquitous and essential feature of discussions of natural rate. Like the controlled slipping between the two disks of a clutch in a car, it allows systems moving in quite different ways to be joined up without either side fracturing from the stress. The ambiguity between these distinct meanings is itself normal, natural and desired.

The ECB gives perhaps an even nicer statement: “At its most basic level, the interest rate is the ‘price of time’ — the remuneration for postponing spending into the future.” R* corresponds to this. It is a rate of interest determined by purely non monetary factors, which should be unaffected by developments in the financial system. Unfortunately, the actual interest rate may depart from this. In that case, the natural rate, says the ECB, “while unobservable … provides a useful guidepost for monetary policy.”

I love the idea of an unobservable guidepost. It perfectly distills the contradiction embodied in the idea of R*.

As a description of what the interest rate is, a loanable-funds model is merely wrong. But when it’s turned into a model of the natural rate, it isn’t even wrong. It has no content at all. There is no way to connect any of the terms in the model with any observable fact in the world.

Go back to Friedman’s formulation, and you’ll see the problem: We don’t possess a model that embeds all the “actual structural characteristics” of the economy. For an economy whose structures evolve in historical time, it doesn’t make sense to even imagine such a thing.

In practice, the short-run natural rate is defined as the one that results in inflation being at target — which is to say, whatever interest rate the central bank prefers.

The long-run natural rate is commonly defined as the real interest rate where “all markets are in equilibrium and there is therefore no pressure for any resources to be redistributed or growth rates for any variables to change.” In this hypothetical steady state, the interest rate depends only on the same structural features that are supposed to determine long-term growth — the rate of technical progress, population growth, and households’ willingness to defer consumption.

But there is no way to get from the short run to the long run. The real world is never in a situation where all markets are in equilibrium. Yes, we can sometimes identify long-run trends. But there is no reason to think that the only variables that matter for those trends are the ones we have chosen to focus on in a particular class of models. All those “actual structural characteristics” continue to exist in the long run.

The most we can say is this: As long as there is some reasonably consistent relationship between the policy interest rate set by the central bank and inflation, or whatever its target is, then there will be some level of the policy rate that gets you to the target. But there’s no way to identify that with “the interest rate” of a theoretical model. The current level of aggregate spending in the economy depends on all sorts of contingent, institutional factors, on sentiment, on choices made in the past, on the whole range of government policies. If you ask, what policy interest rate is most likely to move inflation toward 2 percent, all that stuff matters just as much as the supposed fundamentals.

The best you can do is set the policy rate by whatever rule of thumb or process you prefer, and then after the fact say that there must be some model where that would be the optimal choice.

Michael Woodford is the author of Interest and Prices, one of the most influential efforts to incorporate monetary policy into a modern macroeconomic model. He pretty explicitly acknowledges that’s what he was doing — trying to backfill a theory to explain the choices that central banks were already making.

What are the implications of this?

First, with regard to monetary policy, let’s acknowledge that it involves political choices made to achieve a variety of often conflicting social goals. As Ben Braun and others have written about very insightfully.

Second, recognizing that interest is the price of liquidity, set in financial markets, is important for how we think about sovereign debt.

There’s a widespread story about fiscal crises that goes something like this. First, a government’s fiscal balance (surplus or deficit) over time determines its debt-GDP ratio. If a country has a high debt to GDP, that’s the result of overspending relative to tax revenues. Second, the debt ratio determines to market confidence; private investors do not want to buy the debt of a country that has already issued too much. Third, the state of market confidence determines the interest rate the government faces, or whether it can borrow at all. Fourth, there is a clear line where high debt and high interest rates make debt unsustainable; austerity is the unavoidable requirement once that line is passed. And finally, when austerity restores debt sustainability, that will contribute to economic growth.

Alberto Alesina was among the most vigorous promoters of this story, but it’s a very common one.

If you accept the premises, the conclusions follow logically. Even better, they offer the satisfying spectacle of public-sector hubris meeting its nemesis. But when we look at debt as a monetary phenomenon, we see that its dynamics don’t run along such well-oiled tracks.

First of all, as a historical matter, differences in growth, inflation and interest rates are at least as important as the fiscal position in determining the evolution of the debt ratio over time. Where debt is already high, moderately slower growth or higher interest rates can easily raise the debt ratio faster than even very large surpluses can reduce it – as many countries subject to austerity have discovered. Conversely, rapid economic growth and low interest rates can lead to very large reductions in the debt ratio without the government ever running surpluses, as in the US and UK after World War II. More recently, Ireland reduced its debt-GDP ratio by 20 points in just five years in the mid-1990s while continuing to run substantial deficits, thanks to very fast growth of the “Celtic tiger” period.

At the second step, market demand for government debt clearly is not an “objective” assessment of the fiscal position, but reflects broader liquidity conditions and the self-confirming conventional expectations of speculative markets. The claim that interest rates reflect the soundness or otherwise of public budgets runs up against a glaring problem: The financial markets that recoil from a country’s bonds one day were usually buying them eagerly the day before. The same markets that sent interest rates on Spanish, Portuguese and Greek bonds soaring in 2010 were the ones snapping up their public and private debt at rock-bottom rates in the mid-2000s. And they’re the same markets that returned to buying those countries debt at historically low levels today, even as their debt ratios, in many cases, remained very high.

People like Alesina got hopelessly tangled up on this point. They wanted to insist both that post-crisis interest rates reflected an objective assessment of the state of public finances, and that the low rates before the crisis were the result of a speculative bubble. But you can’t have it both ways.

This is not to say that financial markets are never a constraint on government budgets. For most of the world, which doesn’t enjoy the backstop of a Fed or ECB, they very much are. But we should never imagine that financial conditions are an objective reflection of a country’s fiscal position, or of the balance of savings and investment.

The third big takeaway, maybe the biggest one, is that money is never neutral.

If the interest rate is a price, what it is a price of is not “saving” or the willingness to wait. It is not “remuneration for deferring spending,” as the ECB has it. Rather, it is of the capacity to make and accept promises. And where this capacity really matters, is where finance is used not just to rearrange claims on existing assets and resources, but to organize the creation of new ones. The technical advantages of long lived means of production and specialized organizations can only be realized if people are in a position to make long-term commitments. And in a world where production is organized mainly through money payments, that in turn depends on the degree of liquidity.

There are, at any moment, an endless number of ways some part of society’s resources could be reorganized so as to generate greater incomes, and hopefully use values. You could open a restaurant, or build a house, or get a degree, or write a computer program, or put on a play. The physical resources for these activities are not scarce; the present value of the income they can generate exceeds their costs at any reasonable discount rate. What is scarce is trust. You, starting on a project, must exercise a claim on society’s resources now; society must accept your promise of benefits later. The hierarchy of money allows participants in various collective projects to substitute trust in a third party for trust in each other. But trust is still the scarce resource.

Within the economy, some activities are more trust-intensive, or liquidity-constrained, than others.

Liquidity is more of a problem when there is a larger separation between outlays and rewards, and when rewards are more uncertain.

Liquidity is more of the problem when the scale of the outlay required is larger.

Liquidity and trust are more important when decisions are irreversible.

Trust is more important when something new is being done.

Trust is more scarce when we are talking about coordination between people without any prior relationship.

These are the problems that money and credit help solve. Abundant money does not just lead people to pay more for the same goods. It shifts their spending toward things that require bigger upfront payments and longer-term commitments, and that are riskier.

I was listening to an interview with an executive from wind-power company on the Odd Lots podcast the other day. “We like to say that our fuel is free,” he said. “But really, our fuel is the cost of capital.” The interest rate matters more for wind power than for gas or coal, because the costs must be paid almost entirely up front, as opposed to when the power is produced.

When costs and returns are close together, credit is less important.

In settings where ongoing relationships exist, money is less important as a coordinating mechanism. Markets are for arms-length transactions between strangers.

Minsky’s version of the story emphasizes that we have to think about money in terms of two prices, current production and long-lived assets. Long-lived assets must be financed – acquiring one typically requires committing to a series of future payments . So their price is sensitive to the availability of money. An increase in the money supply — contra Hume, contra Meyer — does not raise all prices in unison. It disproportionately raises the price of long-lived assets, encouraging production of them. And it is long-lived assets that are the basis of modern industrial production.

The relative value of capital goods, and the choice between more and less capital-intensive production techniques, depends on the rate of interest. Capital goods – and the corporations and other long-lived entities that make use of them – are by their nature illiquid. The willingness of wealth owners to commit their wealth to these forms depends, therefore, on the availability of liquidity. We cannot analyze conditions of production in non-monetary terms first and then afterward add money and interest to the story. Conditions of production themselves depend fundamentally on the network of money payments and commitments that structure them, and how flexible that network is.

Taking money seriously requires us to reconceptualize the real economy.

The idea of the interest rate as the price of saving assumes, as I mentioned before, that output already exists to be either consumed or saved. Similarly, the idea of interest as an intertemporal price — the price of time, as the ECB has it — implies that future output is already determined, at least probabilistically. We can’t trade off current consumption against future consumption unless future consumption already exists for us to trade.

Wicksell, who did as much as anyone to create the natural-rate framework of today’s central banks, captured this aspect of it perfectly when he compared economic growth to wine barrels aging in the cellar. The wine is already there. The problem is just deciding when to open the barrels — you would like to have some wine now, but you know the wine will get better if you wait.

In policy contexts, this corresponds to the idea of a level of potential output (or full employment) that is given from the supply side. The productive capacity of the economy is already there; the most that money, or demand, can accomplish is managing aggregate spending so that production stays close to that capacity.

This is the perspective from which someone like Lawrence Meyer, or Paul Krugman for that matter, says that monetary policy can only affect prices in the long run. They assume that potential output is already given.

But one of the big lessons we have learned from the past 15 years of macroeconomic instability is that the economy’s productive potential is much more unstable, and much less certain, than economists used to think. We’ve seen that the labor force grows and shrinks in response to labor market conditions. We’ve seen that investment and productivity growth are highly sensitive to demand. If a lack of spending causes output to fall short of potential today, potential will be lower tomorrow. And if the economy runs hot for a while, potential output will rise.

We can see the same thing at the level of individual industries. One of the most striking, and encouraging developments of recent years has been the rapid fall in costs for renewable energy generation. It is clear that this fall in costs is the result, as much as the cause, of the rapid growth in spending on these technologies. And that in turn is largely due to successful policies to direct credit to those areas.

A perspective that sees money as epiphenomenal to the “real economy” of production would have ruled out that possibility.

This sort of learning by doing is ubiquitous in the real world. Economists prefer to assume decreasing returns only because that’s an easy way to get a unique market equilibrium.

This is one area where formal economics and everyday intuition diverge sharply. Ask someone whether they think that buying more or something, or making more of something, will cause the unit price to go up or down. If you reserve a block of hotel rooms, will the rooms be cheaper or more expensive than if you reserve just one? And then think about what this implies about the slope of the supply curve.

There’s a wonderful story by the great German-Mexican writer B. Traven called “Assembly Line.” The story gets its subversive humor from a confrontation between an American businessman, who takes it for granted that costs should decline with output, and a village artisan who insists on actually behaving like the textbook producer in a world of decreasing returns.

In modern economies, if not in the village, the businessman’s intuition is correct. Increasing returns are very much the normal case. This means that multiple equilibria and path dependence are the rule. And — bringing us back to money — that means that what can be produced, and at what cost, is a function of how spending has been directed in the past.

Taking money seriously, as its own autonomous social domain, means recognizing that social and material reality is not like money. We cannot think of it in terms of a set of existing objects to be allocated, between uses or over time. Production is not a quantity of capital and a quantity of labor being combined in a production function. It is organized human activity, coordinated in a variety of ways, aimed at open-ended transformation of the world whose results are not knowable in advance.

On a negative side, this means we should be skeptical about any economic concept described as “natural” or “real”. These are very often an attempt to smuggle in a vision of a non monetary economy fundamentally different from our own, or to disguise a normative claim as a positive one, or both.

For example, we should be cautious about “real” interest rates. This term is ubiquitous, but it implicitly suggests that the underlying transaction is a swap of goods today for goods tomorrow, which just happens to take monetary form. But in fact it’s a swap of IOUs — one set of money payments for another. There’s no reason that the relative price of money versus commodities would come into it.

And in fact, when we look historically, before the era of inflation-targeting central banks there was no particular relationship between inflation and interest rates.

We should also be skeptical of the idea of real GDP, or the price level. That’s another big theme of the book, but it’s beyond the scope of today’s talk.

On the positive side, this perspective is, I think, essential preparation to explore when and in what contexts finance matters for production. Obviously, in reality, most production coordinated in non-market ways, both within firms — which are planned economies internally — and through various forms of economy-wide planning. But there are also cases where the distribution of monetary claims through the financial system is very important. Understanding which specific activities are credit-constrained, and in what circumstances, seems like an important research area to me, especially in the context of climate change.

Let me mention one more direction in which I think this perspective points us.

As I suggested, the idea of the interest rate as the price of time, and the larger real-exchange vision of which it is part, treats money flows and aggregates as stand-ins for an underlying nonmonetary real economy. People who take this view tend not be especially concerned with exactly how the monetary values are constructed. Which rate, out of the complex of interest rates, is “the” interest rate? Which f the various possible inflation rates, and over what period, do we subtract to get the “real” interest rate? What payments exactly are included in GDP, and what do we do if that changes, or if it’s different in different countries?

If we think of the monetary values as just proxies for some underlying “real” value, the answers to these questions don’t really matter.

I was reading a paper recently that used the intensity of nighttime illumination across the Earth’s surface as an alternative measure of real output. It’s an interesting exercise. But obviously, if that’s the spirit you are approaching GDP in, you don’t worry about how the value of financial services is calculated, or on what basis we are imputing the services of owner-occupied housing. The number produced by the BEA is just another proxy for the true value of real output, that you can approximate in all kinds of other ways.

On the other hand, if you think that the money values are what is actually real — if you don’t think they are proxies for any underlying material quantity — then you have to be very concerned with the way they are calculated. If the interest rate really does mean the payments on a loan contract, and not some hypothetical exchange rate between the past and the future, then you have to be clear about which loan contract you have in mind.

Along the same lines, most economists treat the object of inquiry as the underlying causal relationships in the economy, those “fundamental structural characteristics” that are supposed to be stable over time. Recall that the natural rate of interest is explicitly defined with respect to a long run equilibrium where all macroeconomic variables are constant, or growing at a constant rate. If that’s how you think of what you are doing, then specific historical developments are interesting at most as case studies, or as motivations for the real work, which consists of timeless formal models.

But if we take money seriously, then we don’t need to postulate this kind of underlying deep structure. If we don’t think of interest in terms of a tradeoff between the present and the future, then we don’t need to think of future income and output as being in any sense already determined. And if money matters for the activity of production, both as financing for investment and as demand, then there is no reason to think the actual evolution of the economy can be understood in terms of a long-run trend determined by fundamentals.

The only sensible object of inquiry in this case is particular events that have happened, or might happen.

Approaching our subject this way means working in terms of the variables we actually observe and measure. If we study GDP, it is GDP as the national accountants actually define it and measure it, not “output” in the abstract. These variables are generally monetary.

It means focusing on explanations for specific historical developments, rather than modeling the behavior of “the economy” in the abstract.

It means elevating descriptive work over the kinds of causal questions that economists usually ask. Which means broadening our empirical toolkit away from econometrics.

These methodological suggestions might seem far removed from alternative accounts of the interest rate. But as Arjun and I have worked on this book, we’ve become convinced that the two are closely related. Taking money seriously, and rejecting conventional ideas of the real economy, have far-reaching implications for how we do economics.

Recognizing that money is its own domain allows us to see productive activity as an open-ended historical process, rather than a static problem of allocation. By focusing on money, we can get a clearer view of the non-monetary world — and, hopefully, be in a better position to change it.

Keynes and Socialism

(Text of a talk I delivered at the Neubauer Institute in Chicago on April 5, 2024.)

My goal in this talk is to convince you that there is a Keynesian vision that is much more radical and far-reaching then our familiar idea of Keynesian economics.

I say “a” Keynesian vision. Keynes was an outstanding example of his rival Hayek’s dictum that no one can be a great economist who is only an economist. He was a great economist, and he was many other things as well. He was always engaged with the urgent problems of his day; his arguments were intended to address specific problems and persuade specific audiences, and they are not always easy to reconcile. So I can’t claim to speak for the authentic Keynes. But I think I speak for an authentic Keynes. In particular, the argument I want to make here is strongly influenced by the work of Jim Crotty, whose efforts to synthesize the visions of Keynes and of Marx were formative for me, as for many people who have passed through the economics department at the University of Massachusetts.

Where should we begin? Why not at the beginning of the Keynesian revolution? According to Luigi Passinetti, this has a very specific date: October 1932. That is when Keynes returned to King’s College in Cambridge for the Michaelmas term to deliver, not his old lectures on “The Pure Theory of Money,” but a new set of lectures on “The Monetary Theory of Production”. In an article of the same title written around the same time, he explained that the difference between the economic orthodoxy of the “the theory which I desiderate” was fundamentally the difference between a vision of the economy in terms of what he called “real exchange” and of monetary production. The lack of such a theory, he argued, was “the main reason why the problem of crises remains unsolved.”

The obvious distinction between these two visions is whether money can be regarded as neutral; and more particularly whether the interest rate can be thought of — as the textbook of economics of our times as well as his insist — as the price of goods today versus goods tomorrow, or whether we must think of it as, in some sense, the price of money.

But there is a deeper distinction between these two visions that I think Keynes also had in mind. On the ones side, we may think of economic life fundamentally in terms of objects — material things that can be owned and exchanged, which exist prior to their entry into economic life, and which have a value — reflecting the difficulty of acquiring them and their capacity to meet human needs. This value merely happens to be represented in terms of money. On the other side, we may think of economic life fundamentally in terms of collective human activity, an organized, open-ended process of transforming the world, a process in which the pursuit of money plays a central organizing role.

Lionel Robbins, also writing in 1932, gave perhaps the most influential summary of the orthodox view when he wrote that economics is the study of the allocation of scarce means among alternative uses. For Keynes, by contrast, the central problem is not scarcity, but coordination. And what distinguishes the sphere of the economy from other areas of life is that coordination here happens largely through money payments and commitments.

From Robbins’ real-exchange perspective, the “means” available to us at any time are given, it is only a question of what is the best use for them. For Keynes, the starting point is coordinated human activity. In a world where coordination failures are ubiquitous, there is no reason to think — as there would be if the problem were scarcity — that satisfying some human need requires withdrawing resources from meeting some other equally urgent need. (In 1932, obviously, this question was of more than academic interest.) What kinds of productive activity are possible depends, in particular, on the terms on which money is available to finance it and the ease with which its results can be converted back into money. It is for this reason, as Keynes great American successor Hyman Minsky emphasized, that money can never be neutral.

If the monetary production view rejects the idea that what is scarce is material means, it also rejects the idea that economic life is organized around the meeting of human needs. The pursuit of money for its own sake is the organizing principle of private production. On this point, Keynes recognized his affinity with Karl Marx. Marx, he wrote, “pointed out that the nature of production in the actual world is not, as economists seem often to suppose, a case of C-M-C’, i. e., of exchanging commodity (or effort). That may be the standpoint of the private consumer. But it is not the attitude of business, which is the case of M-C-M’, i. e., of parting with money for commodity (or effort) in order to obtain more money.”

Ignoring or downplaying money, as economic theory has historically done, requires imagining the “real” world is money-like. Conversely, recognizing money as a distinct social institution requires a reconception of the social world outside of money. We must ask both how monetary claims and values evolve independently of the real activity of production, and how money builds on, reinforces or undermines other forms of authority and coordination. And we must ask how the institutions of money and credit both enable and constrain our collective decision making. All these questions are unavoidably political.

For Keynes, modern capitalism is best understood through the tension between the distinct logics of money and of production. For the orthodox economics both of Keynes’s day and our own, there is no such tension. The model is one of “real exchange” in which a given endowment of goods and a given set of preferences yielded a vector of relative prices. Money prices represent the value that goods already have, and money itself merely facilitates the process of exchange without altering it in any important way.

Keynes of course was not the first to insist on a deeper role for money. Along with Marx, there is a long counter tradition that approaches economic problems as an open ended process of transformation rather than the allocation of existing goods, and that recognizes the critical role of money in organizing this process. These include the “Army of brave heretics and cranks” Keynes acknowledges as his predecessors.

One of the pioneers in this army was John Law. Law is remembered today mainly for the failure of his fiat currency proposals (and their contribution to the fiscal troubles of French monarchy), an object lesson for over-ambitious monetary reformers. But this is unfair. Unlike most other early monetary reformer, Law had a clearly articulated theory behind his proposals. Schumpeter goes so far as to put him “in the front rank of monetary theorists of all times.”

Law’s great insight was that money is not simply a commodity whose value comes from its non-monetary uses. Facilitating exchange is itself a very important function, which makes whatever is used for that purpose valuable even if it has no other use.

“Money,” he wrote, “is not the Value for which goods are exchanged, but the Value by which goods are exchanged.” The fact that money’s value comes from its use in facilitating exchange, and not merely from the labor and other real resources embodied in it, means that a scarcity of money need not reflect any physical scarcity. In fact, the scarcity of money itself may be what limits the availability of labor: “’tis with little success Laws are made, for Employing the Poor or Idle in Countries where Money is scarce.”

Law here is imagining money as a way of organizing and mobilizing production.

If the capacity to pay for things — and make commitments to future payments — is valuable, then the community could be made better off by providing more of it. Law’s schemes to set up credit-money issuing banks – in Scotland before the more famous efforts in France – were explicitly presented as programs for economic development.

Underlying this project is a recognition that is central to the monetary production view; the organization of production through exchange is not a timeless fact of human existence, but something that requires specific institutional underpinning — which someone has to provide. Like Alexander Hamilton’s similar but more successful interventions a half century later, Law envisioned the provision of abundant liquidity as part of a broader project of promoting commerce and industry.

This vision was taken up a bit later by Thornton and the anti-bullionists during the debates over suspension of gold convertibility during and after the Napoleonic Wars. A subsequent version was put forward by the mid-19th century Banking School and its outstanding figure, Thomas Tooke — who was incidentally the only contemporary bourgeois economist who Karl Marx seems to have admired — and by thinkers like Walter Bagehot, who built their theory on first hand experience of business and finance.

A number of lines divide these proto-Keynesian writers from the real-exchange orthodoxy.

To begin with, there is a basic difference in how they think of money – rather than a commodity or token that exists in a definite quantity, they see it as a form of record-keeping, whose material form is irrelevant. In other words credit, the recording of promises, is fundamental; currency as just one particular form of it.

Second, is the question of whether there is some simple or “natural” rule that governs the behavior of monetary or credit, or whether they require active management. In the early debates, these rules were supposed to be gold convertibility or the real bills doctrine; a similar intellectual function was performed by Milton Friedman’s proposed money-supply growth rule in the 20th century or the Taylor Rule that is supposed to govern monetary policy today. On the other side, for these thinkers, “money cannot manage itself,” in Bagehot’s famous phrase.

Third, there is the basic question of whether money is a passive reflection of an already existing real economy, or whether production itself depends on and is organized by money and credit. In other words, the conception of money is inseparable from how the non-monetary economy is imagined. In the real-exchange vision, there is a definite quantity of commodities already existing or potentially producible, which money at best helps to allocate. In the monetary production view, goods only come into existence as they are financed and paid for, and the productive capacity of the economy comes into being through an open-ended process of active development.

It’s worth quoting Bagehot’s Lombard Street for an example:

The ready availability of credit for English businesses, he writes,

gives us an enormous advantage in competition with less advanced countries — less advanced, that is, in this particular respect of credit. In a new trade English capital is instantly at the disposal of persons capable of understanding the new opportunities… In countries where there is little money to lend, … enterprising traders are long kept back, because they cannot borrow the capital without which skill and knowledge are useless. … The Suez Canal is a curious case of this … That London and Liverpool should be centres of East India commerce is a geographic anomaly … The main use of the Canal has been by the English not because England has rich people … but because she possesses an unequalled fund of floating money.

The capacity for reorganization is what matters, in other words. The economic problem is not a scarcity of material wealth, but of institutions that can rapidly redirect it to new opportunities. For Bagehot as for Keynes, the binding constraint is coordination.

It is worth highlighting that there is something quietly radical in Bagehot’s argument here. The textbooks tell us that international trade is basically a problem of the optimal allocation of labor, land and other material resources, according to countries’ inherent capacities for production. But here it’s being claimed is not any preexisting comparative advantage in production, but rather the development of productive capacities via money; financial power allows a country to reorganize the international division of labor to its own advantage.

Thinkers like Bagehot, Thornton or Hamilton certainly had some success on policy level. For the development of central banking, in particular, these early expressions of of monetary production view played an important role. But it was Keynes who developed these insights into a systematic theory of monetary production.

Let’s talk first about the monetary side of this dyad.

The nature and management of money were central to Keynes’ interventions, as a list of his major works suggests – from Indian Currency Questions to the General Theory of Employment, Interest and Money. The title of the latter expresses not just a list of topics but a logical sequence: employment is determined by the interest rate, which is determined by the availability of money.

One important element Keynes adds to the earlier tradition is the framing of the services provided by money as liquidity. This reflects the ability to make payments and satisfy obligations of all kinds, not just the exchange of goods focused on by Law and his successors. It also foregrounds the need for flexibility in the face of an unknown future.

The flip side of liquidity — less emphasized in his own writings but very much by post Keynesians like Hyman Minsky — is money’s capacity to facilitate trust and promises. Money as a social technology provides offers flexibility and commitment.

The fact that bank deposit — an IOU — will be accepted by anyone is very desirable for wealth owner who wants to keep their options open. But also makes bank very useful to people who want to make lasting commitments to each other, but who don’t have a direct relationship that would allow them to trust each other. Banks’ fundamental role is “acceptance,” as Minsky put it – standing in as a trusted third party to make all kinds of promises possible.

Drawing on his experience as a practitioner, Keynes also developed the idea of self-confirming expectations in financial markets. Someone buying an asset to sell in the near term is not interested in its “fundamental” value – the long-run flow of income it will generate – but in what other market participants will think is its value tomorrow. Where such short-term speculation dominates, asset prices take on an arbitrary, self-referential character. This idea is important for our purposes not just because it underpins Keynes’ critique of the “insane gambling casinos” of modern financial markets, but because it helps explain the autonomy of financial values. Prices set in asset markets — including, importantly, the interest rate — are not guide to any real tradeoffs or long term possibilities.

Both liquidity and self-confirming conventions are tied to a distinctive epistemology , which emphasizes the fundamental unknowability of the future. In Keynes’ famous statement in chapter 12 of the General Theory,

By ‘uncertain’ knowledge … I do not mean merely to distinguish what is known for certain from what is only probable. The sense in which I am using the term is that in which the prospect of a European war is uncertain, … About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know!

Turning to the production side, taking the he monetary-production view means that neither the routine operation of capitalist economies nor the choices facing us in response to challenges like climate change should be seen in terms of scarcity and allocation.

The real-exchange paradigm sees production as non-monetary process of transforming inputs into outputs through a physical process we can represent as a production function. We know if we add this much labor and this much “capital” at one end, we’ll get this many consumption goods at the other end; the job of market price is to tell us if it is worth it. Thinking instead in terms of monetary production does not just mean adding money as another input. It means reconceiving the production process. The fundamental problem is now coordination — capacity for organized cooperation.

I’ve said that before. Let me now spell out a little more what I mean by it.

To say that production is an open ended collective activity of transforming the world, means that its possibilities are not knowable in advance. We don’t know how much labor and machinery and raw materials it will take to produce something new — or something old on an increased scale — until we actually do it. Nor do we know how much labor is potentially available until there’s demand for it.

We see this clearly in a phenomenon that has gotten increasing attention in macroeconomic discussions lately — what economists call hysteresis. In textbook theories, how much the economy is capable of producing — potential output — does not depend on how much we actually do produce There are only so many resources available, whether we are using them or not. But in reality, it’s clear that both the labor force and measured productivity growth are highly sensitive to current demand. Rather than a fixed number of people available to work, so that employing more in one area requires fewer working somewhere else, there is an immense, in practice effectively unlimited fringe of people who can be drawn into the labor force when demand for labor is strong. Technology, similarly, is not given from outside the economy, but develops in response to demand and wage growth and via investment.

All this is of course true when we are asking questions like, how much of our energy needs could in principle be met by renewable sources in 20 years? In that case, it is abundantly clear that the steep fall in the cost of wind and solar power we’ve already seen is the result of increased demand for them. It’s not something that would have happened on its own. But increasing returns and learning by doing are ubiquitous in real economies. In large buildings, for instance, the cost of constructing later floors is typically lower than the cost of constructing earlier ones.

In a world where hysteresis and increasing returns are important, it makes no sense to think in terms of a fixed amount of capacity, where producing more of one thing requires producing correspondingly less of something else. What is scarce, is the capacity to rapidly redirect resources from one use to a different one.

A second important dimension of the Keynesian perspective on production is that it is not simply a matter of combining material inputs, but happens within discrete social organisms. We have to take the firm seriously as ongoing community embodying multiple social logics. Firms combine the structured cooperation needed for production; a nexus of payments and incomes; an internal hierarchy of command and obedience; and a polis or imagined community for those employed by or otherwise associated with it.

While firms do engage in market transactions and exist — in principle at least — in order to generate profits, this is not how they operate internally. Within the firm, the organization of production is consciously planned and hierarchical. Wealth owners, meanwhile, do not normally own capital goods as such, but rather financial claims against these social organisms.

When we combine this understanding of production with Keynesian insights into money and finance , we are likely to conclude, as Keynes himself did, that an economy that depends on long-lived capital goods (and long-lived business enterprises, and scientific knowledge) cannot be effectively organized through the pursuit of private profit.

First, because the profits from these kinds of activities depend on developments well off in the future that cannot cannot be known with any confidence.

Second, because these choices are irreversible — capital goods specialized and embedded in particular production processes and enterprises. (Another aspect of this, not emphasized by Keynes, but one which wealth owners are very conscious of, is that wealth embodied in long-lived means of production can lose its character as wealth. It may effectively belong to the managers of the firm, or even the workers, rather than to its notional owners.) Finally, uncertainty about the future amplifies and exacerbates the problems of coordination.

The reason that many potentially valuable activities are not undertaken is not that they would require real resources that people would prefer to use otherwise. It is that people don’t feel they can risk the irreversible commitment those activities would entail. Many long-lived projects that would easily pay for themselves in both private and social terms are not carried out, because an insufficient capacity for trustworthy promises means that large-scale cooperation appears too risky to those in control of the required resources, who prefer to keep their their options open.

Or as Keynes put it: “That the world after several millennia of steady individual saving, is so poor as it is in accumulated capital-assets, is to be explained neither by the improvident propensities of mankind, nor even by the destruction of war, but by the high liquidity- premiums formerly attaching to the ownership of land and now attaching to money.”

The problem, Keynes is saying, is that wealth owners prefer land and money to claims on concrete productive processes. Monetary production means production organized by money and in pursuit of money. But also identifies conflict between production and money.

We see this clearly in a development context, where — as Joe Studwell has recently emphasized — the essential first step is to break the power of landlords and close off the option of capital flight so that private wealth owners have no option but to hold their wealth as claims on society in the form of productive enterprises.

The whole history of the corporation is filled with conflicts between the enterprise’s commitment to its own ongoing production process, and the desire of shareholders and other financial claimants to hold their wealth in more liquid, monetary form. The expansion or even continued existence of the corporation as an enterprise requires constantly fending off the demands of the rentiers to get “their” money back, now. The “complaining participants” of the Dutch East India Company in the 1620s, sound, in this respect, strikingly similar to shareholder activists of the 1980s.

Where privately-owned capital has worked tolerably well — as Keynes thought it had in the period before WWI, at least in the UK — it was because private owners were not exclusively or even mainly focused on monetary profit.

“Enterprise,” he writes, “only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.”

(It’s a curious thing that this iconic Keynesian term is almost always used today to describe financial markets, even though it occurs in a discussion of real investment. This is perhaps symptomatic of the loss of the production term of the monetary production theory from most later interpretations of Keynes.)

The idea that investment in prewar capitalism had depended as much on historically specific social and cultural factors rather than simply opportunities for profit was one that Keynes often returned to. “If the steam locomotive were to be discovered today,” he wrote elsewhere, “I much doubt if unaided private enterprise would build railways in England.”

We can find examples of the same thing in the US. The Boston Associates who pioneered textile factories in New England seem to have been more preserving the dominant social position of their interlinked families as in maximizing monetary returns. Schumpeter suggested that the possibility of establishing such “industrial dynasties” was essential to the growth of capitalism. Historians like Jonathan Levy give us vivid portraits of early American industrialists Carnegie and Ford as outstanding examples of animal spirits — both sought to increase the scale and efficiency of production as a goal in itself, as opposed to profit maximization.

In Keynes’ view, this was the only basis on which sustained private investment could work. A systematic application of financial criteria to private enterprise resulted in level of investment that was dangerously unstable and almost always too low. On the other hand — as emphasized by Kalecki but recognized by Keynes as well — a dependence on wealth owners pursuit of investment for its own sake required a particular social and political climate — one that might be quite inimical to other important social goals, if it could be maintained at all.

The solution therefore was to separate investment decisions from the pursuit of private wealth. The call for the “more or less comprehensive socialization of investment” at the end of The General Theory, is not the throwaway line that it appears as in that book, but reflects a program that Keynes had struggled with and developed since the 1920s. The Keynesian political program was not one of countercyclical fiscal policy, which he was always skeptical of. Rather it envisioned a number of more or less autonomous quasi-public bodies – housing authorities, hospitals, universities and so on – providing for the production of their own specific social goods, in an institutional environment that allowed them to ignore considerations of profitability.

The idea that large scale investment must be taken out of private hands was at the heart of Keynes’ positive program.

At this point, some of you may be thinking that that I have said two contradictory things. First, I said that a central insight of the Keynesian vision is that money and credit are essential tools for the organization of production. And then, I said that there is irreconcilable conflict between the logic of money and the needs of production. If you are thinking that, you are right. I am saying both of these things.

The way to reconcile this contradiction is to see these as two distinct moments in a single historical process.

We can think of money as a social solvent. It breaks up earlier forms of coordination, erases any connection between people.As the Bank of International Settlements economist Claudio Borio puts it: “a well functioning monetary system …is a highly efficient means of ‘erasing’ any relationship between transacting parties.” A lawyers’ term for this feature of money is privity, which “cuts off adverse claims, and abolishes the .. history of the account. If my bank balance is $100 … there is nothing else to know about the balance.”

In his book Debt, David Graeber illustrates this same social-solvent quality of money with the striking story of naturalist Ernest Thompson Seton, who was sent a bill by his father for all the costs of raising him. He paid the bill — and never spoke to his father again. Or as Marx and Engels famously put it, the extension of markets and money into new domains of social life has “pitilessly torn asunder the motley feudal ties that bound man to his “natural superiors”, and has left remaining no other nexus between man and man than naked self-interest, than callous “cash payment”.

But what they neglected to add is that social ties don’t stay torn asunder forever. The older social relations that organized production may be replaced by the cash nexus, but that is not the last step, even under capitalism. In the Keynesian vision, at least, this is a temporary step toward the re-embedding of productive activity in new social relationships. I described money a moment ago as a social solvent. But one could also call it a social catalyst. By breaking up the social ties that formerly organized productive activity, it allows them to be reorganized in new and more complex forms.

Money, in the Keynesian vision, is a tool that allows promises between strangers. But people who work together do not remain strangers. Early corporations were sometimes organized internally as markets, with “inside contractors” negotiating with each other. But reliance on the callous cash payment seldom lasted for long. Large-scale production today depends on coordination through formal authority. Property rights become a kind of badge or regalia of the person who has coordination rights, rather than the organizing principle in its own right.

Money and credit are critical for re-allocating resources and activity, when big changes are needed. But big changes are inherently a transition from one state to another. Money is necessary to establish new production communities but not to maintain them once they exist. Money as a social solvent frees up the raw material — organized human activity — from which larger structures, more extensive divisions of labor, are built. But once larger-scale coordination established, the continued presence of this social solvent eating away at it, becomes destructive.

This brings us to the political vision. Keynes, as Jim Crotty emphasizes, consistently described himself as a socialist. Unlike some of his American followers, he saw the transformation of productive activity via money and private investment as being a distinct historical process with a definite endpoint.

There is, I think, a deep affinity between the Keynes vision of the economy as a system of monetary production, and the idea that this system can be transcended.

If money is merely a veil, as orthodox economics imagines, that implies that social reality must resemble money. It is composed of measurable quantities with well-defined ownership rights, which can be swapped and combined to yield discrete increments of human wellbeing. That’s just the way the world is. But if we see money as a distinct institution, that frees us to imagine the rest of life in terms of concrete human activities, with their own logics and structures. It opens space for a vision of the good life as something quite different from an endless accumulation of commodities – a central strand of Keynes’ thinking since his early study of the philosopher G. E. Moore.

In contemporary debates – over climate change in particular – a “Keynesian” position is often opposed to a degrowth one. But as Victoria Chick observes in a perceptive essay, there are important affinities between Keynes and anti-growth writers like E. F. Schumacher. He looked forward to a world in which accumulation and economic growth had come to an end, daily life was organized around “friendship and the contemplation of beautiful objects,” and the pursuit of wealth would be regarded as “one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.”

This vision of productive activity as devoted to its own particular ends, and of the good life as something distinct from the rewards offered by the purchase and use of commodities, suggests a deeper affinity with Marx and the socialist tradition.

Keynes was quite critical of what he called “doctrinaire State Socialism.” But his objections, he insisted, had nothing to do with its aims, which he shared. Rather, he said, “I criticize it because it misses the significance of what is actually happening.” In his view, “The battle of Socialism against unlimited private profit is being won in detail hour by hour … We must take full advantage of the natural tendencies of the day.”

From Keynes’ point of view, the tension between the logic of money and the needs of production was already being resolved in favor of the latter. In his 1926 essay “The End of Laissez Faire,” he observed that “one of the most interesting and unnoticed developments of recent decades has been the tendency of big enterprise to socialize itself.” As shareholders’ role in the enterprise diminishes, “the general stability and reputation of the institution are more considered by the management than the maximum of pro

A shift from production for profit to production for use — to borrow Marx’s language — did not necessarily require a change in formal ownership. The question is not ownership as such, but the source of authority of those managing the production process, and the ends to which they are oriented. Market competition creates pressure to organize production so as to maximize monetary profits over some, often quite short, time horizon. But this pressure is not constant or absolute, and it is offset by other pressures. Keynes pointed to the example of the Bank of England, still in his day a private corporation owned by its shareholders, but in practice a fully public institution.

Marx himself had imagined something similar:

As he writes in Volume III of Capital,

Stock companies in general — developed with the credit system — have an increasing tendency to separate … management as a function from the ownership of capital… the mere manager who has no title whatever to the capital, … performs all the real functions pertaining to the functioning capitalist as such, … and the capitalist disappears as superfluous from the production process.

The separation of ownership from direction or oversight of production in the corporation is, Marx argues, an important step away from ownership as the organizing principle of production. “The stock company,” he continues, “is a transition toward the conversion of all functions… which still remain linked with capitalist property, into mere functions of associated producers.”

In short, he writes, the joint stock company represents as much as the worker-owned cooperative “the abolition of the capitalist mode of production within the capitalist mode of production itself.”

It might seem strange to imagine the tendency toward self-socialization of the corporation when examples of its subordination to finance are all around us. Sears, Toys R Us, the ice-cream-and-diner chain Friendly’s – there’s a seemingly endless list of functioning businesses purchased by private equity funds and then hollowed out or liquidated while generating big payouts for capital owners. Surely this is as far as one could get from Keynes’ vision of an inexorable victory of corporate socialism over private profit?

But I think this is a one-sided view. I think it’s a mistake — a big mistake — to identify the world around us as one straightforwardly organized by markets, the pursuit of profit and the logic of money.

As David Graeber emphasized, there is no such thing as a capitalist economy, or even a capitalist enterprise. In any real human activity, we find distinct social logics, sometimes reinforcing each other, sometimes in contradiction.

We should never imagine world around us — even in the most thoroughly “capitalist” moments — is simply the working out of a logic pdf property, prices and profit. Contradictory logics at work in every firm — even the most rapacious profit hungry enterprise depends for its operations on norms, rules, relationships of trust between the people who constitute it. The genuine material progress we have enjoyed under capitalism is not just due to the profit motive but perhaps even more so in spite of it.

One benefit of this perspective is it helps us see broader possibilities for opposition to the rule of money. The fundamental political conflict under capitalism is not just between workers and owners, but between logic of production process and of private ownership and markets. Thorstein Veblen provocatively imagined this latter conflict taking the form of a “soviet of engineers” rebelling against “sabotage” by financial claimants. A Soviet of engineers may sound fanciful today, but conflicts between the interests of finance and the needs of productive enterprise — and those who identify with them — are ongoing.

Teaching and nursing, for example, are the two largest occupations that require professional credentials.But teachers and nurses are also certainly workers, who organize as workers — teachers have one of the highest unionization rates of any occupation. In recent years, this organizing can be quite adversarial, even militant. We all recall waves of teacher strikes in recent years — not only in California but in states with deeply anti-union politics like West Virginia, Oklahoma, Arizona and Kentucky. The demands in these strikes have been workers’ demands for better pay and working conditions. But they have also been professionals’ demands for autonomy and respect and the integrity of their particular production process. From what I can tell, these two kinds of demands are intertwined and reinforcing.

This struggle for the right to do one’s job properly is sometimes described as “militant professionalism.” Veblen may have talked about engineers rather than teachers, but this kind of politics is, I think, precisely what he had in mind.

More broadly, we know that public sector unions are only effective when they present themselves as advocates for the public and for the users of the service they provide, and not only for their members as workers. Radical social service workers have fought for the rights of welfare recipients. Powerful health care workers unions, like SEIU 1199 in New York, are successful because they present themselves as advocates for the health care system as a whole.

On the other side, I think most of us would agree that the decline or disappearance of local news outlets is a real loss for society. Of course, the replacement of newspapers with social media and search engines isn’t commodification in the straightforward sense. This is a question of one set of for-profit businesses being displaced by another. But on the other hand, newspapers are not only for-profit businesses. There is a distinct professional ethos of journalism, that developed alongside journalism as a business. Obviously the “professional conscience” (the phrase is Michelet’s) of journalists was compatible with the interests of media businesses. But it was not reducible to them. And often enough, it was in tension with them.

I am very much in favor of new models of employee-owned, public and non-profit journalism. Certainly there is an important role for government ownership, and for models like Wikipedia. But I also think — and this is the distinct contribution of the Keynesian socialist — that we should not be thinking only in terms of payments and ownership. The development of a distinct professional norms for today’s information sector is independently valuable and necessary, regardless of who owns new media companies. It may be that creating space for those norms is the most important contribution that alternative ownership models can make

For a final example of this political possibilities of the monetary-production view, we can look closer by, to higher education, where most of us in this room make our institutional home. We have all heard warnings about how universities are under attack, they’re being politicized or corporatized, they’re coming to be run more like businesses. Probably some of us have given such warnings.

I don’t want to dismiss the real concerns behind them. But what’s striking to me is how much less often one hears about the positive values that are being threatened. Think about how often you hear people talk about how the university is under attack, is in decline, is being undermined. Now think about how often you hear people talk about the positive values of intellectual inquiry for its own sake that the university embodies. How often do you hear people talk about the positive value of academic freedom and self-government, either as specific values of the university or as models for the broader society? If your social media feed is like mine, you may have a hard time finding examples of that second category at all.

Obviously, one can’t defend something from attack without at some point making the positive case that there is something there worth defending. But the point is broader than that. The self-governing university dedicated to education and scholarship and as ends in themselves, is not, despite its patina of medieval ritual, a holdover from the distant past. It’s an institution that has grown up alongside modern capitalism. It’s an institution that, in the US especially, has greatly expanded within our own lifetimes.

If we want to think seriously about the political economy of the university, we can’t just talk about how it is under attack. We must also be able to talk about how it has grown, how it has displaced social organization on the basis of profit. (We should note here the failure of the for-profit model in higher education.) We should of course acknowledge the ways in which higher education serves the needs of capital, how it contributes to the reproduction of labor power. But we also should acknowledge all the ways that is more than this.

When we talk about the value of higher education, we often talk about the products — scholarship, education. But we don’t often talk about the process, the degree to which academics, unlike most other workers, manage our own classrooms according to our own judgements about what should be taught and how to effectively teach it. We don’t talk about how, almost uniquely in modern workplaces, we the faculty employees make decisions about hiring and promotion collectively and more or less democratically. People from all over the world come to study in American universities. It’s remarkable — and remarkably little discussed — how this successful export industry is, in effect, run by worker co-ops.

At this moment in particular, it is vitally important that we make the case for academic freedom as a positive principle.

Let me spell out, since it may not be obvious, how this political vision connects to the monetary production vision of the economy that I was discussing earlier.

The dominant paradigm in economics — which shapes all of our thinking, whether we have ever studied economics in the classroom — is what Keynes called, I distinction to his own approach, the real exchange vision. From the real-exchange perspective, money prices and payments are a superficial express of pre-existing qualities of things — that they are owned by someone, that they take a certain amount of labor to produce and have a definite capacity to satisfy human needs. From this point of view, production is just a special case of exchange.

It’s only once we see money as an institution in itself, a particular way of organizing human life, that we can see production as something distinct and separate from it. That’s what allows us to see the production process itself, and the relationships and norms that constitute it, as a site of social power and a market on a path toward a better world. The use values we socialists oppose to exchange value exist in the sphere of production as well as consumption. The political demands that teachers make as teachers are not legible unless we see the activity they’re engaged in in terms other than equivalents of money paid and received.

I want to end by sketching out a second political application of this vision, in the domain of climate policy.

First, decarbonization will be experienced as an economic boom. Money payments, I’ve emphasized, are an essential tool for rearranging productive activity, and decarbonizing will require a great deal of our activity to be rearranged. There will be major changes in our patterns of production and consumption, which in turn will require substantial changes to our means of production and built environment. These changes are brought about by flows money.

Concretely: creating new means of production, new tools and machinery and knowledge, requires spending money. Abandoning old ones does not. Replacing existing structures and tools and techniques faster than they would be in the normal course of capitalist development, implies an increase in aggregate money expenditure. Similarly, when a new or expanding business wants to bid workers away from other employment, they have to offer a higher wage than an established business needs to in order to retain its current workers. So a rapid reallocation of workers implies a faster rise in money wages.

So although decarbonization will substantively involve a mix of expansions of activity in some areas and reduction of activity in others, it will increase the aggregate volume of money flows. A boom in this sense is not just a period of faster measured growth, but a period in which demand is persistently high relative to the economy’s productive potential and tight labor markets strengthen the bargaining position of workers relative to employers – what is sometimes called a “high-pressure economy.”

Second. There is no tradeoff between decarbonization and current living standards. Decarbonization is not mainly a matter of diverting productive activity away from other needs, but mobilizing new production, with positive spillovers toward production for other purposes.

Here again, there is a critical difference between the monetary-production and the real-exchange views of the economy. In the real-exchange paradigm, we possess a certain quantity of “means.” If we choose to use some of them to reduce our carbon emissions, there will be less available for everything else. But when we think in terms of social coordination organized in large part through money flows, there is no reason to think this. There is no reason to believe that everyone who is willing and able to work is actually working, or people’s labor is being used in anything like its best possible way for the satisfaction of real human needs. Nor are relative prices today a good guide to long-run social tradeoffs.

Third. If we face a political conflict involving climate and growth, this will come not because decarbonization requires accepting a lower level of growth, but because it will entail faster economic growth than existing institutions can handle. Today’s neoliberal macroeconomic model depends on limiting economic growth as a way of managing distributional conflicts. Rapid growth under decarbonization will be accompanied by disproportionate rise in wages and the power of workers. Most of us in this room will probably see that as a desirable outcome. But it will inevitably create sharp conflicts and resistance from wealth owners, which need to be planned for and managed. Complaints about current “labor shortages” should be a warning call on this front.

Fourth. There is no international coordination problem — the countries that move fastest on climate will reap direct benefits.

An influential view of the international dimension of climate policy is that “free riding … lies at the heart of the failure to deal with climate change.” (That is William Nordhaus, who won the Nobel for his work on the economics of climate change.) Individual countries, in this view, bear the full cost of decarbonization measures but only get a fraction of the global benefits, and countries that do not engage in decarbonization can free-ride on the efforts of those that do.

A glance at the news should be enough to show you how backward this view is. Do Europeans look at US support for the wind, solar and battery industries, or the US at China’s support for them, and say, “oh, what wonderfully public-spirited shouldering of the costs of the climate crisis”? Obviously not. Rather, they are seen as strategic investments which other countries, in their own national interest, must seek to match.

Fifth. Price based measures cannot be the main tools for decarbonization.

There is a widely held view that the central tool for addressing climate should be an increase in the relative price of carbon-intensive commodities, through a carbon tax or equivalent. I was at a meeting a few years ago where a senior member of the Obama economics team was also present. “The only question I have about climate policy,” he said, “is whether a carbon tax is 80 percent of the solution, or 100 percent of the solution.” If you’ve received a proper economics education, this is a very reasonable viewpoint. You’ve been trained to see the economy as essentially an allocation problem where existing resources need to be directed to their highest-value use, and prices are the preferred tool for that.

From a Keynesian perspective the problem looks different. The challenge is coordination — bottlenecks and the need for simultaneous advances in multiple areas. Markets can, in the long run, be very powerful tools for this, but they can’t do it quickly. For rapid, large-scale reorganization of activity, they have to be combined with conscious planning — and that is the problem. The fundamental constraint on decarbonization should not be viewed as the potential output of the economy, but of planning capacity for large-scale non-market coordination.

If there is a fundamental conflict between capitalism and sustainability, I suggest, it is not because the drive for endless accumulation in money terms implies or requires an endless increase in material throughputs. Nor is it the need for production to generate a profit. There’s no reason why a decarbonized production process cannot be profitable. It’s true that renewable energy, with its high proportion of fixed costs, is not viable in a fully competitive market — but that’s a characteristic it shares with many other existing industries.

The fundamental problem, rather, is that capitalism treats the collective processes of social production as the private property of individuals. It is because the fiction of a market economy prevents us from developing the forms of non-market coordination that actually organize production, and that we will need on a much larger scale. Rapid decarbonization will require considerably more centralized coordination than is usual in today’s advanced economies. Treatment of our collective activity to transform the world as if it belonged exclusively to whoever holds the relevant property rights, is a fundamental obstacle to redirecting that activity in a rational way.

Thirteen Ways of Looking at Money

I taught a class last semester on alternative theories of money, drawing heavily on Money and Things, the book I am working on with Arjun Jayadev. It was one of the best classes I’ve ever taught in terms of the quality of the discussions. John Jay MA students are always great, but this group was really exceptional. It was a a privilege to have such thoughtful and wide-ranging conversations, with such an enthusiastic and engaged group of (mostly) young people.

The class syllabus is here. A number of the readings were draft chapters from the book. I am not posting these publicly, but if you are interested you can contact me and I’ll be happy to share.

In this post, I want to sketch out some of the puzzles and questions around money — my own version of what makes money difficult. Many of these were explicit topics during the semester, others were in the background. I wouldn’t claim this is a comprehensive list, but I think most debates around money fall somewhere on here.

The first problem is defining the topic. When we talk about “money” as a distinct set of questions in economics, what are we distinguishing from what? In particular, are finance, credit and interest on the money side of the line? Given that aggregate demand is, presumably, defined in terms of desired monetary expenditure, are demand and its effects a subset of questions around money? The main classification codes for economics articles include a category for “Macroeconomics and Monetary Economics”; this suggests an affirmative answer, at least in the mainstream imagination. Do we agree?

Put another way, a focus on money in economic analysis means something quite different if the implied alternative is an imagined world of barter, versus if it’s a a broader range of financial arrangements. In the first case, talking about money involves a broadening of perspective, in the second case a narrowing of it. If someone says, “we have to think about the business cycle in terms of money” are they rejecting Real Business Cycle approaches (a good thing, in my book) or are they telling us to focus on M2 (not so good)?

In principle one would like to delineate the field designated by “money” before asking questions within it. But in practice what concepts we group with money depends on our views about it. So let’s move on to some more substantive questions.

1. First, is money better imagined as a (physical) token, or as a unit of measurement? Or perhaps better, does our analysis of money start with exchange, or with accounting? Do we start by asking what is the thing that is exchanged with commodities, and then build an account of its use as a standard of value and in debt contracts on top of that? Or do we start with he idea of money as a unit like the meter or second, which is used to denominate obligations? In which case the debts incurred in the circulation of commodities appear as one particular case of the more general category, and the question of what exactly is accepted in settlement of an obligation is secondary.

I think of this as the difference between an exchange-first and and an accounting-first approach; Schumpeter makes a similar distinction between money theories of credit and credit theories of money. You’ll find most economists from Adam Smith to modern textbook writers on the first side, along with Marx (arguably) and most Marxists (definitely). On the second side you’ll find Keynes (in the Treatise if not the General Theory) along with Schumpeter, various chartalists, and sociologists like Geoffrey Ingham.

This is a question about logical priority, about where we should start analytically. But the same question can be, and often is, posed as a historical one. Did money originate out of barter, or out of a system of public record-keeping? In principle, the origin of money is separate from the question of how we should best think go if it today. But in practice, almost everyone writing about the origin of money is interested in it because they think it is informative about, or a parable for, how money works in the present.

Another dimension of this question is how we think of the central bank. Do we think of it as — in some more or less metaphorical sense — issuing the nation’s currency? Or do we think of it as the peak institution of the banking system?

2. A second question, related to the first one, is, where do we draw the line between money and credit? Is there a sharp divide, or a continuum? Or does money just describe particular kinds of credit, or credit as it is used in certain settings? To the extent there is a distinction, which is primary and which is derivative? Is money any promise, or any promise that can be transferred to a third party, or anything that can be used to settle an obligation? Almost any statement about money can have a different meaning depending on what parts of credit and finance are implicitly being included with it.

Similarly, is there a sharp line between money and other assets, or does money describe some function(s) that can be performed to different degrees by many assets? An important corollary of this is, is there a meaningful quantity of money? If there is a sharp line between money and other assets then at any moment there should be a definite quantity of money in existence. If “moneyness” is a property which all kinds of assets possess in different degrees, then there isn’t. This is a more important question than it might seem, because many older debates about money are were framed in terms of the quantity of it, and it’s not always obvious how to translate them for a world where liquidity exists across the balance sheet, on both the asset and liability sides.

This is a question where the conventional wisdom has shifted quite sharply over the past generation. Into the 1990s, both mainstream and heterodox writers used the money stock M as a basic part of the theoretical toolkit. But now it has almost entirely disappeared from the conversation in both academic and policy worlds.¹

3. Third: To the extent that it is meaningful to talk about a quantity of money, is the quantity fixed independently of demand for it, or does it vary endogenously with demand? (And if so, does this happen within the banking system, or through the actions of the monetary authority? — the old horizontalists versus verticalists debate.) When I was first studying economics, this question was a central line of conflict between (Post) Keynesians and the mainstream, but its valence has shifted since then. “Banks create money” used to be a touchstone for heterodox views; now it’s something that everyone knows. There is still the question of how much this matters, i.e. how much bank lending is constrained by the supply of reserves or monetary policy more broadly. Victoria Chick has a fascinating piece on shifting views on this question over the 20th century.

In general, talking about how M varies with demand for it now feels a bit conservative and old-fashioned, since it assumes that the money stock is an economically meaningful quantity. After teaching some of the same articles on these questions that I read in graduate school, I feel like the question is now: How can the debate over endogenous money be reformulated for a world without a distinct money stock? Another possible reframing: Is endogeneity inherent in the nature of money, or is it a contingent, institutional fact that evolves over time? At one point, bitcoin looked like an effort to re-exogenize the money supply; but I don’t think anybody talks about it that way anymore.

The flip side of the question of endogenous money — or maybe an alternative formulation of it — is, is the supply of money ever a constraint (on credit creation, and/or on real activity)? A negative answer is stronger than simply saying that the money supply is endogenous, since it further implies it can be expanded costlessly.

4. This leads to the fourth question: What role does money play in the determination of the interest rate? Is interest, as Bagehot got put it, the price of money? Or is it the price of savings, or of future relative to present consumption, which just happens to be expressed (like other prices) in terms of money? This is another long-standing frontline between orthodox economics and its Keynesian challengers, which remains an active site of conflict.

In the General Theory, Keynes developed his claims about money and interest in terms of demand for an exogenously fixed stock of money. This was a serious wrong turn, in my view; chapter 17 (“The Essential Properties of Interest and Money”) is in my opinion the worst chapter of the book, the one most likely to confuse and mislead modern readers.² But unlike endogeneity, this is a Keynesian theme that is easily transposed to an accounting-first key. We simply have to think of interest as the price of liquidity, rather than of one particular asset. This view of interest — as opposed to one that starts from savings — remains arguably the most important dividing line between orthodoxy and followers of Keynes. In general, if you want to work within Keynes’ system, you shouldn’t be talking about saving at all.

5. The role of money in the determination of the interest rate leads to a fifth, broader question: Is money neutral? If so, with respect to what? And over what time horizon? In other words, do changes in the supply (or availability) of money affect “real” variables such as employment, or do they affect the price level? Or do they affect both, or neither?

From a political-policy perspective, neutrality is the question. Can increasing the availability of money (in general, or to some people in particular) solve coordination problems, mobilize unutilized resources, or otherwise increase the real wealth of the community? Or will it only bid up the price of the stuff that already exists? When, let’s say, late-19th century Populists demanded a more elastic currency, were they expressing the real interests of their farmer and artisan constituency, or were they victims (or peddlers) of economic snake oil? And if the former, what were the specific conditions that made more abundant money a meaningful political demand?

Another way of looking at this: Does money just facilitate trades that would have happened anyway? (What does it mean to facilitate, in that case?) On the other hand, if we think of money as a technology for making promises, for substituting a general obligation for a particular one, then it may do so to a greater or lesser extent. Increasing the availability of money, or broadening the range of ways it can be used, should make new forms of cooperation possible. If money is useful, shouldn’t it follow that more money is more useful?

Turning to the present, is the availability of money an important constraint on decarbonization? The content of this question is contingent on some of the earlier ones; is the terms no which credit is available to green projects a question of money? But even if you say yes, it’s not clear how important this dimension of the problem is. There’s a plausible case, to me at least, that there is a vast universe of decarbonization projects with positive private returns at any reasonable discount rate, which nonetheless aren’t undertaken because of a lack of financing. But it’s also possible that credit constraints are not all that important, at least not directly; that what’s scarce is the relevant skilled labor and organizational capacity, not financing.³

Though it lies a bit downstream from some of the more fundamental theoretical issues, money’s neutrality is probably the highest-stake question in these debates.

To what extent, and under what conditions, can increasing access to money and credit develop the real productive capacities of a community? To what extent are shorter-term fluctuations and crises the result of interruptions in the supply of money and credit? One reason, it seems to me, that debates on these questions can be so murky and acrimonious is that while economic orthodoxy makes a strong claim that money is neutral, there is no well-defined pole on the other side. Rejecting the textbook view, in itself, doesn’t tell us much about when and how money does matter.

6. The other side of this is the sixth question: What is the relationship between money and inflation? If money is neutral with respect to the “real” economy (bracketing what exactly this means) then what it does affect must be the price level. If you pick up, let’s say, Paul Krugman’s international economics textbook, you will find the thoroughly Friedmanesque claim that the central banks its the supply of money (M), that in the short run an increase in the supply of money may raise output and employment, but over periods beyond a few years, changes in the money supply simply translate one for one into changes the price level, with output and other “real” variables following the same path regardless of what the central bank does.

The claim that the price level varies directly with an exogenously fixed money supply is the quantity theory of money, arguably the oldest theory in economics. This can be derived on first principles only under a set of stringent assumptions that clearly done’t describe real economies. So is there some broader metaphorical sense in which it is sort of true, at least in some times and places? Inflation is only defined with respect a unit of account, but it’s not clear that there is any necessary link with money in its concrete existence.

Here, unlike the previous question, there are (at least) two well-defined poles. Anyone who has read anything on these issues has encountered Friedman’s koan that inflation is everywhere and always a monetary phenomenon. Against this there is a vocal group of economists (both Post Keynesian and more mainstream) who counter that “inflation is always and everywhere a conflict phenomenon.” Personally, I am not convinced that inflation is always and everywhere any one particular thing. But that is a topic for another time.

7. More broadly, whether reimagine “the money supply” as a fixed quantity or in terms of more or less elastic credit, we can ask, are changes in money supply linked to changes in prices, in incomes, in the interest rate, or some combination of them? This leads to the seventh question: Is the money supply, or the terms on which money is provided or created, an appropriate object of policy? This is partly question about what social objectives can be advanced by changes in the availability of money. But it is also a question about whether there is something inherently public about money as a social ledger, which means that it should be (or in some sense always is) the responsibility of the state.

8. Which brings us to question eight: Is there a fundamental relationship between money and the state, and with the authority to collect taxes? Georg Simmel famously described money as “a claim against society”. Who represents society, in this case? Is it — necessarily or in practice — the government? If we think of money as a ledger recording all kinds of obligations as commensurable quantities and allowing them to be netted out, is the use of such a shared ledger necessarily imposed by a sovereign authority, or can we think of it as arising organically? A bit more concretely: Is the value of money backed, in some sense, by the authority to tax? This view is strongly associated with chartalism. But you can also get a version of it from someone like Duncan Foley, working within the Marxist tradition.

9. Turning to money as a unit of measurement, our ninth question is: Do money values refer to some objective underlying quantity? And if so, what is it? What does it mean to speak of “real” values underlying the monetary ones? Obviously money values have objective content within a given pay community. For an individual within the community, the fact that two objects – or more precisely, two distinct property rights – have an equal price, implies the possibility of a choice between them. Ownership of this stuff and ownership of that stuff are equivalent in the sense that one can have one more of one by giving up an equal value of the other. For the community as a whole, we can, on some not too unreasonable assumptions, interpret price as reflecting the possibilities of producing more of one thing as opposed to something else.

But what about when comparisons are made outside of an exchange community? If there is no possibility of substitution either in the purchase or production of things – where there is no market in which they exchange – is there a sense in which we can nonetheless compare their value? Do the quantities of money describe some underlying “real” quantity? When we compare “real income” ver time or between different countries, what is it exactly that we are comparing?

The textbook answer is that we are thinking of the economy in terms of a single representative consumer whose preferences are the same in all times and places (and at all levels of income), and asking how much income in one setting it would take to buy a basket of goods that this representative consumer would willingly swap for the average basket of goods consumed somewhere else. When stated like this, it sounds absurd. Yet this is literally the basis for widely used price level measures like Purchasing Power Parity indexes used to compare real incomes across countries. The problem is actually even worse than this, since even on the most heroic assumptions there is no way to consistently measure price levels both across countries and over time.⁴ But it’s very hard for people — certainly for economists — to give up the idea that there exists something called “real GDP” or “real income” that behaves like a physical quantity.

If the neutrality of money is the question with the most immediate real-world implications, this one, I think, is where there is the biggest gap between what people assume or think they know, and what holds up on closer examination.

10. Related to this, question ten: Are relative prices prior to, or independent of, money prices? In his review of David Graeber’s Debt, Mike Beggs insisted that “States print the money, but not the price lists.” This is the orthodox view — if one of commodity A trades for two of commodity B, that is an intrinsic fact about the commodities themselves, reflecting their costs of production and/or their ability to satisfy human needs.It doesn’t depend on the fact that the prices are expressed in terms of money, or that the commodities are bought and sold for money rather than directly exchanged for each other.

But as I pointed out in my reply to Mike, not all economists agree with this. Hyman Minsky’s two-price model (much more interesting, in my mind, than the financial fragility hypothesis) is precisely an argument that money matters for the price of long-lived assets in a way that it does not for current output. The price of a building, say, cannot be derived from just the cost of producing it and the rent people will pay for it; it depend fundamentally on the terms on which it can be financed.

More broadly, we can think of some activities — those that lock in payment commitments while promising distant or uncertain income — as being more demanding of liquidity. Changes in the availability of money will change the price of these activities relative to those that are less liquidity-demanding. From a Minskyan perspective, money is not neutral; the price lists depend fundamentally on how much (and on what terms) money is being printed.

11. Finally, some questions about the international dimension of money. First, various questions related to exchange rates — how they are, and should be, determined, and what effects they have on real activity. This is one area— perhaps the only one on the whole list — where, it seems to me, there is a very clear difference between today’s textbook views and pre-Keynesian orthodoxy. Today, floating exchange rates are treated as normal, and government interventions in the foreign exchange market are viewed with suspicion. Whereas the older orthodoxy assumed that currencies should, and apart from exceptional cases would, be permanently fixed in terms of gold.

12. Twelfth: If we think of money as a ledger, does it matter where the ledger is kept? That the dollar is the global currency is true in obvious, observable ways — its unrivaled dominance in reserve holdings, foreign-exchange transactions, and trade pricing. (And despite constant predictions to the contrary, this shows no signs of changing.) But what constraints does this fact impose on the rest of the world, both in terms of international positions and domestic finance? And what, advantages (or disadvantages) does it have for the United States?

One argument (made powerfully by Jörg Bibow, and also in this old working paper by me) is that in a world of unmanaged cross-border trade and financial flows, the United States current account deficit plays an essential role as a source of dollar liquidity for the rest of the world — that efforts to balance US trade will only lead to slower growth elsewhere. The assumption here, which may or may not be reasonable, is that there is something like of an exogenous stock of global money, even if not at the national level.

A related issue is how the financial and current account sides of the balance of payments balance. If we think of money as a token or substance, then any given transaction involves a certain amount of it either flowing into or out of a country, and the need for these flows to equal out evidently calls for some kind of market mechanism. On the other hand, if we think of money as a ledger entry, then the mere fact that a transaction takes place automatically creates an offsetting entry on the financial account. There may well be ways in which, say, foreign demand for a country’s assets causes its trade balance to shift toward deficit. But the argument has to be made in behavioral terms, it is not necessarily true.

13. Finally, thirteen: What does it mean to possess monetary sovereignty? Is having control over your own money a binary, yes or no question, or does it exist on a continuum? A more concrete aspect of this question is under what conditions countries can set their own interest rates. The older view was that a floating exchange rate was sufficient; the newer view — among established as well as heterodox economists — is that autonomous monetary policy is only possible with limits on financial flows, i.e. capital controls. Otherwise, what happens to your interest rate depends on the Fed’s choices, not yours.

I have my own opinions about what are more and less convincing answers to these questions. But my goal is not to convince you, or my students, of the answers. My goal is to convince you that these are real questions.

One reason that arguments about money-related questions are so often so painful an inconclusive, it seems to me, is that people start out from strong commitments to particular answers to various of these questions, or questions like these, without even realizing that they are questions — that it is possible to take a view on the other side. Almost nobody who talks about “real GDP” pauses to ask what exactly this number refers to. That the interest rate is the price of liquidity — of money — is the pivot of Keynes’ whole argument in The General Theory. But it’s constantly ignored or forgotten by people who think of themselves as Keynesians. In general, it seems to me, debates connected with money are less often about disagreements on substantive issues than about different premises, which are seldom recognized or acknowledged. Before denouncing each other, before accusing people of some basic error of fact, let’s at least try to map out the intellectual terrain we are fighting over.

A second purpose of this list is to show how these are not just academic questions, but have important implications for our efforts to, in Haavelmo’s phrase, become masters the happenings of real life. To be sure, this post doesn’t do this. But it was a goal of the class. And it is very much a goal of the book.

Eich on Marx on Money

I’ve been using some of Stefan Eich’s The Currency of Politics in the graduate class I’m teaching this semester. (I read it last year, after seeing a glowing mention of it by Adam Tooze.) This week, we talked about his chapter on Marx, which reminded me that I wrote some notes on it when I first read it. I thought it might be worthwhile turning them into a blogpost, incorporating some points that came out in the discussion in today’s class.

Eich begins with one commonly held idea of Marx’s views of money: that he was “a more or less closeted adherent of metallism who essentially accepted … gold-standard presumptions” — specifically, that the relative value of commodities is prior to whatever we happen to use for units of account and payments, that the value of gold (or whatever is used for money) is determined just like that of any other commodity, and that changes to the monetary system can’t have any effects on real activity (or at least, only disruptive ones). Eich’s argument is that while Marx’s theoretical views on money were more subtle and complex than this, he did share the operational conclusion that monetary reform was a dead end for political action. In Eich’s summary, while at the time of the Manifesto Marx still believed in a public takeover of the banking system as part of a socialist program, by the the 1860s he had come to believe that “any activist monetary policy to alter the level of investment, let alone … shake off exploitation, was futile.”

Marx’s arguments on money of course developed in response to the arguments of Proudhon and similar socialists like Robert Owen. For these socialists (in Eich’s telling; but it seems right to me) scarcity of gold and limits on credit were “obstacles to reciprocal exchange,” preventing people from undertaking all kinds of productive activity on a cooperative basis and creating conditions of material scarcity and dependence on employers. “A People’s Bank,” as Eich writes channeling Proudhon, “was the only way to guarantee the meaningfulness of the right to work.” Ordinary people are capable of doing much more socially useful (and remunerative) work than whatever jobs they were offered. But under the prevailing monopoly of credit, we have no way to convert our capacity to work into access to the means of production we would need to realize it.

Why, we can imagine Proudhon asking, do you need to work for a boss? Because he owns the factory. And why does he own the factory? Is it because only he had the necessary skills, dedication, and ambition to establish it? No, of course not. It’s because only he had the money to pay for it. Democratize money, and you can democratize production.

Marx turned this around. Rather than money being the reason why a small group of employers control the means of production, it is, under capitalism, simply an expression of that fact. And if we are going to attribute this control to a prior monopoly, it should be to land and the productive forces of nature, not money. The capitalist class inherits its coercive power from the landlord side of its family tree, not the banker side.

In Marx’s view, Proudhon had turned the fundamental reality of life under capitalism — that people are free to exchange their labor power for any other commodity — into an ideal. He attributed the negative consequences of organizing society around market exchange to monopolies and other deviations from it. (This is a criticism that might also be leveled against many subsequent reformers, including the ”market socialists” of our own time.)

That labor time is the center of gravity for prices is not a universal fact about commodities. It is a tendency — only a tendency — under capitalism specifically, as a result of several concrete social developments. First, again, production is carried out by wage labor. Second, wage labor is deskilled, homogenized, proletarianized. The equivalence of one hour of anyone’s labor for one hour of anyone else’s is a sociological fact reflecting that fact that workers really are interchangeable. Just as important, production must be carried out for profit, because capitalists compete both in the markets for their product and for the means of production. It is the objective need for them to produce at the lowest possible cost, or else cease being capitalists, that ensures that production is carried out with the socially necessary labor time and no more.

The equivalence of commodities produced by the same amount of labor is the result of proletarianization on the one side and the hard budget constraint on the other. The compulsion of the market, enforced by the “artificial” scarcity of money, is not an illegitimate deviation from the logic of equal exchange but its precondition. The need for money plays an essential coordinating function. This doesn’t mean that no other form of coordination is possible. But if you want to dethrone money-owners from control of the production process, you have to first create another way to organize it.

So one version of Marx’s response to Proudhon might go like this. In a world where production was not organized on capitalist lines, we could still have market exchange of various things. But the prices would be more or less conventional. Productive activity, on the other side, would be embedded in all kinds of other social relationships. We would not have commodities produced for sale by abstract labor, but particular use values produced by particular forms of activity carried out by particular people. Given the integration of production with the rest of life, there would be no way to quantitatively compare the amount of labor time embodied in different objects of exchange; and even if there were, the immobility of embedded labor means there would be no tendency for prices to adjust in line with those quantities. The situation that Proudhon is setting up as the ideal — prices corresponding to labor time, which can be freely exchanged for commodities of equal value — reflects a situation where labor is already proletarianized. Only when workers have lost any social ties to their work, and labor has been separated from the rest of life, does labor time become commensurable.

In the real world, the owners of the means of production have harnessed all our collective efforts into the production of commodities by wage labor for sale in the market, in order to accumulate more means of production – that is to say, capital. In this world, and only in this world, quantitative comparisons in terms of money must reflect the amount of labor required for production. Changes to the money system cannot change these relative values. At the same time, it’s only the requirement to produce for the market that ensures that one hour of labor really is equivalent to any other. Proudhon’s system of labor chits, in which anyone who spent an hour doing something could get a claim on the product of an hour of anyone else’s labor, would destroy the equivalence that the chits are supposed to represent. (A similar criticism might be made of job guarantee proposals today.)

For the mature Marx, money is merely “the form of appearance of the measure of value which is immanent in commodities, namely labor time.” There is a great deal to unpack in a statement like this. But the conclusion that changes in the quantity or form of money can have no effect on relative prices does indeed seem to be shared with the gold-standard orthodoxy of his time (and of ours).

The difference is that for Marx, that quantifiable labor time was not a fact of nature. People’s productive activities become uniform and homogeneous only as work is proletarianized, deskilled, and organized in pursuit of profit. It is not a general fact about exchange. Money might be neutral in the sense of not entering into the determination of relative prices, which are determined by labor time. But the existence of money is essential for there to be relative prices at all. The possibility of transforming authority over particular production processes into claims on the social product in general is a precondition for generalized wage labor to exist.

While Marx does look like commodity money theorist in some important ways, he shared with the credit-money theorists, and greatly developed, the idea — mostly implicit until then — that the productive capacities of a society are not something that exist prior to exchange, but develop only through the generalization of monetary exchange. Much more than earlier writers, or than Keynes and later Keynesians, he foregrounded the qualitative transformation of society that comes with the organization of production around the pursuit of money.

You could get much of this from any number of writers on Marx. What is a bit more distinctive in the Eich chapter is the links he makes between the theory and Marx’s political engagement. When Marx was writing his critique of Proudhon’s monetary-reform proposals in the 1840s, Eich observes, he and Engels still believed that public ownership of the banks was an important plank in the socialist program. Democratically-controlled banks would “make it possible to regulate the credit system in the interest of the people as a whole, and … undermine the dominion of the great money men. Further, by gradually substituting paper money for gold and silver coin, the universal means of exchange … will be cheapened.” At this point they still held out the idea that public credit could both alleviate monetary bottlenecks on production and be a move toward the regulation of production “according to the general interest of society as represented in the state.”

By the 1850s, however, Marx had grown skeptical of the relevance of money and banking for a socialist program. In a letter to Engels, he wrote that the only way forward was to “cut himself loose from all this ‘money shit’”; a few years later, he said, in an address to the First International, that “the currency question has nothing at all to do with the subject before us.” In the Grundrisse he asked rhetorically, “Can the existing relations of production and the relations of distribution which correspond to them be revolutionized by a change in the instrument of circulation…? Can such a transformation be undertaken without touching the existing relations of production and social relations which rest on them?” The answer, obviously, is No.

The reader of Marx’s published work might reasonably come away with something like this understanding of money: Generalized use of money is a precondition of wage labor, and leads to qualitative transformations of human life. But control over money is not the source of capitalists’ power, and the logic of capitalism doesn’t depend on the specific workings of the financial system. To understand the sources of conflict and crises under capitalism, and its transformative power and development over time, one should focus on the organization of production and the hierarchical relationships within the workplace. Capitalism is essentially a system of hierarchical control over labor. Money and finance are at best second order.

Eich doesn’t dispute this, as a description of what Marx actually he wrote.. But he argues that this rejection of finance as a site of political action was based on the specific conditions of the times. Today, though, the power and salience of organized labor has diminished. Meanwhile, central banks are more visible as sites of power, and the allocation of credit is a major political issue. A Marx writing now, he suggests, might take a different view on the value of monetary reform to a socialist program. I’m not sure, though, if this is a judgment that many people inspired by Marx would share.

At Substack: Hello World

I barley keep up this blog any more; do I really need a new format for (not) writing online? The problem, from my point of view, is that, these days, the only way people see blogs (or most other things one writes) is via twitter. And relying on twitter does not, at this point, see like a great idea. I’m moderately hopeful that an email newsletter can offer an alternative way.

In any case, my new substack is here. It’s pretty no-frills at the moment. I’ve pasted the first post below. For the moment I plan on cross-posting everything, but depending on how the substack goes I may revisit that.

What is this? This is an email newsletter, delivered through Substack. You probably get some others like it already. This one is from me, Joshua William Mason, or J. W. Mason as I usually write it. It’s called Money and Things. This specific email or post is the first one.

Why am I getting this? Either you signed up for it, or I added you. I subscribed a few people who I thought might be interested in hearing from me now and then. I hope you don’t mind! If you do, there’s an unsubscribe button somewhere. I promise I won’t add you again.

What’s the point of it? My main goal with this is to share things I’ve said or written in other settings, along with some interesting things I have read. I write a fair amount in a fair number of venues, and am in the news now and then. So it seems worth having one place to share it all with people who might like to see it. And then, despite the firehouse of content constantly aimed at each of our heads, it still can be nice to have someone point out something worth reading that you might not have run across otherwise.

The other goal is to have a structure for comments on things that are happening in the world. There are always things going on that I don’t have the time or energy or confidence to write about at length, but might have something interesting to say about in a more informal setting. Will a substack be any better for this than the blog I’ve been keeping for the past dozen years? I don’t know, but it seems worth a try.

So, a lot like a twitter feed, then? Yes, very much. I want to use the newsletter to share material that right now I use twitter for. Not everyone is on twitter, after all. And while I can’t see myself getting off twitter entirely – there are still too many interesting people there – I would like to spend less time on it, for all the familiar reasons.

How often will you be sending these? I’m vaguely hoping for once a week. I’m sure it won’t be more often than that; it could be much less. I will at least try to send one out whenever I publish something.

Why is the newsletter called Money and Things? Well, that captures the range of my interests. I write a lot about money, finance, central banks, credit and debt, inflation and other money-related and money-adjacent topics. But I also write about other things.

Also, Money and Things is the working title of the book that Arjun Jayadev and I are working on. This book has been in progress for longer than I care to think about, but it’s now mostly written and should be coming out from the University of Chicago Press sometime in the next year. So I also want to use this email to share material from the book, and, down the road, to encourage people to read it.

What is the book about? Oof, I hoped you wouldn’t ask that. Well, it’s about money … and things.

Can you be more specific? The book is an effort to pull together some different strands of thinking around money that Arjun and I have been grappling with since we were students at the University of Massachusetts 20 years ago. One place to start is the tendency — both in economics and everyday common sense — to think of money either as just one useful object among others, or as a faithful reflection of a material world outside itself. Whereas to us it seems clear we should think of it as constituting its own self-contained world, a game or a logic, that in some ways responds to external material and social reality, but also evolves autonomously, and reshapes that external world in its turn. Economists like to think that when we measure things in terms of money, that is capturing some pre-existing “real” value or quantity. (Like, when you see a figure like GDP, you assume in some sense it reflects a quantity of stuff that was produced.) But in fact — our argument goes — while money is a yardstick that allows all sorts of things to be numerically compared, it doesn’t reflect any underlying quantity except money itself.

Keynesians have been criticizing the idea that money is neutral, just a veil, for decades. But we think there’s still space to spell out what the positive alternative looks like, and why it matters. You might say it’s an attempt to elevate the argument of our “Fisher dynamics” papers — where we argued that movements in debt-income ratios have more to do with interest rates and inflation than change in borrowing behavior — into a worldview or paradigm.

What we’re mainly interested in is the interface or boundary between money-world and the concrete world outside of it. (One jokey summary is that we’re starting from Keynes’ General Theory of Money, Interest and Employment, and writing about the “and”.) The idea is that by focusing there, we can connect some long-standing theoretical questions around the nature of money with contemporary debates about policy and politics, and with historical developments like the shareholder revolution or the euro crisis. We’re aiming for a spot in intellectual space somewhere between Jim Crotty, Perry Mehrling, Doug Henwood and David Graeber, if that makes sense.

Will you have a better answer to this question by the time the book comes out? I hope so!

Getting back to the newsletter — will there be free and paid versions? No, there will not. If someone wanted to give me money for it, I wouldn’t say no. If I got a little, I’d buy my kids ice cream. If I got a significant amount, which seems unlikely, then I might put more time into writing it. If I get none at all, that’s perfectly fine.

My personal view – which I know not everyone shares – is that if you are a tenure-track academic, it’s a bit unethical to charge money for a newsletter or similar product. The job of an academic is not just teaching; we are being paid to think about the world and share what we learn. So to me – again, I know many people feel differently – when you turn your work as a scholar into a kind of private business venture, that’s almost a form of embezzlement. Perhaps you saw Inside Job, that movie about economists and the financial crisis. Remember how eagerly someone like Frederic Mishkin turned his stature as a big-name monetary economist into big checks for himself? I don’t want to be that guy. Of course I’m not under any illusion that my integrity carries anything like the market price of a Mishkin’s. But it’s still worth something to me.

To be clear, this doesn’t apply to people who make a living as journalists or writers. If you are a professional writer your readers need to be paying you one way or another, and subscriber-only newsletter content is a legitimate way to make that happen. But as an academic, I’m already being compensated for this kind of work.

Does this mean your book will also be distributed for free? Well, no. The publishers will charge whatever they normally do for a book like this, and Arjun and I will get whatever (presumably small) royalties we’re entitled to out of that.

So how is that different? I don’t know. I feel like it’s different? Of course producing a physical book is costly, and the publisher has their own employees, whose services are valuable, and other costs that have to be paid. On the other hand, it would be technically feasible to just put the book up online as a pdf, and let anyone download it. So making people pay is in some sense a choice we are making. Still, if Inside Job had merely caught Mishkin admitting he’d published a book about financial crises, I don’t think that would have been much of a gotcha. Although then again, on the other hand, the textbook-writing business does seem a bit morally compromised. (Personally I try not to assign anything I can’t distribute a free pdf of.) I do hope our book will be used in the classroom. But I wish students could get excerpts of it in xeroxed course packets, they way I did when I was in college.

Anyway. Money and Things, the newsletter, will always be entirely free. Money and Things, the book, will not be.

You seem to have strong feelings on this topic. Do you have anything else to say about it? Yes, I do. I’ve always found it infuriating that so much scholarly work is hidden behind paywalls. It goes against the whole idea of scholarship, especially if you think of your academic work as part of some political project or as otherwise useful. During the six-seven years between my two stints in graduate school, I was intermittently engaged in online economics discussions, and I found it deeply frustrating that there were so many interesting articles that, without an academic affiliation, I was not permitted to read. I hope someday we recognize IP as applied to academic work for what it is, a comprehensive regime of censorship. (And Alexandra Elbakyan, the creator of sci-hub, as one of humanity’s heroes.)

A bit more recently, but still some years ago, I joined the steering committee of the Union for Radical Political Economics in large part to see if I could convince them to convert URPE’s journal, the Review of Radical Political Economics, to open access. Here you are, I thought, doing work that’s supposed to be part of a larger transformative project, that is relevant not just for other academics but for workers and activists. So why are you enlisting the power of the state to stop people from reading it?

As is often the case, what seemed unanswerable in principle turned out to be less straightforward in practice. The leadership of URPE the organization is largely separate from that of the journal; there’s a multi-year contract with the publisher; and even if open access were allowed, URPE’s share of the subscription revenue is basically the organization’s entire budget. If we went open-access, how would we pay the editor, or award fellowships to students in heterodox programs, or fly people out for the steering committee meetings? Maybe, I suggested, allowing people to read the journal is more important than flying people to meetings. Easy for you to say, someone replied, you live in New York; for others, if they can’t come out and meet in person, they won’t be part of this community at all. Besides, are there really so many non-academics who want to read RRPE?

Maybe if I’d pushed harder I could have got somewhere. But the obstacles were real, and no one seemed to agree with me, so I gave up, and eventually left the steering committee. (Life is too short to be on too many committees.) But I still think I was right.

Anything else? No, I think that’s it for now. But don’t worry – there will be another post coming shortly after this one.

Slides on “Rethinking Supply Constraints”

On December 2-3, 2022, the Political Economy Research Institute at the University of Massachusetts-Amherst (where I did my economics PhD) will be hosting a conference on “Global Inflation Today: What Is To Be Done?”⁵

I will be speaking on “Rethinking Supply Constraints,” a new project I am working on with Arjun Jayadev. Our argument is that we should think of supply constraints as limits on the speed at which production can be reorganized and labor and other resources can be reallocated via markets, as opposed to limits on the level of production determined by “real” resources. The idea is that this makes better sense of recent macroeconomic developments; fits better with a broader conception of the economy in terms of human productive activity rather than the exchange of pre-existing goods; and points toward more promising responses to the current inflation.

I was hoping to have a draft of the paper done for the conference, but that is not to be. But I do have a set of slides, which give at least a partial sketch of the argument. Feedback is most welcome!

Climate Policy from a Keynesian Perspective

(This is the extended abstract for a piece I am writing for “The Great Turnaround,” a collection of essays on the economics of decarbonization from ZOE-Institute for Future-fit Economies and the Heinrich Böll Foundation.)

In the world in which we live, large-scale cooperation is largely organized through payments of money. Orthodox economics conflates these money flows, on the one hand with quantities of real social and physical things, and on the other hand with a quantity of wellbeing or happiness. One way of looking at Keynes’ work is as an attempt to escape this double conflation and see money as something distinct. Eighty years later, it can still be a challenge to imagine our collective productive activity except in terms of the quantities of money that organize it. But this effort of imagination is critical to address the challenges facing us, not least that of climate change.

The economic problems of climate change are often discussed, explicitly or implicitly, in terms of the orthodox real-exchange vision of the economy, in which problems are conceived of in terms of the allocation of scarce means among alternative ends.

In the real-exchange framework, decarbonization is a good which must be traded off against other goods. From this point of view, the central question is what is the appropriate tradeoff between current consumption and decarbonization. The problem is that since climate is an externality, this tradeoff cannot be reached by markets alone; the public sector must set the appropriate price via a carbon tax or equivalent. In general, more rapid decarbonization will be disproportionately more costly than slower decarbonization. A further problem is that since the climate externality is global, higher costs will be borne by the countries that move more aggressively toward decarbonization while others may free-ride.

This perspective does leave space for more direct public action to address climate change. Public investment, however, faces the same tradeoff between decarbonization and current living standards that price-mediated private action does. It is also limited by the state’s fiscal capacity. Governments have a finite capacity to generate money flows through taxation and bond-issuance (or equivalently to mobilize real resources) and use of this capacity for decarbonization will limit public spending in other areas.

The claims in the preceding two paragraphs may sound reasonable at first glance. But from a Keynesian standpoint, none are correct; they range from misleading to flatly false. In the Keynesian vision, the economy is imagined as aa system of monetary production rather than real exchange, with the binding constraints being not scarce resources, but demand and, more broadly, coordination. From this perspective, the problem of climate change looks very different. And these differences are not just about terminology or emphasis, but a fundamentally different view of where the real tradeoffs and obstacles to decarbonization lie.

In this paper, I will sketch out the central elements that distinguish a Keynesian vision of the economics of climate change. For this purpose, the Keynesian monetary-production framework can be seen as involving three fundamental premises.

1. Economic activity is coordination- and demand-constrained, not real resource-constrained.

2. Production is an active, transformative process, not just a combining of existing resources or factors.

3. Money is a distinct object, not just a representative of some material quantity; the interest rate is the price of liquidity, not of saving.

These premises have a number of implications for climate policy.

1. Decarbonization will be experienced as an economic boom. Decarbonization will require major changes in our patterns of production and consumption, which in turn will require substantial changes to our means of production and built environment. In capitalist economies, these changes are brought about by spending money. Renovating buildings, investing in new structures and equipment, building infrastructure, etc. add to demand. The decommissioning of existing means of production does not, however subtract from demand. Similarly, high expected returns in growing sectors can call forth very high investment there; investment can’t fall below zero in declining sectors. So even if aggregate profitability is unchanged, big shift in its distribution across industries will lead to higher investment.

2. There is no international coordination problem — the countries that move fastest on climate will reap direct benefits. While coordination problems are ubiquitous, the real-exchange paradigm creates one where none actually exists. If the benefits of climate change mitigation are global, but it requires a costly diversion of real resources away from other needs, it follows that countries that do not engage in decarbonization can free-ride on the efforts of those that do. The first premise is correct but the second is not. Countries that take an early lead in decarbonization will enjoy both stronger domestic demand and a lead in strategic industries. This is not to suggest that international agreements on climate policy are not desirable; but it is wrong and counterproductive to suggest that the case for decarbonization efforts at a national level is in any way contingent on first reaching such agreements.

3. There is no tradeoff between decarbonization and current living standards. Real economies always operate far from potential. Indeed, it is doubtful whether a level of potential output is even a meaningful concept. Decarbonization is not mainly a matter of diverting productive activity away from other needs, but mobilizing new production, with positive spillovers toward production for other purposes. The workers engaged in, say, expanding renewable energy capacity are not being taken away from equal-value activity in some other sector. They are, in the aggregate, un- or underemployed workers, whose capacities would otherwise be wasted; and the incomes they receive in their new activity will generate more output in demand-constrained consumption goods sectors.

4. Price based measures cannot be the main tools for decarbonization. There is a widely held view that the central tool for addressing climate should be an increase in the relative price of carbon-intensive commodities, through a carbon tax or equivalent. This make sense in a vision of the economy as essentially an allocation problem where existing resources need to be directed to their highest value use. But from a Keynesian perspective there are several reasons to think that prices are a weak tool for decarbonization, and the main policies need to be more direct. First, in a world of increasing returns, there will be multiple equilibria, so we can not think only in terms of adjustment at the margin. In the orthodox framework, increasing the share of, say, a renewable energy source will be associated with a higher marginal cost, requiring a higher tax or subsidy; but in an increasing-returns world, increasing share will be associated with lower marginal costs, so that while even a very large tax may not be enough to support an emerging technology once it is established no tax or subsidy may be needed at all. Second, production as a social process involves enormous coordination challenges, especially when it is a question of large, rapid changes. Third, fundamental uncertainty about the future creates risks which the private sector is often unwilling or unable to bear.

5. Central bank support for decarbonization must take the form active credit policy. As applied to central banks, carbon pricing suggests a policy to treat “green” assets more favorably and other assets less favorably. This is often framed as an extension of normal central bank policies toward financial risk, since the “dirty” asset suppose greater risks to their holders or systematically than the “green” ones. But there is no reason, in general, to think that the economic units that are at greatest risk from climate change are the same as the ones that are contributing to it. A deeper and more specifically Keynesian objection is that credit constraints do not bind uniformly across the economy. The central bank, and financial system in general, do not set a single economy wide “interest rate”, but allocate liquidity to specific borrowers on specific terms. Most investment, conversely, is not especially sensitive to interest rates; for larger firms, credit conditions are not normally a major factor in investment, while for smaller borrowers constraints on the amount borrowed are often more important. Effective use of monetary policy to support decarbonization or other social goals requires first identifying those sites in the economy where credit constraints bind and acting to directly to loosen or tighten them.

6. Sustained low interest rates will ease the climate transition. A central divide between Keynesian and orthodox macroeconomic theory is the view of the interest rate. Mainstream textbooks teach that the interest rate is the price of saving, balancing consumption today against consumption in the future — a tradeoff that would exist even in a nonmonetary economy. Keynes’ great insight was that the interest rate in a monetary economy has nothing to do with saving but is the price of liquidity, and is fundamentally under the control of the central bank. He looked forward to a day when this rate fall to zero, eliminating the income of the “functionless rentier”. As applied to climate policy, this view has several implications. First, market interest rates tell us nothing about any tradeoff between current living standards and action to protect the future climate. Second, there is no reason to think that interest rates must, should or will rise in the future; debt-financed climate investment need not be limited on that basis. Third, while investment in general is not very sensitive to interest rates, an environment of low rates does favor longer-term investment. Fourth, low interest rates are the most reliable way to reduce the debt burdens of the public (and private) sector, which is important to the extent that high debt ratios constrain current spending.

7. There is no link between the climate crisis and financial crisis. It is sometimes suggested that climate change and/or decarbonization could result in a financial crisis comparable to the worldwide financial crisis of 2007-2009. From a Keynesian perspective, this view is mistaken; there is no particular link between the real economic changes associated with climate change and climate policy, on the one hand, and the sudden fall in asset values and cascading defaults of a financial crisis, on the other. While climate change and decarbonization will certainly devalue certain assets — coastal property in low-lying cities; coal producers — they imply large gains for other assets. The history of capitalism offers many examples of rapid shifts in activity geographically or between sectors, with corresponding private gains and losses, without generalized financial crises. The notion that financial crises are in some sense a judgement on “unsound” or “unsustainable” real economic developments is an ideological myth we must reject. This is the converse of the error discussed under point 6 above, that measures to protect against the financial risks from climate change and decarbonization will also advance substantive policy goals.

8. There is no problem of getting private investors to finance decarbonization. Many proposals for climate investment include special measures to encourage participation by private finance; it is sometimes suggested that national governments or publicly-sponsored investment authorities should issue special green bonds or equity-like instruments to help “mobilize private capital” for decarbonization. Such proposals confuse the meaning of “capital” as concrete means of production with “capital” as a quantity of money. Mobilizing the first is a genuine challenge for which private businesses do offer critical resources and expertise not present in the public sector; but mobilizing these means paying for them, not raising money from them. On the financing side, on the other hand, the private sector offers nothing; in rich countries, at least, the public sector already borrows on more favorable terms than any private entity, and has a much greater capacity to bear risk. If public-sector borrowing costs are higher than desired, this can be directly addressed by the central bank; offering new assets for the private sector to hold does nothing to help with any public sector financing problem, especially given that such proposal invariably envision assets with higher yields than existing public debt.

These eight claims mostly argue that what are widely conceived as economic constraints or tradeoffs in climate policy are, from a Keynesian perspective, either not real or not very important. Approaches to the climate crisis that frame the problem as one of reallocating real resources from current consumption to climate needs, or of raising funds from the private sector, both suffer from the same conflation of money flows with real productive activity.

I will conclude by suggesting two other economic challenges for climate change that are in my opinion underemphasized.

First, I suggest that we face a political conflict involving climate and growth, this will come not because decarbonization requires accepting a lower level of growth, but because it will entail faster economic growth than existing institutions can handle. Today’s neoliberal macroeconomic model depends on limiting economic growth as a way of managing distributional conflicts. Rapid growth under decarbonization will be accompanied by disproportionate rise in wages and the power of workers. There are certainly reasons to see this as a desirable outcome, but it will inevitably create sharp conflicts and resistance from wealth owners that has to be planned for and managed. Complaints about current “labor shortages” should be a warning call on this front.

Second, rapid decarbonization will require considerably more centralized coordination than is usual in today’s advanced economies. If there is a fundamental conflict between capitalism and sustainability, I suggest, it is not because the drive for endless accumulation in money terms implies or requires an endless increase in material throughputs. Rather, it is because capitalism treats the collective processes of social production as the private property of individuals. (Even the language of “externalities” implicitly assumes that the normal case is one where production process involves no one but those linked by contractual money payments.) Treatment of our collective activity to transform the world as if it belonged exclusively to whoever holds the relevant property rights, is a fundamental obstacle to redirecting that activity in a rational way. Resistance on these grounds to a coordinated response to the climate crisis will be partly political and ideologically, but also concrete and organizational.

Inflation for Whom?

A point I’ve been emphasizing about inflation (see here and here) is that it is just an average of price changes; it doesn’t have any independent existence.

One implication of this is that there is not, even in principle, a true inflation rate. Pick any basket of goods and measure their prices over time; that is an inflation rate. The “all urban consumers” basket used by the BLS for the headline CPI inflation rate is a useful benchmark, but it’s just one basket among others. Any individual household or subgroup of households will have its own consumption basket and corresponding inflation rate.

Because a small number of items have gone up in price a lot recently, the average price increase in the CPI basket is greater than increase in wages over the past year. In this sense, real wages have gone down. I am not convinced this is a meaningful statistic. For one thing, car prices are almost certain to come back down over the next year, once the current semiconductor bottleneck is relieved and manufacturers ramp up output. Wage gains, on the other hand, have a lot of inertia. This year’s wage gains are likely to continue; certainly they will not be given back.

But there’s another reason the “falling real wage” claim is misleading. When price increases are concentrated in a few areas, the inflation rate facing people who are buying stuff in those areas will be very different from the rate facing those who are not. Most Americans do buy a car every few years, but relatively few need to buy a car right now.⁶ And even averaged over time, different groups of people spend more or less on cars relative to other things. The same goes for other categories of spending.

The BLS’s Consumer Expenditure Survey (CEX) tries to measure the distribution of consumption spending by different demographic groups. In principle, you could construct a separate CPI for each group, like CPI-E the BLS reports for elderly households. (For what it’s worth the CPI-E increased by 4.8 percent over the past year, a bit slower than the headline rate.) In practice the challenges in doing this are formidable — for the headline measure weights can be based on retail sales, but the weights for demographic group have to be based on household surveys, which are slower and much less reliable. (I have some discussion of these issues in Section 7 of this paper.) Still, the CEX can give us at least a rough sense of the difference in consumption baskets and inflation rates across different groups.

It’s particularly interesting to look at consumption baskets across income groups. One of the central arguments for running the economy hot is that it tends to compress wages. From this point of view, an increase in prices paid disproportionately by lower income households is more concerning than a similar aggregate increase in prices paid more by the better off.

For this post, I chose to focus on the consumption basket of households with pre-tax income below $30,000 a year — about one quarter of the population.

In the table below, I show 20 items, accounting for almost 95% of the CPI basket. The first column shows its share of the CPI-U basket, taken from the most recent CPI Table 2. The second column shows the difference between the weight of the item in consumption by households earning less than $30,000 and its weight in total consumption.⁷ So a positive value means something that makes up a larger share of consumption for households with incomes under $30,000 than of consumption for the population as a whole. This comes from the most recent Consumer Expenditure Survey, covering July 2019 through June 2020. The third column shows the price change of that item from July 2020 to July 2021, again from CPI Table 2. The items are ordered from the ones that make up the largest relative share of the consumption basket for low-income households to the ones that make up the smallest relative share. So it gives at least a rough sense of the different inflations experienced by lower versus higher income families.

Expenditure Category	Overall share (CPI)	Relative share, income <$30k (CEX)	Inflation, July 2020-July 2021 (CPI)
Rent of primary residence	7.6	8.3	1.9
Food at home	7.6	2.4	2.6
Electricity	2.5	1.5	4
Medical care services	7.1	1	0.8
Medical care commodities	1.5	0.35	-2.1
Recreation commodities	2.0	0.35	3.2
Water and sewer and trash collection	1.1	0.3	3.7
Education and communication services	6.1	0.2	1.2
Motor fuel	3.8	0.2	41.6
Utility (piped) gas service	0.7	0.2	19
Apparel	2.7	0.2	4.2
Motor vehicle parts and equipment	0.4	0.05	4.3
Fuel oil and other fuels	0.2	0.05	30.9
New vehicles	3.7	-0.15	6.4
Transportation services	5.3	-0.15	6.4
Lodging away from home	1.0	-0.3	21.5
Used cars and trucks	3.5	-0.3	41.7
Alcoholic beverages	1.0	-0.3	2.4
Food away from home	6.2	-0.35	4.6
Recreation services	3.7	-0.6	3.7
Household furnishings and supplies	3.7	-0.7	3
Owners’ equivalent rent	22.4	n/a⁸	2.4

As you can see, the items that are increasing at less than 2 percent a year — highlighted in blue — are all things disproportionately consumed by lower-income households. Rent, in particular, makes up a much higher share of spending for low-income households. Rent growth slowed sharply during the pandemic and, unlike many other prices, it has not so far accelerated again. Rent growth over the past year is about half the average rate in the three years before the pandemic.

Medical goods and services also make up a larger share of spending for lower-income households; prices there have grown slowly or income cases actually fallen over the past year. Prescription drug prices, for example, fell by 2 percent over the past year. Finally, education services, including childcare, have pulled inflation down over the past year, rising by about 1 percent (college tuition was flat.) Education inflation has been slowing for a long time — a trend I don’t recall seeing discussed much — but it slowed even more during the pandemic. Education and childcare make up a slightly higher fraction of spending for low-income households than for others.

On the other side, almost all the sectors where inflation is notably high — highlighted in red — make up a larger share of spending for higher-income households. Lodging away from home, for example, where prices are up over 20 percent, makes up less than 1 percent of the consumption basket for households with incomes under $30,000, but 2.5 percent of the basket for households with incomes over $200,000. Transportation services, food away from home, and new and used cars, which account for the majority of non-energy inflation, are also disproportionately consumed by higher income households.

In general, it seems clear that lower-income households are facing less inflation than higher income ones. The biggest price increases are in areas that are disproportionately consumed by higher-income families, while several of the most important consumption categories for lower-income families are seeing prices rise more slowly than before the pandemic. Any discussion of “falling real incomes” that ignores this fact is at best incomplete.

There is, of course, one big exception: energy. Gasoline especially, but also electricity and heating gas, are seeing big price increases and make up a larger share of consumption for lower-income families. And unlike auto purchases, energy consumption can’t be postponed. If you want to tell a story about higher prices eating up wage gains, it seems to me that energy is your best bet.

Except, of course, that these are prices that we want to see rise, if we are serious about climate change. Many of the same people fretting about inflation eroding real wages, are strong supporters of carbon taxes or permits. If you think a goal of policy is to raise the relative price of fossil fuels, why object when it happens via the market?

At the end of the day, perhaps the current debate about inflation and real wages doesn’t belong in the macroeconomics box at all, but in the climate box. The difficult problem here is not how to keep demand strong enough to raise wages without also raising prices. The price spikes we’re seeing right now are mainly about short-term supply constraints. I am confident that prices for autos and many other goods will come back down or at least stabilize over the next year, even if demand remains strong. The really difficult problem is how we make the transition away from fossil fuels without unacceptably burdening the people who are currently dependent on them.

UPDATE: I am getting some very confused readers, who note that historically rent, education and health care have historically risen in price faster than most goods, while in this post I’m saying they are rising more slowly. The original post, should have, but did not, make clear that the pattern of price changes over the past year or so is quite different from what we are used to. That said, this is not all about the pandemic. As I did note, inflation in education has been slowing for a long time; health care inflation has fallen dramatically during the pandemic but was also slowing before that, arguably thanks to the ACA. But the key point is that I am not saying that poor people face lower inflation in general; I’m saying this is a distinct feature of the inflation we’re experiencing now.

Alternative Visions of Inflation

Like many people, I’ve been thinking a bit about inflation lately. One source of confusion, it seems to me, is that underlying concept has shifted in a rather fundamental way, but the full implications of this shift haven’t been taken on board.

I was talking with my Roosevelt colleague Lauren Melodia about inflation and alternative policies to manage it, which is a topic I hope Roosevelt will be engaging in more in the later part of this year. In the course of our conversation, it occurred to me that there’s a basic source of confusion about inflation.

Many of our ideas about inflation originated in the context of a fixed quantity money. The original meaning of the term “inflation” was an increase in the stock of money, not a general increase in the price level. Over there you’ve got a quantity of stuff; over here you’ve got a quantity of money. When the stock of money grows rapidly and outpaces the growth of stuff, that’s inflation.

In recent decades, even mainstream economists have largely abandoned the idea of the money stock as a meaningful economic quantity, and especially the idea that there is a straightforward relationship between money and inflation.

Here is what a typical mainstream macroeconomics textbook — Olivier Blanchard’s, in this case; but most are similar — says about inflation today. (You can just read the lines in italics.)

There are three stories about inflation here: one based on expected inflation, one based on markup pricing, and one based on unemployment. We can think of these as corresponding to three kinds of inflation in the real world — inertial, supply-drive, and demand-driven. What there is not, is any mention of money. Money comes into the story only in the way that it did for Keynes: as an influence on the interest rate.

To be fair, the book does eventually bring up the idea of a direct link between the money supply and inflation, but only to explain why it is obsolete and irrelevant for the modern world:

Until the 1980s, the strategy was to choose a target rate of money growth and to allow for deviations from that target rate as a function of activity. The rationale was simple. A low target rate of money growth implied a low average rate of inflation. …

That strategy did not work well.

First, the relation between money growth and inflation turned out to be far from tight, even in the medium run. … Second, the relation between the money supply and the interest rate in the short run also turned out also to be unreliable. …

Throughout the 1970s and 1980s, frequent and large shifts in money demand created serious problems for central banks. … Starting in the early 1990s, a dramatic rethinking of monetary policy took place based on targeting inflation rather than money growth, and the use of an interest rate rule.

Obviously, I don’t endorse everything in the textbook.⁹ (The idea of a tight link between unemployment and inflation is not looking much better than the idea of a tight link between inflation and the money supply.) I bring it up here just to establish that the absence of a link between money growth and inflation is not radical or heterodox, but literally the textbook view.

One way of thinking about the first Blanchard passage above is that the three stories about inflation correspond to three stories about price setting. Prices may be set based on expectations of where prices will be, or prices may be set based on market power (the markup), or prices may be set based on costs of production.

This seems to me to be the beginning of wisdom with respect to inflation: Inflation is just an increase in prices, so for every theory of price setting there’s a corresponding theory of inflation. There is wide variation in how prices get set across periods, countries and markets, so there must be a corresponding variety of inflations.

Besides the three mentioned by Blanchard, there’s one other story that inflation is perhaps even more widespread. We could call this too much spending chasing too little production.

The too-much-spending view of inflation corresponds to a ceiling on output, rather than a floor on unemployment, as the inflationary barrier. As the NAIRU has given way to potential output as the operational form of supply constraints on macroeconomic policy, this understanding of inflation has arguably become the dominant one, even if without formalization in textbooks. It overlaps with the unemployment story in making current demand conditions a key driver of inflation, even if the transmission mechanism is different.

Superfically “too much spending relative to production” sounds a lot like “too money relative to goods.” (As to a lesser extent does “too much wage growth relative to productivity growth.”) But while these formulations sound similar, they have quite different implications. Intuitions formed by the old quantity-of-money view don’t work for the new stories.

The older understanding of inflation, which runs more or less unchanged from David Hume through Irving Fisher to Milton Friedman and contemporary monetarists, goes like this. There’s a stock of goods, which people can exchange for their mutual benefit. For whatever reasons, goods don’t exchange directly for other goods, but only for money. Money in turn is only used for purchasing goods. When someone receives money in exchange for a good, they turn around and spend it on some good themselves — not instantly, but after some delay determined by the practical requirements of exchange. (Imagine you’ve collected your earnings from your market stall today, and can take them to spend at a different market tomorrow.) The total amount of money, meanwhile, is fixed exogenously — the quantity of gold in circulation, or equivalently the amount of fiat tokens created by the government via its central bank.

Under these assumptions, we can write the familiar equation

MV = PY

If Y, the level of output, is determined by resources, technology and other “real” factors, and V is a function of the technical process of exchange — how long must pass between the receipt of money and it spending — then we’re left with a direct relationship between the change in M and the change in P. “Inflation is always and everywhere a monetary phenomenon.”¹⁰

I think something like this underlies most folk wisdom about inflation. And as is often the case, the folk wisdom has outlived whatever basis in reality it may once have had.¹¹

Below, I want to sketch out some ways in which the implications of the excessive-spending-relative-to-production vision of inflation are importantly different from those of the excessive-money-relative-to-goods vision. But first, a couple of caveats.

First, the idea of a given or exogenous quantity of money isn’t wrong a priori, as a matter of logic; it’s an approximation that happens not to fit the economy in which we live. Exactly what range of historical settings it does fit is a tricky question, which I would love to see someone try to answer. But I think it’s safe to say that many important historical inflations, both under metallic and fiat regimes, fit comfortably enough in a monetarist framework.

Second, the fact that the monetarist understanding of inflation is wrong (at least for contemporary advanced economies) doesn’t mean that the modern mainstream view is right. There is no reason to think there is one general theory of inflation, any more than there is one general etiology of a fever. Lots of conditions can produce the same symptom. In general, inflation is a persistent, widespread rise in prices, so for any theory of price-setting there’s a corresponding theory of inflation. And the expectations-based propagation mechanism of inertial inflation — where prices are raised in the expectation that prices will rise — is compatible with many different initial inflationary impulses.

That said — here are some important cleavages between the two visions.

1. Money vs spending. More money is just more money, but more spending is always more spending on something in particular. This is probably the most fundamental difference. When we think of inflation in terms of money chasing a given quantity of goods, there is no connection between a change in the quantity of money and a change in individual spending decisions. But when we think of it in terms of spending, that’s no longer true — a decision to spend more is a decision to spend more on some specific thing. People try to carry over intuitions from the former case to the latter, but it doesn’t work. In the modern version, you can’t tell a story about inflation rising that doesn’t say who is trying to buy more of what; and you can’t tell a story about controlling inflation without saying whose spending will be reduced. Spending, unlike money, is not a simple scalar.

The same goes for the wages-markup story of the textbook. In the model, there is a single wage and a single production process. But in reality, a fall in unemployment or any other process that “raises the wage” is raising the wages of somebody in particular.

2. Money vs prices. There is one stock of money, but there are many prices, and many price indices. Which means there are many ways to measure inflation. As I mentioned above, inflation was originally conceived of as definitionally an increase in the quantity of money. Closely related to this is the idea of a decrease in the purchasing power of money, a definition which is still sometimes used. But a decrease in the value of money is not the same as an increase in the prices of goods and services, since money is used for things other than purchasing goods and services. (Merijn Knibbe is very good on this.¹²) Even more problematically, there are many different goods and services, whose prices don’t move in unison.

This wasn’t such a big deal for the old concept of inflation, since one could say that all else equal, a one percent increase in the stock of money would imply an additional point of inflation, without worrying too much about which specific prices that showed up in. But in the new concept, there’s no stock of money, only the price changes themselves. So picking the right index is very important. The problem is, there are many possible price indexes, and they don’t all move in unison. It’s no secret that inflation as measured by the CPI averages about half a point higher than that measured by the PCE. But why stop there? Those are just two of the infinitely many possible baskets of goods one could construct price indexes for. Every individual household, every business, every unit of government has their own price index and corresponding inflation rate. If you’ve bought a used car recently, your personal inflation rate is substantially higher than that of people who haven’t. We can average these individual rates together in various ways, but that doesn’t change the fact that there is no true inflation rate out there, only the many different price changes of different commodities.

3. Inflation and relative prices. In the old conception, money is like water in a pool. Regardless of where you pour it in, you get the same rise in the overall level of the pool.

Inflation conceived of in terms of spending doesn’t have that property. First, for the reason above — more spending is always more spending on something. If, let’s say for sake of argument, over-generous stimulus payments are to blame for rising inflation, then the inflation must show up in the particular goods and services that those payments are being used to purchase — which will not be a cross-section of output in general. Second, in the new concept, we are comparing desired spending not to a fixed stock of commodities, but to the productive capacity of the economy. So it matters how elastic output is — how easily production of different goods can be increased in response to stronger demand. Prices of goods in inelastic supply — rental housing, let’s say — will rise more in response to stronger demand, while prices of goods supplied elastically — online services, say — will rise less. It follows that inflation, as a concrete phenomenon, will involve not an across-the-board increase in prices, but a characteristic shift in relative prices.

This is a different point than the familiar one that motivates the use of “core” inflation — that some prices (traditionally, food and energy) are more volatile or noisy, and thus less informative about sustained trends. It’s that when spending increases, some goods systematically rise in price faster than others.

This recent paper by Stock and Watson, for example, suggests that housing, consumer durables and food have historically seen prices vary strongly with the degree of macroeconomic slack, while prices for gasoline, health care, financial services, clothing and motor vehicles do not, or even move the opposite way. They suggest that the lack of a cyclical component in health care and finance reflect the distinct ways that prices are set (or imputed) in those sectors, while the lack of a cyclical component in gas, clothing and autos reflects the fact that these are heavily traded goods whose prices are set internationally. This interpretation seems plausible enough, but if you believe these numbers they have a broader implication: We should not think of cyclical inflation as an across the board increase in prices, but rather as an increase in the price of a fairly small set of market-priced, inelastically supplied goods relative to others.

4. Inflation and wages. As I discussed earlier in the post, the main story about inflation in today’s textbooks is the Phillips curve relationship where low unemployment leads to accelerating inflation. Here it’s particularly clear that today’s orthodoxy has abandoned the quantity-of-money view without giving up the policy conclusions that followed from it.

In the old monetarist view, there was no particular reason that lower unemployment or faster wage growth should be associated with higher inflation. Wages were just one relative price among others. A scarcity of labor would lead to higher real wages, while an exogenous increase in wages would lead to lower employment. But absent a change in the money supply, neither should have any effect on the overall price level.

It’s worth noting here that altho Milton Friedman’s “natural rate of unemployment” is often conflated with the modern NAIRU, the causal logic is completely different. In Friedman’s story, high inflation caused low unemployment, not the reverse. In the modern story, causality runs from lower unemployment to faster wage growth to higher inflation. In the modern story, prices are set as a markup over marginal costs. If the markup is constant, and all wages are part of marginal cost, and all marginal costs are wages, then a change in wages will just be passed through one to one to inflation.

We can ignore the stable markup assumption for now — not because it is necessarily reasonable, but because it’s not obvious in which direction it’s wrong. But if we relax the other assumptions, and allow for non-wage costs of production and fixed wage costs, that unambiguously implies that wage changes are passed through less than one for one to prices. If production inputs include anything other than current labor, then low unemployment should lead to a mix of faster inflation and faster real wage growth. And why on earth should we expect anything else? Why shouldn’t the 101 logic of “reduced supply of X leads to a higher relative price of X” be uniquely inapplicable to labor?¹³

There’s an obvious political-ideological reason why textbooks should teach that low unemployment can’t actually make workers better off. But I think it gets a critical boost in plausibility — a papering-over of the extreme assumptions it rests on — from intuitions held over from the old monetarist view. If inflation really was just about faster money growth, then the claim that it leaves real incomes unchanged could work as a reasonable first approximation. Whereas in the markup-pricing story it really doesn’t.

5. Inflation and the central bank. In the quantity-of-money vision, it’s obvious why inflation is the special responsibility of the central bank. In the textbooks, managing the supply of money is often given as the first defining feature of a central bank. Clearly, if inflation is a function of the quantity of money, then primary responsibility for controlling it needs to be in the hands of whoever is in charge of the money supply, whether directly, or indirectly via bank lending.

But here again, it seems, to me, the policy conclusion is being asked to bear weight even after the logical scaffolding supporting it has been removed.

Even if we concede for the sake of argument that the central bank has a special relationship with the quantity of money, it’s still just one of many influences on the level of spending. Indeed, when we think about all the spending decisions made across the economy, “at one interest rate will I borrow the funds for it” is going to be a central consideration in only a few of them. Whether our vision of inflation is too much spending relative to the productive capacity of the economy, or wages increasing faster than productivity, many factors are going to play a role beyond interest rates or central bank actions more broadly.

One might believe that compared with other macro variables, the policy interest rate has a uniquely strong and reliable link to the level of spending and/or wage growth; but almost no one, I think, does believe this. The distinct responsibility of the central bank for inflation gets justified not on economic grounds but political-institutional ones: the central bank can act more quickly than the legislature, it is free of undue political influence, and so on. These claims may or may not be true, but they have nothing in particular to do with inflation. One could justify authority over almost any area of macroeconomic policy on similar grounds.

Conversely, once we fully take on board the idea that the central bank’s control over inflation runs through to the volume of credit creation to the level of spending (and then perhaps via unemployment to wage growth), there is no basis for the distinction between monetary policy proper and other central bank actions. All kinds of regulation and lender-of-last-resort operations equally change the volume and direction of credit creation, and so influenced aggregate spending just as monetary policy in the narrow sense does.

6. The costs of inflation. If inflation is a specifically monetary phenomenon, the costs of inflation presumably involve the use of money. The convenience of quoting relative prices in money becomes a problem when the value of money is changing.

An obvious example is the fixed denominations of currency — monetarists used to talk with about “shoe leather costs” — the costs of needing to go more frequently to the bank (as one then did) to restock on cash. A more consequential example is public incomes or payments fixed in money terms. As recently as the 1990s, one could find FOMC members talking about bracket creep and eroded Social Security payments as possible costs of higher inflation — albeit with some embarrassment, since the schedules of both were already indexed by then. More broadly, in an economy organized around money payments, changes in what a given flow of money can buy will create problems. Here’s one way to think about these problems:

Social coordination requires a mix of certainty and flexibility. It requires economic units to make all kinds of decisions in anticipation of the choices of other units — we are working together; my plans won’t work out if you can change yours too freely. But at the same time, you need to have enough space to adapt to new developments — as with train cars, there needs to be some slack in the coupling between economic unit for things to run smoothly. One dimension of this slack is the treatment of some extended period as if it were a single instant.

This is such a basic, practical requirements of contracting and management that we hardly think about it. For example, budgets — most organizations budget for periods no shorter than a quarter, which means that as far as internal controls and reporting are concerned, anything that happens within that quarter happens at the same time.¹⁴Similarly, invoices normally require payment in 30 or 60 days, thus treating shorter durations as instantaneous. Contracts of all kinds are signed for extended periods on fixed money terms. All these arrangements assume that the changes in prices over a few months or a year are small enough that they can be safely ignored.can be modified when inflation is high enough to make the fiction untenable that 30, 60 or 90 days is an instant. Social coordination strongly benefits from the convention that shorter durations can be ignored for most periods, which means people behave in practice as if they expect inflation over such shorter periods to be zero.

Axel Leijonhufvud’s mid-70s piece on inflation is one of the most compelling accounts of this kinds of cost of inflation — the breakdown of social coordination — that I have seen. For him, the stability of money prices is the sine qua non of decentralized coordination through markets.

In largely nonmonetary economies, important economic rights and obligations will be inseparable from particularized relationships of social status and political allegiance and will be in some measure permanent, inalienable and irrevocable. … In monetary exchange systems, in contrast, the value to the owner of an asset derives from rights, privileges, powers and immunities against society generally rather than from the obligation of some particular person. …

Neoclassical theories rest on a set of abstractions that separate “economic” transactions from the totality of social and political interactions in the system. For a very large set of problems, this separation “works”… But it assumes that the events that we make the subject of … the neoclassical model of the “economic system” do not affect the “social-political system” so as … to invalidate the institutional ceteris paribus clauses of that model. …

Double-digit inflation may label a class of events for which this assumption is a bad one. … It may be that … before the “near-neutral” adjustments can all be smoothly achieved, society unlearns to use money confidently and reacts by restrictions on “the circles people shall serve, the prices they shall charge, and the goods they can buy.”

One important point here is that inflation has a much greater impact than in conventional theory because of the price-stability assumption incorporated into any contract that is denominated in money terms and not settled instantly — which is to say, pretty much any contract. So whatever expectations of inflation people actually hold, the whole legal-economic system is constructed in a way that makes it behave as if inflation expectations were biased toward zero:

The price stability fiction — a dollar is a dollar is a dollar — is as ingrained in our laws as if it were a constitutional principle. Indeed, it may be that no real constitutional principle permeates the Law as completely as does this manifest fiction.

The market-prices-or-feudalism tone of this seems more than a little overheated from today’s perspective, and when Arjun and I asked him about this piece a few years ago, he seemed a bit embarrassed by it. But I still think there is something to it. Market coordination, market rationality, the organization of productive activity through money payments and commitments, really does require the fiction of a fixed relationship between quantities of money and real things. There is some level of inflation at which this is no longer tenable.

So I have no problem with the conventional view that really high inflations — triple digits and above — can cause far-reaching breakdowns in social coordination. But this is not relevant to the question of inflation of 1 or 2 or 5 or probably even 10 percent.

In this sense, I think the mainstream paradoxically both understates and overstates the real costs of inflation. They exaggerate the importances of small differences in inflation. But at the same time, because they completely naturalize the organization of life through markets, they are unable to talk about the possibility that it could break down.

But again, this kind of breakdown of market coordination is not relevant for the sorts of inflation seen in the United States or other rich countries in modern times.

It’s easier to talk about the costs (and benefits) of inflation when we see it as a change in relative prices, and redistribution of income and wealth. If inflation is typically a change in relative prices, then the costs are experienced by those whose incomes rise more slowly than their payments. Keynes emphasized this point in an early article on “Social Consequences of a Change in the Value of Money.”¹⁵

A change in the value of money, that is to say in the level of prices, is important to Society only in so far as its incidence is unequal. Such changes have produced in the past, and are producing now, the vastest social consequences, because, as we all know, when the value of money changes, it does not change equally for all persons or for all purposes. …

Keynes sees the losers from inflation as passive wealth owners, while the winners are active businesses and farmers; workers may gain or lose depending on the degree to which they are organized. For this reason, he sees moderate inflation as being preferable to moderate deflation, though both as evils to be avoided — until well after World War II, the goal of price stability meant what it said.

Let’s return for a minute to the question of wages. As far as I can tell, the experience in modern inflations is that wage changes typically lag behind prices. If you plot nominal wage growth against inflation, you’ll see a clear positive relationship, but with a slope well below 1. This might seem to contradict what I said under point 4. But my point there was that insofar as inflation is driven by increased worker bargaining power, it should be associated with faster real wage growth. In fact, the textbook is wrong not just on logic but on facts. In principle, a wage-driven inflation would see a rise in real wage. But most real inflations are not wage-driven.

In practice, the political costs of inflation are probably mostly due to a relatively small number of highly salient prices.

7. Inflation and production. The old monetarist view had a fixed quantity of money confronting a fixed quantity of goods, with the price level ending up at whatever equated them. As I mentioned above, the fixed-quantity-of-money part of this has been largely abandoned by modern mainstream as well as heterodox economists. But what about the other side? Why doesn’t more spending call forth more production?

The contemporary mainstream has, it seems to me, a couple ways of answering the question. One is the approach of a textbook like Blanchard’s. There, higher spending does lead to to higher employment and output and lower unemployment. But unless unemployment is at a single unique level — the NAIRU — inflation will rise or fall without limit. It’s exceedingly hard to find anything that looks like a NAIRU in the data, as critics have been pointing out for a long time. Even Blanchard himself rejects it when he’s writing for central bankers rather than undergraduates.

There’s a deeper conceptual problem as well. In this story, there is a tradeoff between unemployment and inflation. Unemployment below the NAIRU does mean higher real output and income. The cost of this higher output is an inflation rate that rises steadily from year to year. But even if we believed this, we might ask, how much inflation acceleration is too much? Can we rule out that a permanently higher level of output might be worth a slowly accelerating inflation rate?

Think about it: In the old days, the idea that the price level could increase without limit was considered crazy. After World War II, the British government imposed immense costs on the country not just to stabilize inflation, but to bring the price level back to its prewar level. In the modern view, this was crazy — the level of prices is completely irrelevant. The first derivative of prices — the inflation rate — is also inconsequential, as long as it is stable and predictable. But the second derivative — the change in the rate of inflation — is apparently so consequential that it must be kept at exactly zero at all costs. It’s hard to find a good answer, or indeed any answer, for why this should be so.

The more practical mainstream answer is to say, rather than that there is a tradeoff between unemployment and inflation with one unambiguously best choice, but that there is no tradeoff. In this story, there is a unique level of potential output (not a feature of the textbook model) at which the relationship between demand, unemployment and inflation changes. Below potential, more spending calls forth more production and employment; above potential, more spending only calls forth higher inflation. This looks better as a description of real economies, particular given that the recent experience of long periods of elevated unemployment that have not, contrary to the NAIRU prediction, resulted in ever-accelerating deflation. But it begs the question of why should be such a sharp line.

The alternative view would be that investment, technological change, and other determinants of “potential output” also respond to demand. Supply constraints, in this view, are better thought of in terms of the speed with which supply can respond to demand, rather than an absolute ceiling on output.

Well, this post has gotten too long, and has been sitting in the virtual drawer for quite a while as I keep adding to it. So I am going to break off here. But it seems to me that this is where the most interesting conversations around inflation are going right now — the idea that supply constraints are not absolute but respond to demand with varying lags — that inflation should be seen as often a temporary cost of adjustment to a new higher level of capacity. And the corollary, that anti-inflation policy should aim at identifying supply constraints as much as, or more than, restraining demand.

Finance, Money and Cow Clicking

Finance and its derivatives like financialization, are like many political economy categories: they’re a widely used term but lack an agreed-upon definition. One often encounters formulations like “financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions.” That isn’t very helpful!

Let me offer a simple definition of finance, which I think corresponds to its sense both for Marx and in everyday business settings. Finance is the treatment of a payment itself as a commodity, independent of the transaction or relationship that initially gave rise to it.

The most straightforward and, I think, oldest, form of finance in this sense is the invoice. Very few commercial transactions are in cash; much more common is an invoice payable in 30 or 60 or 90 days. This is financing; the payment obligation now appears as a distinct asset, recorded on the books of the seller as accounts receivable, and on the books of the buyer as accounts payable.

The distinct accounting existence of the payment itself, apart from the sale it was one side of, is a fundamental feature, it seems to me, of both day-to-day accounting and capitalism in a larger sense. In any case, it develops naturally into a distinct existence of payments, apart from the underlying transaction, in a substantive economic sense. Accounts payable can be sold to a third party, or (perhaps more often) borrowed against, or otherwise treated just like any other asset.

So far we’re talking about dealer finance; the next step is a third party who manages payments. Rather than A receiving a commodity from C in return for a promise of payment in 30 or 60 or 90 days, A receives the commodity and makes that promise to B, who makes immediate payment to C. Until the point of settlement, A has a debt to B, which is recorded on a balance sheet and therefore is an asset (for B) and a liability (for A.) During thins time the payment has a concrete reality as an asset that not only has a notional existence on a balance sheet, but can be traded, has a market price, etc.

If the same intermediary stands between the two sides of enough transactions, another step happens. The liabilities of the third party, B, can become generally accepted as payment by others. As Minsky famously put it, the fundamental function of a bank is acceptance — accepting the promises of various payors to the various payees. Yes, the B stands for Bank.

Arriving at banks by this route has two advantages. First, it puts credit ahead of money. The initial situation is a disparate set of promises, which come to take the form of a uniform asset only insofar as some trusted counterparts comes to stand between the various parties. Second, it puts payments ahead of intermediation in thinking about banks

But now we must pause for a moment, and signal a turn in the argument. What we’ve described so far implicitly leans on a reality outside money world.

As money payments, A —> C and A —> B —> C are exactly equivalent. The outcomes, described in money, are the same. The only reason the second one exists, is because they are not in reality equivalent. They are not in reality only money payments. There is always the question of, why should you pay? Why do you expect a promise to be fulfilled? There are norms, there are expectations, there are authorities who stand outside of the system of money payments and therefore are capable of enforcing them. There is an organization of concrete human activity that money payments may alter or constrain or structure, but that always remain distinct from them. When I show up to clean your house, it’s on one level because you are paying me to do it; but it’s also because I as a human person have made a promise to you as another person.

This, it seems to me, is the rational core of chartalism. The world, we’re told, is not the totality of things, but of facts. The economic world similarly is not the totality of things, but of payments and balance sheets. The economic world however is not the world. Something has to exist outside of and prior to the network of money payments.

This could, ok, be the state, as we imagine it today. This is arguably the situation in a colonial setting. The problem is that chartalism thinks the state, specifically in the form of its tax authority, is uniquely able to play this role of validating money commitments. Whereas from my point of view there are many kind of social relationships that have an existence independent of the network of money payments and might potentially be able to validate them.

Within the perspective of law, everything is law; just as within the perspective of finance, everything is finance. If you start from the law, then how can money be anything but a creature of the state? But if we start instead from concrete historical reality, we find that tax authority is just one of various kinds of social relations that have underwritten the promises of finance.

Stefano Ugolino’s Evolution of Central Banking describes a fascinating variety of routes by which generalized payments systems evolved in Western Europe. The overwhelming impression one takes away from the book is that there is no general rule for what kinds of social relationships give rise to a centralized system of payments. Any commitment that can be commuted to cash can, in principle, backstop a currency.

In the medieval Kingdom of Naples payments were ultimately based on the transfer of claims tokens at the network pawnbrokers operated by the Catholic Church. The Kingdom of Naples, writes Ugolino, “is the only country with a central bank that was founded by a saint.”

A somewhat parallel example is found in Knibbe and Borghaerts’ “Capital market without banks.” There they describe an early modern setting in the Low Countries where the central entity that monetizes private debt contracts is not the tax-collecting state, but the local pastor.

The general point is made with characteristic eloquence by Perry Mehrling in “Modern Money:Credit of Fiat”:

For monetary theory, so it seems to me, the significant point about the modern state is not its coercive power but the fact that it is the one entity with which every one of us does ongoing business.We all buy from it a variety of services, and the price we pay for those services is our taxes. … It is the universality of our dealings with the government that gives government credit its currency. The point is that the public “pay community” … is larger than most any private pay community, not that the state s more powerful than any other private entity.

There are different kinds of recipients of money payments and the social consequences they can call on if the payments aren’t made vary widely both in severity and in kind. The logic of the system in which payments are automatically made is the same in any case. But all the interesting parts of the system are the places where it doesn’t work like that.

Let me end with a little parable that I wrote many years ago and stuck in a drawer, but which now seems somehow relevant in this new age of NFTs.

Once upon a time there was a game called cow clicker. In this game, you click on a cow. Then you can’t click it again for a certain period of time. That’s it. That is the game.

How much is a cow click? Asked in isolation, the question is meaningless. You can’t compare it to anything. It is just an action in a game that has no other significance or effect. How much is a soccer goal, in terms of baseball runs?

On one level, you cannot answer the question. They exist in different games. You could add up the average score per game as a conversion factor … but then should you also take into account the number of games in a season… ? But you can’t even do that with cow clicker, there is no outcome in the game that corresponds to winning or losing. There is no point to it at all — the game was created as a joke, and that is the point of the joke.

Nonetheless, and to the surprise of the guy who created it, people did play cow clicker. They liked clicking cows. They wanted more cows. They wanted to know if there was any way to shorten the timeline before they could click their cow again.

Now suppose it was possible to get extra cow clicks by getting other people to also click a cow. These people, who wanted to click their cows more, now could persuade their friends to click cows for them. Any relationship now is a potential source of cow clicks.

For example, if you exercise any kind of coercive power over someone — a subordinate, a student, a child — you might use it to compel them to click cows for you. Or if you have anything of value, you might offer it in return for clicking cows. Clicking cows is still inherently valueless. And your relationship with your friends, kids, spouse, are valuable but not quantifiable in themselves. But now they can be expressed in terms of cow clicks.

Imagine this went further. If enough cow-clicker obsessives are willing to make real-life sacrifices — or use real-life authority — to get other people to click cows, then a capacity to click cows (some token in the game) becomes worth having for its own sake. Since you can offer it to the obsessives in return for something they have that you want. Even people who think the game is pointless and stupid now have an interest in figuring out exactly how many cows they can click in a day, and if there is any way to click more.

As more and more of social life became organized around enticing or coercing people into clicking cows, more and more relationships would take on a quantitative character, and be expressible in as a certain number of cow-clicks. These quantities would be real — they would arise impersonally, unintentionally, based on the number of clicks people were making. For instance, if a husband or wife can be convinced to click 10 times a day, while a work friend can only be convinced to click once a day on average, then a spouse really is worth 10 co-workers. No one participating in the system set the value, it is an objective fact from the point of view of participants. And, in this case, it doe express a qualitative relationship that exists outside of the game — marriage involves a stronger social bond than the workplace. But the specific quantitative ratio did not exist until now, it does not point to anything outside the game.

In this world, the original contentless motivation of the obsessives becomes less and less important. The answer to “why are you clicking cows” becomes less anything to do with the cows, and more because someone asked me to. Or someone will reward me if I do, or someone will punish me if I don’t. And — once cow-clicks are transferable — this motivation applies just as much to the askers, rewarders and publishers. The original reason for clicking was trivially feeble but now it can even disappear entirely. Once a click can reliably be traded for real social activity, that is sufficient reason for trading one’s own social existence for clicks.

EDIT: The idea of finance as intermediation as an object in itself comes, like everything interesting in economics, from Marx. Here’s one of my favorite passages from the Grundrisse:

Bourgeois wealth, is always expressed to the highest power as exchange value, where it is posited as mediator, as the mediation of the extremes of exchange value and use value themselves. This intermediary situation always appears as the economic relation in its completeness…

Thus, in the religious sphere, Christ, the mediator between God and humanity – a mere instrument of circulation between the two – becomes their unity, God-man, and, as such, becomes more important than God; the saints more important than Christ; the popes more important than the saints.

Where it is posited as middle link, exchange value is always the total economic expression… Within capital itself, one form of it in turn takes up the position of use value against the other as exchange value. Thus e.g. does industrial capital appear as producer as against the merchant, who appears as circulation. … At the same time, mercantile capital is itself in turn the mediator between production (industrial capital) and circulation (the consuming public) or between exchange value and use value… Similarly within commerce itself: the wholesaler as mediator between manufacturer and retailer, or between manufacturer and agriculturalist…

Then the banker as against the industrialists and merchants; the joint-stock company as against simple production; the financier as mediator between the state and bourgeois society, on the highest level. Wealth as such presents itself more distinctly and broadly the further it is removed from direct production and is itself mediated between poles, each of which, considered for itself, is already posited as economic form. Money becomes an end rather than a means; and the higher form of mediation, as capital, everywhere posits the lower as itself, in turn, labour, as merely a source of surplus value. For example, the bill-broker, banker etc. as against the manufacturers and farmers, which are posited in relation to him in the role of labour (of use value); while he posits himself toward them as capital, extraction of surplus value; the wildest form of this, the financier.

You read this stuff and you think — how can you not? — that Marx was a smart guy,