Thursday, March 7, 2019

KV - Just Another Theory of Money

I decided to separate this from the Magic Money Tree post below because I felt it distracted from it and could generate two different discussions. In that article they spoke about what money is which got me thinking about it again. This is just a very simplified view of how money works in society, but it helps me to understand it.

This is my theory of what money is: that it is work in a stored, unused form which is denominated in tokens - but this is an analogy. It's really a stored claim for work and with it we can purchase work, or products, at a later date. So, we can convert work into money, by getting paid, and then we can convert the money back into work, by paying someone to do work for us.

We use money as a system for exchanging work with one another. It has no fixed value and at one store I might spend $30 on food but at another store I might only need to spend $25 to get the same thing. But money does give us a rough idea of how much we can get for it.

If I borrow $100 from a bank - which it creates out of thin air - I can purchase labour with it, or buy something someone has made. I am then asked to pay interest on the loan until it is repaid. This interest is a payment to the bank for running the system, which is how it gets paid for doing work.

When I have spent the $100 loan, the only way I can get the money back is by earning it. So I will have to work for someone else to get $100, plus the interest owed, and then I can repay the loan. In this way, I have exchanged work with someone else, which the money helped me to do. When I repay the loan, the bank zeros my account and the money disappears from existence.

The money always represented work, and the loan was real money as long as I did the work to repay it and did not go bankrupt. If I fail to repay the loan due to bankruptcy, ill health, or death, then the money is circulating in society with no work behind it. It is then counterfeit money.

Let's say a bank lends someone $100,000 to buy a house, but he goes bankrupt soon after and so the bank repossess the house. It looks like the bank has created money out of thin air and now owns a house - a freebie - but it doesn't, because it has to sell the house to raise the money to cancel the loan, after which the money then dissapears. If the bank doesn't do this, the $100,000 can circulate in society with no work being done for it. Plus we have an empty house doing nothing.

When someone buys the house from the bank, that $100,000 that was counterfeit is now claimed for. The new owner got the $100,000 from another bank and now he will have to work hard to repay the loan. There was $100,000 circulating in society with no work backing it, but the new owner has taken onboard a $100,000 loan, and, in effect, it is he who is now backing it with work and this means the money is not counterfeit anymore. As he works, he will get paid and slowly over the lifetime of the loan draw that $100,000 back out of society and the bank will cancel it. That $100,000 equals his work and everything gets balanced out.

Until the bank re-sold the house there was $100,000 circulating in society which was not being matched by any work being done. This means that good and services were not being produced to go along with the extra money. There is now a mismatch in society as there is more money compared to the amount of goods and services available, and this can be inflationary, but not necessarily so. If the economy is underperforming the extra money can expand the economy and then society works to produce the extra goods and services which soaks up the excess money. This is how in MMT government fiat money can be used to grow the economy without causing inflation, or the need to raise taxes.

Work is money and money is work, but as a contract, an agreement. It's a mental construct. Fiat money is real money because it is based on real work - work that will be done in the furure. The government gives fiat money it's authority and people readily accept it without question because it is 'government money' - it is legal tender. And it certainly looks important with the Queens head, or George Washington, or some other noble historic person on it.


Konrad said...

“This is my theory of what money is: that it is work in a stored, unused form which is denominated in tokens.”

I don’t see it that way, since money is not physical or limited. Money is an accounting system. Money only exists in the human mind, like the concept of “blue,” or the number “three.” Money is represented by marks on a ledger, or by marks on a statement of a bank account. Money is also represented by tokens (e.g. coins and notes).

Again, money is strictly a mental thing. No one has ever seen a physical “dollar” or a physical “bank account”; only representations thereof. Money represents work, but since money is not physical, money cannot “store” work.

Money is a scoreboard in the game of life. He who controls the scoreboard controls the game.

“Work is money and money is work.”

Again, I don’t see it that way. Work has physical existence. Money does not. Money represents work, but money is not work. Money is an accounting system. In token form, money serves as a medium of exchange.

We humans operate by agreement. We live in a consensus reality, composed myths, hoaxes, and group-think that is protected by taboos, inertia, laziness, and sheer habit. If I have a five-pound note in my hand, the note is just a piece of paper. It does not “contain” or “create” work. Only humans can create work. And humans agree that the “fiver” represents work.

When people study MMT, one of the last delusions they must overcome is the false chimera that money is physical and limited. This chimera keeps popping up again and again until people finally weed it out of their minds at the root.

Konrad said...

Poor people think of money as something that is physical and scarce.

Rich people think of money as a way to "keep score," like points on a scoreboard.

For rich people, money is an accounting system for property, which includes humans and human energy.

Kaivey said...

No, money is stored work, but only as a contract, an agreement. The money itself is worthless, just as digits in your bank account are, but because of the system people will agree to work for it, because they know they can get other people to work for it.

Money is in the mind, a mental construct, but it produces real work. It's a way of exchanging work.

Kaivey said...

Describing money as stored work is just a simple way of looking at it as there is no work being stored anywhere. The store is really in other people who will work for it when you ask them at a future date.

You can work a lifetime, earn money, and then only spend 90% of it each day, the other 10% gets saved in a pension. In other words, you did 100% work each day, but only bought 90% of work back, saving the other 10% of work as money, or digits. Now society owes you 10% of the work you did, which wasn't claimed. The work is stored in the society at large for a future date because you can get people to work for it when you ask.

At retirement you can now claim the work you never claimed in the past. Other people will now work for that money. By saving the money you stored work, or the promise to do work (if they want your money, that is, and most people want paid work).

It's about an agreement, a mental construct.

André said...

But isn't the hole point of MMT that money is a tax credit token? That is it. It is not necessarily anything else

Unknown said...

Isn't money what human beings call a "convention" (an abstract convenience or symbol or token) that you'll deploy so much energy to produce a product or deliver a service measured by a unit of time we call a person-hour. So the token then also gets measured in so many person-hours according to the degree of skill utilized in the energy expenditure. I'd charge you more person-hours for doing your taxes than for cleaning your house.

The number of person-hours measurement can vary from country to country because different tokens are used. This permits trading advantage manipulation if the government has sufficient autocratic power. Exports can be "taxed" by forcing all currency exchange to go through state owned banks. The "tax" creamed off can be used to buy the tokens (usually the treasury bonds) of the country you're exporting to forcing up the value of that country's tokens. This reinforces the understanding your country's "energy" is cheaper and therefore better value all other things being equal.

Konrad said...

“No, money is stored work, but only as a contract, an agreement. The money itself is worthless, just as digits in your bank account are, but because of the system people will agree to work for it, because they know they can get other people to work for it.” ~ Kaivey

If money is an agreement or a contract, and is intrinsically worthless, and only exists in the human mind, how can money “store” work, or “produce” work? How can something that has no physical existence “contain” work?

The concept of “red” only exists in the human mind. Can marks that represent “red” contain redness, which itself only exists in the human mind?

What performs work are humans, not money, which is just an abstract way for humans to keep score.

Perhaps you are speaking figuratively or metaphorically, but in my opinion we should be careful how we use these terms, since careless use is one reason why we have a vast and growing gulf between the rich and the rest.

Clint Ballinger said...

Just a tax credit. That's it. Dont over think it.

Kaivey said...

How can something that has no physical existence “contain” work?'

Easy, if other people agree to work for those digits. It's the fiat system, or agreement.

If I earn a hundred units of money a week, and only spend 90 units every week, then I am ten units in credit each week. With that 10 units of credit I can buy work, or something someone has made at any time in the future. But instead I decide to store the units. The 10 units represent work that I did, but I never claimed any work back for. I'm in credit by 10 units, and I can claim 10 units of work at any time in the future, I.e, it is stored work (but only as a agreement).

I can save these credits over a lifetime and when I retire I can give up work and use the credits to pay other people to do work for me. The credits have no physical value, just as any contact has no physical value - the paper it is written on is worthless - but the contract, or agreement has value, but only because we agree it does.

The fiat system is the agreement. People see those digits as money, I.e, they can purchase work with it, or something someone has made (which is work).

Over the course of my lifetime I earned 100 units of work each week, but only spend 90 units of week each week. Every 10 units I didn't spend is work I never made a claim on. I saved it up.

But those units of work have no fixed value either. One week I might be able to get 20 apples for one units, but another week I might only get 10 apples for it. The units, money, is only used for negotiating prices.

I might do 8 hours of work in my dentist's garden, but he will only offer me one hours of work at his surgery. He might give me a voucher to claim one hours work at a future date. I now have stored work, which I can claim anytime. When I ask, he will take the voucher and do work an hours work for me.

But instead I could get someone else to work for me and I could offer them my voucher instead of money. If they accept my voucher, they know they can get an hours worth of work at my dentist's surgery.

It's like a form of stored unused work. I did work on my dentist's garden, but never claimed one hours worth of work back at his surgery. I held onto it to be used at a later date. I can exchange it for work at any time.

Kaivey said...

Yes, I'm thinking it right down to the nuts and bolts.

GLH said...

Is there any reason that money cannot be both a unit of account and a store of work? I understand that there are two kinds of money, government currency and bank credit and that credit can be used either for real tangible assets and work or it can be used for asset purchases in order to change titles. Since most of the money in circulation today is bank credit used to change title and drain currency out of the real economy then we are left a shrinking real economy while we have an increasing asset bubble. Is that correct?

Critical Tinkerer said...

Money is all that above in all comments. Everyone is right about money in some part of it.

Ralph Musgrave said...

Re the claim by Clint Ballinger and others above that money is just a tax credit, that is true of base money, but not of commercial bank issued money. Commercial bank issued money used to represent about 95% of all money untill billions of dollars worth of base money was issued via QE.

Critical Tinkerer said...

If you imagine what we do as if there is no money in the world: we gift each other with values we can offer (mostly labor. Money motivates us to share gifts with each other as a record of gifts. We share as a huge family using the same currency/ record of gifts. As in any family, sharing isn't equal. But, money makes us share gifts as a family. Money is a token of our gifts to each other. I find this is the most general description of money.

Senexx said...

MMT agrees with you. Money is a credit, in my view a social credit. However the name social credit theory has already been taken.

Unfortunately so has Quantum Economics which would have been useful to explain microeconomics and how micro does not scale up to macroeconomics.

I see only a difference in presentation.

Kaivey said...

You're right, Jure, there are different descriptions of money, and all are right in their own way.

Clint Ballinger said...

Ralph, those are promises to pay tax credits on your behalf. That's it. If the promise to pay system is too big, regulate it better. That's it.

Andrew Anderson said...

If the promise to pay system is too big, regulate it better. That's it. Clint Ballinger

Via government privileges, the liabilities of the usury cartel are largely a sham.

So a genuine solution would be to eliminate those privileges so "the banks" have genuine liabilities.

Or do you not believe in genuine accounting, Clint?

Konrad said...

A. How can something that has no physical existence “contain” work?'

Q. Easy, if other people agree to work for those digits. It's the fiat system, or agreement. ~ Kaivey

As you say above, we are dealing with a semantic issue.

What “stores work” is the human mind. Money or credits is just a way for human minds to keep accounts. As I said above, no one has ever seen a dollar or a bank account. All we see are representations thereof.

In any case my main point is that money is not physical, and therefore not limited.

André said...

"that is true of base money, but not of commercial bank issued money"

True. I was talking about base money.

Bank deposits are a promise to redeem, on demand, base money.

You would still be unable to claim that "money is work"...

I mean, you can work and in return earn some bananas and then store it to use (or sell it later) but that doesn't make banana = work. Bananas are bananas and work is work

Kaivey said...

Yes, the semantics could be better. Money is not a store of work, like a magnetic field is a store of work. Money is a store of numbers which is part of a system which can use to buy work, or something that someone has made.

You can earn the numbers by doing work, and your bank account may go up by 100 digits. Then at a later date you can use some of the numbers to buy work. I was trying to make it simple by describing this as a store of work - that work converts into money and money can be converted back into work, and I can still see it that way because this is how it appears to behave - but it's really a store of a promise that someone will do work for it.

Unknown said...

Human beings use symbols as a convention to better handle uncertainty in life. Symbols are abstract. We use abstract alphanumeric symbols. We apply the abstract use of numeric symbols to money. Human labour is measured in the abstract symbols of money and time.

Kaivey said...

What I mean André, is that you can work and get money and then with that money you can buy work, or something someone has made. Therefore work can be converted into money and money can be converted back into work. When you hold a dollar in your pocket, you can view as a something that can be converted into work someday, so it acts like a store of work, but it is a human construct, it's not really a store of real work as such. Money is not able to do anything, it's people that do the work.

Money is a store that can be used to buy work, and the more you have, the more you can buy.

Now, you can inherit money which you didn't work for, but your family did. Or you can invest money and other people will do the work for you.

So, rather than work = money and money = work (which is just an anology, a way of seeing it) : work can be converted into money and then money can be converted back into work. It my opinion it's the same thing.

I'm going to have to think of a better way to write it, but I believe my theory of money is correct.

Kaivey said...

Now, when the government deficit spends and puts money into society, there was no work backing it (except someone at the treasury typing some numbers into a keyboard).

Well, I'm still working on this one...

But at the moment I can see that if the economy is underperforming, then the new money will generate work. If a government employee gets an extra $10 each week from the government, he might spend it on a book each week, then the shop keeper can stock an extra book, and the book company can print an extra book (each week). Extra produce has been made which soaks up the $10, so no inflation sets in yet.

But what happens when the economy is at full potential?

Unknown said...

Some agency has to initially put the measuring device units into society and some agency has to regulate the quantity relative to resources. It needs to do this democratically and especially so when it franchises out the creation of these units.

André said...

The meter, the foot or yard are all units of length decided by social convention, and a measuring tape is a device to measure distance using those units. They are more than just symbols, but they are conventions nonetheless.

Base money, on the other hand, is not just a bunch of numbers nor just some social convention to measure work nor a device to measure work. Base money is a tax credit. It grants to its holder the liberating power from tax liabilities. Those tax liabilities, if not paid, will not liberate the taxpayer, and will bring negative consequences - including the seizure of some of the taxpayer’s properties through police force (and, in the past, prison and physical violence). This is much more than convention or a device.

Bank deposits are promises to redeem tax credits on demand. Its value depends on the trustworthiness that the issuing bank enjoys. If people don’t believe that the bank is fully capable of fulfilling its promise, the bank deposit or bank note will be traded with a discount or may not be traded at all.

As you can see, money cannot be “work”, an “abstract symbol”, or “a convention”.

The fact that you can trade apple to bananas, and then bananas back to apples does not mean that you can claim that a banana is an apple. The fact that you can compare the relative value of a banana in terms of apples also doesn’t mean that a banana is an apple.

What you are claiming seems to me the old, naive theory of money...

Unknown said...

"It grants to its holder the liberating power from tax liabilities."

Money as a "Get of Jail" card! Hmmm!

André said...

"Money as a 'Get of Jail' card! Hmmm!"

Exactly! But the owner of the jail is a mafia that will certainly jail you (if you don't have the "card"). And how do you get the "card"? By working for the mafia! It's something like this...

It is not a transcendal abstract work measure entity... just a Get of Jail card... At least this is the whole point of MMT...

You may not be an MMTer, but then why would you be a writer in Mike Norman's Blog? ("An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT)", right?)

Clint Ballinger said...

"Exactly! But the owner of the jail is a mafia that will certainly jail you (if you don't have the "card"). And how do you get the "card"? By working for the mafia! It's something like this..."

Government is a stationary bandit. Better than the roving bandits we had before (A PAX MAFIOSA if you will).

The mafia gives value to its protection racket (taxes).
If used right, we are indeed better off with the gov :)

All money before taxing govs had to have as a unit of account a commodity (even if a credit money, needed a measure of the unit, in gold or grain or silver). The emergence of the tax-credit replaced the commodity as the unit. This sometimes took thousands of years to emerge fully, consistently. No wonder people are still confused.
Tax-credits act as a commodity (think how reserves trade).
Anyway, the tax-credit is conceptually easy to understand. And like the commodity it replaces, deserves no %.
You can build a promise to pay system with thte tax-credit as the redeemable unit (rather than gold or whatever). That is what all govs capable of taxation have done (starting in about 1700 give or take a century).
That's it. Not that hard in principle

Andrew Anderson said...

You can build a promise to pay system with thte tax-credit as the redeemable unit (rather than gold or whatever). That is what all govs capable of taxation have done (starting in about 1700 give or take a century).
That's it. Not that hard in principle
Clint Ballinger

1) Certainly the DEMAND for tax-credits (fiat) is artificially low in that only depository institutions, "the banks", may use them in account form. That should be fixed.
2) Since they are inherently risk-free, the monetary sovereign may and should charge interest for using tax-credits with an individual citizen exemption up to a reasonable limit.

So the power of banks is entirely a result of government privilege; otherwise they could only act as loan brokers between citizen accounts at the Central Bank or Treasury - not run their own payment system on top of inherently risk-free tax-credits, aka "fiat."

So when are MMT advocates going to advocate the abolition of those privileges?

Clint Ballinger said...

2009 perhaps

Kaivey said...

'The fact that you can trade apple to bananas, and then bananas back to apples does not mean that you can claim that a banana is an apple."

Correct, but the work done to produce those products is the same kind of work - human work - effort.

Andrew Anderson said...

2009 perhaps Clint Ballinger

How does INCREASING* bank privileges abolish them?

Also, regulating banks does not solve the problem of the use of what is, in essence, the public's credit but for private gain. Otoh, completely de-privileging depository institutions does solve that problem.

* examples:
1) unlimited, FREE(!), deposit insurance.
2) unlimited, unsecured loans at ZERO percent.

Unknown said...

OK the world is currently unbalanced at the moment because of Mafia Capitalism and Mafia Nationalism and we human beings are so far the most complex work in progress in terms of ability to sort it out. But help is at hand with the concept of MMT which offers us the idea we must think of money as first of all being a nationalist benign tax credit. We have of course now worked out a way of exchanging it with other nation's monies using electronic currency exchange markets instead of expensively carting it around in the solid form of gold or silver.

How much value a nation's money is worth on the electronic exchange markets, however, appears to be based on uncertainty just as more solid commodities like wheat or corn are on futures markets. (Indeed the great apostle of uncertainty John Maynard Keynes made a great deal of money for Cambridge University on the futures markets.)

So the benign tax credit appears to have something to do with uncertainty. Conceptually it can be a hedge against uncertainty if you have the sophisticated flexibility and strong nerves you can hop out of one nation's benign tax credit into another. If there was just one global benign tax credit would there still be some wanting to switch into gold or silver when economic uncertainty loomed? Depends to some degree you'd have to at least first start taking into account your view on how much human beings have tamed Mafia Capitalism and Nationalism. But at root that benign tax credit appears to have the characteristic of being value variable and as human beings we're constantly rooting around to find certainty in it in a world full of uncertainty.

At the moment we're uncertain whether the American dollar has the world's best certainty despite its military clout. That benign tax credit has fallen into the world of "conceptualizing" whether this is still so!

Greg said...

Good thread here I think, lots of good comments.

How we conceptualize money is at the root of our economic problems I believe. You can pretty much divide up the political camps into how they see money.

One thought on the money = work. Where this really breaks down I think is in the act of saving or deferred spending. Definitions of inflation relate to how much we lose in our purchasing power over time. Deferred spending is never supposed to be less valuable than when that income was initially earned. If I give you a massage today and you give me a coupon for two foot rubs in return, should I expect that coupon to be honored forever? Obviously not. There is a limit to the amount of time that this can be honored. You might die! Can i then go to your wife and say "You owe me two foot rubs!" ? But even if you dont die, your situation could change where you can t fulfill that obligation to my satisfaction. There is a limited time that full exchange value exists.

This why businesses that give a coupon for a product or service put an expiration date. I can't walk into a McDonalds with a coupon from 1995 and expect my free hamburger!! Now if you have $5.00 gift card issued by a McDonalds they will let you redeem that forever but you won't get as much for your $5.00 in 5-10 years more than likely.

Our notion of "saving" as something inherently responsible/noble/moral needs to be thrown in the dustbin I think.


I must ask why you object so vehemently to deposit insurance? Seems to me the deposit insurance helps the depositor more than the bank. There is no reason banks can't be closed down or punished while still agreeing that the depositor gets every dollar in checking account guaranteed. Obviously there should be limitations on what type of accounts get 100% insured to infinity but if someone wants to amass 1 million dollars in an interest free checking account why should that not be insured fully? Insuring it fully would actually be the same as having a checking act with the Fed. Making depositors use their deposits as something for the banks to compete for is what encourages explosion of banking bad behaviors.

Kaivey said...


'In any case my main point is that money is not physical, and therefore not limited.'

But the work it can buy is. If we put more money out than there is work a available we get inflation because goods and services can't be produced to soak up the money.

But I can see what people are getting at now. It's as if I'm saying that by limiting money to the amount of work that can be done, I'm limiting the amount of money the government can create - but it can create as much as it likes. But what MMT does say there are limits to government spending, and these limits are the physical and human resources available.

So, my article sounds like it's saying that all money is related to work, and so the government can't create any more money.

Hmmm! But there is no point in creating any more money when it can't buy anymore work. And MMT says this.

Andrew Anderson said...

I must ask why you object so vehemently to deposit insurance? Greg

Deposits at the Central Bank are inherently risk-free so why can't citizens have accounts there too and not just banks?

The real question then is why privileges for the banks are so vehemently DEFENDED?

You tell me.

Greg said...

I dont view deposit insurance as privilege for the banks to be honest. I dont know the full history of FDIC but I do know that prior to some point in the 1930s ,I believe, there was no deposit insurance at a bank. If you feared your bank might go under you ran and took your money out. Banks wanted no such behavior to escalate. Panics were bad for banking and they sometimes weren't rational. I believe it was an FDR era idea to insure some deposits. Banks went along but they didn't necessarily want people to be able to have a certain amount guaranteed to them. If they did they would have offered some such thing prior to it being mandated by the govt.

Banks did push for a limit because they felt people needed some skin in the game so to speak, but that notion of a bank is no longer applicable to today. We know today that Im not giving my deposits to a bank so that they have something to lend. It was a semi useful fiction. Banks would be totally against insuring a higher level of deposits so that alone should tell you that its not a handout to the banks.

Unknown said...

Since money has variable value as one of its characteristics then of course it's conceptual. We conceptually value what an hour's work with a particularly skill is worth in currency units and that value varies from country to country according to the development stage its at.

Currency units have to also vary in value for the following reason. As we create more goods and services we’re going to need more currency units (money) otherwise one of two things will occur:-

1) The value of everything we own and need will begin to fall precipitously (deflation) because the same number of currency units has to be allocated to more goods and services as we create them.

2) We’ll have to call a halt to producing fewer goods and services to keep prices aligned to the fixed quantity of currency units we have available.