The future of money and the payment system: what role for central banks? Lecture by Agustín Carstens

The economics of money is back in the limelight. Even five years ago, I cannot imagine that a lecture on money and the payment system could have been a subject for an event like today’s. Theoretically speaking, money is a social convention. People accept money in the expectation that everyone else will do the same. According to this bare-bones definition, anything could serve as money provided that everyone, as it were, buys in. In economic parlance, this equilibrium analysis gives rise to a theoretical notion of a currency area consisting of users in a community, as shown in a recent paper by our host Markus Brunnermeier and his co-authors. In giving further texture to the analysis of money as a convention, economists and central bankers have learned over the years that the institutional details matter when it comes to how durable and how efficient any economic arrangement can be. To define money as a self-sustaining convention is not the same as nailing down the nitty-gritty details of the monetary system’s architecture.

"...money is a social convention. People accept money in the expectation that everyone else will do the same." Right. As David Graeber showed in Debt: The First 5000 Years, the concept of "money" arose from prehistoric tribal societies that operated on the  "gift economy," when gifts were considered social obligations to be reciprocated. Adherence to such customs generated social trust, not only for "money" as a social construct but also for the rule of law (justice) over the rule of men (power) as a matter of reciprocity and fairness, in addition to utility.

Money and other constructs (arrangements) that underlie institutions later evolved into institutionalized debt and record-keeping using a unit of account, as Michael Hudson showed. "Credit money" as a social construction was developed prior to the advent of state monies that were tax-driven to generate demand. See the work of A. Mitchell Innes.

It was the temple and not the palace that seems to have given rise to institutional monies. Interestingly, the Federal Reserve is referred to as "the temple." It is the palace (state) that backs the temple. I am thinking specifically of William Greider's Secrets of the Temple: How the Federal Reserve Runs the Country.

Subsequently, the palace (state) took over from the temple. Georg Friedrich Knapp described "chartal money" in The State Theory of Money (1905). Institutionalists, Post Keynesians and MMT economists later elaborated on this, as well as legal scholars.

The highlight of the lecture is central bank money as a public good.

The monetary system is founded on trust in the currency. This is something that only the central bank can provide. Like the legal system and other public goods, the trust underpinned by the central bank has the attributes of a public good.3 To coin a phrase, I would like to refer to “central bank public goods”.

This is a huge step in the right direction. The state's power to create currency is delegated to the central bank as the government's fiscal agent. This power derives from the constitution of the state. Thus, the currency issued on this fashion is a public good rather than a private good.

The function of the central bank is also involved in the creation of the public-private institution of commercial banking, where banks are given access to the central bank's payments system and the central bank as lender of last resort. In turn, banks agree to state regulation.

Bank for International Settlement (PDF)
The future of money and the payment system: what role forcentral banks?
Lecture by Agustín Carstens General Manager, Bank for International Settlements
Princeton University, New Jersey, 5 December 2019

What happened to the public economy in economics? — June Sekera

Important. Demonstrates the need for a return to political economy" to right the balance, which has swung too far in the direction of economic liberalism.

The problem is that the assumptions on which economic liberalism is based are ideological and not empirical, seeming to contradict what actually happens institutionally especially in democratic societies regarding "public goods." Economic liberalism assumes that public goods are only needed as a result of "market failure," so the solution is not to provide public goods but rather to correct the underlying market failure by allowing "free market" to work it magic through liberating natural "market forces" from government interference.

"Socialism" as managed fiscal policy is the target. Neoliberalism want to limit the role of government in economics to monetary policy set by a politically independent central bank. For neoliberals the government's fiscal position should be dictated by "expansionary fiscal austerity" and "sound money," instead of the fiscal stance targeting welfare and distributed prosperity, e.g., through a full employment policy and the provision of public goods by using the power of the government as currency issuer as needed. Thus the preference for rules and the rejection of discretion as interference.

Real-World Economics Review Blog
What happened to the public economy in economics?

June Sekera

Mariana Mazzucato — Yes, Government Creates Wealth

Economics has never accepted the idea that the public sector creates wealth. But it does—and acknowledging that can lead to sweeping change....

Democracy — A Journal of Ideas
Yes, Government Creates Wealth

Mariana Mazzucato | RM Phillips chair in the Economics of Innovation at SPRU in the University of Sussex

See also

Ten years after the global economic crisis, profits have recovered, but investment remains weak. Ultimately, the reason is that economic policy continues to be informed by neoliberal ideology and its academic cousin, “public choice” theory, rather than by historical experience.

Project Syndicate
Who Really Creates Value in an Economy?
Mariana Mazzucato | RM Phillips chair in the Economics of Innovation at SPRU in the University of Sussex

John Quiggin — We are all socialists now

Socialism is much more than public ownership of productive enterprises. Still, if there is one policy that clearly distinguishes socialists from their (or rather our) opponents, it is support for public enterprise as a way of organizing large-scale production, and, in particular, as the preferred model for industries characterized by natural monopoly or other major market failures. The opposite view, dominant since the 1970s, is the market liberal framework that favors comprehensive private ownership, with “light-handed” regulation as the response to market “imperfections”.

Now that I’ve explicitly adopted the term “socialist”, I’ve been struck by the fact that I seem to be pushing against an open door....

As a socialist, I support a mixed economy in which both public and private ownership play important roles. The evidence of the past century shows, in my view, that most large-scale infrastructure should be publicly owned, and operate on a statutory authority model, accountable to the public through governments, but with politicians kept at arms length from day-to-day decisions. On the other hand, small business should be left to private ownership. That leaves a large share of the economy to balance between large for-profit corporations and public enterprise. The design of a mixed economy involves getting that balance right.

In my view, feudalism is a socio-economic system that prioritizes land (control of territory) as a factor of production. Capitalism is a socio-economic system that prioritizes capital (ownership). Socialism is an socio-economic system that prioritizes workers (people).

John Quiggin's Blog

We are all socialists now
John Quiggin | Professor and an Australian Research Council Laureate Fellow at the University of Queensland, and a member of the Board of the Climate Change Authority of the Australian Government

Marshall Auerback — Trump’s Bogus Infrastructure Plan Takes the U.S. Further Down the Road of Rentier Capitalism

President Trump presented his infrastructure plan last week. If you’re keen on the idea of out-of-control privatized utilities gouging customers and manipulating energy markets, or consortia building overpriced, expensive toll roads (until they go bust), then you’ll love the president’s proposals. His mooted public-private partnerships are another variant of socialism for the rich and free market discipline for the rest of us. PPPs are like a religion that offers its adherents the promise of capitalist heaven via tax breaks, subsidized funding, and guaranteed returns, minus the discipline of private bank credit arrangements or potential bankruptcy, the costs of which are invariably borne by a public already experiencing the hell of significantly more restricted access (think toll roads and bridges), higher user fees or “slower lane” traffic (think the end of net neutrality), and the costs of bailouts if and when the venture goes bust....

No private market discipline is enforced on management because in most cases they are given control of what was once a public monopoly, which is simply converted into a private one. It’s rentier capitalism, plain and simple.... 

In essence, these public-private partnerships are one of the sick jokes that the neoliberal era visited on all of us in the name of economic efficiency and responsible government—a ‘joke’ because the beneficiaries of all this public largesse have been laughing all the way to the bank as stupid public officials continue to fall prey to their lobbying as they joyfully hand over the keys to the public purse. Trump is simply perpetuating the trend of allowing governments to continue to abrogate their true responsibilities to pursue and safeguard public purpose. Governments should never have become agents of private profit.…

Neoliberalism can be viewed as government as agent of private profit based on "free market" ideology that prioritizes private ownership over public because "efficiency," along with public policy that favors capital formation as the basis for growth, under the assumption that "a rising tide lifts all boats" (trickle down).

Naked Capitalism
Trump’s Bogus Infrastructure Plan Takes the U.S. Further Down the Road of Rentier Capitalism

Marshall Auerback

Cross-posted from Alternet

June Sekera — The absence of a theory of public economy in today’s economics

More than a century ago, the effective operation of the public economy was a significant, active concern of economists. With the insurgence of market-centrism and rational choice economics, however, government was devalued, its role circumscribed and seen from a perspective of “market failure.” As Backhouse (2005) has shown, the transformation in economic thinking in the latter half of the 20th century led to a “radical shift” in worldview regarding the role of the state. The very idea of a valid, valuable public non-market has almost disappeared from sight....

Because mainstream economists in the U.S. and elsewhere have been so market-focused for so long, production outside the market has been erased from the equations of economics. So now, government action is regarded as an “intervention” that “distorts” smooth operation of an otherwise beneficent market. Government is considered to have an economic role only (or primarily) in cases of so called “market failure.” Consequently, there is no viable and explanatory concept of an actual, let alone a legitimate, public non-market economy. So pervasive is the creed that government only “intervenes” in what is thought to be the valid, market economy that even literature from the Congressional Research Service (Labonte, 2010) relegates government to an outsider role.... 

As I noted earlier, the “public choice” school has become the framework to which economists default for an explanation of the public economy. Backhouse (2005) outlines the development of the public choice school, which stems from a cluster of works published in the 1950s and 1960s by James Buchanan, Gordon Tullock, Mancur Olson, and Anthony Downs. It became a school, and a movement, when James Buchanan and Warren Nutter found a home for their efforts at George Mason University in Virginia. In the mid-1980s George Mason opened the Center for the Study of Market Processes, with its largest supporter being the Koch Family Foundations. Stretton and Orchard (1994) have demonstrated the anti-government, anti-democratic stance of public choice theorists in their extensive treatment of the school in Public Goods, Public Enterprise, Public Choice; Theoretical Foundations of the Contemporary Attack on Government. After critiquing the theory in economics terms, they suggest that public choice “reasoning seems to arise from the theorists’ reluctance to ‘come out’ and identify themselves as open enemies of democracy or at least of universal suffrage…Governments are viewed as exploiters of the citizenry, rather than the means through which the citizenry secures for itself goods and services that can best be provided jointly or collectively.”...

Real-World Economics Review Blog
The absence of a theory of public economy in today’s economics

June Sekera, researcher, UCL Institute for Innovation and Public Purpose; founder of the independent Public Goods Institute, and Research Fellow at the Global Development And Environment Institute (GDAE) at Tufts University, where she established and leads GDAE’s Public Economy Project

Geoffrey M. Hodgson — Education is not a public good

I am surprised that Geoffrey Hodgson would make an elementary error in argument by taking an arbitrary definition as an absolute criterion.

His argument actually says that those he is opposing are using the term "public good" in a way that contradicts current convention in the dominant faction of the economics profession.

What if the definition is too narrow to fit the general case and is therefore only suitable for special case models?

This is similar to the claim of conventional economists that the methodological debate is over and only their method is admissible in inquiry and debate.

It's also reminiscent of religious dogmatism.

It is an example of the sort of authoritarian nonsense that Paul Feyerabend was opposing in Against Method (PDF download).

Yeah, I know — "Anarachism," "Postmodernism," "epistemological relativism," and all that. The basis for asserting these types of view derives from an analysis of the role of power in discourse.

This is a classic power play at the level of John Bates Clark and James Buchanan. As an institutionalist, Hodgson should know this. Or maybe he does?

I actually like the conventional definition in some respects, but as guideline rather than a dogma. I don't receive it as "blest."

The "blessing" comes from elevating economic liberalism over social and political liberalism, which results in many paradoxes.

Why should what some liberal economists say (assume) dictate criteria outside the framework in which they serve as arbitrary criteria. Hello, model definitions are always stipulations and their necessity is logical necessity limited to the model.

As for conventional economics and lot more, the influence of these views will recede as the Anglo-American influence declines in a changing world where the Global East and South are rising and the North and West are waning.

New Politics

Education is not a public good

Geoffrey M. Hodgson | Research Professor of Business Studies in the University of Hertfordshire, and also the editor-in-chief of the Journal of Institutional Economics.

Bill Raden — Free Tuition Was Once the Norm in California

For an increasing number of education and political leaders, bringing debt-free higher education back to California is long overdue. In 2015 alone, over half of UC and CSU seniors graduated with a staggering $1.3 billion debt load. Since 2004, California’s public university students have collectively racked up student debt in excess of $12 billion. That liability has been a catastrophe, according to UC San Francisco medical professor Stanton Glantz, president of the Council of University of California Faculty Associations.

“Even if you take a fairly conservative approach, it’s had huge negative effects on the California economy,” he explains in a phone interview, “because people who graduate with this ridiculous amount of debt have to delay starting families, starting businesses, and it just becomes a weight on the whole economy. … The same people, if you look at the state as a whole, are going to end up paying for higher ed. It’s just, [with free tuition] you give it to everybody, and then the society recoups the costs over the long run by creating more wealth, [rather than] what we’re doing now, which is where you take the people who are actually getting educated and saddle them with [the cost].”...

The argument that a university degree benefits both the graduate and society has been made repeatedly over the years. For the college graduate, it means significantly increased lifetime earnings; for the state, increased tax revenue and reduced costs for social welfare programs and incarceration. A 2012 study by UC Berkeley’s Institute for the Study of Societal Issues estimated that ongoing returns to the state from UC and CSU graduates averaged $12 billion annually, “well above the general fund expenditures for the UC, CSU and CCC systems combined.”...

Education is institutionalized as a public good in the US and matriculation is required until completing secondary education or attaining majority.

Why not higher education, especially in a competitive world where the US is now trying desperately to stay on top while the emerging world (read China) is breathing down its neck. But soon enough it will also be India, and then....

 AlterNet
Free Tuition Was Once the Norm in California
Bill Raden | Capital and Main

Jon Walker — Democrats Have Given Up on Private Health Care Markets — and for Good Reason

Some Democrats are coming to recognize that since access to health care is a right, health care is a public good, and universal health care cannot be provided efficiently and effectively by the private sector for profit.

Longish, but it goes in to the history and details. A good introduction to the present state.

The Intercept
Democrats Have Given Up on Private Health Care Markets — and for Good Reason
Jon Walker

Lars P. Syll — Marketization undermining the welfare system

1. Privatization is supposed to reduce cost by increasing efficiency. However, "efficiency" can be increased by trading off effectiveness and reducing quality.

2. The argument about privatization and deregulation generally assumes that there is no distinction between public and private goods, and it often also ignores externalities.

Lars P. Syll’s Blog
Marketization undermining the welfare system
Lars P. Syll | Professor, Malmo University

Jean-Claude Worms — Science And The Entrepreneurial State

The title of this post is adapted from Mariana Mazzucato’s book “The Entrepreneurial State,” published in 2013, and in which she successfully – at least in my view – debunks a number myths that modern capitalism has impressed upon most of us concerning the role of private entrepreneurs in innovation. I am attempting below to link that discussion with the need for public investments in science.

I hope I will be forgiven for extensively quoting from Mazzucato's brilliant work.

SCIENCE IS RISKY

This statement is true inasmuch as science cannot really guarantee a return on investment, at least not in financial terms within a predictable timeframe. It does not serve this purpose. Science is a “public good, difficult to appropriate” (Mazzucato 2013).

Science Connect

Science And The Entrepreneurial State

Dr. Jean-Claude Worms

James Kwak — How Markets Work

Argument for single payer based on health care being a public good rather than a private good.

Baseline Scenario
How Markets Work
James Kwak | Associate Professor of Law at the University of Connecticut School of Law

Lars P. Syll — For-profit schools — a total disaster

John Quiggin quote that is relevant in light of Donald Trump's appointment of pro-voucher pro-privatization Betsy DeVoss as US Secretary of Education. It's a concept that has been tried and failed.

Lars P. Syll’s Blog
For-profit schools — a total disaster
Lars P. Syll | Professor, Malmo University

See also

Public Goods

Cameron Murray — Future of health & retirement is public, not private

For the free market ideologue who hates big government, our current situation of small government using its powers of taxation and compulsion to force people into a situation of “private taxation” should be even crazier than the socialist view of big government funding and delivering health and retirement schemes. Not only is there no clear ideological reason for these markets, they suffer from a number of fundamental economic problems that make them rather unsuitable for provision in a private market.… 

Apart from these problems, the apparent economic rational of having private insurance in these markets to reduce public debt makes no sense, even from an economic perspective. It is just an accounting trick. Economics teaches us that real resources are what constrains our productive output, not the balance sheet of different organisations. This is all the more obvious because the government is using its power to make contributions to these private insurance schemes compulsory, making them no different from taxation anyway.…

Fresh Economic Thinking
Future of health & retirement is public, not private
Cameron K. Murray

Samuel Bowles — When economic incentives crowd in social preferences

Explicit economic incentives – for example, a subsidy to contribute to a public good – can sometimes ‘crowd out’ generous and ethical motives. But when properly designed, can incentives ‘crowd in’ these civic virtues? This column uses an example from ancient Athens to show how this might be done, providing a lesson for modern mechanism design and public policy.

Is there a close connection between morality and economics. Bowles suggests so, based Aristotle and ancient Athens.

Voxeu
When economic incentives crowd in social preferences
Samuel Bowles | Research Professor and Director of the Behavioral Sciences Program, Santa Fe Institute

Nicholas Gruen — Success Means Competing and Cooperating. Adam Smith as You’ve Never Seen Him Before

Free rider problems and twenty-first century public goods

Evonomics
Success Means Competing and Cooperating. Adam Smith as You’ve Never Seen Him Before

Nicholas Gruen | CEO of Lateral Economics

Jeremiah Dittmar and Ralf R Meisenzahl — Origins of growth: How state institutions forged during the Protestant Reformation drove development

Throughout history, most states have functioned as kleptocracies and not as providers of public goods. This column analyses the diffusion of legal institutions that established Europe’s first large-scale experiments in mass public education. These institutions originated in Germany during the Protestant Reformation due to popular political mobilisation, but only in around half of Protestant cities. Cities that formalised these institutions grew faster over the next 200 years, both by attracting and by producing more highly skilled residents.

Raising the general level of education raises the level of collective consciousness of a group, reducing insularity and increasing appreciation of universality. Education requires freedom of thought and expression. What is needed now is a new "protestant reformation" in economics to overthrow the "priesthood" and "priestcraft" of the currently dominant ideology that fetishizes "freedom" as independence from governmental intrusion in the economy other than to provide security and enforce law, especially property rights, assuming spontaneous natural order as a secular Deism.

Project Syndicate

Origins of growth: How state institutions forged during the Protestant Reformation drove development
Jeremiah Dittmar, Professor of Economics, London School of Economics, and Ralf R Meisenzahl, Senior Economist, Federal Reserve Board

Paul Romer — Speeding-up and Missed Opportunities: Evidence

Paul Romer is up with another thought-provoking post today.

The bar I set for a model is that it should yield answers we believe to questions that matter. For a model of growth, the two questions that matter most are:

1. Speeding-up: Why has the rate of growth at the technological frontier been increasing over time?

2. Missed Opportunities: Why have so many countries that start from far behind the frontier failed to achieve rapid catch-up growth?

This month, I’m writing a series of posts in response to a nudge from Joshua Gans noting that this is the 25th anniversary of the publication of my paper Endogenous Technological Change, JPE (1990). In this post, I’ll recapitulate the evidence that convinced me when I was writing the 1990 paper that these are the two big questions that growth theory should address. In a subsequent post, I’ll explain why the conceptual framework that I used in the 1990 paper, one that relies on partially excludable nonrival goods, is the bare minimum for answering them.

Interestingly, this is similar to the model that China used in playing catch up. So did the USSR, whose progress in industrializing a chiefly agricultural economy is usually underestimated in the West. Public enterprise also the field in which Mariana Mazzucato has been working.

For reference, see Public Goods.

Paul Romer's Blog
Speeding-up and Missed Opportunities: Evidence
Paul Romer | University Professor at NYU and director of the Marron Institute of Urban Management

ht Brad DeLong

Oleg Komlik — When public good exchanged to private gain: neoliberalism, higher education and social inequality

In open-access paper “From social rights to the market: neoliberalism and the knowledge economy” by John Holmwood (University of Nottingham) looks at changing policies for higher education in the United Kingdom and the emergence of a neoliberal knowledge regime. This subordinates higher education to the market and shifts the burden of paying for degree courses onto students. It seeks to stratify institutions and extend the role of for-profit providers. From a role in the amelioration of social inequality, argues Holmwood, universities are now asked to participate actively in the widening inequalities associated with a neoliberal global market-based knowledge economy At the same time, emphasis shifts from the quality of a system of higher education serving diverse needs, to the placing of individual institutions within a rank order of universities in a global market place for education. 

Focusing on the UK, this article nevertheless precisely portrays those eroding neoliberal trends taking place also in higher education in other countries, where in the name of efficiency public good exchanged to private gain.

Economic Sociology and Political Economy
When public good exchanged to private gain: neoliberalism, higher education and social inequality
Oleg Komlik | founder and editor-in-chief of the ES/PE, Chairman of the Junior Sociologists Network at the International Sociological Association, a PhD Candidate in Economic Sociology in the Department of Sociology and Anthropology at Ben-Gurion University, and a Lecturer in the School of Behavioral Sciences at the College of Management Academic Studies

Greg Mankiw — California should raise the price of water

Sometimes the market solution is the right solution to public goods and utilities like water provision. While privatizing water, which had been a free good and then a regulated public utility, would not be a good solution, putting a higher price on water for bulk users and subsidizing other users would increase efficient use.

For example, households could be allocated a free or very low cost monthly water allowance and this could be varied by household size. This is in place in some areas already. There could also be a differential cost between residential use and commercial use and also an incremental cost for commercial use.

This would probably be more successful in a water-deprived state like California than the across the board 25% reduction in use just imposed.

The advantage of the 25% cut is that it is universal and so no one can say that their ox is being selected politically to be gored. All oxen just get less of a ration to drink. But as critics have noted it's difficult to enforce and avoidance is likely. Price is much more difficult to avoid, but water is a necessity of life, so a purely market solution with a single price is too regressive.

Some may worry about the distributional effects of a higher price of a necessity. But the revenue from a higher price could be rebated to consumers on a lump-sum basis, making the whole system progressive. We would end up with more efficiency and more equality.

This involves political decisions in addition to economic factors, so implementing anything in California will be difficult, given a divisive political climate and the political strength of commercial interests.

This is an increasingly pressing that the whole world is facing and we had better get on it instead of imposing ad hoc solution, i.e., shooting from the hip, after facing an imminent crisis and not having prepared for it. The alternative is lose the use of a lot of land, which will displace a lot of people, which will then result in migration to more resource-rich areas, causing problems there.

This is a supply issue that can't be fixed by just throwing public money at it. Moreover, this is a problem that faces only certain states, and states are budget-constrained since they are currency users. The low hanging fruit in supply problems is efficiency, and with respect to natural resources, conservation and recycling. The opportunity here is private investment in solutions to inefficiencies and public investment and regulation to address relevant externalities.

Greg Mankiw's Blog
California should raise the price of water
Greg Mankiw | professor and chairman of the economics department at Harvard University