[PDF]Ideal Money and Asymptotically Ideal Money - Lindau 2008

Ideal Money and Asymptotically

Ideal Money


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Revolutionary or Evolutionary Changes
or Reforms of Systems of Money

Our topic is focused on an ideal, specifically on "Ideal Money", and it is
not hard to see that there are naturally different routes by which a system
of money might become either improved or might become, in some senses, more
degraded and less worthy of praise. Change can come at a stroke, like when
Alexander cut the Gordian knot, or it can come in a gradual fashion, through
many smaller steps, and this latter can be classed as the pathway of "evol¬
utionary change".

It is easy to illustrate cases of "revolutionary" reform or change in
systems of money. A good example came in 1717 when Isaac Newton, supported
by George II, fixed the value of the local UK currency to a precise amount
of gold that defined the value of the currency (the "pound") in such a way
that it was immediately recognizable throughout the Continent (of Europe)
s of a fixed value in relation to generally accepted standards (of the time).
(And this was the origin of the "gold standard".)

Another example of revolutionary change was when Argentina attempted
to establish an internationally respectable system of money by means of a
"currency board". (This attempt failed conspicuously, but the failure was
rather similar to a bankruptcy event involving an ordinary commercial bank
which simply turned out to have insufficient "capital".)

When the use of paper and printing was developed in China that made
possible a "revolutionary" change, namely the introduction of paper money.



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Jacques Rueff, F. A. von Hayek, and R. Mundell are notable scholars and
economists who have particularly contributed to the theories of how a system
or systems of money might be improved in an effectively revolutionary fashion.
For example there has been a quite dramatic improvement in the internationally
perceived apparent) quality of the money used in the countries of Italy and
Greece simply because they have moved through the revolutionary transition
of renouncing the use of the lira or the drachma and have accepted the use
of the newly established "euro" unit.


Evolutionary Changes and Relevant Teachings

On the other hand (from the case of "revolutionary" changes) there is
often the possibility that a system of money may gradually improve in quality,
either through somewhat accidental circumstances (like a very favorable trade
balance) or through the learning of good teachings of applicable varieties.

A series of American economists have been notable through their contrib¬
utions which have enhanced the understanding of how systems of money actually
function and particularly of how the dollar (US) and its value have been
interacting with the relevant factors of influence. There has always been
some "populist" thinking in the USA which can encourage ideas about money
that are not well based in any scientific sense. And the teachings of some
of the notable economists have sometimes given a more scientific perspective
on the areas where the "populist" viewpoints have been influential.

M. Friedman acquired fame through teaching the linkage between the supply
of money and, effectively, its value. In retrospect it seems as if elementary,
but Friedman was as if a teacher who re-taught to American economists the
classical concept of the "law of supply and demand", this in connection with
money.



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We can also note at this point that the understanding of the effects
of the uncontrolled behavior of all the various "users" of a domestic money
is the inclusive category of description into which the notable contributions
of a series of American economists can be recognized.

F. Kydland, R. Lucas, E. Phelps, and E. Prescott are notable American
economists who have contributed to the better understanding of issues arising
in the area of theories of "macroeconomics". Without arguing for a direct
constitutional reform of the status quo of the dollar in the USA they have
contributed much enlightenment in relation to the interactions between
intelligent categories of the "users" of currencies (or in particular the
dollar) and "the central authorities" (of central bank, treasury, state
institutions, executive and legislative government).

The evolving recognition of the fact that the "users" of a currency become
like players in a game and have optional strategies by means of which they
will be able to seek to optimize according to their own particular economic
interests leads to the recognition that the tasks of central planners and
managers, of a state, are not as simple as if they had only to herd flocks
of sheep.

Thus the "users", like the managers, can be viewed as players in interact¬
ive games. In particular, with this perspective, it is natural to think of the
users as having "expectations" in relation to the future value of the domestic
currency, compared either with real assets, foreign currencies, or indices
of costs. These expectations may or may not be "well-founded" or "rational"
but they will inevitably guide or influence the choices made by the "users".



General Considerations and History


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The special commodity or medium that we call money has a long and
interesting history. And since we are so dependent on our use of it and so
much controlled and motivated by the wish to have more of it or not to lose
what we have we may become irrational in thinking about it and fail to be able
to reason about it as if about a technology, such as radio, to be used more
or less efficiently.

We present the argument that various interests and groups, notably
including "Keynesian" economists, have sold to the public a "quasi-doctrine"
which teaches, in effect, that "less is more" or that (in other words) "bad
money is better than good money". Here we can remember the classic ancient
economics saying called "Gresham's law" which was "The bad money drives out
the good". The saying of Gresham's is mostly of interest here because it
illustrates the "old" or "classical" concept of "bad money" and this can be
contrasted with more recent attitudes which have been very much influenced
by the Keynesians and by the results of their influence on government policies
since the 30's.


Digression on the Philosophy of Money

It seems to be relevant to the politics of state decisions that affect
the character of currency systems promoted by states that there are typical
popular attitudes in relation to money. Although money itself is merely an
artifact of practical usefulness in human societies and/or civilizations,
there are some traditional or popular views associating money with sin or



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immorality or unethical or unjust behavior. And such views can have the
effect that an ideal of good money does not seem such a good cause as an ideal
of

a good public water supply. There is also, for example, the Islamic concept
which has the effect of classing as "usury" any lending of money at interest.
(Here we can wonder about what sort of inflation rates might have been typical
for any major varieties of money, such as Byzantine money, at
the times actually contemporaneous with the Prophet Mohammed.)

In general, money has been associated in popular views with moral or
ethical faults, like greed, avarice, selfishness, and lack of charity.

But on the other hand, the existence of money often makes it easy to make
valuable donations of philanthropic sorts and the parties receiving such
contributions tend to find it most helpful when the donations are received
as money!

But the New Testament story about "money changers" being driven from
the Temple illustrates clearly the idea of putting the clearly mundane and
possibly "unclean" utility of money at some distance from where that money
would presumably continue to be received when used as a vehicle for donations.

Economics has been called "the dismal science" and it is certainly an area
of studies where "the mundane" is appropriately studied.

And philosophically viewed, money exists only because humanity does not
live under "Garden of Eden" conditions and there are specializations of labor
functions. So we are always exchanging, mediated by money transfers, the
differing fruits of our varied forms of labor.



Welfare Economics


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A related topic, which we can't fully consider in a few paragraphs, is
that of the efforts to be made by the national state and society in general
for dealing with "social equity" and concerns for the general "economic
welfare". Here the key viewpoint is methodological, as we see it. HOW should
society and the state authorities seek to improve economic welfare generally
and what should be done at times of abnormal economic difficulties or
"depression"?

We can't go into it all, but we feel that actions which are clearly
understandable as designed for the purpose of achieving a "social welfare"
result are best. And in particular, programs of unemployment compensation seem
to be comparatively well structured so that they can operate in proportion to
the need. And public works projects allow the wealthy to pay through taxes to
provide jobs for workers and these can produce valuable works if the projects
are well planned.


Money, Utility, and Game Theory

In the sort of game theory that is studied and applied by economists
the concept of "utility" is very fundamental and essential. Von Neumann and
Morgenstern give a notably good and thorough treatment of utility in their
book (on game theory and economic behavior). The concept of utility (mathe¬
matical) does indeed predate the book of Von Neumann and Morgenstern. And
for example, as a concept, mathematical utility can be traced back to a paper
published in 1886 in Pisa by G. B. Antonelli.

When one studies what are called "cooperative games", which in economic
terms include mergers and acquisitions or cartel formation, it is found



to be appropriate and is standard to form two basic classifications:


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(1) : Games with transferable utility.

(and)

(2) : Games without transferable utility, (or "NTU" games).

In the world of practical realities it is money which typically causes
the existence of a game of type (1) rather than of type (2); money is the
"lubrication" which enables the efficient "transfer of utility". And generally
if games can be transformed from type (2) to type (1) there is a gain, on
average, to all the players in terms of whatever might be expected to be
the outcome.

But this function of money in generally facilitating the transfer of
utility would seem to be as well performed by the currency of Zimbabwe as
by that of Switzerland. Or the question can be asked "How do 'good money'
and 'bad money' differ, if at all, for the valuable function of facilitating
utility transfer?". But if we consider contracts having a relatively long
time axis then the difference can be seen clearly.

Consider a society where the money in use is subject to a rapid and
unpredictable rate of inflation so that money worth 100 now might be worth
from 50 to 10 by a year from now. Who would want to lend money for the term
of a year?

In this context we can see how the "quality" of a money standard can
strongly influence areas of the economy involving financing with longer-term
credits.



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And also, if we view money as of importance in connection with transfers
of utility, we can see that money itself is a sort of "utility", using the
word in another sense, comparable to supplies of water, electric energy or
telecommunications. And then, if we think about it, we can consider the
quality of money as comparable to the quality of some "public utility" like
the supply of electric energy or of water.


"Keynesians"

The thinking of J. M. Keynes was actually multidimensional and consequen¬
tly there are quite different varieties of persons at the present time who
follow, in one way or another, some of the thinking of Keynes. And of course
SOME of his thinking was scientifically accurate and thus not disputable. For
example, an early book written by Keynes was the mathematical text "A Treatise
on Probability".

The label "Keynesian" is convenient, but to be safe we should have a
defined meaning for this as a party that can be criticized and contrasted
with other parties.

So let us define "Keynesian" to be descriptive of a "school of thought"
that originated at the time of the devaluations of the pound and the dollar
in the early 30's of the 20th century. Then, more specifically, a "Keynesian"
would favor the existence of a "manipulative" state establishment of central
bank and treasury which would continuously seek to achieve "economic welfare"
objectives with comparatively little regard for the long term reputation
of the national currency and the associated effects of that on the reputation
of financial enterprises domestic to the state.

And indeed a very famous saying of Keynes was "...in the long run we will
all be dead ...".



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A Critique of the Science of the Keynesians

It is difficult to make a criticism here because so much of the scientific
research work, particularly of American economists, in the years since, say,
"the thirties", has been in the area of the study of the topic called "macro¬
economics" and most or almost all of this work has a "Keynesian" orientation.

I think there is a good analogy to mathematical theories like, for
example, "class field theory". In mathematics a set of axioms can be taken
as a foundation and then an area for theoretical study is brought into being.
For example, if one set of axioms is specified and accepted we have the theory
of rings while if another set of axioms is the foundation we have the theory
of Moufang loops.

So, from a critical point of view, the theory of macro-economics of the
Keynesians is like the theory of plane geometry without the axiom of Euclid
that was classically called the "parallel postulate". (It is an interesting
fact in the history of science that there was a time, before the nineteenth
century, when mathematicians were speculating that this axiom or postulate
was not necessary, that it should be derivable from the others.)

So I feel that the macroeconomics of the Keynesians is comparable
to a scientific study of a mathematical area which is carried out with an
insufficient set of axioms. And the result is analogous to the situation in
plane geometry, the plane does not need to be really flat and the area within
a circle can expand hyperbolically as a function of the radius rather than
merely with the square of the radius. (This picture suggests the pattern
of inflation that can result in a country, over extended time periods,
when there is continually a certain amount of gradual inflation.)

The missing axiom is simply an accepted axiom that the money being



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put into circulation by the central authorities should be so handled as
to maintain, over long terms of time, a stable value.

Instead of this one can observe, in the context of the popularity
of "Keynesian" orientations, that it is considered extremely undesirable
that there should ever occur a period of deflation (where wages and prices
might be forced to decrease) but that continual inflation is an acceptable
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