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-- Posted Tuesday, 4 February 2003 | Digg This Article
"All the perplexities, confusion and distress in America arise, not from defects of the Constitution or Confederation; not from any want of honor or virtue, as much as downright ignorance of the nature of coin, credit and circulation" - John Adams
On occasion, readers ask me, "to which theory of the business cycle do you ascribe?" Of the current theories on offer, the Austrian view has provided me with more enlightenment, yet I wouldn't call myself an Austrian. Philosophically, I think man's success or failure, individually or collectively, depends upon its ability to understand and act upon the truth, defined in a crude Pragmatic sense as "that, belief in which, leads to definite, assignably good effects". Extending that idea to economics, I think the business cycle, measured qualitatively, is a function of changing beliefs about money, where optimum results flow from the generally held view that money is a medium of exchange. If you wish to give this view a name, I respond, you can call me a "pragmatic monetary definitionalist".
Wait a second, I imagine certain Austrians might argue, disprove our contention that the credit boom is the root of the problem. To which I respond, with all due respect, as I would not have arrived at my view without the foundation of Mises and Hayek, I agree that the credit boom and bust is explanatory, but think that prior to the credit boom, there must first be confusion about the nature of money. Leaning on a favored foundation, "the love of money, is the root of all evil."
The confusion to which I refer is the focus on money as a "thing in itself" rather than as a "medium of exchange". In the first instance, one is thinking about paying, getting, investing or borrowing $, Jpy, Euros or whatever currency you happen to use while in the second you are thinking about trading your labor/goods now, receiving the fruits of another's labor/goods now, depositing the fruits of your labor/goods for a return, or promising your future labor/goods. In the latter metaphor, I contend, economic agents can more easily see their roles in the complex system by which we sustain ourselves, while in the former, the love of money can lead these same agents to do silly (as a quick run through the TV dial attests) or even counter productive things.
The credit boom begins, I argue, when a critical mass of people confuse the representation of the thing, money, with the thing itself, the labor/goods. This can arise after a period of prosperity whether "real" in the sense of a series of bountiful harvests, or "fake" as results from the initial effects of currency debasement. Over time, this state of confusion leads people to make more promises than can be kept, which eventually results in a deflation of those promises. The effects of this deflation either trace back to the originators of the promises or are diffused to the public depending upon the rigidity of the governing body's application of the definition of money. The more elastic the definition applied by the governing body in the resolution phase, the more the effect of the non-viable promises will be diffused to the money using public.
Wait a second, I imagine certain Gold bugs might argue, where do we fit in this picture. Without repeating the evolution of money theory ubiquitous in economics texts written prior to the 1920s, of which I recommend Mises', I simply argue that man's millennia old desire to posses precious metals in general and Gold in particular makes them well suited to remind people of money's function as medium of exchange. Defining paper money in their terms, payable on demand, kept that definition in the minds of the financiers by giving the savers of the community the ability to check their lending, or if too many forgot, forced them all to "return to the drawing board", poorer but wiser for the experience.
So what does this mean to the average man, today. Well, I think a critical mass of people has been confused about money for a long period of time, and has acted on those confused beliefs, inflating promises of future payment beyond the ability to repay, aka "credit boom", which over time lent itself to an ever more elastic view of money to avoid facing the consequences of the inability to fulfill those promises. Currently, neither the borrower nor the lender has a definite idea of what is being promised which lends itself to even more wild excesses. However, with the human population continuing to grow, dependency on this ever more complex web of promises is increasing. The solution to the dilemma is not more promises but rather a focus on which promises can be fulfilled and which cannot. Thinking of money as a thing in itself is like following the magician's misdirection, leading you to take your eye off the ball, before it disappears.
-- Posted Tuesday, 4 February 2003 | Digg This Article
- Dave Lewis
http://www.chaos-onomics.com
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