The always-brilliant J. W. Mason’s response to what in my opinion is a quite befuddled Mike Beggs review in Jacobin of David Graeber’s Debt: The First Five Thousand Years prompts me to tackle a subject that I’ve been worrying at for a long time: Money.
I’ve been worrying at it despite (or because of) endless reading spanning centuries of money thinkers, reading that has brought me to the conclusion that economists don’t have an even-vaguely coherent or agreed-upon definition of what money is. No: saying that it “serves three purposes” — store of value, means of exchange, and unit of account — does not a definition make. Not even close. In my opinion, that fumbling tripartite stab at something vaguely definition-like actually takes us farther from, and obfuscates, any useful definition.
It’s not uncommon to find leading economists of all stripes — even deep money thinkers like Randall Wray — using vague, quasi-technical terms like “moneyness” and “money-like.” They don’t seem to have a tight technical definition that they can rely upon others to understand and use synonymously. cf., Decades, centuries of inconclusive argument on the proper definition(s) of “the money supply,” and the various definitions thereof.
What is arguably the most important word in economics remains undefined or at best variously and inconsistently defined — and used.
We find this “money confusion” in the center of J. W.’s response, where he addresses the theoretical (and historical) tangles surrounding commodity, fiat, and credit money — a quagmire he illuminates nicely, but doesn’t manage to untangle. He continues (emphasis mine):
“It is odd,” Mike says, “that Graeber claims that ‘you can no more touch a dollar or a deutschmark than you can touch an hour or a cubic centimeter’ – because there actually are things called dollars you can touch, carry around in your wallet, and spend.” And, “however far credit may stretch money, it still depends on a monetary base: people ultimately expect to get paid in some form or other.” And, most decisively, “What circulates [as money] need not be a physical thing, but it is a thing in the sense that it cannot be in two places at once: when a payment is made, a quantity is deleted from one account and added to another. That the thing that is accepted in payment may be a third party’s liability does not change this fundamental point.” These are all, quite simply, statements of Friedman’s quantity theory of money, refuted by generations of Post Keynesian economists but still carrying on its zombie existence in the textbooks.
Open your wallet again: Yes, you see things called dollars, but most likely you also see a piece of pallastic labeled Visa or Mastercard. This is money too — you can buy almost anything with t that you can buy with the bills. When you do so, new monetary liabilities are created on the spot, linking you to your bank and your bank to the vendor. Nothing is deleted from anywhere. You do, of course, have a credit limit, but that depends on what you’re buying an who you are buying it from, and it can rise or fall for all sorts of reasons without changes in anyone else’s. This is the fundamental difference between fiat and commodity money, on the one hand, and credit money on the other. There is a fixed quantity of the former but not of the latter. Now if the maximum volume of credit that could be created by banks was closely linked to their holdings of gold or state tokens, it wouldn’t make a difference; and thanks to various regulatory and other constraints, this was more or less true for much of the 19th and 20th centuries. But it is not true today. The idea of money as a “thing” that you “carry around” is fundamentally wrong as a description of today’s monetary system.
This fundamental wrongness (if it is indeed wrong) is inscribed right at the top of the Wikipedia article on money, and in almost every economist’s understanding of the concept (bold mine):
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts…
And the Money Supply entry explicitly acknowledges the definitional problem:
There are several ways to define “money,”
I don’t think Graeber is completely right in his characterizations of money, Beggs completely doesn’t get it, and Mason doesn’t go go far enough. Despite common usage, that idea of money as a “thing” that you can carry around is not a useful technical economic definition for discussing any monetary system. It doesn’t allow us to think about money or money economies coherently.
Imagine if physicists didn’t have a solid definition of energy — if they meant slightly (or wildly) different things when they referred to it, sometimes hewing to some vernacular usage, sometimes silently assuming various technical definitions. Or if one was never sure which definition they were using in any given discussion. Or if two physicists arguing were frequently using different implicit definitions, and often weren’t even aware of it. Or if they shifted their own (implicit) definitions within the course of a discussion, often even within a single sentence?
Physics discussions would be in the same kind of eternally inconclusive mess that economics is in, and has been in for centuries.
I want to suggest a definition in which a dollar bill is not money. It’s a definition that I’m finding to be conceptually useful, tractable, and applicable to much of the good economic thought that has emerged over the centuries (emerging, amazingly, even in the absence of such a definition). Neither is a gold coin money, and neither is a balance in your checking account. Economists have been unable to disentangle themselves from that common, vernacular usage. What they (we) need is a term of art, a technical term that is clearly defined and uniformly deployed. As with many terms of art, such a definition is likely to bear little or at best only a glancing resemblance to everyday usage.
So if a dollar bill isn’t money, what is it? It’s a financial asset, as are gold coins, bank deposits, bonds, stocks, collateralized debt obligations, and so on and so forth, all of which embody or represent money. Ditto bank reserves. (This last is important because reserves are — for sensible reasons, within the definitional vacuum that economics inhabits — excluded from almost all definitions of the money supply. Nevertheless, they’re financial assets that embody money, in a complicated institutional way. They have very special properties, different from other financial assets.)
So what is money? Let’s take a look at the physics definition of energy, and see if it might be a useful guide. Here from Wikipedia (which at least has the virtue of not being widely disagreed with; otherwise it would be rewritten):
In physics, energy … is an indirectly observed quantity that is often understood as the ability of a physical system to do work on other physical systems.
That’s a pretty heady conceptual definition. Does something similar work with money? Try this:
In economics, money is a quantity that is often understood as value that can be exchanged for real-world goods and services.
Or a simpler version: money is exchange value.
Like energy, under this definition money cannot exist except as manifested in some embodiment — for energy, a gallon of gas, fields/waves/particles propagating through the void, or a boulder at the top of a hill; for money, some financial asset. Absent such an embodiment, energy and money do not even, cannot even, exist. (Though exchange value obviously can.)
Money in this definition does not exist except as it is embodied in financial assets. But that doesn’t mean that financial assets — even dollar bills – are money.
If you’ve got a battery in your pocket, do you say you’re carrying “energy”? You could, but you don’t because you know that you’re carrying a battery that embodies or contains or holds energy. You understand the conceptual distinction between the battery and the energy.
But when you have a dollar bill in your pocket, you do say, “I have money in my pocket.” You don’t make the distinction — that the bill and the money are conceptually different things.
Ditto with bank deposits: they are legally enforceable claims. They’re not “money” (in this definition). And other financial assets: we commonly say “how much money” do you have? What we really mean is “what is the net value of your financial assets?”
Let’s go back to the key word in the physics definition of energy, and in my definition of money: “quantity.” What does Wikipedia tell us about that word?
Quantity is a property that can exist as a magnitude or multitude. Quantities can be compared in terms of “more”, “less” or “equal”, or by assigning a numerical value in terms of a unit of measurement. Quantity is among the basic classes of things along with quality, substance, change, and relation. Being a fundamental term, quantity is used to refer to any type of quantitative properties or attributes of things. Some quantities are such by their inner nature (as number), while others are functioning as states (properties, dimensions, attributes) of things such as heavy and light, long and short, broad and narrow, small and great, or much and little.
So by this definition, money is a quantitative property. A property of what? I would say: financial assets. Those assets have other properties as well: exchangeability (in different markets), confidence, volatility, etc. All those properties are mutually interrelated in ways that I will not delve into here, and those other properties all affect the quantitative property — money — that is embodied in all financial assets.
It seems to me that economists’ failure to make that conceptual distinction between money and financial assets makes it impossible to discuss the economics of a money-based economy coherently, or understand such an economy properly. They end up talking about things like “the demand for money” and “the market for money” (instead of “the markets for different financial assets”) — which are at best vague and at worst meaningless phrases under this definition — when what they really mean, what they really need to discuss, is shifting preferences/demand for different types of financial assets that have different properties – all of which assets embody “money.” (Also: the forces driving changing substitution preferences among these different asset classes and properties of different asset classes — substitution being the sine qua non of demand curves.)
By this definition:
Money is not a store of value. Financial assets are stores of value, with the value quantity designated in terms of money, which in turn is designated in terms of a particular unit of currency.
Money is not a medium of exchange. Physical currency is a medium of exchange, as are the legal obligations that we refer to as bank balances. Within the financial industry there are many other units of exchange. Though it’s rare for them to be exchanged directly for real-world goods and services, they can be exchanged for things (bank balances) that can be so exchanged, so it’s quite reasonable to view them as embodying “money.”
Money is not a unit of account. Currencies are units of account. (“Currencies” in the conceptual rather than physical or particular sense of that term — “the dollar,” not “dollar[ bill]s.”)
I’m proposing a very abstract, term-of-art definition here, one that is far removed from most understandings of “money.” But look at the physics definition of energy, above. Does it have the kind of simple, intuitive clarity that we feel when we say “I’m full of energy today” or “I have money in my pocket”? Not even close. The definition is actually quite hard to understand. Nevertheless, it seems to have served its purpose very well over the centuries.
I have a lot more I’d like to say on this subject — for instance on the egregiously sloppy and criminally vague usages of the term “capital” throughout economics writing — but I want to stop here and see if my gentle readers find any value in this thinking, whether they can contribute to my muddled and ever-groping understanding of how (money) economies work. Thoughts?
Cross-posted at Angry Bear.