Some trenchant comments from Miles Kimball

Tyler Cowen links to these comments from Miles Kimball:

In a recent critique of Matthew Yglesias’s proposal, Tyler Cowen lists many reasons why it would be hard to abolish paper currency entirely, suggesting in fact that a black-market paper currency might arise (possibly of some foreign currency) if the government tried to banish paper currency entirely.  Responding to Tyler Cowen, JP Koning suggests the possibility of keeping paper money legal but restricting paper currency to small bills to make it harder to warehouse large dollar amounts. But Scott Sumner gives the most trenchant response to Tyler Cowen, pointing out that the real problem is the “unit of account” role of paper currency, not the role of paper money as a way to buy things, which is Tyler Cowen’s major concern:

“Money is not special because it is a big part of wealth, or a big part of credit.  Indeed it’s not even special because it’s the    medium of exchange [a way to buy things]. It’s special because it’s the medium of account [an economic yardstick].”

Trenchant is one of those words I’ve seen 1000 times, but never knew the precise meaning.  The internet gives a number of definitions. Here’s one:

sharply perceptive

This post is a sort of inside joke, which will go over the heads of those who haven’t followed our endless MOE/MOA debate in the comment section of this post.

PS.  Saturos; it appears there are at least two blogging lunatics who see MOA as the key attribute of money.


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60 Responses to “Some trenchant comments from Miles Kimball”

  1. Gravatar of vincent vincent
    6. November 2012 at 14:36

    fwiw, trenchant is a French word meaning cutting or sharp, as in a sharp knife.

  2. Gravatar of Brett Brett
    6. November 2012 at 14:39

    The problem with a black market paper currency when all the legitimate stuff is electronic is that laundering it into legal money could be made very difficult. They’d probably need a legal intermediary good that could be “bought” with the black market money, then turned around and traded for legitimate money.

  3. Gravatar of Becky Hargrove Becky Hargrove
    6. November 2012 at 15:19

    hehehe

  4. Gravatar of Major_Freedom Major_Freedom
    6. November 2012 at 15:31

    Two blogging lunatics now?

    At this rate, there is a strong possibility that the “money is primarily a MoA” crowd may even reach fringe status before I hit 95 years old.

    Kimball also does not grasp the blatantly obvious fact that a commodity cannot even serve as an “economic yardstick” (MoA) for goods in general unless that commodity is exchanged for goods in general such that people even know what prices to put on their financial statements.

    Like I said a 1000 times: If a concept is based on prices (MoA), then it is ipso facto based on exchanges, since prices derive from actual exchanges, not arm chair posturing or star gazing of what those prices might be divorced from exchanges. And if the concept is based on exchanges, and that commodity is a generally accepted commodity, then boom, we’re talking about a MoE.

    MoA simply cannot be logically divorced from MoE.

  5. Gravatar of Simon Simon
    6. November 2012 at 15:56

    Saturos, assuming us Aussies volunteered to become America’s 51st state, do you think we would be rejected:

    A: Because we have universal healthcare, and Republicans would never, ever let such awful ideas infect their country, or

    B: Because we have privatized social security (superannuation), and Democrats would never, ever let such awful ideas infect their country?

    C: Because we are so too awesome for them?

  6. Gravatar of A Brazilian Lurker A Brazilian Lurker
    6. November 2012 at 15:57

    I think there can be three lunatics that think this way (the third being Marcus Nunes):

    http://thefaintofheart.wordpress.com/2012/10/31/two-kinds-of-money/
    On March 1st future president Cardoso, at the time the Finance Minister, introduced a new “MoA”, the “URV” (“Real Unit of Value”). At that date all prices were converted into URV at a stated “exchange rate”. During the next four months, until June 30, everyday a new “exchange rate” between the MoE (at the time called the Cruzeiro Real (CR$)) and 1 URV was posted. While MoE prices were rising MoA prices were stable.(…)
    On June 30, presuming an “equilibrium” price level in URV had been established (with relative prices having had the time to adjust), the government announced that on July 1st the URV would disappear. The new MoE AND MoA would be called Real and 1 Brazilian Real would equal 1USD. In effect, the exchange rate to the dollar became the anchor of the new currency.
    Things worked perfectly, so that by August inflation had fallen from almost 50% in June to “just” 2%. There was no recession and no unemployment. Demand for the new “good money” soared and the Central Bank accommodated.

    [end of quote]

    As a Brazilian in his late twenties, I really loved Nunes’ post.

    I think all of us should study a little more my country’s long term relationship — three fraking decades! — with high inflation, as it could teach some interesting lessons about (bad) monetary policy and Brazilian’s people great ingenuity to cope with it.

  7. Gravatar of A Brazilian Lurker A Brazilian Lurker
    6. November 2012 at 16:00

    * “… there may be …”

  8. Gravatar of Max Max
    6. November 2012 at 17:45

    Miles oddly gets things backwards here:

    “it would just be a matter of figuring out with a pocket calculator how many extra paper dollars it would take to make up for the fact that each one was worth less than an electronic dollar.”

    The paper “dollars” could trade ABOVE face value, but never below (since if below people would redeem them for bank money).

  9. Gravatar of Max Max
    6. November 2012 at 21:33

    “The paper “dollars” could trade ABOVE face value, but never below (since if below people would redeem them for bank money).”

    I should qualify – this applies to existing FRNs and FRN-like things, not to a hypothetical new currency that doesn’t offer face value redemption, which is apparently what Miles had in mind.

  10. Gravatar of 123 123
    6. November 2012 at 23:08

    But I still haven’t seen a case that proves that only one of these two ( MoE and MoA ) matters.

  11. Gravatar of Saturos Saturos
    7. November 2012 at 06:55

    Sorry guys, I’m about to flood this page with comments… I have more shame than MF, so I thought I’d apologize first.

    Scott, I’m not going to try to persuade Miles as well, he’s a great economist too but he’s even further away than you when it comes to accepting the quantity theory of money. So given how hard it’s been getting through to you…

    Once again, Scott, the MoA has no effect on RGDP unless there is also a MoE, or unless real wages change… you still haven’t convinced me why that isn’t true.

  12. Gravatar of Saturos Saturos
    7. November 2012 at 06:56

    “In order for MOA shocks to create macro disequilibrium, exchange must occur with a MOE. Otherwise people will barter, and MOA shocks will only create disequilibrium in the MOA market, no other.”

    Exactly. And then the MoA would no longer determine RGDP, it would only determine P. And if the MoA determines P but not Y, then there’s no sense in saying it determines NGDP.

    The value of the MoA is 1/P, not 1/NGDP. Unless there is an MoE. Then the value of MoA is 1/”nominal” value of MoE. And then the MoA can cause recessions.

    “It seems to me that if the value of gold doubled, people would prefer to swap fruit for gold at the sticky prices, not other fruit.”

    Yeah, um… that’s not how a barter economy works. If I’m an apple producer in a barter economy, then I swap apples for everything I consume (through a long convoluted chain of swaps). And by the way you’ve just commited a Sumnerian fallacy. You just reasoned from a price change. If the value of gold doubles becausethere is less gold, people don’t demand more gold as a result. Or perhaps you mean that gold is now more desirable to have, as it buys more other goods. But then it costs twice as many apples, too. And then you are intermediating exchanges with gold…

    And once again you give me a nonsense example, “proving” that MoA has real effects by saying “what if NGDP falls 20% , and P only falls 2%, then obviously RGDP must fall as well”.

    What I hear: “what if P*Y falls 20%, and P only falls 2%, then obviously Y must fall as well.”

    *deep breath* For the last time:

    Why is NGDP falling by 20%, when prices can only fall by 2% Why is RGDP falling too? How is the MoA causing NGDP to fall 20%, when prices can only fall 2%? How is the MoA causing RGDP to fall?

    How does an excess demand for bananas cause the banana price to rise? Well, there are some people who don’t get bananas at that price, so they offer higher prices to the sellers. Meanwhile sellers realise they can raise prices and still have enough customers… that’s the kind of explanation I’m looking for.

    The burden of proof is on you to say: Why does MoA affect RGDP?

    “Now assume that a big new discovery of gold does not cause long run k to fall enough to offset the boost to gold stocks (M). So long run expected NGDP rises.”

    No, that’s not an answer. How does long run expected NGDP rise? How does long run NGDP rise? Suppose the world ends tomorrow and everyone knows it: how does NGDP rise? Remember there is no medium of exchange, so you can’t slip in a mechanism which tacitly assumes its existence. You have to explain how NGDP rises. And you have to explain how that rise could possibly involve a rise in Y, as opposed to just P.

    “I have a very simple view. The MOA market determines NGDP. Period, end of story.”

    I’m afraid your “simple” view really is “simple”. Of course the MoA affects P, by definition it does. But saying it affects Y too is nonsense without a medium of exchange.

  13. Gravatar of Saturos Saturos
    7. November 2012 at 06:57

    “You are essentially making the MOA price meaningless, and are bartering at equilibrium prices. The whole point of the disequailibrium wage/price model is that goods (and labor) actually get exchanged at THE WRONG PRICE. But in your and Nick’s barter example, the goods are exchanged at the correct price, the price as if there were perfect price level flexiblity.”

    You are very close to realizing how confused you are. The whole point of the disequilibrium price model is that goods get exchanged at the wrong price, in terms of money. The price at which money, the medium of exchange is traded for goods in general needs to be a lower price level, a higher price of money. Otherwise there is disequilibrium, and many goods go unsold for money. If money wasn’t used then the price in terms of money wouldn’t matter, though. As long as relative prices between goods and each other were correct, they could all be sold.

    The price level is the price of money. The reason why prices are correct is not because the price level was flexible, it’s because the price level didn’t matter. Because we removed the need for using money. Then the price level didn’t matter, only relative prices. And then Walras’ Law applies. If one relative price is wrong, then the opposite price is wrong in the opposite direction. More Walrasianally, if one price, measured not as an exchange rate but with a numeraire, at which all sorts of things are exchanged for, say, apples, at an apple price of $x with apples demanded by selling many other goods – if there is an excess demand for apples, then this is equal to the excess supplies of all the other goods being offered in exchange for apples.

    The “correct price” depends on what is on the other side of the market. The price is set to clear the market. If goods are on one side, and goods are on the other, then we are talking about relative prices. So if they were correct before, then holding relative prices constant they are correct again. And if relative prices are incorrect then there is a glut of some things and a shortage of others.

    On the other hand, if there is money, the medium of exchange, on the other side of the market, then we are talking about the general exchange rate between goods and the medium of exchange. If money is also the MoA or numeraire, then this exchange rate is also the Price Level.

    So there are two ways to avoid the sticky price level problem: 1) make prices more flexible 2) stop exchanging goods with money, so the price level is no longer the relevant “correct price”, so prices don’t need to be flexible. Or 3) have better monetary/fiscal policy.

    Of course it doesn’t matter what the exchange rate is between apples and oranges on the one hand, and gold on the other hand, if gold isn’t MoE! And of course there’s an observational difference: a sticky price level, i.e. a sticky gold-goods exchange rate, means that gold goes into disequilibrium with goods sometimes! So gold can’t be fully sold for goods all the time (or goods can’t be fully sold for gold). In your example if half the gold stock vanishes and prices are stuck at 1, there is excess demand for gold in terms of both apples and oranges (which are both traded for gold, I presume).

    The MOA becomes essentially sidelined, it becomes just one more good, not likely powerful enough to create big problems.

    Jesus christ of course it’s just one more good! It’s just the good whose exchange rate we arbitrarily choose to compute a common set of prices from!

    PRICES only affect OUTPUT if they are a RATE at which output is EXCHANGED. A commodity (call it MoA, or Mowhatevertheheckyoulike) only affects output via its price if that price is the rate at which output is EXCHANGED for IT. Ergo, the only commodity which can disturb all outputs is the one directly exchanged for all outputs. In a monetary economy that’s the medium of exchange. In a barter economy that’s nothing, as removing one commodity from trade doesn’t interfere with the trades that are going on between all the other commodities and each other.

    Also, in a monetary economy, if prices are fixed in terms of the MoA, then the amounts of MoE people will sell their goods for are fixed in terms of the MoA they can buy (implicit exchange rate with MoA). Then the MoA can affect most output, even if most output isn’t traded for MoA. Because all output is traded for MoE, but exchange rates between goods and MoE always fluctuate in tandem with the MoE-MoA exchange rate. But those exchange rates, funnily enough, don’t fluctuate to actually clear disequilibria between MoE and goods.

    The MoA isn’t becoming “sidelined” by barter though. It doesn’t lose any powers that it had before. It is always just “one more good”. But with an MoE in the picture, fluctuations in the MoA-MoE exchange rate change the purchasing power of MoE, hence cause recessions.

  14. Gravatar of Saturos Saturos
    7. November 2012 at 06:58

    I realize my comments are beginning to sound like MF. Don’t worry, I’m hoping the next ones sound more like Bill Woolsey.

  15. Gravatar of Saturos Saturos
    7. November 2012 at 06:58

    Scott, I think Bill is basically right. You are not thinking enough about how things move to equilibrium. (This also speaks to your point about math; comparative statics equations are hardly a full formal model of the economy. Full mathematical description would require you to state everything you believe about how the economy works, in mathematical language, with full logical deduction. You can’t state some beliefs [the price is always such that quantity supplied equals quantity demanded” without explaining and reasoning through exactly how that works. So that any claim can be rigorously proved from first principles, every time.)

    Earlier, I said:

    “You cannot logically assume all of the following:

    - that the market for MoA always clears
    - that the MoE is irrelevant/doesn’t exist
    - that the price level is not completely flexible
    - No change in relative prices of the component items of GDP”

    It seems you have answered this challenge by rejecting the fourth point. So let’s investigate exactly how you think this works.

    Once again, gold is MoA. There is no MoE, and the absence of MoE makes it a barter economy. All goods in GDP are exchanged directly for each other. Exchange is not intermediated by a common medium. However gold, which is not part of GDP, is only exchanged for apples. Implicit exchange rates are computed for all the goods in GDP in gold terms; the weighted average of these is the Price Level.

    Now, halve the gold stock. The gold-apples exchange rate is fully flexible, always adjusting to equilibrium. But the price level is sticky. That’s the average price level; however, some individual prices are flexible. We also assume that all arbitrage opportunities are immediately eliminated, so all cross-exchange rates are in equilibrium.

    The new equilibrium gold price in apple terms is now (let’s say) twice what it was. And it reaches that price! But the price level is still sticky. How is this possible?

    Well, the price of apples in gold terms has now halved. So the apples-component of NGDP has brought the price level down slightly. Let’s say that the price level, although sticky, is flexible enough to allow that slight fall.

    If gold were traded for everything, then the prices of everything would halve in gold terms, and the price level would halve. But the price level is not that flexible. And despite not being a MoE, gold still could be traded for everything, just as everything else is traded for everything in a barter economy. Lack of intermediation simply means that we don’t have the situation in our economy, where you (generally) don’t trade apples for bananas. You sell apples for money, then you buy bananas with money.

    Fortunately, in our example gold is only traded for apples. However, the price of everything else is the product of the exchange rate between gold and apples, and the exchange rate between apples and everything else. So if the prices of everything else are to remain fixed in gold terms (in order to prevent the price level from halving), then the exchange rates between apples and each other good in GDP, must now double. This despite the real production of apples and everything else remaining fixed.

    Now, what you are suggesting is that, in order to keep prices sticky, the exchange rates of everything else will jump out of equilibrium with apples (and remain fixed in disequilibrium). Despite the fact that supplies of apples and everything else are constant, and people have been going on bartering apples for everything else all this time. People will say, “No! The gold value of your apples has halved, I will only sell to you for twice as many apples now!”. And they won’t lower that price. Does this seem plausible to you?

    Let’s say it did happen, though. How does this prevent all non-apple sellers from continuing to barter with each other, and all non-apple producing workers to continue to remain employed?

  16. Gravatar of Saturos Saturos
    7. November 2012 at 06:59

    Now let’s change the example. Suppose gold is now traded for a basket of goods. Half the goods in the economy (say all capital goods). The exchange rates between gold and everything else are computed as follows: directly if it is a capital good, and indirectly if it is a consumer good. (There go my definitions from my argument with MF…) The weighted average of these is the Price Level.

    Suppose all capital good prices are flexible in gold terms. Then when the gold stock halves, the prices of all capital goods halve in gold terms.

    This would be a massive decline in the price level. However, let’s suppose the price level is just flexible enough to allow this. The price level can fall 25%, no more.

    But now to prevent the price level falling all the way in half, the prices of all consumer goods must double, in terms of capital goods. Despite the fact that consumer goods output and capital goods output is constant. People are now going to say, “Sorry, your apples are only worth half what they were in terms of gold, I’ll have to ask you for twice as many apples for this.” And they won’t lower that price. Does this seem plausible to you?

    Let’s say it did happen, though. Now relative prices are out of whack between one half of the economy and the other. Producers and consumers in each half can still barter with each other. But no one can trade across halves, as Diocletian’s edict forbids it (you know what I’m talking about). So there is mass structural unemployment. People need to shift from one sector to the other. And people within sectors can still trade.

    Does any of this sound like what occurs in cyclical recessions?

  17. Gravatar of Saturos Saturos
    7. November 2012 at 07:00

    Now consider a third example. There is no MoA this time, and hence no Price Level. Gold is the medium of exchange. No good in GDP is traded directly for another. Instead all products must be sold for gold, which is not in GDP, and all products must be bought with gold. People quote all sorts of exchange rates, though: gold-apples, apples-gold, bananas-kumquats, haircuts-folding chairs, medical care-iPads. All cross-exchange rates immediately adjust to parity (people have supernatural knowledge) and there are no arbitrage opportunities.

    However, most of the gold-{x|x is an element of GDP} exchange rates are fixed (and their inverse rates).

    Now halve the supply of gold. Don’t halve the desired fraction of nominal income people want to hold as gold-balances. People find themselves with half as much gold as they’d like to carry in their pockets. Each person/agent cuts spending on everything, expecting that ceteris paribus this will lead to more gold to accumulate in their inventory. However everybody does the same. The result is that no one’s nominal inventories of gold increase, but the flow of spending of gold on everything else halves. This must lead to a halving of nominal GDP, as nominal spending = nominal income, so people now find that, with their nominal incomes halved they are once again willing to hold the same stocks of gold. Gold stocks are now in equilibrium, in terms of supply and demand for holding inventories

    Now everybody selling GDP goods is still demanding as much gold in exchange per unit of sales (because gold/other commodity exchange rates are stuck). But the amount of gold being offered for goods in every exchange has halved. So half as much GDP gets sold. So Real GDP falls by half. So “NGDP” falls by half. And every market where goods are traded for gold, is in disequilibrium.

    But because nominal income fell, the supply and demand for holding stocks of gold remains in equilibrium; in fact it is always in equilibrium (except when it is moving between equilibria). Even though every commodity market is now in disequilibrium.

    At one point, before RGDP fell, there may have even been a rise in bond yields, as bond prices collapsed when people kept selling bonds for gold. This rise in yields would have two implications. One is that, in the market where money (gold) is traded for bonds, the equilibrium price falls. However, each person selling bonds for money only takes money from somebody else. But people want to hold more money in aggregate. So they keep on selling bonds, trying to get more money in their inventories.

    The price of bonds keeps falling and falling, the yield rising and rising, until people find themselves with wanting to hold no more inventories in aggregate, as the opportunity cost is too high. At this point, the price in the money-bonds market, where flows of money are exchanged for flow (sales) of bonds, the price has collapsed. However, this is NOT the equilibrium that you have been talking about.

    The equilibrium that you have been talking about, which appears on the second diagram on your previous post, is an equlibrium in stocks. It is not a “market” equilibrium. The supply curve is not somebody’s Wicksteedian offer curve, offering money in exchange for another commodity. The demand curve is not an inverse Wicksteedian offer curve, where bonds are offered from money. Saying that this “market” always moves to equilibrium, does not imply that the markets where money is traded (all of them, when money is the medium of exchange) will always clear. You can go to “point B” if you like, and show an equilibrium in stocks; that doesn’t say anything about the actual MARKETS where flows of money are actually EXCHANGED are in fact clearing. It doesn’t even imply that the bond market is clearing! You need a separate diagram to show the equilbrium in the bond market, determining the equilibrium price or yield at which money is exchanged for bonds. (And that’s why I accused you of commiting the same fallacy – the Keynesians call the L-M diagram a model of the “money market” or “bonds market” – it is really no such thing.)

  18. Gravatar of Saturos Saturos
    7. November 2012 at 07:00

    However, as bond yields rise, we do move to a point where people want to hold no more than the available stock of gold. This is like your point B, on the stocks diagram, except you were talking about an increase in the money supply.

    This doesn’t last long though. Remember that people were only selling bonds becase they wanted to hold more money than they had. But now the interest rate has fallen. So they don’t want to hold more money. So now they stop selling bonds…

    The supply curve in the bonds market shifts to the left. The interest rate falls. And we are back to having an excess demand for money. What happens next?

    At this point, the excess cash balances mechanism proper takes over. The excess demand for money now leads to less spending of money (less flow supply of money) on all markets. The supply curves shift to the left, on all markets where money is bought with goods. The demand curves shift to the left, on all markets where goods are bought with money. (The same markets.)

    Now, either prices adjust or they don’t. If they do, then nominal income falls, and the demand for holding money stocks shifts back into equilibrium with the reduced stock of money. The recession is avoided.

    But if prices don’t fall, or don’t fall enough, there is a recession. There is an excess supply of goods on all markets. People aren’t selling those goods because they want more money; they sell those goods because they want to buy other goods, but can’t do so directly. But people are also trying to increase their money holdings. Which means they are buying less of all goods.

    So quantity supplied of all goods and services is the same. Quantity demanded of all goods and services is much less. That’s a decline in aggregate demand, or effective demand. That’s what causes a general glut of all goods and services. The only way to have a general glut of all goods and services. And now money is trading in disequilibrium on all markets. Output (the amount actually sold) falls, and RGDP falls, and NGDP falls.

    But because RGDP fell, nominal income fell. And because nominal income fell, demand for holding money fell. We now go back to your diagram. The demand for money/gold balances shifts to the left. We reach a point corresponding to “gamma”, except this is a contraction in money, not an expansion, so gamma is on the left. Chronologically, as I said, gamma occurs between B and C. But on your diagrams? Gamma would take the place of B on your first diagram (curves reflected to the left). And gamma would take the place of C on your second.

    Once again we have equilibrium in stocks. The money supply is now “in equilibrium” with the demand to hold it. It is also probably in equilibrium on asset markets, where prices are flexible. But that doesn’t count, as asset prices aren’t part of the price level, not part of GDP. The money supply is however in disequilibrium on every market where it is traded for GDP, “Y”.

    Because you ignored gamma, you ignored the need to mention precisely how the fluctuations in the curves on your graph, could cause a fluctuation in real income. Which would cause the demand curve to shift, giving us an equilibrium point gamma where the money stock had shifted and the demand for holding it as a function of *real* income shifted. But if real income falls, this means not all goods that can be produced are being sold for money. Which means there is disequilibrium, in flows, on all the markets where goods in GDP are swapped for money. At the same time, however, we remain at gamma, which is an equilibrium point, in stocks. But the only reason we are at gamma is because there is disequilibrium, in flows.

    Get it?

    (And eventually, in the long run, when we are all dead, we move to C, and real income recovers.)

  19. Gravatar of Saturos Saturos
    7. November 2012 at 07:01

    Italics are displayed by putting the relevant section between “i”s in triangle brackets, by the way. {Open triangle bracket, “i”, close triangle bracket, text, open triangle bracket, forward slash (/), “i”, close triangle bracket}.

  20. Gravatar of Saturos Saturos
    7. November 2012 at 07:03

    OK, no way Scott is ever going to read through all of that… so I guess this is really it now…

  21. Gravatar of Saturos Saturos
    7. November 2012 at 07:04

    Simon, they’d throw us out for being no good at baseball or American football, and for using the metric system.

  22. Gravatar of Major_Freedom Major_Freedom
    7. November 2012 at 08:55

    Saturos:

    Sorry guys, I’m about to flood this page with comments… I have more shame than MF, so I thought I’d apologize first.

    and

    I realize my comments are beginning to sound like MF. Don’t worry, I’m hoping the next ones sound more like Bill Woolsey.

    Your comments sound like someone who refuses to take full responsibility and hence full attention on himself, and would rather drag others into the muck with him so that people can more spend time thinking about me, and less thinking about you and your long posts.

    You said (within your explanations):

    The price level is the price of money.

    This is incorrect. The price of money is what is exchanged for money, just like the price of apples is that which is exchanged for apples. Thus, the price of money is the real goods and services that are exchanged for money.

    Nobody trades “the price level” for money, and so it cannot possibly be a price of money.

    I was essentially in agreement with you (with some minor quibbles) until I saw that comment. That was too egregious an error for me to keep going…

  23. Gravatar of Saturos Saturos
    7. November 2012 at 09:03

    Geez, get over yourself MF. And yes, I meant the inverse price of money. When you have to repeat yourself so many times, some times you let yourself slip into near-truths – he didn’t realize that of course, removing MoE is going to make the average price level irrelevant (for recessions), that’s the whole point…

  24. Gravatar of Saturos Saturos
    7. November 2012 at 09:04

    Still, I’m glad someone took the time to read through all that, took me over an hour to write…

  25. Gravatar of Major_Freedom Major_Freedom
    7. November 2012 at 09:12

    Saturos:

    Actually, I kept going…

    You said

    Once again, gold is MoA. There is no MoE, and the absence of MoE makes it a barter economy. All goods in GDP are exchanged directly for each other. Exchange is not intermediated by a common medium. However gold, which is not part of GDP, is only exchanged for apples. Implicit exchange rates are computed for all the goods in GDP in gold terms; the weighted average of these is the Price Level.

    If gold is a MoA, then it is necessary that people have the knowledge of the various “price of good in gold” with which they put on their accounting statements.

    On the other hand, if people only trade on barter, say apples for shoes, sheep for cows, iron for wood, etc, then what would the seller of shoes write down for the price of shoes in gold? If gold isn’t being exchanged for shoes, then he would have no means with which to write down any “price of good in gold” statistic!

    This is the core weakness of your entire approach, and it is the same weakness of Sumner’s approach. Both of you are presuming that there can be “price of good in gold” known to the various sellers of goods, barter or not, even though those seller’s goods are not being sold for gold!

    In other words, you are presuming that prices can be divorced from exchanges, when prices ARE the ratios of exchanged goods. The price of apples in gold is how many apples are exchanged for gold. The price of shoes in gold is how many shoes are traded for gold. The price of sheep in gold is how many sheep are traded for gold. The price of cows in gold is how many cows are traded for gold.

    If you are imagining what you think is a barter economy in which every seller is using gold as a MoA, then you are necessarily also imagining, whether you accept or not and whether you are even aware of it or not, that gold is actually being exchanged for all the goods that are being accounted for in gold prices.

    And what does it mean if all goods are exchanged for gold? It would make gold a MoE, rather than this ephemeral “MoA” concept that is treated as conceptually independent of MoE.

    Bottom line: Sellers of goods can only account for the prices of their goods in an MoA gold if and only if all goods are actually exchanged for gold, i.e. gold is MoE.

  26. Gravatar of Saturos Saturos
    7. November 2012 at 09:16

    MF, if gold swaps for apples at 2:1, and apples swaps for shoes at 3:1, then gold swaps for shoes at 6:1… etc.

  27. Gravatar of Saturos Saturos
    7. November 2012 at 09:18

    In a barter economy everything is traded for everything. Gold could be one of those every-things.

    A medium of exchange is a good which appears on one side of every transaction (or most transactions). So we don’t trade everything for everything: we trade everything for money.

  28. Gravatar of Major_Freedom Major_Freedom
    7. November 2012 at 09:23

    Saturos:

    Geez, get over yourself MF.

    Give me a good reason, given the fact that you keep mentioning me.

    And yes, I meant the inverse price of money.

    Inverse price of money is…inverse real goods and services. That sounds incoherent to me. What is the inverse of an apple? Don’t say 1/apple. The numerator and denominator are incommensurate.

    When you have to repeat yourself so many times, some times you let yourself slip into near-truths – he didn’t realize that of course, removing MoE is going to make the average price level irrelevant (for recessions), that’s the whole point…

    Yes, the principle that prices cannot be conceptually divorced from MoE is the main point that I agree with you about.

    Still, I’m glad someone took the time to read through all that, took me over an hour to write…

    For me, I tend to enjoy longer posts than shorter ones.

  29. Gravatar of Major_Freedom Major_Freedom
    7. November 2012 at 09:33

    MF, if gold swaps for apples at 2:1, and apples swaps for shoes at 3:1, then gold swaps for shoes at 6:1… etc.

    Why are you assuming apples are being exchanged for shoes?

    Remember, if you say gold is MoA, then ALL sellers must be able to trace the sales of all other goods, to their own goods, via barter transactions.

    But that cannot be assumed to be the case in barter. That’s the whole reason economists say there is a burden of double coincidences of wants.

    Not only that, but in order for every seller to price their goods in gold, every seller would have to acquire knowledge of every exchange in the whole economy. This is actually impossible, since it requires omniscience.

    Then there is the further problem that because there are many sellers, it is possible that there can be 100s or even 1000s of different shoes for sheep ratios. In other words, just because you notice that one seller sells 3 apples for a pair of shoes, i.e. a ratio of 3:1, it doesn’t mean that you can then say that because you sold apples for gold at 1:2, that you can account for your shoes in gold at 6:1.

    In barter, it is not the case that there exists a line of exchanges, traceable in the way you assume, from every single good back to gold in some way. There are both broken lines, and there are more than one line from one node of barter exchange to another.

    But in order for gold to be a MoA at all, there cannot be such gaps and there cannot be multiple paths where there are no gaps.

  30. Gravatar of Saturos Saturos
    7. November 2012 at 09:44

    MF, price of money is how many GDP baskets you pay for 1 unit money. Inverse price of money is how many units money you pay for 1 GDP basket.

    “Remember, if you say gold is MoA, then ALL sellers must be able to trace the sales of all other goods, to their own goods, via barter transactions. ”

    Yes, you need for every good to be linked to gold via a series of exchanges. Then any two goods being exchanged are connected to each other, via gold. Which makes gold a natural candidate for MoE.

    “But that cannot be assumed to be the case in barter. That’s the whole reason economists say there is a burden of double coincidences of wants.”

    What are you talking about? There’s rarely double coincidence od wants, how does that prevent goods being linked to each other through a series of barters via gold?

    “Not only that, but in order for every seller to price their goods in gold, every seller would have to acquire knowledge of every exchange in the whole economy. This is actually impossible, since it requires omniscience.”

    Yes, you would need to know every exchange rate. Another reason why we don’t have barter.

    If you read my discussion, you’ll see I assumed that arbitrage had put all cross-exchange rates in equilibrium. Of course I was also assuming law of one price for any given exchange rate, again because of arbitrage. Yes that’s another implausible assumption under barter. There’s a reason we use money…

  31. Gravatar of Major_Freedom Major_Freedom
    7. November 2012 at 10:05

    Saturos:

    In a barter economy everything is traded for everything. Gold could be one of those every-things.

    Incorrect. If everything was traded for everything, then everyone would be buyers of everything. Who buys everything even in monetary economies?

    No, in barter there are huge gaps in trading. Sellers of sheep may only buy from a few dozen or so sellers, in a total population of tens of thousands of sellers.

    A medium of exchange is a good which appears on one side of every transaction (or most transactions). So we don’t trade everything for everything: we trade everything for money.

    But nobody trades everything for money either!

    MF, price of money is how many GDP baskets you pay for 1 unit money. Inverse price of money is how many units money you pay for 1 GDP basket.

    OK, real goods. That’s what I had hoped you knew or learned.

    “Remember, if you say gold is MoA, then ALL sellers must be able to trace the sales of all other goods, to their own goods, via barter transactions. ”

    Yes, you need for every good to be linked to gold via a series of exchanges. Then any two goods being exchanged are connected to each other, via gold. Which makes gold a natural candidate for MoE.

    If everything were exchanged for everything (it isn’t, but for the sake of argument), then ANY good could be a “good MoA”, since any good could allegedly be traced in a matrix of sales the same way you are thinking you can do so for gold.

    “But that cannot be assumed to be the case in barter. That’s the whole reason economists say there is a burden of double coincidences of wants.”

    What are you talking about? There’s rarely double coincidence od wants, how does that prevent goods being linked to each other through a series of barters via gold?

    Rarely double coincidence of wants? Oh dear.

    The argument, and I mean “the” argument, for why money is superior to barter is because it creates gains by eradicating the double of coincidence of wants problem that plagues barter economies.

    “Not only that, but in order for every seller to price their goods in gold, every seller would have to acquire knowledge of every exchange in the whole economy. This is actually impossible, since it requires omniscience.”

    Yes, you would need to know every exchange rate. Another reason why we don’t have barter.

    You misunderstand. I am saying such knowledge does not exist in barter, so you can’t even posit the hypothetical of gold as an MoA, since it requires such knowledge.

    If you read my discussion, you’ll see I assumed that arbitrage had put all cross-exchange rates in equilibrium. Of course I was also assuming law of one price for any given exchange rate, again because of arbitrage. Yes that’s another implausible assumption under barter. There’s a reason we use money…

    I am saying a complete cross exchange rate matrix in barter is not possible in barter, which means your original claim that every seller can account for their sales in gold by way of such cross exchange rates, was a flawed assumption, and thus the assumption that is built on that, namely gold as an MoA in barter, is flawed as well.

    You can’t say in response “Well, that’s why we have money”. I am challenging the very conceptualization of the hypothetical world “gold is MoA in a barter economy” on the basis that gold CANNOT be a MoA in barter, because the required premises are untenable.

    I am doing this because my main argument is that it was wrong to conceptually divorce MoA from MoE in the first place.

  32. Gravatar of Major_Freedom Major_Freedom
    7. November 2012 at 10:07

    By “nobody trades everything for money either”, I meant “no one individual trades everything for money either”

  33. Gravatar of Eliezer Yudkowsky Eliezer Yudkowsky
    7. November 2012 at 14:32

    I confess I’m having trouble tracking the debate here. I don’t know as much monetary theory as I probably should to track it. But it’s also hard to figure out which exact economic conditions Sumner vs. Saturos think have different real-world effects.

    When I try to imagine “MoA without MoE” myself, I run into the issue that debts have to be denominated in something (MoA) that then actually gets paid back to the bank (which presumably makes this same good an MoE).

    Suppose all economic goods were bought and sold in a completely arbitrary unit, the Federation credit, which cannot actually be bought or sold anywhere – there is no such thing as a Federation credit; it’s a purely theoretical manifestation of the idea that in a high-tech barter economy, all goods will have consistent exchange rates after the financial arbitrageurs get through with them. Hence it must be possible to slap a consistent arbitrary “credit” on the restaurant menus, which tells you how much a food item costs in terms of your barterable real wealth, which has also been valued in credits. If this economy runs only on equities and has rejected the idea of loans – all investments get shares of some corporation, or some such – then it looks to me like, ignoring sticky price effects, we could replace all the credit prices with the same numbers divided by two, and this would have no effects on the economy. Am I wrong? More importantly, do the two of you have a disagreement about what happens in this economy if they wake up one morning and multiply all the numbers by two?

    If we add fixed debts also denominated in credits, then… I want to say that multiplying the numbers by two has a very large effect on the economy because it doubles all debts, but even before then, there’s the question of how the bank can tell that it’s been paid back in the first place. Why couldn’t everyone else enter into a conspiracy to quadruple all ‘credit’ prices and thereby defraud the banks? If there’s no actual ‘credit’ that can be bought or sold in which the debts are denominated, what does it mean to denominate a loan in credits?

    So instead let’s say that we anchor all the debts in platinum, but there isn’t much platinum in the world and almost no platinum is ever exchanged. To settle a debt, you give the bank shares in the equity market having a corresponding price in platinum; and there are tender laws enforcing the settle-ability of debts in any highly liquid good with thinly traded bid-ask spreads. I can’t tell which of you would consider this “MoA without MoE”, or if you would both consider platinum to have become the MoE, or if the two of you are making any different experimental predictions about what would happen if a huge new deposit of platinum were discovered or if aliens annihilated half the old platinum. But this is at least a scenario I can visualize.

    I can also imagine that it might be possible-in-practice to have an economy in which everything was denominated in purely theoretical credits (as the symbol of a consistent exchange rate once the arbitrageurs got through). Even debts would be denominated in ‘credits’, but when you take out a loan from the bank, they don’t give you ‘credits’ in a bank account, they give you equity shares with that current value in credits. Which you then invest in a factory, allowing you to later to repay the loan plus interest in more equity shares. I can imagine that all of this would be saved from total instability by sheer price stickiness once an MoA existed. And that would be a genuine case of there just being no MoE… although this scenario comes with other problems like “How do banks stay in business if every loan they make has to have a higher average interest rate than the return on equities plus the default rate?”

    But in this case I can’t visualize what real circumstances might produce MoA shocks that the two of you could make different predictions about.

    Sorry if all of this is missing the point in some way – I was just hoping to get some better visualization of what, exactly, is being disputed.

  34. Gravatar of ssumner ssumner
    7. November 2012 at 17:49

    I’ll take Eliezer first, as he just left one comment. Then Saturos.

    I am not certain, but as far as I can tell a purely abstract MOA leaves the price level indeterminate. You could have hyperinflation or hyperdeflation. There is nothing to pin prices down. Even stickiness may not be enough, as price stickiness breaks down if hyperinflation expectations set in.

    I should say that I don’t have a lot of confidence in my analysis of a purely abstract MOA.

    As far as real circumstances that would allow us to discriminate between the two views, I made the same argument in an earlier post—I can’t think of any. My preference for MOA is because prices are measured in MOA terms, so in some sense MOA market shocks that affect inflation and NGDP seem more like “exogenous” shocks, and changes in the MOE seem more endogenous. But if you are who I assume you are, you are much more capable than I am of figuring out whether the endogenous/exogenous distinction is meaningful here. I don’t have a strong philosophical background on that distinction.

  35. Gravatar of ssumner ssumner
    7. November 2012 at 18:22

    A question for the Brazilian, During this transition period, was the actual price tags on items in stores in the old depreciating currency or the new more stable MOA?

    Saturos, But I do accept the QTM, I just think that “M” is the MOA.

    I’m increasingly inclined to think these “no-MOE” examples are meaningless. As I’ve said before, I think one of two things happens:

    1. The MOA no longer trades at the free market price. In that case I agree with you.

    2. Under barter price stickiness breaks down.

    If neither happen, then with no MOE, and a MOA that always in is equilibrium, barter will often be passed up for better deals in the MOA market. MOA will inexortably start to become a sort of quasi-MOE.

    You said in response to someone:

    ““In order for MOA shocks to create macro disequilibrium, exchange must occur with a MOE. Otherwise people will barter, and MOA shocks will only create disequilibrium in the MOA market, no other.”

    Exactly. And then the MoA would no longer determine RGDP, it would only determine P. And if the MoA determines P but not Y, then there’s no sense in saying it determines NGDP.”

    I’d much better be in my shoes, as you are shooting for an inside straight. For your argument to be true:

    1. Recessions cannot be caused by wages getting out of equilibrium.

    2. And, you must reject my “if it takes two to tango, the the MOA is the dominant partner” argument. That is, even if you are right that a MOE is essential for the process to happen, I could argue that a MOA is also essential, and the MOA is the market that drives the entire nominal shock process forward.

    Then you go way off base by arguing that 1/P, not 1/NGDP, really really is the definition of the value of money. No, any definition of money’s value is arbitrary. If not, then which P? The CPI? The GDP deflator? An index including assets not currently produced? And what about quality change? What really really is the part of a new Dell computer that is real? And what really really is the part that is inflation? Economists don’t even have a decent theory to address this question, as it depends on psychological concepts like utility that are completely unmeasurable. So I will never accept any argument premised on the notion that 1/P is some sort of objective “real thing” out there like a gram of gold atoms.

    And no, I’m not reasoning from a price change in the gold/fruit example. I may be wrong, but I was reasoning that although gold was not generally used as a MOE, as long as it’s price was always in equilibrium, then people always had that option. In that case barter would not simply proceed merrily along, ignoring the gold market, rather people would switch over to buy or sell gold any time the price was in some sense “wrong.” So barter would not solve the problem of prices being sticky in gold terms. It could, if everyone was public spirited and agreed to do only barter, but they aren’t so they’ll try to buy or sell gold when the deal was better.

    As far as why does the MOA affect NGDP, because I assume it does. I assume people like to hold, say, 10% of annual income in the form of gold. If half the gold disappears, and goods are priced in gold terms, and if people still want to hold half of NGDP in the form of gold, then NGDP must fall in half. At that point we bring out the SRAS curve to see what happens to P and Y.

    You said;

    “I’m afraid your “simple” view really is “simple”. Of course the MoA affects P, by definition it does. But saying it affects Y too is nonsense without a medium of exchange.”

    It no more determines P “by definition” then it determines NGDP “by definition.” Or the nominal price of zinc “by definition.” Money doesn’t affect P directly. It affects NGDP, and the P/Y split is determined by the SRAS curve.

    And that’s just the first long comment you left?!?!?!? This may take a week.

    More to come . . .

  36. Gravatar of Ritwik Ritwik
    8. November 2012 at 03:46

    Marcus Nunes’s post is absolutely fascinating. In my view, here are the key lines :

    “On January 1999 the foreign exchange anchor was abandoned. The real depreciated by 100% between December 1998 and February 1999. You wouldn´t have guessed something so drastic took place by eyeballing the monthly inflation chart above.

    That happened because the MoA property of the real remained “standing”. That it did so was mostly due to the fact that Brazil quickly introduced (with surprisingly “instant credibility”) an inflation targeting regime as the new anchor for the domestic money.”

    In other words, the MoA is not a thing, it is simply the unit in which people mentally account for, it is the monetary regime.

    You can count me as a fourth MoA nutter, Scott, it’s just that I don;t think ‘currency’ is an MoA, it’s just one of the various MoEs, a relatively unimportant one at that.

    Fwiw, I also go along with Mehrling’s view that MoE, while relevant to explaining ‘general gluts’, is a category mistake for it includes both – means of payment and promises to pay – which are different for different actors. Indeed, scalable, impersonal MoEs are almost invariably somebody else’s promises to pay.

  37. Gravatar of Saturos Saturos
    8. November 2012 at 05:54

    Ritwik, I’d say that MoE is really only the means of payment. Scalable, impersonal MoEs are almost invariably somebody else’s promises to pay – by making a transfer of means of payment.

    Oh, and it’s a pleasure arguing with you. I wouldn’t want to give you any other impression…

  38. Gravatar of Saturos Saturos
    8. November 2012 at 05:54

    Oh man, Eliezer Yudkowsky is here! Talk about a deus ex machina! Let’s see what gets destroyed by the Truth now…

  39. Gravatar of Saturos Saturos
    8. November 2012 at 05:56

    Eliezer:

    Hi. Thanks for stopping by. (I would have expected you to be far too busy to involve yourself in random economics debates…)

    I see you’ve taken my hypothetical and complicated the heck out of it. I was actually talking about a very simple barter economy with no credit or financial system. In fact, the position which I have been inelegantly defending all this time is basically this one here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/10/medium-of-account-vs-medium-of-exchange.html
    Going to your comments, though:

    “Suppose all economic goods were bought and sold in a completely arbitrary unit, the Federation credit, which cannot actually be bought or sold anywhere – there is no such thing as a Federation credit”

    I’m pretty sure Scott would call that a unit of account, not a medium of account. As Scott says, if you use a mere incorporeal unit to denominate prices, the average level of GDP-prices is no longer pinned down by market exchange. Doubling or tripling all prices would be possible, without any respect to a market for an accounting-commodity, or numeraire. I don’t agree that the price level would be indeterminate, though. The Federation authorities could arbitrarily decree that the (weighted) average price level would always be 1: then relative prices would vary according to supply and demand. Change in demand for one commodity in terms of another would push both “Federation credit” prices away from the average in opposite directions. (Leon Walras had a lot to say about how this worked out for the economy as a whole.) Then things like, “Why couldn’t everyone else enter into a conspiracy to quadruple all ‘credit’ prices and thereby defraud the banks?”, wouldn’t work.

    I think both Scott and I agree (along with David Hume, et al.) that doubling all Federation prices in this case would have no real effects in this case, short or long run. Of course the value of debts would double too. But as you say, there would be “tender laws enforcing the settle-ability of debts in any highly liquid good with narrow bid-ask spreads”. These goods would have doubled nominal values too, so everyone can still pay off their debts.

    If we go so far as to say that all debts (and all spot-prices, too) are denominated in platinum, which is rarely traded, then I would call this MoA without MoE. The key is that platinum doesn’t have to appear on one side of every transaction (or most transactions), the way that money-assets do in our economy. If I grow apples and want shoes, I make a long series of trades that get me from apples to shoes, like “Hans in Luck” or the “One red paperclip” guy, instead of simply trading apples – money – shoes.

  40. Gravatar of Saturos Saturos
    8. November 2012 at 05:57

    Suppose aliens destroyed half the stock of platinum, which is not in GDP. (Ignore further impact of said aliens.) Assume also that, in every market where some commodity is directly bartered for platinum, the demand for platinum is unit-elastic. And all these commodities traded for platinum are in GDP. Finally assume that the average price level is sticky downwards.

    My prediction: The equilibrium price of platinum in terms of each of those commodities will double. This means that the equilibrium platinum-prices of each of these commodities halve. However, the actual market platinum-price rises somewhat, but stops below equilibrium. Correspondingly the platinum prices of all the goods directly traded for platinum falls a bit, but not to equilibrium. There is excess demand for platinum, and “notional” excess supplies of things traded for platinum on the platinum markets. Unable to buy all the platinum they want under the quantity-constraint, agents reformulate their demands, and go and buy other things instead of platinum. (Which then causes relative exchange rates within GDP to change slightly.) In other words, the situation described in this post: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/04/walras-law-vs-monetary-disequilibrium-theory.html

    Why don’t platinum prices of things directly traded for platinum fall all the way? Because the supplies of all GDP components, which are bartered for each other, are unchanged, which I think would keep relative exchange rates of things-in-GDP constant. And the platinum prices of each thing that isn’t directly traded for platinum, are the product of platinum prices of directly traded things, multiplied by a series of relative exchange rates completing the path.

    So I think that if platinum prices of the few directly traded things fall, then the platinum price of all other things fall too. And the whole price level falls by that amount. So even those few prices can’t fall in half, as then the whole price level would fall in half, contradicting the stickiness assumption. So I say none of the platinum markets clear.

  41. Gravatar of Saturos Saturos
    8. November 2012 at 05:57

    Now, Scott rejects this prediction. He says the platinum markets are always in equilibrium, or platinum isn’t MoA anymore. I’m not quite sure what he predicts, though. Perhaps the following:

    The platinum stock halves. A handful of things, that are sometimes bartered for platinum, lose fully half their platinum-value. These markets all clear. The price level is going to fall in half. But it doesn’t, because relative exchange rates between things that are directly swapped for platinum, and things that aren’t, jump high enough to prevent the whole average price level from halving. Maybe it only falls a little bit, instead. Platinum-prices of “far” goods remain constant, whilst goods that are “next to” platinum see their prices halve, so the price level as a whole falls just a little bit.

    Now the relative exchange rates between things “adjacent-to” platinum and things “far” from platinum, are in disequilibrium. Far things can no longer be bartered for “platinum-adjacent” things. There is excess demand for adjacent things in terms of far things, and excess supplies of far things on the adjacent-things–markets. But these are just notional demands and supplies. Finding themselves quantity-constrained, the far-thing makers stop demanding those excess adjacent things at disequilibrium prices, and demand other things instead.

    What happens now? My (conditional) prediction would be that far-thing makers switch to bartering amongst themselves. They keep on offering to trade with adjacent-makers at the disequilibrium prices, but people who are quantity-constrained turn away and demand something else amongst other near things. The volume of far-near trade shrinks. And platinum-adjacent thing makers leave their industries and join the bigger barter market. Eventually as supplies adjust the prices aren’t disequilibrium ones anymore, as desired quantities supplied and demanded adjust, instead of the price.

    To clarify, the handful of near-thing producers suffer a decline in output and employment for a while. But most people in the economy don’t. (Yes, I’m considering a fairly large economy here; as you say platinum is traded for a tiny fraction of the components of GDP) I wouldn’t call that a general demand-side recession, would you? It’s certainly not a Keynesian “general glut”, where everything becomes harder to sell, and easier to buy. Say’s Law is still true: supply of X creates demand for Y, where X and Y are both in GDP.

  42. Gravatar of Saturos Saturos
    8. November 2012 at 05:58

    However, continuing on with Scott’s prediction (as I infer it), though: he now thinks that the platinum prices of far things are “wrong”. It’s here that I have trouble working out what he thinks will happen next.

    Hey, I can kill two responses with one stone! I’ll now quote Scott’s latest comment.

    I may be wrong, but I was reasoning that although gold was not generally used as a MOE, as long as it’s price was always in equilibrium, then people always had that option. In that case barter would not simply proceed merrily along, ignoring the gold market, rather people would switch over to buy or sell gold any time the price was in some sense “wrong.” So barter would not solve the problem of prices being sticky in gold terms. It could, if everyone was public spirited and agreed to do only barter, but they aren’t so they’ll try to buy or sell gold when the deal was better.

    So far-goods sellers somehow start using gold as MoE, to circumvent the disequilibrium barter prices? Remember they don’t actually want gold, which has no intrinsic value except to Ron Paul and dentists. They want those near goods which they were having excess demands for. (Now the “near-far” nomenclature is obsolete, but let’s keep it.) So they trade their “far” goods for gold, and then trade gold for (originally) adjacent goods. (I’ve also switched from platinum to gold, partly to keep with the quoted paragraph but mainly because I wanted to make the Ron Paul joke.)

    I guess the far goods sellers now see that the gold prices of the adjacent things have halved. This makes them get a “better deal” elsewhere? I don’t understand this. It’s precisely because their gold prices have halved that the far-goods sellers want twice as many of them in exchange! That’s why the relative exchange rate has doubled! That’s why there’s an excess demand for near-goods now! The gold/platinum prices of those far goods are still the same (because the price level is sticky), so each one still sells for the same amount of other stuff!

    And this means that switching to gold as an MoE doesn’t help either. Those far goods, which would have been in equilibrium with gold/platinum with no excess demands or supplies, if their prices (and the price level) had halved – aren’t in equilibrium with gold either! In fact, if everybody now tries to sell stuff in exchange for gold/platinum MoA, using it to bridge the near-far gap – there will now be excess demand for gold in terms of all commodities! So that doesn’t solve the problem.

  43. Gravatar of Saturos Saturos
    8. November 2012 at 05:59

    Now, if gold really were the MoE now, then basically all exchanges would have to be intermediated by it. So now there’s an excess demand for gold in terms of everything; and an excess supply of everything, on the markets where everything is swapped for gold. That’s a recession and a general glut; since people can’t take those excess supplies elsewhere. Everything must be sold for gold, when gold is MoE. Switching to gold doesn’t help people buy any more near goods than before! Of course, as they were asking for too many. Furthermore gold as MoE makes the problem worse: now far goods aren’t bartered for each other. So their internal relative prices are correct, but all exchanges must pass through gold, and the gold price of far goods is too high, so…

    Some people do obtain gold, of course, and trade gold for the near goods, and for other far goods. But there’s big output loss and unemployment. Remember, in a MoE economy, the markets with MoE on one side are (practically) the only markets. (If you include financial markets then you need to consider more things as MoE, but the point remains.)

    But if they ignore gold and go back to bartering, then that takes us back to my conditional prediction. So removing the MoE and switching to barter solves the general recession. Or it would, if barter was feasible. Since barter isn’t feasible, you better make sure that the aggregate flow of MoE is big enough to clear all the markets where MoE flows are traded for GDP, given that prices are sticky. But they are sticky in terms of the MoA, when there is one, so fluctuations in the MoA stock will instigate RGDP shocks (by changing the purchasing power of MoE).

    As you can see, my fundamental problem with Scott is not that I think he makes a false prediction; it’s that his viewpoint is incoherent. And he makes a similar charge against me, telling me that I am playing games by considering barter economies in order to separate the causal effects of MoA vs. MoE. And he doesn’t let me present a clear no-recession prediction with no MoE as a refutation of him – he calls that playing games with the meaning of “MoA”!

  44. Gravatar of Saturos Saturos
    8. November 2012 at 05:59

    I’m not sure how your equity-loans scheme works though. You’re saying banks make profits by loaning out their own equity at interest? But accept factory-equity in repayment? What do the factories do with the bank-equity you pay them, why would people sell things to factories in exchange for bank-equity, which earns dividends based on profits on loans of bank equity… *brain explodes* I imagine that in a barter system all equity and debt payments would occur in real assets or commodities. (Unless “bank equity” is a medium-of-exchange asset with no intrinsic value… but now you’ve got to explain what makes banks accept each other’s money.) But all this is wildly implausible of course. We don’t use barter like that. I think it’s best to consider a simpler thought experiment, with only a handful of goods in GDP, plus a medium of account, and no finance, making up the entire economy, as Nick Rowe does. Then see how recessions might occur.

    Are you by any chance one of those people who believes that money and credit are fundamentally entwined? Plenty of monetary economists do; but Scott and I are not among them. We both prefer to separate the role of money from that of credit. Interestingly, in this case Scott is quite happy to prove the independence of money from credit by considering monetary economies with no credit, or moneyless economies with credit… #inconsistency

  45. Gravatar of Saturos Saturos
    8. November 2012 at 08:03

    To Scott:

    “What really really is the part of a new Dell computer that is real?”

    All of it. Suppose a new Dell computer sells for twice as much as an old. And over time Dell produces 0 old ones and half as many new ones.

    Suppose GDP is entirely Dell computers. Sometimes Dell computers are swapped for platinum, the MoA. And the stock of platinum is constant. So NGDP is constant.
    Now, statisticians will have trouble working out whether RGDP fell in half (because the new ones aren’t any better) and hence the deflator doubled. Or whether real GDP was unchanged, because the Dell computers are exactly twice as good (perhaps because consumers demonstrated indifference between 2 old ones and 1 new one during the transition period – although that ignores marginal analysis and makes interpersonal utility comparisons – but GDP does that all the time. I personally am quite comfortable with the Kaldor-Hicks definition of wealth-maximization.).

    In this case you can argue how much of it is real. I wouldn’t bother, though. Because none of this matters for the value of platinum. Before, 1 platinum bought x Dell computers. Now, it buys x/2 Dell computers. The price of each Dell computer doubles. The value of money is x/2 Dell computers. The value of a Dell computer is 2/x units platinum.

    You can argue whether “the real amount of stuff has changed” or not. But what really matters is how sticky the output prices are. If the entire composition of output turns over, I don’t think there’d be any stickiness. But whatever measure of output you choose, the value of platinum is the ratio of the platinum stock and the computer supply. And the value of computers is the inverse ratio. And doubling the platinum stock, for any given measure of RGDP, doubles the average price of that GDP supply. It might be sensible to choose the definition of RGDP that yields the stickiest P, in case the supply was flexible to monetary shocks (though I still think that this is MoE, especially on the downside.)

  46. Gravatar of Saturos Saturos
    8. November 2012 at 08:03

    The stock of MoA determines the value of output. X is the size of the MoA stock, in units. And Y is the size of the stock of output, in units. Y fluctuates if more output is produced. Or Y fluctuates if we choose to measure the output stock/flow differently, if we divide it into a different number of units. But however we measure the number of units Y, each unit sells for X/Y dollars, yes? And the whole output sells for Y * $X/Y, or $X. Now if X is NGDP, then P is X/Y.

    Since Y becomes tricky to measure, you simplify by saying that the whole stock of output is worth $PY, and each dollar buys 1/PY of $PY. That’s just $1, of course. I’m saying that each dollar buys 1/P of 1/Y of output, where Y is the number of units you’ve divided output into. Same thing, right?
    The problem with your way is that it’s confusing you. I say that MoA controls the value $P that each unit sells for. You say that MoA controls the value $PY that the whole stock of Y units sells for, whatever Y is. But Y is exogenous! It depends on what people produce, and how many units Y you divided the stock into. It doesn’t depend on MoA! If MoA increases, then the value of the stock of output $PY increases. But only for the same reason that my value $P increases! It doesn’t change production, and it doesn’t change how we divide the production into units! You value the stock at $PY. You stop trying to measure Y. But you don’t stop thinking about the quantity of Y. So then you claim that as MoA drives $PY, it can affect the size of the stock Y as easily as it affects P, whenever P doesn’t adjust! But it isn’t affecting the size of the stock, only the dollar value $PY! Y itself is a physical variable! PY rises for any given Y, as MoA rises – but MoA isn’t changing Y!

    I’ll go through it again. You first ignore the quantity of stuff produced, Y (too hard to measure), and only think about the dollar value of all stuff $PY. Then you adjust MoA. This changes $PY. Then you hold P fixed or sticky. Then you claim that Y (the quantity of stuff) must have adjusted! Magic!

    You’ve very cleverly managed to confuse yourself here.

  47. Gravatar of Saturos Saturos
    8. November 2012 at 08:05

    One more time: MoA determines P, given Y. If there are PY units platinum, and all output sells for platinum, and each platinum sells once; then the total supply of output sells for $PY. You may not know how to measure Y, but you know that the bigger you make Y the smaller you’ll have to make P, given that the total stock will sell for PY. You might be tempted to say: The size of the MoA stock (and how often each MoA reappears on the MoA market in a year) determines $PY, or NGDP. P is just an accounting fiction produced by picking some measure of Y. If PY dollars are spent on total output, then each dollar buys 1/PY of total output. Of course that’s just 1/PY *$PY, or $1. If we divide total output into Y units, then P dollars are spent on each unit. Each dollar buys 1/P units of output. It’s the same.

    Your approach in talking about the MoA determining NGDP is useful for treating supply shocks, like the Dell example. You don’t have to measure the size of the supplies, as however much you decide RGDP fell, the deflator rises by a corresponding amount. NGDP is constant. You might say that the MoA effectively determines NGDP.

    But the problem with your approach is that you confuse the difficulty of determining Y, with the notion that MoA determines Y. You avoid the problem of measuring Y by saying that a dollar buys 1/PY of total output, instead of 1/P of each unit of output. But as a result you’ve got it into your head that the MoA necessarily controls the size of Y! As you can (hopefully) see now, that’s just silly.

    Going back to computers: deciding on the value of improvements only affects measurement of RGDP, and the relationship between NGDP and RGDP (the deflator). But it doesn’t change the fact that, however much output you produce, each unit of output will sell for P dollars – however you count the units. And since the production of output, and the way in which we divide it into units, is independent of MoA – it’s better to think of MoA as driving P. Then you see how nominal values of output are driven by the fact that, whatever Y is produced and counted as, 1 unit MoA buys 1/P units of Y. OTOH if you want to see MoA as buying 1/PY, or 1/NGDP, of the whole stock of output – you begin to confuse nominal and real values, and think that the MoA stock is somehow automatically determining a real value, the physical quantity of Y, whenever prices fail to adjust. Instead of affecting Y via a market process (thanks, Bill), where Y fails to be sold for some MoE, whose P in terms of MoA is falling.

    I hope you understand your mistake now, it took me ages to work out how to communicate this to you in a way that might make you see where you were going wrong. I might have an inkling now of what Eliezer goes through in writing his blog…

  48. Gravatar of Peter N Peter N
    9. November 2012 at 01:26

    I’m not sure what exactly people here mean when they talk about a medium of account.

    The concept of a unit of account is clear enough, but it doesn’t require that there be a corresponding medium. There are historical examples of this.

    So, a medium of account must be a unit of account tied to some group of additional properties. The obvious questions are exactly what properties and how can these properties be unambiguously and mutually consistently defined. If you don’t have clear answers to these questions,you have people talking past each other because they are using medium of account to mean different things, and I believe this is what’s happening here.

    For instance, if the medium of account is not the medium of exchange, is the medium of account traded, and if so, how, by whom, under what circumstances and with what restrictions?

    Is there any trade outside the system, and what effect does this have on the medium of account?

    Is the value of the medium of account subject to arbitrage?

    There’s clearly a whole potential taxonomy of media of account, so you have to specify what species you’re talking about.

    I don’t think there’s too much you can say that applies to all media of account other than they represent physical instantiations of the unit of account.

  49. Gravatar of Saturos Saturos
    9. November 2012 at 03:28

    Bill Woolsey defined it earlier. I think Scott calls a commodity a MoA when it is traded for other goods on a market which is always in equilibrium, and when it is possible to compute prices for everything in the economy in terms of that medium.

    I think Scott accepts that the market value of MoA will be defined by arbitrage.

  50. Gravatar of Saturos Saturos
    9. November 2012 at 07:47

    Then again, maybe we’re both wrong…
    https://twitter.com/mattyglesias/status/266763654207270914

  51. Gravatar of Peter N Peter N
    9. November 2012 at 12:28

    Saturos,

    That helps, but a market can’t be “always in equilibrium”. Does this mean “moves entirely through a Walrasian sequence of equilibria”?

    Does “traded for other goods” mean directly tradeable for all goods or indirectly tradeable for all goods through some chain of intermediate goods”. Does this mean tradeable by anyone in all circumstances or only for certain people in certain circumstances (like privileged importers in Venezuela)?

    What risk is assumed in using the medium of account as a store of value (for example the forced conversion of old for new currency in North Korea)?

    Also “possible to compute prices for everything in the economy in terms of that medium” is not well defined. Does it mean possible by supernatural omniscience, possible but only with impractical natural effort (consider combinatorial explosion), possible with some defined level of information cost which might make the transaction not clearing were it actually to be assessed or always possible with a negligible information cost?

    This is all over and above whether such a definition is practically useful. Here MF’s Austrian criticisms are fairly persuasive.

    It would probably be more useful to survey historical examples of media of account and characterize their behavior. This would be a good thesis for some lucky grad student. Even a simple taxonomy would be useful.

    Then we would know we were all talking about the same thing.

  52. Gravatar of ssumner ssumner
    9. November 2012 at 16:25

    Saturos, You have a long comment that I am completely unable to follow, and then you said;

    “Does any of this sound like what occurs in cyclical recessions?”

    If you make all sorts of assumptions that are radically different from the way the actual real world is set up, then why be surprised if the implication of the model is different from what occurs in the real world?

    In your next comment (even longer) you assume no MOA, and gold is the MOE and prices are sticky in gold terms. But in that case isn’t gold the MOA? I don’t get it. But if I’m wrong and there is no MOA, then you are right. Later on you talk about the flow of money market being in disequilibrium. I agree, but I don’t call that the flow of money market, I call it the NGDP or goods market. And I agree there is disequilibrium in that market.

    Much much more to come . . .

  53. Gravatar of ssumner ssumner
    9. November 2012 at 17:59

    Saturos, You said;

    “However, as bond yields rise, we do move to a point where people want to hold no more than the available stock of gold. This is like your point B, on the stocks diagram, except you were talking about an increase in the money supply.

    This doesn’t last long though. Remember that people were only selling bonds becase they wanted to hold more money than they had. But now the interest rate has fallen. So they don’t want to hold more money. So now they stop selling bonds…

    The supply curve in the bonds market shifts to the left. The interest rate falls. And we are back to having an excess demand for money. What happens next?”

    I don’t follow. First you say bond yields rise and then interest rates fall. But yields are interest rates.

    You said;

    “But because RGDP fell, nominal income fell.”

    Isn’t the reverse true? Because NGDP fell, and because prices are sticky, the RGDP fell.

    Here’s how I see it:

    RGDP fell because NGDP fell and prices are sticky.
    NGDP fell because the nominal expenditure (M*V) fell. (Actually an identity.)
    And nominal expenditure fell because of shocks to the market for the medium of account.

    {i} test italics {/i}

    Ritwik, Of course the medium of account is a thing–that’s its definition.

  54. Gravatar of ssumner ssumner
    9. November 2012 at 18:06

    Saturos, You said;

    “Then again, maybe we’re both wrong…
    https://twitter.com/mattyglesias/status/266763654207270914

    Tell Matt to be careful he doesn’t wander into cultural explanations, and get hammered by Noah Smith.

    I’m burned out on this today–I’ll have to return later for your more recent comments.

  55. Gravatar of Major_Freedom Major_Freedom
    9. November 2012 at 18:46

    ssumner:

    If you want to put words in italics, use the “less than”, i.e. , keys, instead of those bracket thingys.

    Like this:

    http://www.w3schools.com/tags/tryit.asp?filename=tryhtml5_i

    HTML tags in general:

    http://www.w3schools.com/tags/default.asp

    Note: Not all of these tags will work on your blog.

  56. Gravatar of Saturos Saturos
    9. November 2012 at 18:56

    Scott, very quickly –

    The “radical difference” in my model is that people barter instead of using MoE. That’s it. With the example you are complaining about – I was just trying to make assumptions as generous as possible to you. You disagree with my barter examples, so I tried to investigate what you might expect to happen under barter… still couldn’t get a demand-side recession to happen.

    Yep, NGDP is the flow of money. Why can’t prices be sticky in terms of something other than MoA? Imagine imposing price controls in the Forex market.

    Sorry, I got mixed up. Trying to think about your diagram and my example simultaneously. Yields and interest rates rise, in that particular scenario.

    I completely disagree with how you conceptualize NGDP as a causal factor on RGDP, in lieu of an MoE. See my final remarks to you, beneath my response to Eliezer.

    Italics are done with triangle brackets. The ones on the comma and period keys. These ones: >>><<<<

  57. Gravatar of Saturos Saturos
    9. November 2012 at 18:57

    Hey, remember that time Eliezer Yudkowsky left a comment on TheMoneyIllusion.com? That was weird…

    (I guess it would be too much to hope for a new LessWrong post: “Hey guys! Guess what, I’ve rationally concluded that falling NGDP caused the Great Recession…”)

  58. Gravatar of Saturos Saturos
    9. November 2012 at 19:01

    “I’ve concluded with P = 0.879 that a monetary shock caused the Great Recession…”

  59. Gravatar of ssumner ssumner
    11. November 2012 at 07:22

    Saturos: You said;

    “Yep, NGDP is the flow of money. Why can’t prices be sticky in terms of something other than MoA? Imagine imposing price controls in the Forex market.”

    The MOA is defined as “that which prices are quoted in terms of.” So you are saying; “It’s possible for prices to be quoted in terms of something other than that which prices are quoted in terms of?” My head is spinning.

    You said;

    “So I say none of the platinum markets clear.”

    As I’ve said many times, if the MOA market doesn’t clear, then my argument doesn’t hold.

    You said;

    “Now, Scott rejects this prediction. He says the platinum markets are always in equilibrium, or platinum isn’t MoA anymore. I’m not quite sure what he predicts, though. Perhaps the following:”

    I don’t predict anything. I have no idea what happens if the MOA market doesn’t clear. Perhaps you just have a pure barter economy. That economy might or might not have recessions, depending on wage stickiness.

    I take your price stickiness discussion to mean that what matters is not the “price level” as the term is defined by economists, but rather the average price of “things” that prices are sticky in terms of. So if the new computer is twice as good, but the same price, there has been no deflation of computer prices. I’m fine with that. But then monetary shocks aren’t detemining the “price level” in the sense in which the term is defined by economists. We would need a new word for what you are talking about.

    You said;

    “But Y is exogenous! It depends on what people produce, and how many units Y you divided the stock into. It doesn’t depend on MoA!”

    I don’t agree. It’s exogenous in the long run, but in the short run NGDP shocks will impact Y.

    You said;

    “Then you see how nominal values of output are driven by the fact that, whatever Y is produced and counted as, 1 unit MoA buys 1/P units of Y. OTOH if you want to see MoA as buying 1/PY, or 1/NGDP, of the whole stock of output – you begin to confuse nominal and real values, and think that the MoA stock is somehow automatically determining a real value, the physical quantity of Y, whenever prices fail to adjust.”

    No, PY is not a real/nominal hybrid, it is 100% nominal. Just like when you multiply a negative and positive integer, the product is a negative integer, not some sort of hybrid. And I don’t think of the MOA market as automatically determining Y. It doesn’t affect Y at all unless wages and prices are sticky.

    I still don’t understand your argument that MOA shocks can affect prices but not quantities. If prices are sticky, then anything that affects prices ipso facto affects quantities. I thought everyone accepted that point.

  60. Gravatar of Saturos Saturos
    11. November 2012 at 09:18

    The MOA is defined as “that which prices are quoted in terms of.”

    When I said “prices” there, I meant rates of market exchange in general.

    “I take your price stickiness discussion to mean that what matters is not the “price level” as the term is defined by economists, but rather the average price of “things” that prices are sticky in terms of.”

    No, I was talking about two things there:

    - We should define the price level as the broadest aggregation of sticky prices, for stabilization purposes.

    - Just as the value of a good is the amount of money each one exchanges for, the value of money is the amount of goods each unit money exchanges for. The units for the value of money is physical units of goods, not “dollars”. Nor is it “the fraction of the dollar value of output” that money buys, whether total output (your way) or unit output (my way). The exchange value of money is a real variable, not a nominal one.

    You need to think about how fundamentally “prices” (or exchange rates) and quantities get determined on a market. And in what sense a MoA on one side of the market is capable of determining “quantities”. And whether the “quantity” determined on that market is the same as, or even related to, RGDP, or physical output consumed.

    I still don’t understand your argument that MOA shocks can affect prices but not quantities.

    And I fear you never will. That was my best shot. You’re never going to see that a purely nominal “NGDP shock” doesn’t “cause” anything, and certainly doesn’t “cause” changes in Y. You will remain fundamentally confused.

    “As I’ve said many times, if the MOA market doesn’t clear, then my argument doesn’t hold.”

    I can’t keep holding your hand through this, Scott. It’s up to you now to follow the thread of the debate as a whole, see just what it is you’re denying and committing yourself to, and whether you’re even prepared to accept that your views are capable of being false here, and what that entails.

    “So I say none of the platinum markets clear.”

    That was a (apparently wasted) response to Eliezer Yudkowsky. He wanted a prediction, and I gave him one. And you didn’t. (As I predicted.)

    Damn, I wish he’d stuck around. I had no idea he read blogs like this anymore! I would have asked him about the Keynesian view of probability…

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