My final attempt to explain the MOA

I can see from comments that people are very confused about the role of the medium of account.  I am going to address two misconception in the post.  First I will explain exactly the sense in which the MOA is more central to monetary economics than the medium of exchange, and which sense it is not.  Then I will explain why nominal price levels differ between countries.

Obviously it’s going to be impossible to explain the difference between a MOA and a MOE if the same asset serves both purposes.  We’d end up with an “angels on the head of a pin” debate.  Who could say why money is important if it serves both roles?  At a minimum we need a MOE than is not a MOA.  So let’s assume that a gram of gold is the MOA and a gram of silver is the MOE.  Prices (and wages) are denominated in terms of gold grams, but bills at the cash register are paid in silver coins. They have those modern cash registers with built in computers. The exchange rate is set each morning based on conditions in the gold and silver markets.  An easy way to envision this process is to assume some countries use gold and some use silver. Then the store just looks up the foreign exchange rate each morning and programs the cash register.

Now for my claim that the MOA is more “fundamental” than the MOE.  What do I mean by this?  I mean one thing and one thing only.  Here goes:

A discovery of a new process for easily turning lead into gold would have massive inflationary implications for the economy.  NGDP would soars and debtors would gain while creditors lost.

A discovery of a new process for easily turning lead into silver would reduce the nominal price of silver, but otherwise have no important implications for the economy.

That’s the sense (and the only sense) in which I think the market for the MOA is “interesting” and the market for the MOE is “uninteresting.”  Now I am quite aware of that fact that in the gold alchemy case, the value of the existing stock of (silver) MOE measured in terms of the MOA does soar, so one can also argue that the MOE is important for that reason.  I understand that argument, but simply don’t find it persuasive.  It still seems to me that gold is the dog and silver is the tail.

Now on to international price level differences.  Imagine that Austria uses grams of gold as their MOA, and Argentina uses grams of silver as their MOA.  A visitor from Austria notices that prices in Buenos Aires seem 40 times higher than in Vienna, or at least the price tags on goods in stores that would say “2 grams” in Vienna say “80 grams” in Buenos Aires.  So the “nominal price” (nominal means number) is 40 times higher in Argentina.  Real prices are fairly similar, perhaps slightly lower in Argentina.  The real ratio of price levels is also called the “real exchange rate.”

The Austrian visitor wants to know why nominal prices are 40 times higher in Buenos Aires.  Do you explain the difference with reference to:

1.  The path of nominal interest rates in each country over time.

2.  The path of real interest rates over time.

3.  The path of market interest rates minus the Wicksellian interest rate over time.

4.  Fiscal policy in each country.

5.  Minimum wage laws.

6.  The difference in MOA.

I say answer 6 is not just the right answer, it’s the only non-insane answer.  The market for the MOA determines each price level.  Period, end of story.

And logically, if the market for the MOA determines what sort of numbers you see on price tags in 2013, it will also explain what sort of numbers you see on price tags in the year 2023.  And that means (purely as a matter of logic), that it explain the inflation rate between 2013 and 2023.

Questions?

PS.  In 1900 Japanese prices were only modestly higher than US prices (nominally), whereas now they are roughly 100 times higher.  How did this happen?  The Keynesian model can’t really tell you.  If you instead focus on the MOA in each country (let’s say currency printed by each government), it’s easy to understand why Japanese prices are now 100 times higher than US prices.  These price differences don’t just happen, there are reasons.  And don’t say the reason is “the exchange rate.”  The exchange rate is simply another price, it begs the questions.  It’s the market for the MOA that determines nominal values.


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59 Responses to “My final attempt to explain the MOA”

  1. Gravatar of Mike Sax Mike Sax
    16. September 2013 at 11:49

    Ok, Scott so I think part of the confusion is that in most cases most people are familiar with today the MOA and MOE are the same is that right?

  2. Gravatar of Felipe Felipe
    16. September 2013 at 11:56

    At a minimum we need a MOE than is not a MOA.

    I have a hard time separating the roles of MOE and MOA, because even when MOE != MOA, the price of MOE in terms of MOA is usually fixed. Is there an example of a MOE that has a floating price in terms of MOA?

  3. Gravatar of Mike Sax Mike Sax
    16. September 2013 at 11:57

    However,are recent countries that pegged their currency to the dollar examples of having a different MOA and MOE?

  4. Gravatar of MMdoubter MMdoubter
    16. September 2013 at 12:01

    An imaginary currency “gilbit” in country A:
    Price of tomatoes: 20 gilbits/kg
    Price of potatoes: 30 gilbits/kg

    An imaginary currency “bitgil” in country B:
    Price of tomatoes: 20 bitgils/kg
    Price of potatoes: 40 bitgils/kg

    Oh no, money has two fundamental values! What happened, Scott? Can you save us?

    (But seriously, *that* was your explanation of exchange rates?)

  5. Gravatar of Niklas Blanchard Niklas Blanchard
    16. September 2013 at 12:19

    Felipe,

    Separation of the MoE and the MoA functions of money has been the norm throughout much of history. Convergence of the two functions seems to have been a product of the Industrial Revolution.

  6. Gravatar of Gene Callahan Gene Callahan
    16. September 2013 at 12:55

    Scott, as a charter member of the MOA (Michael Oakeshott Association), I can assure you it needs no explanation.

  7. Gravatar of jknarr jknarr
    16. September 2013 at 13:05

    To take it further, the MOE function is only a rump of MOA. Revenue generated through sales generally balance with items purchased — and can be net reconciled in the hub of the banking system and loans. The vast bulk of MOE function is a self-extinguishing derivative of MOA. All MOE purchases net out – buyer and seller – and the residual is wrapped into MOA as a capital surplus or deficit.

  8. Gravatar of MikeDC MikeDC
    16. September 2013 at 13:11

    I think this is transposing the store of value function with the MOA function.

    What’s really fundamental in these examples is the store of value property of gold is changing, not the MOA property.

    To be an MOA, the gold merely has to be fungible. One gram of gold is the same as any other gram of gold, and thus the MOA is consistent.

    When the market is flooded with a suddenly expanded supply of grams of gold (through alchemy), the fungibility of the gold hasn’t changed though.

    What has changed is the predictable utility of all those gram’s of gold you stored up. Or didn’t bother storing up.

    That is pure, unadulterated “store of value”. Which makes sense, because the fundamental issue at play with economic growth is time and expectations. When we have unexpected change in our stores of value, our economic plans are upset and we have to recalculate.

  9. Gravatar of jknarr jknarr
    16. September 2013 at 13:37

    “Separation of the MoE and the MoA functions of money has been the norm throughout much of history. Convergence of the two functions seems to have been a product of the Industrial Revolution.”

    http://www.professorfekete.com/articles%5CAEFMonetaryReformGoldAndBillsOfExchange.pdf

  10. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 13:42

    MMdoubter,

    I don’t understand what you are arguing, all you have done is assume a situation where goods have different relative prices in two different places. If there is a currency market for gilbits and bitgils, there will still be an exchange rate. So maybe country A is Germany where (I’m guessing) the cost of producing a potato is relatively cheap and country B is Italy, where tomatoes are cheaper to produce and it is costly to transport them. So you go back in time and observe that it costs more Marks to buy a tomato in Germany than it would if you converted them to Lira and bought one in Italy, what have you proved about MOE, MOA, exchange rates or monetary policy?

  11. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 13:49

    MikeDC,

    If we have unexpected change in ________, our economic plans are upset and we have to recalculate. Fill in the blank with whatever you like and you will most likely be correct.

    Water is fungible but I’ve never heard of it being used as a medium of account. Surely this is not the definition but only one quality which is necessary to be a MOA.

    I don’t see how these concerns negate the affect on the MOA or the MOE.

  12. Gravatar of TravisV TravisV
    16. September 2013 at 14:05

    Hilsenrath!

    “Janet Yellen Now Front-Runner for Fed Chief”

    http://online.wsj.com/article/SB10001424127887324665604579079501712799442.html?mod=WSJ_LatestHeadlines

  13. Gravatar of MMdoubter MMdoubter
    16. September 2013 at 14:31

    Mike,

    You’re totally right that there will be an exchange rate that can be determined between country A and B.

    But as you can see, that exchange-rate has been determined by *real* factors (ease of production of real goods – not nominal goods) and has nothing to do with the medium of account.

    All I’m saying is that Scott is flat-out wrong when he says that exchange-rates are solely determinable using nominal aggregates if money = MOA. Of course, the nominal aggregate matters (in so far as it can help indicate term-structure of liquidity/future path of interest-rates/heterogeneity in rate-transmission – ie what people term as monetary velocity of a particular aggregate – etc). In the same manner, using real variables such as aggregate-demand/supply in a particular period can help extend that argument to an inter-temporal case in a single economy.

  14. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 14:43

    MMdoubter,

    But there will be a bitgil/gilbit exchange rate. In other words, there will be a nominal exchange rate which is independent of the real relative prices of the goods. This will depend on the quantity of the MOE/MOA (if they are different, then there may be two different exchange rates) but this doesn’t necessarily change the real relative prices or prevent any schedule of real prices from prevailing due to real circumstances.

  15. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 14:47

    Oh, and as a side note, I don’t think aggregate demand and aggregate supply are real variables. If they were willingness to buy/sell real goods at certain real prices, they would not make any sense. They only have meaning because they are in terms of the nominal price level. In a sense they are a sort of bridge between nominal and real variables so this is sort of semantic but you couldn’t talk about “aggregate demand” in a moneyless real economy.

  16. Gravatar of MMdoubter MMdoubter
    16. September 2013 at 14:53

    Oh I can totally talk about aggregate demand in a moneyless economy (say a barter economy). I just have to measure that in heterogenous units (20 million coconuts+30 million potatoes+10 million sacks of rice+100,000 television-sets+… etc – things, you know, a few hundred thousand people comprising a country might require for daily life). It still is aggregate demand, nonetheless.

    Same goes for aggregate supply.

    And in the example that I gave for relative prices of goods, can you give me an exchange-rate which is *independent* of the relative prices of the goods in the two economies and totally dependent on my choice of MoA?

    (The short answer is no – mathematically impossible – unless you’d like to have arbitrage – in which case, well, anything goes)

  17. Gravatar of JAS JAS
    16. September 2013 at 14:56

    Since MOA and MOE are the same (fiat currency)in most countries, it does seem to me that you are arguing about angels on the head of a pin. Why assume that MOA and MOE are different? You don’t want to go back to a gold standard, which seems like that is where MOA versus MOE would have some interest. I don’t see the big picture here.

  18. Gravatar of Negation of Ideology Negation of Ideology
    16. September 2013 at 15:04

    I hope this isn’t really your final post on MOA vs. MOE because those are your best posts. I certainly agree that the MOA is more central to monetary economics and more important to the economic well-being of the citizens.

    But I do think the MOE is important for seignorage. If the MOA were NGDP and the MOE was gold the government would earn less seignorage for taxpayers than if the the MOA were NGDP and the MOE were Federal Reserve Notes. That would be a wealth transfer from taxpayers to owners of gold mines. That’s probably 1-2% of GDP – not nearly as important as having a stable MOA, but not trivial either.

  19. Gravatar of Morgan Warstler Morgan Warstler
    16. September 2013 at 15:50

    In your throw down with Nick, I was reminded I wanted to mention this and never got to, this is Nick attempting to argue money is not a storehouse of value:

    “When you buy a good, you buy the option to use it, and the option to sell it again. For most goods, both options have value to the buyer. For a good that is only used as money, the first option is worthless; only the second option has value. Because if I can’t sell it again, I can’t use it as a medium of exchange.”

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/02/money-as-store-of-wealth.html

    I always thought Nick gave away how his brain works, bc he’s clearly wrong here.

    A good that is used only as money can be both used and then sold.

    You can loan money out or you can sell it (trade it for goods services). Slightly in the middle is taking equity.

    When you loan money it’s still yours, there’s something behind it, you have put it to work for you, you are using it…. you are a bank.

    He then gives this one:

    “If the government made it illegal for me to sell my assets, my wealth would drop, but I would still be wealthier than someone who had no assets. I could still live in my house, drive my car, sit on my chair, and use my computer. Even my financial assets would still pay dividends, or might be redeemed at some future point.”

    But if the government made it illegal for him to own assets, it took all property, and then said he could only use his money to rent those things from the state.

    The main function of money would be a store of value. And he’d be wealthier than anyone who had less paper money.

    The point of the analogy is that our government doesn’t get to do either.

    —–

    The point is our government doesn’t “exist” in these hypotheticals.

    The people trading who want to get past barter, they want money to function in all three way: account, exchange, storehouse.

    Note the KEY thing here, WHO gets to decide what money is?

    The people trading.

    The government doesn’t decide. Nick doesn’t decide.

    The people trading get to decide and they want money to do all three things.

    Witness Bitcoin.

    All around us everyday is proof that people who don’t “presume govt.” want money to function as more than MOA and MOE.

    But since it gives Nick fits, and I think Scott too, bc deflation – there’s an effort to presume government to make money be something that goes against the traders first position.

    MMT gets even more aggressive about the desire to insist government is the decider.

    BUT NOTH Nick and MMT are just saying this: “since I like govt. and don’t have a ton money, I don’t want money to be a storehouse of value, bc it makes it harder to run govt.”

    And as we in MM see ALL THE TIME, money is a good that functions as both MOA and MOE, AND as storehouse of value, and it functions that way not bc government says so, but bc the dominant creators / traders say so.

    If it wasn’t expected to be a storehouse of value, ecnos would have a much easier time cheering for inflation.

    Instead, if we are to be anthropologists studying America (as Nick insists) WE HAVE TO ADMIT that government and money both live in service to the deciders, the hegemony. And the hegemony WANTS money to operate as a storehouse of value.

  20. Gravatar of MikeDC MikeDC
    16. September 2013 at 16:05

    @Mike
    If we have unexpected change in ________, our economic plans are upset and we have to recalculate. Fill in the blank with whatever you like and you will most likely be correct.

    Only to the extent we care about the thing that changed. Thus, I will be most correct when you fill in the blank with the generally accepted store of value/medium of credit. Because it’s what everyone cares about.

    We could change the denomination of our MOA and, so long as we’re consistent with it, and change the denominations of future transactions, contracts and debts accordingly, we would get no meaningful change.


    Water is fungible but I’ve never heard of it being used as a medium of account. Surely this is not the definition but only one quality which is necessary to be a MOA.

    Fungible+Divisible+Verifiable = a good MOA.

    Which is why MOA is the wrong thing to focus on. At the real level, the store of value/credit function of money is where the action is. It really works outward from our basic economic theory.

    1. Voluntary trade is wealth improving because we expect each side will benefit from a trade.
    2. Money expands the possible voluntary trades we can make in both scope (because with MOE/MOA, I don’t have to barter my stuff for yours, we each sell for money and conduct trades indirectly) and time (because with money as a store of value/standard of credit, I can make and sell today, but not consume until tomorrow).
    3. Another way to say this is that changing these MOE/MOA don’t destroy the value of many transactions. Past transactions were still value-adding and the value of future transactions will quickly be recalculated. On the other hand, if the store of value/standard of credit changes, it calls into question the worth of the whole set of deferred consumption choices people make. In a sense, those are transactions that are still “in progress”.

  21. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 16:14

    MMdoubter,

    Demand, in a micro sense, is a measurement of how much of a good people are willing (if I knew how to do it, the word “willing” would be italicized) to buy at a given price where the price represents (somehow) other goods which they have to give up. You can’t aggregate demand for all goods because there is nothing left to measure what they are giving up. (This is putting aside the issue of what unit to measure them in which is also still problematic.)

    If you are talking about goods which are “required for daily life” you are missing the point of economics. The notion of what is required is totally arbitrary and has nothing to do with people making choices between scarce alternatives. I once had a professor who said “there’s no such thing as “need,” some people just have a highly inelastic demand for an appendectomy.”

    You can’t have an exchange rate which is independent of the choice of MOA, that is essentially the point of this post. My point is that the relative prices of the goods can easily be independent of the MOA which means that the fact that they are different in two different places (by assumption) does not imply anything about the MOA or MOE.

  22. Gravatar of ssumner ssumner
    16. September 2013 at 16:28

    Filipe and Mike, If the price is pegged then they are both MOA. I believe there have been a few cases in history where they differed. Obviously if one is going to compare the roles, you must assume the the MOA and MOE differ.

    MMdoubter, Not sure what that’s all about, maybe someone can translate it into English.

    Thanks Niklas,

    Gene, Ah, the other MOA.

    MikeDC, No, it has nothing to do with the store of value role of gold. You could use something that’s not a good store of value, like bananas.

    Mike Freimuth, I’m as confused by him as you are.

    MMdoubter, You said:

    “All I’m saying is that Scott is flat-out wrong when he says that exchange-rates are solely determinable using nominal aggregates if money = MOA. Of course, the nominal aggregate matters (in so far as it can help indicate term-structure of liquidity/future path of interest-rates/heterogeneity in rate-transmission”

    Well this is slightly less incomprehensible, but still very confused. If I want to know why it takes 100 yen to buy a dollar, and 1000 won to buy a dollar, I most assuredly do not look at the term structure of interest rates.

    Mike, You said;

    “They only have meaning because they are in terms of the nominal price level. In a sense they are a sort of bridge between nominal and real variables so this is sort of semantic but you couldn’t talk about “aggregate demand” in a moneyless real economy.”

    Yes, that’s my view as well. BTW, Can someone tell me why principles texts seem to refer to the entire AD curve as “AD” and also a point along the curve as “AD?”

    JAS, These thought experiments allow us to better see which role of money is in some sense fundamental to the macro problems we are interested in.

    Negation, I suppose seignorage could be earned on either. It depends on lots of factors.

    Morgan, Basically cash is a storehouse of value for tax evaders, and a few old people who lost money in the Great Depression.

  23. Gravatar of Felipe Felipe
    16. September 2013 at 16:30

    Niklas,

    But did the price of the MOE float?

  24. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 16:31

    Ha, I never noticed that about AD in textbooks, good point though. You macro people never were big on fundamentals 🙂

  25. Gravatar of Max Max
    16. September 2013 at 16:53

    I prefer Bill Woolsey’s definitions:

    https://www.themoneyillusion.com/?p=17412#comment-201444

  26. Gravatar of Eliezer Yudkowsky Eliezer Yudkowsky
    16. September 2013 at 17:08

    Scott,

    Suppose you were inventing a new currency system. Would there be any particular strong reason to decouple the MoA and MoE? Is there any point at which it is greatly desirable for the economy for these two price levels to move in different directions, or where we want to generate new MoE in a situation where we want to hold MoA constant, or some such? I wouldn’t think so – this view makes MoE mostly uninteresting AFAICT – but it seems worth checking.

  27. Gravatar of Eliezer Yudkowsky Eliezer Yudkowsky
    16. September 2013 at 17:09

    Or maybe to make my question more precise: Is there anything that goes horribly wrong as the result of foolishly trying to have your MoE be your medium of account, or your MoA be your MoE?

  28. Gravatar of Geoff Geoff
    16. September 2013 at 17:13

    I see Dr. Sumner is still confused about MOE and MOA, despite umpteen different times of me explaining them.

    The way a commodity becomes a medium of account, is through it being a medium of exchange. A commodity becomes a medium of account because it is valued. A commodity is valued by way of it being exchanged throughout society. A commodity that is exchanged throughout society is a medium of exchange.

    Enough with the confusion already!

  29. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 17:15

    From that Woolsey comment, I can’t tell what he considers the MOA with modern fiat money. Putting that aside though, it seems he is making a different distinction. He is assuming that MOE and MOA are in the same units and is defining the terms to distinguish between two different physical manifestations of that unit.

    If I understand what ssumner is doing, he is imagining that the two are in different units to try to distinguish between effects that are the result of changes in the MOE (hot potato effect) and those which are the result from changes (or lack of changes) in the MOA (sticky wages).

    I think the point is that when they are both in the same units (let’s say dollars) and you get more of it you have a hot potato effect due to the use as a MOE but this would not have a significant effect on the real economy if it weren’t for the fact that dollars are the MOA and therefore, prices, wages and debt all change in real value. If they do not all automatically adjust then you have some real affect.

    This point cannot be made with Woolsey’s definition.

    If I’m wrong, I trust Scott will get me back on track.

  30. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 17:21

    Geoff,

    I don’t think ssumner is trying to say anything about how something becomes a MOA or MOE, he is just trying to talk about the effects on the economy of changes in monetary variables. It’s too bad there is so much confusion going on here but I’m sure it would all be taken care of if you could only get better at explaining things.

  31. Gravatar of MMdoubter MMdoubter
    16. September 2013 at 17:29

    Scott,

    “If I want to know why it takes 100 yen to buy a dollar, and 1000 won to buy a dollar, I most assuredly do not look at the term structure of interest rates.”

    But you won’t be able to answer why it takes 99 yen to buy a dollar tomorrow without taking forward rates (UIP/CIP or some form of it) into account. Also, if tomorrow, USDJPY indeed went to 99 from 100, you most probably wouldn’t be able to explain the change fully in terms of changes in MoA.

    Or if you wanted a single-economy inter-temporal example, a mobile phone today has the same computational capacity as a supercomputer from the 1960s yet it costs much less. It is not because of changes in nominal aggregates but because of real supply-side changes (ie massive advances in semiconductor technology).

    Simply put, you’d be an easy man to make money off if you were ever actually trading in the FX markets :).

    Mike,

    You have taken the phrase “required for daily life” rather literally here. All I mean to say is that there is *no* requirement for money to exist in order to measure aggregate demand.

    A demand function with components that do not aggregate is as valid as a function in which they do. All that is required that the ordinality of utility-sets obey some mathematical conditions (this is the basic premise utilized in general equilibrium theory). “Economics” (ie resource-allocation to optimize an objective function under constraints – dynamic or static) works perfectly fine in this system.

    Money can be part of the allocation-set but there is no requirement for a notion of a “price” to exist (budget-constraints can indeed be expressed in terms of heterogeneous components – see Arrow/Debreu/Balasko et al).

  32. Gravatar of Nick Rowe Nick Rowe
    16. September 2013 at 17:32

    Scott: “A discovery of a new process for easily turning lead into gold would have massive inflationary implications for the economy. NGDP would soars and debtors would gain while creditors lost.

    A discovery of a new process for easily turning lead into silver would reduce the nominal price of silver, but otherwise have no important implications for the economy.”

    OK. I’m mostly with you there.

    But let me throw in a slight twist: suppose I have a monopoly on production of silver. And I’m currently maximising my profits. Now some new invention comes along that lowers my marginal cost of producing silver, so I want to increase production and sales of silver. If I were a monopolist of any other good, I would just cut the price of my good, and move down along my demand curve to the point exactly above where MR cuts the new MC curve. But I’m a monopolist producer of silver, which is the MOA. How do I cut my price, in order to sell more silver?

  33. Gravatar of Nick Rowe Nick Rowe
    16. September 2013 at 17:34

    Damn! I meant I have a monopoly on the production of *gold* (not silver)!

  34. Gravatar of Nick Rowe Nick Rowe
    16. September 2013 at 17:39

    Scott: ” BTW, Can someone tell me why principles texts seem to refer to the entire AD curve as “AD” and also a point along the curve as “AD?””

    The only answer I can think of: because “aggregate quantity demanded” sounds ugly and weird. But we should make that distinction, despite its ugliness and weirdsoundedness.

  35. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 17:48

    MMdoubter,

    If we’re talking science here, I have to take what you say literally, there is no figurative sense in which what you said makes any sense. I never said money was required for the notion of a price to exist, I was talking about relative prices in all of those previous comments. But “aggregate demand” in the way macroeconomists use it can’t exist because it is a relationship between the price level and the quantity of goods people are willing to buy. You can have utility maximization across multiple goods without money. You can have a general equilibrium in an economy without money. You can have demand curves for any of the goods in that economy in terms of any of the other goods without money. But you can’t aggregate all of those demand curves.

    What would be the independent variable in your aggregate demand curve?

  36. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 17:50

    Nick Rowe,

    It’s even more complicated than that. If you were a silver monopolist, since it is a durable good (which is required to be a MOE) you would have to account for the demand at all points in time and obey some kind of Hotelling rule (MR-dot/MR=1+i if I recall correctly)

  37. Gravatar of Philippe Philippe
    16. September 2013 at 18:08

    “And the hegemony WANTS money to operate as a storehouse of value”

    Which is why we have paper money which constantly loses value…?

  38. Gravatar of MMdoubter MMdoubter
    16. September 2013 at 18:25

    Mike,

    Utility functions can be aggregated to determine aggregate demand (or its components) – there is no need of money for utility aggregation to take place. Many New Keynesian models employ exactly such assumptions (eg linearized Smets-Wouters/canonical Calvo-models (they do have money in the consumption set but not as a means of utility aggregation)).

    In such cases there is no single “independent” variable as you put it but an n-tuple of independent variables (all combining to produce an aggregated utility number – which may or may not have anything to do with money). They may further be homogenized into clusters or even into a single variable (single-good economy) so that people can understand things in nice and simple 2D graphs. But they *do not* require the presence of money for aggregation.

    My original question still hasn’t been answered by you or Scott:

    In my example, tell me of a nominal exchange-rate which is independent of the relative prices of the real-goods while still preserving no-arbitrage.

    Whatever you’ve said so far in words is entirely useless (and makes no sense at all) if the math doesn’t support you.

  39. Gravatar of ssumner ssumner
    16. September 2013 at 18:32

    Lots of good questions, only have 5 minutes tonight (I promise I’ll answer the others tomorrow.)

    Nick, Perhaps a mistake to respond quickly, but off the top of my head I’d say MOA is always bartered. I go to a gas station with a wad of cash and barter it for gasoline. When the government prints more cash, we barter it for smaller and smaller amounts of gasoline. So the gold monopolist would accept smaller and smaller amounts of silver (or other goods) for the gold being mass produced.

    As an aside, my example contemplated competitive industries, but I don’t think that’s necessary. My goal here wasn’t really to convince anyone that my way is the best way (I’m not that optimistic) but rather to get people to see the exact sense in which I think the MOA is more fundamental. I think my example with the two types of alchemy, and their different macro consequences is the clearest explanation I can give. If people don’t see this example the way I do, there’s really nothing more I can say. At that point you start looking for testable implications that differentiate between your view and my view, and I don’t see any. Saying something is “fundamental” is like saying a mountain is beautiful. There’s really no room for dispute, without testable implications that differ.

  40. Gravatar of Morgan Warstler Morgan Warstler
    16. September 2013 at 18:40

    Scott, so your position on Bitcoin, is that is not popular with people who wish to deny the ability of macro economists and Central Banks to matter?

    SERIOUSLY?

    You think they aren’t motivated by the desire to take the tool of money out of the government’s hand?

    They are neither old people or criminals…

    Don’t expect charitable

    Pls don’t play dumb.

    Philippe,

    No dude, thats why countless economists spend all day everyday MOANING AND CRYING hat inflation is less than 2%.

    Ya know the difference between me and many of you, is I don’t want to have my cake and eat too.

    WE WANT MM!

    So I look at it and figure out how to convince the hegemony, the top 1/3, the deicers how to DECIDE to let us have it.

    But none of you want to beg and grovel, none want to prostrate yourselves to get the certain parts of the tight money crowd to go along.

    let’s PRETEND for a just a second that Milton Friedman was a s smart as some of us…

    crazy idea, but hear me out.

    If he was so smart, he must have been equally aware of what optimal policy was…

    perhaps he just had less personal dignity?

    Maybe he viewed all at small government junk, the reflex puking whenever anyone mentioned govt..

    Maybe he just didn’t respect himself as much as we all do, and since he was so pathetic, he just grovelled and was a court jester, and threw red meat to the rubes…

    so they’d go along with his his high minded monetary theories.

    OR MAYBE…

    none of you REALLY want the shit you say you desperately want…

    Anyway.

    Scott you are wrong. Storehouse of value = screw government with its pants on, since it loses MP power. You ain’t crying for no reason. Hegemony is real.

    Milton to get his MP, made sure EVERYBODY knew he could be trusted to screw government into the ground.

  41. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 18:48

    MMdoubter,

    You can’t aggregate utility functions. Utility functions are subjective ordinal preferences, it makes no sense to say you can add them together for different people. I don’t know what you have in mind but it is certainly not an aggregate demand curve as conceived by most macroeconomists and it is certainly not a demand curve at all as conceived by most microeconomists.

    Regarding your challenge with prices, I think I can already anticipate your argument and know the answer but I will play along. The exchange rate is 1-to-1. What’s the problem?

    Presumably, you will say that then you could buy a potato in country A and sell it in country B and make 10 gilbits (or bitgils). Of course that’s not true if there is a cost of more than 10 gilbits to transport the potato or pay customs discover the seller and the eventual buyer or if the potato rots before it can get there. If anything like this is true then there is nothing weird going on in this example and nothing interesting relating to MOE or MOA.

    If nothing like the above is true then there would be arbitrage possible but then those prices probably won’t persist. So what have you proved about MOE or MOA here?

  42. Gravatar of Mike Freimuth Mike Freimuth
    16. September 2013 at 18:52

    MMdoubter,

    I’m a glutton for punishment so I’ll try this: What would increase aggregate demand in your model?

  43. Gravatar of DOB DOB
    16. September 2013 at 19:16

    I think most would say UOA where you say MOA. But other than that, I agree with everything herein.

  44. Gravatar of MFFA MFFA
    16. September 2013 at 22:47

    John Cochrane: “Monetary policy has become highly ineffective” http://bfi.uchicago.edu/feature-story/role-monetary-policy-revisited?utm_content=buffer1be51&utm_source=buffer&utm_medium=twitter&utm_campaign=Buffer

    Unleash the Sumner!

    Personally I don’t get how he can miss the importance of the IOR (he even praises it) to validate his conclusion, it’s like IMHO (trying to use the same ship analogy that Prof Sumner likes) putting a stick that blocks the wheel of the ship, and then say “look, the ship can’t stir anymore, we need another boat to come to rescue”. At the talk someone asked him about Japan and his answer was “hah the Japan question I knew it was coming, its too early to tell, lets wait and see”. In the meantime he’s been spending the summer preaching central bankers about the inefficetiviry of their job! How can someone so smart be so of the chart?

  45. Gravatar of MMdoubter MMdoubter
    17. September 2013 at 02:06

    1. “You can’t aggregate utility functions.”

    Of course, you can as long as they follow some (fairly loose) mathematical conditions.
    And that’s something that has been known from the 1950s ever since Arrow came up with his seminal work in welfare economics.
    http://www.kier.kyoto-u.ac.jp/~geta2009/paper/geta2009Ma.pdf
    http://halshs.archives-ouvertes.fr/docs/00/78/86/47/PDF/aggregation.pdf

    I don’t know which mircoeconomists or macroeconomists you’re talking about but certainly those having studied any level of general equilibrium theory know about utility aggregation (it’s a prerequisite for the entire field of welfare economics and at least one Nobel Prize has been awarded to come up with nifty ways of aggregating utility)

    2. So, for the two-country example, let me present three cases apart from the one that you’ve mentioned:

    (a) Pegged exchange-rate with free capital/goods flow (same thing you’ve mentioned).
    Here the prices of real goods adjust because of potato-trade to quickly weed out any arbitrage advantages.
    Which implies the MOA of both countries change in value relative to what they were initially in terms of real goods.

    (b) Pegged exchange-rate with goods/capital controls
    Unsustainable. Either the peg gives or capital controls are relaxed. Otherwise one can earn infinite profits (in potato terms) from selling potatoes for currency in one country, converting the cash to the currency of the other country and then buying potatoes in the other country.

    (c) Floating exchange-rate with free movement of goods
    Very similar to case (a) above. Float remains where it was initially fixed, real goods prices adjust. MOA changes in value relative to real goods.

    (d) Floating exchange-rate with capital controls
    Exchange-rates adjust as well as goods prices adjust (as demand signals from one country is trasmitted to the other via the exchange-rate). Here the MOA’s value with respect to the real goods remains constant but the equilibrium exchange-rate is determined by the initial supply/demand differences for real goods in both countries.

    In each of the sustainble cases above, either the value of the MoA changes with respect to relative prices of real goods or the exchange-rate is determined according to the initial real imbalances.

    I think this suitably clarifies my argument. Fin.

  46. Gravatar of Brian Donohue Brian Donohue
    17. September 2013 at 02:21

    Morgan,

    I’m pickin’ up what you’re layin’ down here.

  47. Gravatar of ssumner ssumner
    17. September 2013 at 05:01

    Eliezer, It makes sense to combine the two roles. The point of the exercise is to try to figure out which role is the key to monetary policy.

    Mike Freimuth, Yes, that’s right.

    MMdoubter, You said;

    “Or if you wanted a single-economy inter-temporal example, a mobile phone today has the same computational capacity as a supercomputer from the 1960s yet it costs much less. It is not because of changes in nominal aggregates but because of real supply-side changes (ie massive advances in semiconductor technology).”

    I don’t think you understand what’s going on over at this blog. I’m a market monetarist not an old style-monetarist. We don’t believe in a stable relationship between monetary aggregates and the price level.

    And BTW, it’s not a good idea to be snarky when you are making a fool of yourself in front of all the other commenters. You really ought to get up to speed on market monetarism before trying to be funny.

    Nick, You said;

    “The only answer I can think of: because “aggregate quantity demanded” sounds ugly and weird. But we should make that distinction, despite its ugliness and weirdsoundedness.”

    If so, that’s a really horrible reason. The distinction is just as important in macro as micro. Here’s a simple example. The AD curve shifts to the right and the AS curve is vertical. A students asks whether “aggregate demand has increased” What is the answer? There is no answer. Or the answer is “yes and no.” Is that what we want to teach our students?

    mmdoubter, You said;

    “My original question still hasn’t been answered by you or Scott:”

    It hasn’t been answered because it’s so poorly worded I have no idea what you are talking about. Are you assuming that I assume PPP? I don’t. I don’t assume arbitrage equalizes relative prices in different countries. i don’t assume a real exchange rate of one. I don’t even assume a constant real exchange rate.

    Morgan, I assume nothing about bitcoins.

    DOB, If most people confuse UOA with MOA then most people are poorly informed. A unit of account is simply an abstract concept, like US$ or Can$. A medium of account is an actual dollar bill, or specific weight of gold. In 1929 the US and Britain had different UOAs but the same MOAs (gold). So they can’t mean the same thing.

    MFFA, That’s worth a post.

  48. Gravatar of OneEyedMan OneEyedMan
    17. September 2013 at 05:12

    I believe that in ancient Sumeria the MOA was silver and the MOE was mostly barley. That is, you could use silver as a MOE, but it rarely was, except for big transactions or ones where it was required for other reasons (religious mostly). So you would buy a goat for 2 talents of silver, know that the going rate of barley was 3 ephah per talent, and deliver 6 ephahs of barley.

  49. Gravatar of Morgan Warstler Morgan Warstler
    17. September 2013 at 08:11

    Just so I’m clear, how many people have to own / trade BTC for you to note that many people want to take the bat out of money out of Govts hand?

    End the Fed. Gold bugs. BTC. the Tea Party.

    They all want the govt. to lose its power over money. They demand a storehouse of value for that reason.

    Over time your system is less inflationary than our historical past.

    They want a smaller govt. You want a smaller govt.

    You desperately want them something from them… and you can actually give them what they want!

    Why in the world wouldn’t you speak to them on their terms?

    boggles.

  50. Gravatar of Tom Brown Tom Brown
    17. September 2013 at 09:36

    DOB, Bill Woolsey and JP Koning have offered other definitions of UOA and MOA. Here’s some examples of how I think thy might use the terms in different situations:

    Examples of possible MOAs:

    1. Gold
    2. Water
    3. Electricity

    Examples of corresponding UOAs:

    1. 1 dollar = 1 oz gold
    2. 1 dollar = 1 gallon water
    3. 1 Euro = 1 kW-hr electricity

    More examples of corresponding UOAs (different this time, but MOA stays the same for 1.):

    1. 1 dollar = 2 oz gold
    2. 1 Euro = 0.5 gallon water
    3. 1 Yen = 3 kW-hr electricity

    https://www.themoneyillusion.com/?p=17412#comment-201444

    I think my examples above favor what I’ve seen from JP Koning. It’s not clear from Bill, but he may say that the UOA is just the words “dollar” and “Euro” while we need to introduce yet another concept, the “definition” which relates the MOA to the UOA. Koning combines Bill’s definition with the words into the single UOA concept. That’s how I read it anyway… maybe one of them will see this and straighten it out! I’m unable to provide a link to Koning, but he has 15 articles with “medium of exchange” as a tag. These two are good:

    “Discussions of the medium-of-account could be more well-done”

    “My synopsis of the MOE vs MOA debate”

    His latest also touches on this:

    “Separating the functions of money””the case of Medieval coinage”

    Also try the Wikipedia article on Unit of Account. It sounds more like the Woolsey/Koning definition to me. They use Gregory Mankiw’s text as their source. They do not have an article on “Medium of Account” but they do have one on “Medium of Exchange.”

  51. Gravatar of ssumner ssumner
    17. September 2013 at 09:44

    MFFA, Is there a link for him responding to the Japan question?

  52. Gravatar of Tom Brown Tom Brown
    17. September 2013 at 10:30

    DOB, actually the Wikipedia article (which supposedly uses Greg Mankiw’s text as a source) is unclear. If I were to guess, it looks like they are folding the MOA, the UOA (and the definition relating them) all into one concept that they’ve labeled “UOA.” Does anybody have Mankiw’s text to verify this?

  53. Gravatar of Lorenzo from Oz Lorenzo from Oz
    17. September 2013 at 12:53

    Questions?
    You are assuming there is a market for the medium of account. This is not a necessary feature of a medium of account. For example, Irish law codes used slave girl as medium of account after slavery had died out.

    Is your medium of account also a medium for settlement of obligations? Historically, that has been a feature of media of account which were tradable in markets.

    Extending the second question; if a medium of account cannot be used to complete transactions, in what sense is it money?

  54. Gravatar of ssumner ssumner
    17. September 2013 at 15:54

    Lorenzo, Yes, I definitely assume a market for the MOA. There was a very liquid gold market in 1929, but gold was rarely used as a MOE.

  55. Gravatar of ssumner ssumner
    17. September 2013 at 15:56

    OneEyedMan, That’s a little like the use of gold, silver and copper in America.

  56. Gravatar of Geoff Geoff
    17. September 2013 at 16:47

    Mike Freimuth:

    “I don’t think ssumner is trying to say anything about how something becomes a MOA or MOE”

    I don’t think that even matters. Answering this question is indespensible for any explanations about which is “more central” or “more fundamental” than the other.

  57. Gravatar of MMdoubter MMdoubter
    17. September 2013 at 19:02

    Apologies if I sounded snarky. My points are still justified though.

    “Are you assuming that I assume PPP? I don’t. I don’t assume arbitrage equalizes relative prices in different countries. i don’t assume a real exchange rate of one. I don’t even assume a constant real exchange rate.”

    Then the whole point of your post is if if USDJPY=100, then a car which costs $20k in the US will cost 2m JPY in Japan. Nothing more, nothing less, nothing with any degree of predictive power.

    (You do assume one no-arbitrage condition though I think you fail to mention that you do – MoE to MoA exchange-rate is the same for all agents at a given point in time)

  58. Gravatar of John John
    18. September 2013 at 06:04

    No country or monetary regime has ever used a separate medium of exchange and medium of account. It is absolutely silly to imagine a world like that since the transaction costs of converting back and forth all the time in the same country or geographic area would undermine the purpose of developing a money in the first place.

    I will always feel that medium of exchange is the more useful concept because it highlights the fact that it is always final consumer goods being exchanged in every transaction with money simply acting as a veil. This is one of the most important and interesting insights in economics and calling money a medium of account misses that point.

  59. Gravatar of ssumner ssumner
    18. September 2013 at 17:54

    MMdoubter, You said;

    “Then the whole point of your post is if if USDJPY=100, then a car which costs $20k in the US will cost 2m JPY in Japan. Nothing more, nothing less, nothing with any degree of predictive power.”

    No, that’s not the point at all. Indeed if that were true then PPP would hold, and I just told you it didn’t necessarily hold. The point is that we understand price differences by looking at the markets for the two media of account.

    Yes, I assumed the MOA/MOE market was efficient, but relaxing that assumption doesn’t have a big effect on my conclusions.

    John. Other commenters said there have been cases where they differed. In any case, it’s not true that all transactions involve consumer goods.

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