# Nick Rowe’s 6 questions—plus answers

Nick Rowe has a new post that lists 4 fundamental questions about money, plus two add-ons that seems equally important to me:

1. Why do people use monetary exchange?

2. How much money will individuals choose to hold (what determines the demand for money)?

3. What determines the value of money? (What determines the price level?)

4.  What ensures that the equilibrium value of money is positive?

Those are fundamental in the sense that they don’t hinge on short run wage/price stickiness.  Then he adds two more at the end:

5.  What are the effects of monetary policy?

6.  What is the best monetary policy?

I’d like to take a stab at these:

1.  Money (i.e. currency) plays two roles.  It makes transactions more convenient, and it’s a good way to hide wealth.  Most is used for the second purpose (at least in the U.S.)  But the first seems more fundamental.  Money could be useful for transactions in a society where people were not hiding wealth.  But if it wasn’t useful in transactions (or something else like jewelry), it’s hard to see how it could have any value.  BTW, money need not be backed to have value.  Wallets are valuable for the same reason as currency—they making shopping more convenient.  And wallets aren’t backed.

2.  The demand for money depends on the amount of transactions, and the opportunity cost of holding money.  Md = f(NGDP, i)  If you are interested in explaining the price level, you’d look at it this way:  (M/P)d = f(RGDP, i).  If you are interested in explaining NGDP, you might use:  (M/NGDP) = k = 1/V = f(i).

3.  I’ve already answered the third question; it’s determined by the interaction of the supply and demand for money.  If (as I prefer) you define the “value of money” as the share of NGDP that can be purchased with each dollar, then you explain the value of money by explaining NGDP, which means explaining M (the policy instrument) and k, which is negatively related to the nominal interest rate.

4.  I’ll farm out the question of why money has value to Josh Hendrickson, who can explain it much better than I can.  He points out that holding money makes sense as long as the risk of the money suddenly becoming worthless is always pretty low.  I think people need to keep in mind that money is an incredible bargain.  The cost of holding money is utterly trivial; far less, for instance, than the cost of using ATMs.  And yet we don’t see scholarly papers asking why people use ATMs.  If you withdraw \$100 from an ATM, you might pay \$2 for the service.  If you spend it a week later and nominal interest rates are 5.2%, then the opportunity cost of holding that money was just ten cents.  Utterly trivial.  (OK, the possibility of theft makes it a bit higher.)    And yet that 10 cents ties economists into knots!  “What’s wrong with people, why don’t they bring interest-bearing T-bills to Walmart when they go shopping!”  You would not believe how many papers have been written by economists agonizing over that question.  It’s right up there with economists being upset that people vote, when theory says it’s not rational!!

5.  In addition to impacting NGDP, money also impacts hour worked (because nominal wages are sticky):

(Aggregate hours worked/natural rate of aggregate hours) = f[NGDP/NGDP(exp)]

That is, aggregate hours worked will be more or less than the natural rate, depending on whether current NGDP is above or below the level expected a few years earlier.

6.  The optimal monetary policy is NGDPLT, implemented via an NGDP futures market.

PS.  Nick also has an excellent post on why monetary theory is so hard to understand.

Tags:

52 Responses to “Nick Rowe’s 6 questions—plus answers”

1. Saturos
8. June 2012 at 05:48

“If you spend [\$100] a week later and nominal interest rates are 5.2%, then the opportunity cost of holding that money was just ten cents. Utterly trivial. … And yet that 10 cents ties economists into knots!”

I think this is related to Bryan Caplan’s persistent skepticism that money-demand really responds to interest rates, and also the theoretical puzzle as to why exactly Milton Friedman’s reasoning about the stability of broad money-demand was wrong (his argument that the differential between interest on M2 and bonds would be stable).

“”What’s wrong with people, why don’t they bring interest-bearing T-bills to Walmart when they go shopping!” ”

Here I think Scott is close to admitting that the medium of exchange is a special commodity.

Also, Obama is about to do a press conference on the economy at 10:15 am EST.

2. Saturos
8. June 2012 at 05:55
3. Morgan Warstler
8. June 2012 at 05:58

Scott you hit #1 out of the park… although I like the frame, hiding wealth isn’t the only reason – a real reason is that people judge current prices as being TOO HIGH.

I can mow my lawn in 30 minutes and I don’t mind doing it, so for me to have someone else do it, they literally have to shock me with how cheap it can be done.

The most obvious life improvement then is my Guaranteed Income plan, and after that a robot mower (I also enjoy robots).

Holding money is consumer austerity forces sellers into thinning their margins, and forces bad products into oblivion.

The point here is that, quality of goods can suffer where there isn’t a demanding consumer base that has very little desire to let go of their money.

—-

The other larger critique is that Ryan’s frame REALLY screws up money:

1. Why do people use monetary exchange?

1. Why do SOME people agree to create money and government, and which people are they?

The answer here is that the people who actually create value that other people want in the first instance they create property / capital surplus and then create govt. to protect their surplus.

THIS IS THE DEFINING CHARACTERISTIC

“to protect their surplus”

This is WHY the functional instinct of a CB and Monetary policy is maintain the value of the currency.

Scott, the cost of holding money SHOULD BE / OUGHT TO BE trivial, why???

Because the owners of money, the customers of money, the people who created money, and created government, they WANT IT TO BE.

—–

The people arguing for inflation, are agitators who don’t have any money – they coming into a club they have very little involvement with and acting as if they get an equal vote.

They don’t.

Say it with me boys and girls: Money is not a democratic good. It is a consumer good. And not all consumer count as much as others.

4. Morgan Warstler
8. June 2012 at 06:09

Proving my point is Matty:

“Better for millions to stay unemployed than for them to start commuting to work and moving out of their parents’ basement, pushing up oil prices and rents. It’s a perverse judgment in my view, but nobody on the Hill wanted to directly challenge it. ”

There we see directly that maintaining the surplus value of the Money is so important to consumers (the holders of money), that the government, the consumers PAY FOR does what the consumer wants and AGREES that Ben keeping the value of the surplus money is a good thing.

Matty is speaking for the non-holders of money, the non consumers of government as if hey have a equal vote.

—–

I’m not tryin to be rude here, I’m trying to explain the landscape as it really is, so that your people can see what kind of arguments MATTER and which ones don’t.

Selling NGDPLT as “less inflation” than we have had historically is a winner.

“More inflation right away” is a giant loser.

Why do you guys do such a shit job of putting the meat in the window????

5. Saturos
8. June 2012 at 06:15

Here’s the link for Obama, it’s about to start: http://www.whitehouse.gov/live

6. Saturos
8. June 2012 at 06:28

Markets not happy anymore: http://www.cnbc.com/id/47733130

7. Saturos
8. June 2012 at 06:42

Obama is talking right now

He wants Europe’s leaders to act right now to stabilize the financial system by injecting bank capital and deeper collaboration on budgets and banking, so that Parisians can continue to afford American products.

8. Negation of Ideology
8. June 2012 at 06:46

Great post, I like to see you getting into the theory of money. Here are my questions:

1. What is money?

Is it anything that can be used in exchange? That would mean almost anything is money. I think it is more a matter of degree, whatever the primary thing used in exchange in a society is money. Also, if a few things are used by a large number of people in exchange then that is money. I know that’s an incredibly poor and imprecise definition, but it may be a “I know it when I see it” type thing.

2. What is currency?

Whatever the government uses and recognizes as money.

3. Why do people use currency?

Because the government accepts it for taxes, fees, fines, auctions, and civil lawsuits. These create a legal debt that only the legal currency can satisfy.

4. Why does currency usually become the predominant form of money used for private transactions?

Because the government is the only thing every member of society has in common, everyone has some demand for it. Therefore, it normally becomes the standard. People write long term contracts in it, building in future demand. The government can ruin this, but it has to be grossly irresponsible. The more responsible the government is by maintaining a predictable future value, the more people will write contracts in it and use it in private as well as public transactions.

4. What determines the value of currency?

The supply is controlled by the government. The demand is determined by the desire for people to satisfy taxes and public debts – the tax base is roughly GDP. It is also determined by the expectation of it having a predictable value. So if the government is responsible in its issuance, private demand is based on the value of the entire volume of trade in the economy, roughly GDP. So both sources of demand are based on GDP.

5. What is a responsible currency policy?

One that has a predictable value. Since the demand for currency is based on GDP, basing the value on GDP will maximize utility for the citizens and seigniorage for the government.

9. Saturos
8. June 2012 at 06:52

Some structural adjustment necessary, but need flexibility. It’s good news that focus has shifted from austerity to growth, can’t keep cutting and cutting and cutting, ironically makes it harder to reform in long term

Obama is deeply disappointed that Congress refused to pass his bill which would have created another million jobs and was fully paid for. There are plenty of steps we can take right now to put people back to work, that have been endorsed by independent, non-partisan economists.

Apparently the private sector has been hiring at a steady pace over the last several months – the weakness has been in state and local governments. Apparently there are too many unemployed construction workers who could be put to work right now buiilding roads and bridges, fixing roofs etc.

millions of unemployed home owners that have done everything right, needlessly struggling, pass a bill right now to refinance mortgages at historically low rates.

Congress needs to explain to the American people why it won’t take action RIGHT NOW

Europe not simply a debt crisis – some countries like greece really got problems

Some countries fiscally sound but got weakened because weakness in housing and real estate weakened their financial system; markets got nervous making it harder for them to borrow.

Challenges they face solvable, RIGHT NOW need to focus on strengthening banking by taking decisive action that give confidence that banking is solid, shore up capital requirements
various stresses that may be out there absorbed by system. – Just like we did in 09 – 10

Obviously have a potential impact on us, as Europe our largest trading partner
If Europe in recession then we’re selling fewer goods and services, impact on pace of our recovery.

10. dwb
8. June 2012 at 06:53

hey this is progress, 2 years into the Euro crisis its no longer a “debt crisis.” structural reforms are good but…ok maybe 2 years from now they’ll blame the ECB.

11. Saturos
8. June 2012 at 06:53

Couple of sectors still weak, overall private sector been doing good job creating jobs.

Record profits in private sector, But construction and public sector employment still weak.

12. IVV
8. June 2012 at 07:02

The major use of money in the USA is to hide wealth? I honestly have trouble believing that in a world of conspicuous consumption and credit card debt.

13. Cedric
8. June 2012 at 07:03

Are economists actually troubled that people vote? Homo Economicus votes pursuant to this equation:

x = PD + E – C where

P is the your estimation of the probability that your vote will be the deciding factor in the election
D is the expected difference in utility if your favored candidate wins instead of the opponent
E is the utility of voting, regardless of outcome (sense of civil pride, sense of belonging to a team, the ability to say “I voted for the other guy” in future arguments, etc.)
C is the costs associated with voting (registration, lines, etc.)
If x is positive, you vote. If x is negative, you don’t.

Given that P is close to zero and D isn’t really that big, we can ignore the PD part of the equation (except for people who can’t math, who mistakenly believe they have a real shot at being the deciding vote). Then it’s just a matter of figuring out whether the civic pride/other emotional benefits of voting outweigh the relatively minor costs of standing in line for a few minutes.

14. Saturos
8. June 2012 at 07:03

This is what’s changed in the last few decades. We’re a global economy now. What’s happens anywhere in the world can affect us.
We took decisive action in 09. but they have to coordinate 17 governments. We need to be constructive, not frame this as us scolding them, give them advice from our experience stabilizing our financial system.
In terms of characterizing situation over there, same here and there, we’ve got short term and long term problems. We’ve got to put people back to work, not only good for those families, but because it helps reduce deficits and debt. If an economy still weak, recovery fragile, if you resort to strategy of let’s cut more, then we go on downward spiral, makes it harder to pay of debts.

Truth of the matter is we created 4.3 million jobs over last 27 months, 800, 000 in past few months alone
private sector doing fine
If Republicans want to be helpful, move forward put people back to work, need to think how can we help state and local governments and construction sector. Their policies, most economists estimate would lead to more layoffs, not help the housing market.

Now he’s talking about national security leaks.

15. Saturos
8. June 2012 at 07:08

I don’t understand why the reporters throw dumb questions at him just as he’s already begun to walk (“How was the pie?” wtf??). They’re like Australian MPs at question time. they really must have no lives.

16. Saturos
8. June 2012 at 07:09

Just realised that Obama’s vocal register and timbre probably did as much to get him elected as his skin tone and facial features.

17. Saturos
8. June 2012 at 07:17

Obama’s reelection strategy: Gross obfuscation of the employment situation. If you ask me, it ain’t gonna cut it.

18. Cedric
8. June 2012 at 07:29

Saturos,

That vocal register . . . /swoon. It is beautiful, though ironically, for our first black president, he’s got to be below average for black orators. Go to any black church this Sunday, and chances are you’ll see a preacher who is a way better speaker. I recall dozens of conversations with black churchgoers in 2008 who were mystified as to why white folks thought Obama was a great speaker.

Re: whether Obama’s employment obfuscation will cut it.

It will.

19. Saturos
8. June 2012 at 07:36

“Go to any black church this Sunday, and chances are you’ll see a preacher who is a way better speaker.”

It’s pretty hard to find them in Australia. But I know what you mean.

“Re: whether Obama’s employment obfuscation will cut it.

It will.”

Live in hope, man…

20. Morgan Warstler
8. June 2012 at 07:40

Of all forms of public speaking, preaching is the easiest, stand up comedy is the hardest.

Saturos, Obama is behind the 8 Ball with a low percentage shot. I don’t think he’s got the fire in him to pull it off.

I’m 50% that he gets so sure he’s beaten, that he just starts saying what he REALLY thinks.

21. Cedric
8. June 2012 at 07:44

So the real question is: should Obama act like a preacher or a comic?

22. Brian
8. June 2012 at 07:51

Scott,

David Wessel’s column on WSJ. Whaddya think?

http://online.wsj.com/article/SB10001424052702303296604577452651956158024.html

23. GMC
8. June 2012 at 08:04

Saturos said: “millions of unemployed home owners that have done everything right, needlessly struggling, pass a bill right now to refinance mortgages at historically low rates.”

The homeowners who are struggling now are struggling because they were bad risks who did not get low rates or planned to refinance before they hit the escalators in their loans. Refinancing them now at “historically low rates” would ignore the risk of default.

24. Saturos
8. June 2012 at 08:13

Tell that to Obama, whom I was quoting (approximately).

25. Morgan Warstler
8. June 2012 at 08:30

Let’s turn Mitt is the best Keynesian choice meme on it ear for a second:

Say you are Obama, and you think you can win, BUT you aren’t so convinced that it will be decisive, and certainly not that big to turn Congress or even save the Senate.

AND SCOTUS just threw out your signature achievement. You have read the writing on the wall about unions in Wisconsin…

AND you have started reading The Money Illusion…

So what if Obama throws the Unions overboard?

Meaning, he doesn’t just say it, he COMMITS to it.

What if he says in July, keep the millionaires tax credit BUT attach to it:

1. End Davis Bacon
2. 401K’s for Federal Employees – pay Freeze through 2016.
3. Fast Track for all EPA decisions on infrastructure to 90 days or auto-approve
4. Pipeline and Gulf Drill approvals

And I’ll sign it by July 15th

——-

Meaning, he gets by August a Stock and Bond Market that sees Long Term Fiscal Stability and Short Term Stimulus (Davis Bacon and EPA indicates new infrastructure).

And he turns to Fed and says, your turn.

And then he runs hard center right at Tea Party… as a distributist capitalist.

He gives them huge SMB tax cuts paid for by increased taxes on Fortune 1000.

He gives them FDIC only for small banks.

Meaning, assume Obama decides he has to be a centrist in second term anyway, so he goes the full Clinton to save his legacy – solve the Fiscal Deficit, and let Monetary do is job.

Does he actually depress the left vote that much?

26. Morgan Warstler
8. June 2012 at 08:45

Other Republicans at the hearing praised Tarullo for stressing the issue. “There may be many things you and I may or may not agree on. But I think the emphasis on capital as a general matter is exactly the right direction,” Sen. Pat Toomey (R-Pa.) told him. Afterward, Shelby told reporters that he, in fact, supported capital requirements that went even higher than the Basel III rules, which require big banks to hold 7 percent, high-quality capital cushion to back up their lending. “The larger you are, the more capital you need,” he said, per Reuters.

By contrast, many big banks have blasted stronger capital requirements, arguing that they will restrict their ability to lend and hold back the economy at large. The Basel rules are “anti-American,” Jamie Dimon, JPMorgan CEO, asserted in September.

http://www.washingtonpost.com/blogs/ezra-klein/post/heres-one-wall-street-regulation-that-republicans-love/2012/06/07/gJQAWcqeLV_blog.html

27. dwb
8. June 2012 at 08:47

Does he actually depress the left vote that much?

i would have to say, no. not only do i think “no” but from what i’ve read i hear thats the actual plan.

28. dwb
8. June 2012 at 08:49

… not all the things on the list, but i think you have the idea with run hard center right.

29. Major_Freedom
8. June 2012 at 09:36

1. Why do people use monetary exchange?:

Money (i.e. currency) plays two roles. It makes transactions more convenient, and it’s a good way to hide wealth. Most is used for the second purpose (at least in the U.S.) But the first seems more fundamental. Money could be useful for transactions in a society where people were not hiding wealth. But if it wasn’t useful in transactions (or something else like jewelry), it’s hard to see how it could have any value. BTW, money need not be backed to have value. Wallets are valuable for the same reason as currency””they making shopping more convenient. And wallets aren’t backed.

Money is used because it solves the double coincidence of wants problem, or, in other words, what Sumner said: it makes transactions more convenient.

Money does need to be backed to be voluntarily valued, which is exactly why fiat money, which is voluntarily valued very little, to the paper or digital bits, has to be backed by force in order to create the illusion of ostensible value. Force is the only way to get people who do not value a commodity, to accept it as if it were voluntarily valued. If the state ceased using coercion to demand taxes in US dollars, if the state ceased using coercion to demand defendants settle contracts and disputes in “equivalent” US dollars, then the voluntary valuation of fiat notes and digital accounts would finally be revealed as market oriented actions once more, and the value would collapse to the marginal utility of the paper itself, or the digital bits themselves.

Money has to be backed to be voluntarily valued the exact same way wallets are backed and are voluntarily valued: Scarcity. Wallets are voluntarily valued in their marginal proportions because the wallets can physically carry currency, and all physical economic goods are scarce. It’s why invisible wallets are priced at zero, and why leather wallets are priced at above zero. Invisible wallets are not backed by anything that is scarce, so they have zero price. Invisible wallets are like air. Air is not scarce, ergo air has no price.

ALL economic goods that carry an exchange price to money, are goods that are scarce. It is SCARCITY that ultimately “backs” economic valuations. If the state were to start enforcing taxes in leather, if the state were to start enforcing defendants to settle contracts and disputes in leather, then the exchange ratio of goods to leather would substantially increase, and leather would replace paper as currency. Then we’d be here listening to Sumner saying leather money isn’t backed the way paper isn’t backed.

Anyone who says wallets aren’t backed, either doesn’t know what wallets are, or their economics is wrong.

2. How much money will individuals choose to hold (what determines the demand for money)?:

The demand for money depends on the amount of transactions, and the opportunity cost of holding money. Md = f(NGDP, i) If you are interested in explaining the price level, you’d look at it this way: (M/P)d = f(RGDP, i). If you are interested in explaining NGDP, you might use: (M/NGDP) = k = 1/V = f(i).

Nothwithstanding Sumner’s contradicting himself, where even though price inflation is “meaningless”, price inflation is nevertheless used to make a point…

The demand for money is not a function of objective factors, such as price levels, or quantities of money. It is a function of individual subjective valuations.

It is a chimera to consider the demand for money of a community, or society. The individualistic economy as such, which is the only sort of society where there is a demand for money, is not an economic agent. It demands money only insofar as its individuals demand money. The demand for money in a society is just the sum of demands for money of the individuals. But for individual economic agents, it is impossible to make any use of the relation T/V, where T is total volume of transactions and V is velocity.

Therefore, the only way to accurately answer Nick Rowe’s ACTUAL question, which is why INDIVIDUALS would hold money, we of course have to ask what would influence an individual to receiving and paying out money.

Every individual economic agent is obligated to hold a stock of money to cover his probable business and personal affairs. However the amount held depends on individual circumstances. It is influenced by the individual’s personal habits, and by the whole social organization of production and exchange.

These objective factors can only be as motivations of the individual. They can never directly influence the actual amount of money the individual holds. It is the individual subjective valuations that are crucial.

Any attempt to explain demand for money in the way Sumner has done it, by starting with communities, with aggregates, are doomed to fail, because it would make it impossible to find the connection between the stock of money and subjective valuations of individuals.

The problem is easily solved if we start and stay with the individual’s point of view:

If an individual has a stock of money that exceeds his demand for money, he will buy. If an individual is a businessman, and his stock of money exceeds his demand for money, then he will perhaps grow his business, or if that’s not available, he might buy interest bearing bonds, or perhaps he’ll buy consumer goods. Whatever the reason for buying, we can say that he believes his stock of money exceeds his demand for money.

If an individual has a demand for money that exceeds his stock of money, then he will do the reverse. He will go out and seek to acquire money by selling goods/services/labor (or stealing, if he’s a statesman). A shortage of money means a difficulty in disposing of goods/services/labor for money. Monetarists unfortunately believe this problem is a lack of enough money, when in reality it is a problem of price, of investment, of goods/services/labor, that is, of real factors. An individual entrepreneur who cannot sell his goods at a profit, can say the problem is not enough money sales, but by no means can this logic be extended to the market as a whole. In the market as a whole, such things cancel out, and an entrepreneur who finds himself lacking money sales, has made the wrong expectations. Every seller who is obliged to dispose of a good via exchange for money, will accept a smaller amount of money than he otherwise would have demanded, so as to avoid a new loss incurred by selling the good he has acquired, which is harder to sell than money, for the goods he needs for consumption.

3. What determines the value of money? (What determines the price level?):

I’ve already answered the third question; it’s determined by the interaction of the supply and demand for money. If (as I prefer) you define the “value of money” as the share of NGDP that can be purchased with each dollar, then you explain the value of money by explaining NGDP, which means explaining M (the policy instrument) and k, which is negatively related to the nominal interest rate.

Notwithstanding Sumner’s circular logic, of presuming a given value of money (which NGDP requires given that NGDP is not the same as the money stock) in order to answer the question of what determines the value of money (and hence NGDP, given a money stock)…

As a rule, an individuals’ changing of the ratio between their demand for money and their stock of money, doesn’t have very large quantitative influences in the market. They will tend to be accompanied by off-setting, contrary valuation changes by other individuals. The more people there are in the market, the more likely one individual’s changing ratio between their demand for money and their stock of money will be counter-balanced by other individuals. In the world market, it can be assumed that every individual changed ratio will be counter-balanced by others.

But a change in the objective exchange-value of money can only arise when a force is introduced in one direction without a corresponding change in the other direction. Things are different when there is a disturbance in the community as a whole, of a kind to alter the individual’s demand for money and their stock of money. This can occur, for example, when the stock of money rises, without a corresponding increase in the demand for money. Here, also as a rule, an increase in the stock of money always means an increase in the money incomes of certain individuals, whether the money is fiat or commodity based, but it does not mean at the same time an increase in the supply of goods.

For these people, the ratio of their demand for money to their stock of money has altered. They have relatively too much money, and relatively too little other goods. The immediate result for them is that the marginal utility to them of the monetary unit decreases. This necessarily influences their behavior in the market. They are now in a stronger position as buyers. They will now express their desire for goods more intensely than before. They are able to offer more money for the things they want. The prices of the goods they buy will therefore rise.

The rise in prices is not constrained to the goods that the initial receivers of money buy. It will affect the incomes of all those who bring the same good to market. Their proportional stock of money will increase as well, and they in turn will be able to demand more intensively the goods they want, so that those prices rise as well, and so on. Thus there is a diminishing effect on prices, until all goods, some to a greater extent and others to a lesser extent, are affected.

Those who are reached last with the new money, will experience a decrease in their income, as a consequence of a decrease in the value of money brought about by the inflation. If the increase in inflation is one time, and transitory, then it won’t be possible for the differential increase in prices to be completely maintained. A certain amount of adjustment will take place. But there won’t be a complete adjustment such that all prices will rise to the same extent. For the prices of the goods after the rise in prices will not have the same relation to each other as before the inflation. The decrease in purchasing power won’t be uniform with respect to all goods. The economy is forever altered. Those who adhere to the mechanical quantity theory of money are either intellectually lazy, or they don’t understand money (because they start with aggregates!).

4. What ensures that the equilibrium value of money is positive?:

I’ll farm out the question of why money has value to Josh Hendrickson, who can explain it much better than I can. He points out that holding money makes sense as long as the risk of the money suddenly becoming worthless is always pretty low. I think people need to keep in mind that money is an incredible bargain. The cost of holding money is utterly trivial; far less, for instance, than the cost of using ATMs. And yet we don’t see scholarly papers asking why people use ATMs. If you withdraw \$100 from an ATM, you might pay \$2 for the service. If you spend it a week later and nominal interest rates are 5.2%, then the opportunity cost of holding that money was just ten cents. Utterly trivial. (OK, the possibility of theft makes it a bit higher.) And yet that 10 cents ties economists into knots! “What’s wrong with people, why don’t they bring interest-bearing T-bills to Walmart when they go shopping!” You would not believe how many papers have been written by economists agonizing over that question. It’s right up there with economists being upset that people vote, when theory says it’s not rational!!

There is no equilibrium achievable in the market. Equilibrium can only ever be a mental construct.

What ensures that the value of money remains positive are the subjective valuations of individuals, which cannot be predicted in advance using theories dependent on constant causal operative factors in the sphere of human action.

5. What are the effects of monetary policy?:

In addition to impacting NGDP, money also impacts hour worked (because nominal wages are sticky):

(Aggregate hours worked/natural rate of aggregate hours) = f[NGDP/NGDP(exp)]

That is, aggregate hours worked will be more or less than the natural rate, depending on whether current NGDP is above or below the level expected a few years earlier.

Notwithstanding the fact that just one day ago, Sumner was complaining how there were zero academic papers implicating monetary policy for the Great Recession, yet today he does not even make a passing mention of perhaps the most important effect of monetary policy…

The effects of monetary policy are numerous. Many (prices rising, wealth redistribution, change in relative prices) have already been mentioned. Others are: The cause of credit circulation business cycles, reduction in productivity by bringing about an increase in the relative number of wealth consumers and decreasing the relative number of wealth generators, and finally, and perhaps most importantly, it distorts economic calculation by misleading investors as to the true ratios of saving to consumption, such that even normal, rational, profit seeking behavior makes investors behave as if there is more capital available than there really is, thus leading to economy wide panics and crises.

6. What is the best monetary policy?:

The optimal monetary policy is NGDPLT, implemented via an NGDP futures market.

The optimal monetary policy is a 100% reserve free market (i.e. precious metals) money standard. If central banks have to exist, then they should print no more and no less paper claims to money than the amount of additional money that comes into their possession. And the state central bank’s subsidaries, the member banks, should be barred from expanding credit unbacked by prior real saving.

30. Saturos
8. June 2012 at 09:44

“1. Why do people use monetary exchange?:

Money (i.e. currency) plays two roles. It makes transactions more convenient, and it’s a good way to hide wealth. Most is used for the second purpose (at least in the U.S.) But the first seems more fundamental.

Money is used because it solves the double coincidence of wants problem, or, in other words, what Sumner said: it makes transactions more convenient.”

“Anyone who says wallets aren’t backed, either doesn’t know what wallets are, or their economics is wrong.”

Brought to you by Major Freedom.

31. Saturos
8. June 2012 at 09:56

What always puzzles me about you Austrians, is how you can manage to believe that the market is so wonderful at allocating resources, but as soon as a bunch of guys with printing presses join the other lenders it completely falls apart. So what if the money is newly created? Why should prices now fail to reflect true scarcity under the revised circumstances of new money being introduced through the credit market?

32. Negation of Ideology
8. June 2012 at 10:16

Saturos-

That is a great question. The argument is that if prices are flexible then if money (gold or whatever) changes in value then prices will simply adjust and everything will be fine. But if that is true, then if the value of money changes because money printing then prices would simply adjust to that.

Notice that there is more than one type of Austrian. Some, like Rothbard and our friendly commenter on this blog want to criminalize fractional reserve banking. Some go the other way and support Hayek’s “free banking” where any bank can issue as many notes as they want and if a bank goes bust anyone holding notes or deposits loses out. Anyone is free to accept or reject these notes at their own risk.

Both of these types get tied up in knots when you ask them what the government should use for money. Usually the Rothbardians say they don’t want any government, but since they want to criminalize some credit arrangements between adults it’s not clear how they’d enforce their desired laws. Usually it’s some form of anarchism where everyone hires some thugs, er – a private security firm, to enforce their private laws. You have a legal dispute with me? Then our private security firms shoot it out. If your warlord, er – security chief, betrays you, that’s the free market. You should have checked his references more closely.

It’s absolute insanity.

33. Mike Sax
8. June 2012 at 10:19

“Let’s turn Mitt is the best Keynesian choice meme on it ear for a second”

He’s got a bunch of Keynesians on his staff-Grem Mankiw Glen Hubbard etc. He campagins like Major Freedom his staff suggests something different.

34. Mike Sproul
8. June 2012 at 10:29

Question 4 would be really easy to answer if each dollar credibly said “IOU 1 oz of gold”. It would still be easy to answer if each dollar said “In a couple of centuries, if the Fed is liquidated, this dollar will give you a fractional claim to whatever assets the Fed has at the time”. That answer is clearly plausible, even if you don’t agree with it. It also makes much more sense than the alternative view that money has value because people hold it, and they hold it because it has value.

35. Philo
8. June 2012 at 11:49

“The demand for money depends on the amount of transactions, and the opportunity cost of holding money. Md = f(NGDP, i).” I’m OK with ‘i’, but what is ‘NGDP’ doing there? NGDP is, at best, loosely correlated with *the amount of transactions*; most transactions are not purchases of newly domestically produced goods or services.

36. Major_Freedom
8. June 2012 at 12:23

Saturos:

“Anyone who says wallets aren’t backed, either doesn’t know what wallets are, or their economics is wrong.”

Brought to you by Major Freedom.

You write that like merely rewriting it is sufficient to…what is that you are doing again? Supporting or criticizing?

What always puzzles me about you Austrians, is how you can manage to believe that the market is so wonderful at allocating resources, but as soon as a bunch of guys with printing presses join the other lenders it completely falls apart.

It’s because the market process is contingent on private property and voluntary exchange. Allocating resources temporally and cross-sectionally critically depends on economic calculation via the price system. Austrians view money and the price system as a complex of signals of objective information of subjective preferences.

The reason why the market cannot accommodate, or plan around, money printers joining other lenders, is the same reason why radio listeners on airplanes cannot accommodate radio signal jammers joining other radio speakers. In order for the system of radio communication to work, it must be jammer free, so that it’s not just a series of random noises.

Please note, that Austrians think the market is “wonderful” exactly to the same extent that you think YOUR worldview is wonderful.

I could just as easily say

“If inflation and credit expansion are so wonderful, why does the economy keep going through periodic breakdowns? The inflationists got what they wanted. They got money to be completely under the control of a monopolist with subjective powers to create any quantity of money they wanted. It’s the exact OPPOSITE of a free market in money. So we now have what they always wanted. We have a communist monetary regime. WHY THEN ARE THERE STILL PROBLEMS?!?”

We could waste another 100 years believing the problem is that the wrong people with the wrong intelligence and wrong ideas are in charge, but you’ll never find these angels. An individual human isn’t capable of centrally planning entire economies. Not even a group of “elite intellectual” humans can do it. Mises proved this. It has nothing to do with motivation, politics, agendas, bribery, ideology, or anything of that sort. It has to do with economic calculation. Central planners, by virtue of them being human, simply lack the requisite information and knowledge to be able to do what you and other fake “market oriented” monetarists believe can be done. Money production in our society is completely out of the scope of profit and loss. Of market forces. Money production is completely dependent on the whims of the Fed economists. For that reason, because they have no clue as to the price system for money production itself, when more money should be created, and when less money should be created, they are COMPELLED to choose completely arbitrary reasons for expanding or contracting money.

This is easily seen. Just consider Sumner’s NGDPLT 5 year plan. What other good or service increases at 5% each year, every year, year in, year out? NONE. Why? Because the production of goods subject to profit and loss allocates resources where they are most highly valued, at the time, and removes resources from where they are least valued, at the time. Therefore, over time, we see fluctuating supplies of all goods. Why in heaven’s name should the production of money be any different? What moron would believe that 5% NGDPLT year in, year out, is anything close to what individual market actors actually value, and what they actually want?

I mean, if people were such that they increased the production of most of each good and service by 5% per year, then OK, I might say 5% NGDPLT is a good idea. But in reality, nothing, NOTHING, increases by 5% each and every year. “Stability” of growth in a good is simply inimical to human society. Growth ebbs and flows for each good, as new goods are produced, and old ones die out, and existing ones are changed in their valuation relative to other goods.

The reason why the textile industry isn’t causing economy wide problems, is because textiles are integrated into the system of profit and loss. But non-market goods, such as fiat money, because it is NOT integrated into the system of profit and loss, it DISTORTS relative valuations. Fiat money being what it is, one half of almost every trade, thus does not assist in economic calculation, it hampers it.

Only if money production is integrated into the system of profit and loss, can anyone, from Ivy League economist central planner down to Joe Schmoe down the road, know what the “correct” supply of money should be, and whether or not more resources should be allocated to more money production, or something else.

The lack of knowledge is why you see such “clean” solutions from the likes of central planning thinkers like Sumner. It’s an ideal conception of rigidity transformed into policy recommendations.

What idiot would recommend that the supply of cop cars should increase by 5% each year, every year, no matter what? Nobody right? And yet we’re all supposed to believe 5% increase in money spending is somehow god’s gift to the economy? It’s ridiculous.

So what if the money is newly created? Why should prices now fail to reflect true scarcity under the revised circumstances of new money being introduced through the credit market?

Because prices are the only signal millions of economic actors have to coordinate their actions while being self-interested, profit and wage seeking individuals. Prices simply CANNOT rise for goods when the buyers of those goods don’t even have the newly created money yet because it hasn’t spread throughout the economy from the initial receivers!

Why do you monetarists all treat money inflation like it enters everyone’s bank accounts at the same time, which is what would be necessary for prices all throughout the economy to change with a round of inflation? For Pete’s sake people, if I earn \$50k a year, and my company won’t receive any of a round of newly created money until next year, because that’s how long it will take before today’s inflation from the Fed to spread from its initial receivers, to subsequent receivers of spending and respending, finally getting to my company as higher sales revenues, then how in the friggin hell can the price of my labor increase today? My company physically lacks the money to pay me more!!!

Yes, next year I might get a raise, once the money finally reaches my company, but by that time, it is almost a guarantee that there would have been even more inflation in the meantime.

So prices can NEVER adjust fully in the mechanical quantity theory way you have in your mind, when inflation is the de jure policy. Prices CANNOT physically rise unless the demand rises, and demand only rises for some people first, THEN it spreads to other people, slowly, over time.

It’s like if Bernanke promises to double the money supply next year, that I will be able to double the demand I offer to buy goods, and so will everyone else, such that prices double today? Don’t be ridiculous. We’re all constrained to the money we have. We can’t price goods higher with future money we won’t get until later.

37. Major_Freedom
8. June 2012 at 12:38

Negation of Ideology:

That is a great question. The argument is that if prices are flexible then if money (gold or whatever) changes in value then prices will simply adjust and everything will be fine.

Such crude thinking that is. “Prices will adjust.” You’re ignoring so many details and nuances it is not even funny.

Notice that there is more than one type of Austrian. Some, like Rothbard and our friendly commenter on this blog want to criminalize fractional reserve banking.

It’s already criminalized, for non-bankers. If a warehouse did what bankers do, they’d end up in prison.

I just want the law to be applied equally to everyone.

And commercial banks in our society aren’t actually free market institutions. They are more subsidiaries of the government’s central bank. The central bank is the headquarters, and the commercial banks inflate together in unison, so as to avoid one bank calling upon another for redemptions of money that the other bank doesn’t have.

Therefore, contrary to Selgin and White’s crocodile tears, calling for the hammer to be brought down on fractional reserve banking is not in any sense an anti-market advocacy. It is not “government intervention.” It is calling upon the government and its subsidiaries to abide by the rules of property rights that everyone else has to abide by via the law.

Some go the other way and support Hayek’s “free banking” where any bank can issue as many notes as they want and if a bank goes bust anyone holding notes or deposits loses out. Anyone is free to accept or reject these notes at their own risk.

But doing so devalues the money of parties who are not even involved in such fractional reserve transactions.

And no, you can’t say that in a 100% reserve free market standard, the same thing would take place, because then, people would be free to abandon that particular money that is being devalued is they want. In our monopoly standard, through legal tender and taxation laws, that is not permitted. So the devaluation becomes a violation of property rights.

It is similar to monopolizing and enforcing ownership over the atmosphere, and then spewing pollution into people’s breathing space. That would be a violation of their property rights, despite the fact that in a system of private ownership of the atmosphere, people may agree to allow others to spew pollution into their breathing space, provided of course that there is a contractual agreement.

Money devaluation is fine if people are free to leave the money without being coerced. It’s not OK when people are not free to leave it without being coerced.

Both of these types get tied up in knots when you ask them what the government should use for money.

You mean YOU get tied up into knots when you ask what money should be used in a free market.

Market advocates don’t have to answer what the money “should” be, any more than they aren’t obligated to tell you as market advocates of potato and car production how many cars and potatoes there “should” be. Let individuals decide for themselves in the market! You have to stop thinking like a central planner already. It’s seriously clouding your mind.

Usually the Rothbardians say they don’t want any government, but since they want to criminalize some credit arrangements between adults it’s not clear how they’d enforce their desired laws. Usually it’s some form of anarchism where everyone hires some thugs, er – a private security firm, to enforce their private laws. You have a legal dispute with me? Then our private security firms shoot it out. If your warlord, er – security chief, betrays you, that’s the free market. You should have checked his references more closely.

Usually the Sumnerites say they don’t want any government in money, but since they want credit expansion it’s clear how they’d enforce their desired laws. Usually it’s some form of statism where the majority hires some thugs, er – a public security agency, to enforce their laws on everyone else. You have a legal dispute with me? Then the majority’s public security agency shoots at the minority. If your warlord, er – public security chief, betrays you, that’s the state. You should have checked his references more closely.

It’s absolute insanity.

If private production of security is absolute insanity, then demanding a monopolist with no competition is downright sociopathic.

38. ssumner
8. June 2012 at 12:45

Saturos, I agree on interest elasticity. However most currency is hoarded to avoid taxes, and the nominal rate does have a substantial impact on the size of those hoards.

Morgan, Thanks, but because the cost is trivial, and will remain trivial whether inflation is 1% or 3%, I’d rather focus on the business cycle.

Saturos, You said;

“so that Parisians can continue to afford American products.”

AND can continue to retire at 60, while our age gets bumped up to 67.

Negation, Not anything that can be used in exchange is money. Money also must be the medium of account. If wages are denominated in Can\$, then US dollars don’t count in Canada, even if some Canadian stores near the border accepted them.

I don’t think the ability to pay taxes is the only reason cash is accepted. If the IRS declared that henceforth they only accept checks or credit cards, then I still think cash would circulate and have value. Not many people pay the IRS with cash anyway.

dwb, Yes, we are making progress.

Saturos, Even the private sector is weak. Overall NGDP is what matters, and that’s very weak–slowest growth since Herbert Hoover.

IVV, There’s over \$3000 in currency in circulation right now for each man, woman and baby in America. Most people only use a few hundred for transactions. And most currency is \$100 bills. They wear out ultra-slowly, indicating they are hoarded.

Cedric, They ignore the “civic pride” factor–they’re idiots.

Brian, I’m blocked, anything of interest?

Morgan, I’m pleasantly surprised the GOP favors higher capital req.

Mike Sproul, You said;

“It also makes much more sense than the alternative view that money has value because people hold it, and they hold it because it has value.”

I agree, but that’s not my claim. I claim cash has value for the same reason wallets do. No one claims wallets have value because others accept wallets.

Philo, Yes, but I needed to simplify. Keep in mind that cash is rarely used for big transactions like houses and stocks.

39. Major_Freedom
8. June 2012 at 13:00

ssumner:

Saturos, Even the private sector is weak. Overall NGDP is what matters, and that’s very weak-slowest growth since Herbert Hoover.

NGDP has been 4.5% since 2010.

LEVELS, MF! LEVELS!

Yes, NGDP LEVEL has been 4.5% since 2010! Hahaha.

What’s that? I am ignoring pre-2010? That’s right, I am, for the exact same reason you are ignoring pre-1931 as it pertains to the current flavor of the month “level”.

If you can ignore the past, so can I.

That is, unless you can explain the time frames that constitute when a past level drop can be ignored. But like Morgan said, you won’t do that because it would of course box you in to having to answer for when the economy continues to stagnates despite NGDP growing at 4.5%. “I said LEVELS, MF! That means we have to take into account, uh, the time since the civil war! We lost NGDP huge back then, and we have to make up for it! We’ve been unproducing since then because of the lack of Greenbacks.

Market monetarism is so funny.

40. dtoh
8. June 2012 at 18:37

In response to number 2. The best to way think of it is like the gas tank on a car or truck.

1) When the gas tank gets low you fill it up.

2) People hardly ever hold more gas than what will fit in the gas tank.

3) If people drive more, they fill up the tank more often and they use more gas.

4) Having more gas in the tank doesn’t cause people to drive more.

41. Bob Murphy
8. June 2012 at 19:19

What always puzzles me about you Austrians, is how you can manage to believe that the market is so wonderful at allocating resources, but as soon as a bunch of guys with printing presses join the other lenders it completely falls apart.

Printing presses are fine. It’s when they are backed up with guns and prisons that screws things up.

42. Morgan Warstler
8. June 2012 at 20:57

“Printing presses are fine. It’s when they are backed up with guns and prisons that screws things up.”

Love ya Bob, but spoken like a true beta.

The guns are all owned by the A power (the 35% of citizens who spend some of their earning lives in the top 20%), they also own far more wealth than the 1%, an they represent about half of likely voters in any random election.

The Govt. doesn’t back up money with guns, the Tea Party does.

Bob, don’t pretend monetary policy is run like a social good based on Democratic mob rule.

Hell, neither is our govt.

The US Constitution confounds progressives about as much as the Federal Reserve.

The reason the Tea PArty can’t be yawned away, is because they RUN every modern local social institution, they are the Main Street pillars of the community, they OWN MOST OF THE STUFF…

When libertarians play pox on both their houses, they are being intellectually lazy.

In the world of Nozick, it isn’t the 1% who become the hegemony, it is the top third.

Progressives suffer the Tyranny of the large minority. That isn’t going to end any time soon.

43. Larry
8. June 2012 at 23:53

One variable that gets little attention is V. What influences V? Is it entirely exogenous? Can policy directly affect V? Is it a fit subject for consideration when formulating policy or is it simply the residual of M and NGDP?

44. W. Peden
9. June 2012 at 05:22

Larry,

V is very important for policy. For instance, if there’s a change in banks’ cash ratio that’s going to be required, the central bank should be ready to accomodate this. Deregulation has tended to increase the velocity of base money (with credit cards and interest-bearing chequable accounts offering substitutes for cash) while reducing the velocity of broad money (as deposits become more competitive vs. stocks and bonds).

V is less important with an NGDP target that a pure money supply target. The failure to predict the fall in velocity in the 1980s and the rise in the 1990s was what killed off Old Moentarism.

45. Mike Sax
9. June 2012 at 05:37

Banks to be downgraded this week

46. Negation of Ideology
9. June 2012 at 06:02

Scott –

I agree with you on the medium of account point.

“I don’t think the ability to pay taxes is the only reason cash is accepted.”

Maybe I shouldn’t use the term “currency” then. I wasn’t thinking of only paper cash, I was thinking of the US Dollar (in this country). I should probably have used the term “Legal Tender” or something. So if the IRS doesn’t accept paper cash (I don’t know if they do or not) then there’s soem legal way to exhange paper cash for electronic money, probably by taking it to the bank.

I’m really trying to narrow it down. I want to distinguish between the legal monetary unit, and all the various other things that people call money. I guarantee everyone in Mexico and Canada would agree that the US Dollar is money, but it’s not legal tender in those countries. People claim that cigarettes are money in some prisons, but it’s not legal tender. So perhaps if I replaced currency with legal tender above, it would make more sense.

47. Negation of Ideology
9. June 2012 at 07:36

“If private production of security is absolute insanity, then demanding a monopolist with no competition is downright sociopathic.”

Your argument fails on its own terms. If I can hire a private security firm to force you to comply with laws, then just consider the US Government my private security firm. If you don’t recognize its authority, then it is just another security company to you. I have voluntarily chosen to have them defend my property and life from attackers, and I happily and willingly pay them for it. One of the tasks I hire them to do is collect protection money from everyone else who lives here whether they decide to hire them or not. You can go hire your private security firm and try to stop mine. I suspect mine will win.

48. Major_Freedom
9. June 2012 at 10:55

Propagation of Ideology:

“If private production of security is absolute insanity, then demanding a monopolist with no competition is downright sociopathic.”

If I can hire a private security firm to force you to comply with laws, then just consider the US Government my private security firm.

You’re just proving my point of your hypocrisy. You were chastising private production of defense by using deliberate sarcasm and pejorative phrasing. Now you’re telling me to just consider the US government as your private security firm? And you can’t see a problem with you doing that?

OK, let’s switch gears and let me address your characterizing the US government as your private security firm. Question: Why is your private security firm forcing me to pay it, indeed why is it forcing everyone in the territory to pay it, when I, and many others, do not consent to it being MY security firm, hmm?

The US government is not a private security firm at all, because it enforces a territorial monopoly on defense and security. It is therefore a state. You cannot ask me to consider it your private security firm, when I am forced to use it to settle any dispute we may have. It would be like my private security firm not allowing you to go to anyone else but it, if you have a dispute with me.

If you don’t recognize its authority, then it is just another security company to you. I have voluntarily chosen to have them defend my property and life from attackers, and I happily and willingly pay them for it.

Your choice to pay it is not the same thing as me choosing to pay it.

One of the tasks I hire them to do is collect protection money from everyone else who lives here whether they decide to hire them or not. You can go hire your private security firm and try to stop mine. I suspect mine will win.

You’re right, yours will win. But then the same thing can be said about civilians in a Muslim theocracy, who do not want to obey the dictator. The dictator’s supporters sound exactly like you do. “Just try to stop my holy leader. We both know who will win. Shut up and take it.”

You sound insane, and you’re telling me I am advocating an insane alternative? You can’t even grasp your own insanity. You’re basically telling me might makes right, and you’re actually enjoying telling me that, as if it pleases you that innocent and peaceful people are threatened with violence to compel them to obey your chosen master.

I can’t say that what you’re talking about is anything to admire or emulate. You’re a thug, plain and simple. Or, actually, a cowardly thug wannabe who lives vicariously through his masters and convinces himself they are in the right, the same way Stockholme Syndrome victims are enamored with their kidnappers.

49. Lorenzo from Oz
9. June 2012 at 11:09

I recently read Bob Murphy’s restatement of Menger’s theory of the origins of money and von Mises backward induction theory of monetary value.
http://mises.org/daily/1333/The-Origin-of-Money-and-Its-Value

They’re both more or less completely wrong.

(1) Plenty of civilisations relied on barter, money is not a universal feature of civilisations. For example, the Khmer empire.

(2) Coins were a creation of rulership.

(3) A medium of exchange is not money in the full sense.

(4) The transaction utility of money (that it has purchasing power) is not the same as the level of its purchasing power. The latter can shift while the former persists. The question is why (1) money in general is accepted as a transaction good including (2) why some specific money is accepted or not. The rejection of roubles in favour of dollars is not a rejection of money in general, but of a specific money. But it is a feature of any given money that it has a range, an ambit, of transactions. Indeed, some interactions are such that offering money would be insulting or hurtful.

To put it another, explaining why any given money has a range of transactions for which it operates as a transaction good is not the same as explaining what its swap value is at any given time. They are connected, but they are not the same question.

(5) Shared convenience is very powerful. It is the expectation of continuing common convenience which makes money work. Rulership setting up a range of transactions for a money anchors its ambit (of transactions) but does not determine its wider ambit or its swap values.

(6) Money as pure money is a transaction good: it does not appear in any production or consumption function. It is all about the transactions (current or future).

So, I am agreeing with Scott: what a shock 🙂

50. Negation of Ideology
9. June 2012 at 18:02

Major –

“Now you’re telling me to just consider the US government as your private security firm? And you can’t see a problem with you doing that?”

No, I specifically said I was addressing your argument on its own terms, not mine. I see no moral equivalence between an elected government and a private security firm. But on your terms, the US Government is just another security firm hired by the citizens who support it.

“It would be like my private security firm not allowing you to go to anyone else but it, if you have a dispute with me.”

There’s nothing to prevent your security firm from doing exactly that. And if it didn’t then it would lose any dispute with any security firm that did. And any intelligent consumer would choose the firms that did. Anyone who had a dispute with you would hire the strongest and most ruthless security firm he could afford to force you to yield to his terms.

“You’re basically telling me might makes right, and you’re actually enjoying telling me that, as if it pleases you that innocent and peaceful people are threatened with violence to compel them to obey your chosen master.”

Again I’m addressing your argument on its own terms. If anyone can hire their own security firm than the strongest and will win regardless of what’s right. Might doesn’t make right, it wins regardless of right. If someone decides to take Major Freedom as a slave, then if his security firm is stronger than Major Freedom’s security firm, you will be a slave. Or if they want to kill you or take your property. Or if they want to force you to pay protection money. And you will have no vote in the matter.

So if it’s morally acceptable for you if a private security firm enslaves you than it’s morally acceptable for a security firm to take over a whole nation to do so. Or for one security firm to have elections, and say it will not respect the authority of other security firms in some territory, and yes, force people to pay fees to it against their consent.

Again, this is addressing your argument on your terms. I have told you before, I think the law should be the same for everyone, and everyone should have an equal say in what those laws are. Not just people who can afford to pay people to use force on their behalf, as you advocate.

And I guarantee that I’m not enjoying telling you this.

51. ssumner
9. June 2012 at 18:43

dtoh, Good analogy.

Larry, V is positively correlated with nominal interest rates.

Negation, For me the key is the medium of account–medium of exchange is often the same, but MOA is what drives monetary theory.

52. Major_Freedom
11. June 2012 at 10:57

Propagation of Ideology:

“Now you’re telling me to just consider the US government as your private security firm? And you can’t see a problem with you doing that?”

No, I specifically said I was addressing your argument on its own terms, not mine.

But you didn’t even use my terms.

I see no moral equivalence between an elected government and a private security firm.

Neither do I.

But on your terms, the US Government is just another security firm hired by the citizens who support it.

Except this security firm forces payments from everyone, not just those who support it. It enforces a territorial monopoly.

If states should exist, they should be no bigger than city-sized states like Singapore and Liechtenstein. A statist world should be composed of many tens of thousands of independent domains.

“It would be like my private security firm not allowing you to go to anyone else but it, if you have a dispute with me.”

There’s nothing to prevent your security firm from doing exactly that.

Of course there is. There are other security firms. There are third party arbitrators that can be contracted for in advance.

By your logic, there is allegedly nothing stopping Singapore from taking over the world.

And if it didn’t then it would lose any dispute with any security firm that did.

And what would that mean for the CUSTOMERS who finance it? Unlike with monopoly states, customers can cease paying it, and they can finance another protection and security agency.

And any intelligent consumer would choose the firms that did.

False. By that logic, the world would have already become American after WW2.

Anyone who had a dispute with you would hire the strongest and most ruthless security firm he could afford to force you to yield to his terms.

Sure, he could try that, but his firm would be in competition with other security firms. The stronger security firms would be those that are the most just. They would attract the most customers.

“You’re basically telling me might makes right, and you’re actually enjoying telling me that, as if it pleases you that innocent and peaceful people are threatened with violence to compel them to obey your chosen master.”

Again I’m addressing your argument on its own terms.

But you’re not addressing my argument on its own terms. You’re addressing the argument on your own statist terms. You’re talking as if there is an equivalence between statism and lack of statism, as if monopoly is the same as lack of monopoly.

If anyone can hire their own security firm than the strongest and will win regardless of what’s right.

You’re ignoring what makes security firms strongest.

What made the US government the strongest, and why are the world’s most ruthless states so relatively weak in comparison? The US government at first had jurisdiction over a sparsely populated, relatively non-industrial economy. But because the US government was not fascist or communist, not “ruthless”, they attracted more “customers” and more resources.

The same principle applies with competing private security agencies. You’re just assuming the most ruthless will win, when history has shown that to be wrong.

Might doesn’t make right, it wins regardless of right. If someone decides to take Major Freedom as a slave, then if his security firm is stronger than Major Freedom’s security firm, you will be a slave.

Agreed, but you’re presuming that the strongest security firms would be the most ruthless and evil. It’s the opposite.

Or if they want to kill you or take your property. Or if they want to force you to pay protection money. And you will have no vote in the matter.

I will have recourse to other security firms. You keep pretending there is only one. You’re not addressing my arguments on their own terms. You’re addressing them on statist terms.

So if it’s morally acceptable for you if a private security firm enslaves you than it’s morally acceptable for a security firm to take over a whole nation to do so.

There won’t be “nations.” There would be small, independent city-sized domains. Imagine a world full of Singapores. There is no way any single one of them can take over the world without the consent of all the other Singapores.

Or for one security firm to have elections, and say it will not respect the authority of other security firms in some territory, and yes, force people to pay fees to it against their consent.

With what resources?