Policy Research in Macroeconomics

Money as a social construct and public good

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“Everyone, except an economist, knows what ‘money’ means, and even an economist can describe it in the course of a chapter or so…”  – A.H. Quiggin

Right now many of us are transfixed by a new kind of digital money that seems to escape the control of central bankers: Bitcoin and its new market challenger, Litecoin. There are two striking things about the ‘money’ that is Bitcoin. First, its creators (computer programmers) have apparently ensured that there can never be no more than 21m coins in existence. Bitcoin therefore is like gold: its value lies in its scarcity. This potential shortage has added to the currency’s speculative allure, leading to a rise in its value. However, these rises and falls in value made it unreliable as a means of exchange.

Second, Bitcoin is not buttressed by any of the institutions that maintain advanced monetary systems. These include the rule of law, accountancy and criminal justice systems and central banks. It is these institutions that (try to) keep us honest. By contrast Bitcoin’s great attraction is precisely that it bypasses the state and all regulation. Indeed Bitcoin appears to be based on distrust. “Bitcoin was conceived as a currency that did not require any trust between its users” Jonathan Levin wrote recently.

Equally its scarcity means that unlike the endless and myriad social and economic relationships and transactions facilitated by credit, Bitcoin’s capacity to generate economic activity (trade, investment, employment) is limited – to 21 million coins. Like the architects of the gold standard, Bitcoin’s designers intend to deliberately limit economic activity to 21 million coins in order, ostensibly, “to prevent inflation”. In reality the purpose is to ratchet up the scarcity value of Bitcoin most of which are owned by originators of the scheme.

As this article is published, speculators have inflated to delirious heights the value of Bitcoin. The winners will be those who sell – just before the bubble bursts. In the absence of institutions that reinforce and uphold trust, the losers will be robbed.

Money is both a many-splendoured but also a many-layered thing. We all know what it is. We deal with it – in tangible or intangible form – every day. Most of us think it important. Not so economists. The dominant economic orthodoxy – taught at every university to the exclusion of other schools of thought – declines to take money, banks or debt seriously, as Professor Steve Keen argues. One prominent economist – whose anonymity we shall protect – once discouraged a PhD student from majoring in the subject, arguing that the study of money or credit is “a matter of third order importance.”

As a result of that neglect, those who control our money system escape close scrutiny. As a result too, there is widespread public ignorance of how the system for both creating and pricing money is effectively controlled not by central banks, but by the commercial banking system and by private, global capital markets. Despite all the hype around central bank decision-making, the public authorities have little impact on the management of the global financial system.

Perhaps one of the most disturbing aspects of academic neglect of money and monetary systems is the public’s failure to appreciate that the monetary systems of advanced economies evolved as a result of great struggles between private wealth and wider, democratic society. The success of these historic struggles meant that monetary systems in advanced economies evolved to become a great public good serving wider interests. However, periodically monetary systems are recaptured by the “robber barons” of private wealth, and then controlled and manipulated to serve their own rapacious greed.

To shine more light on the subject of money, and to broaden the discussion to a wider public, I published a short e-book aimed mainly at students – especially women students and green campaigners. Its title is Just Money: how society can break the despotic power of finance.

While we all know what money is and means, there is still a great deal of confusion. In the book I try to draw out the key differences between economists that rely on the classical or neo-classical tradition of monetary theory; and those who take a radically different perspective on credit and money. These include great economists like the Scot, John Law, John Maynard Keynes, Joseph Schumpeter, JK Galbraith, contemporary economists like Prof. Victoria Chick, Dr. Geoff Tily, Prof. Randall Wray, Prof. Steve Keen, Standard and Poor’s Chief Global Economist, Paul Sheard; anthropologists like David Graeber; and sociologists like Geoffrey Ingham.

They all understand that the thing we call money has its original basis in a promise, a social relationship: credit. The word credit after all, is based on the Latin word credo: I believe. “I believe you will pay, or repay me for my goods and services, now or at some point in the future.”

To understand this, think of your credit card. There is no money in most credit card accounts before a user begins to spend. All that exists is a social contract with a banker; a promise made to the banker to repay the debt incurred as a result of spending on your card, at a certain time in the future, and at an agreed rate of interest. And when we spend ‘money’ on our credit card, we do not exchange our card for the products we purchase. This is because money is not like barter. No, the card stays in our purse. Instead the credit card, and the trust on which it is based, gives us the power to purchase a product. It is the means by which we purchase the good.

Your spending on a card is expenditure created ‘out of thin air.’ The intangible ‘credit’ – nothing more than the bank’s and the retailer’s belief that you will honour an agreement to repay – gives you purchasing power.

That is why money and credit is a great public good. As a result of monetary systems it is wrong to ever suggest that “there is no money” – for childcare, education, the arts or for the transformation of the economy away from fossil fuels. The bigger question is this: is our money system just? And as a public, not private good, does it serve the needs of wider society?

As long as we remain ignorant of how monetary systems operate, for so long will the public good that is money be captured to serve only the interests of the tiny, greedy minority in possession of private wealth.

Ann Pettifor´s “Just Money – How to Break the Despotic Power of Finance” published by Commonwealth Publishing (January 2014) is available for £2.99 via Amazon or the PRIME Store.

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8 Responses

  1. I’ve got a slight quibble with the title of the above article. I don’t think it’s a good idea to use phrases like “social construct” and “public good”. That sounds too politically left: i.e. it might turn off some of those on the political right.
    In fact the case for banning private money creation (if that’s what Ann is proposing), or the case for a Positive Money type banking and monetary system can perfectly well be argued using politically neutral terms or ideas like: “maximising GDP within environmental constraints”.

  2. “Money may or may not be involved with the expression of a person’s values. Scarcity is not really important, needs are what matters.”
    The values you refer to are determinants of use value, or what orthodox economics calls utility, as opposed to value. Utility and use value is certainly the determinant of demand, so for example, I may place a higher level of utility on Mars Bars than you do, so at any given price, I will tend to demand more of them than you do. But neither your nor my preference for Mars is a determinant of its value, which is a function of the labour-time required for its production, or in modern parlance its cost of production plus the average profit. As a producer of Mars Bars unless I can obtain such a return, I will not continue over the medium-term, to produce Mars Bars. At the very least I will cut back production so that their market price rises. My decision to produce, and the quantity in which I decide to produce has nothing to do with your needs, but only with whether I can at least make this average profit.

    This is no different essentially than the situation facing a direct producer. Suppose I can produce in a year 10 tons of potatoes or 20 tons of carrots. Whether I prefer potatoes to carrots or vice versa does not change the value of either expressed in the labour-time I have to expend to produce them, nor does it change the exchange value of potatoes expressed in carrots. If I really like potatoes, and decide to spend all my time producing them, the value is a year’s labour-time, or put another way the exchange value is 20 tons of carrots. But, if I only marginally prefer potatoes to carrots (or put as I only “need” potatoes slightly more than carrots), this does not at all change the time I have to give up to produce them, nor the quantity of carrots I have to forego.

    The only thing this lower level of utility for potatoes can influence is not the value of either, but only the extent to which I demand potatoes as opposed to carrots, i.e. the quantity of social labour-time (here simply my time) I am prepared to devote to the production of one as opposed to the other.

    That is Marx’s Law of Value.

    1. Orthodox economics does not comprehend human personality, which is unfortunate because markets and economies are driven by human desire. The full spectrum of human desire must be understood if one is to gain real insight into financial, or indeed, any other decision making.
      The problem for traditional economics (and economists) is that we are, and create,non-linear, complex adaptive systems. Whereas the established econometric models are simple, linear views. As such they are incapable of capturing what is really going on – except in a very few constrained examples.

      The real challenge is for us all to develop our thinking – and that is hard work.

  3. An illustration that its not scarcity that creates value. Astronomers have apparently discovered some planets in other star systems where it literally rains diamonds. There is, therefore, no scarcity of diamonds. But, given the labour-time that would be required to go get these diamonds, I don’t expect their price to collapse any time soon!

    1. Human beings have natural ‘attractor’ states, some more cognitive, some more behavioural,some more affective. Values differ amongst these states depending on their individual needs. Thus some value physical exertion, some value quiet reflective moments and others need a nice warm cuddle.
      Money may or may not be involved with the expression of a person’s values. Scarcity is not really important, needs are what matters.

      As for the price of diamonds, there is no scarcity, only a rigged market – used to manipulate perceived needs!

  4. “Bitcoin therefore is like gold: its value lies in its scarcity.”
    Its not scarcity as such that gives gold its value. Its the fact that it requires considerable labour-time to find it, and produce it. Herein lies the difference between gold and bitcoin. No doubt the programmers that wrote the algorithms that control the issuing of bitcoin spent many hours of what Marx would call complex labour in that venture. But, having done so, nor real further expenditure of labour-time is required to issue more bitcoin. To produce more gold, however, requires considerable expenditure of labour-time. Unless, in the long-term, the market price of gold provides the gold producer with at least an equivalent of the labour-time/value they have expended, plus the average profit, they will not continue to produce gold. Mines will close etc.

    In other words, the value of gold is determined by the labour-time required for its production, whereas the price of bitcoin is solely a monopoly price based upon an artificial restriction of its supply. Bitcoin has no real or very little value, because it requires little labour-time to produce. It is no different than paper money, therefore. The only difference is that the state has been printing lots of money tokens thereby reducing their value, whereas the issuance of bitcoin has been restricted pushing its price up in a bubble as people have bid up its price in a constrained market. In that respect its like the bubbles created by people like John Law. Its also why its price fluctuates daily by huge amounts.

    1. “But, having done so, nor real further expenditure of labour-time is required to issue more bitcoin. ”
      The discovery of each Bitcoin requires significant (and increasing) on-going effort.Bitcoin ‘miners’ use expensive ‘rigs’ which are running twenty-four hours a day in search of these elusive numbers. As each new Bitcoin is ‘discovered’ it becomes harder to find the rest. Which is why it is anticipated that it will take until 2040 to identify all twenty-one million of them.

    2. The rigs are essentially the same as fixed capital used in production. As such the “effort” they put in is no different than the work done by any other machine, and is therefore not labour. It creates no new value, and only transfers its only value to the bitcoin it produces. It remains the case that the market price of the bitcoin is a function of a constrained market, not the value of the bitcoin.
      The obvious problem is that bitcoin is not the only virtual currency. The extent to which the bubble in such coins is succesful, the more incentive there is for other producers of virtual currencies to jump on the bandwagon. In that case, what appears to be a monopolised market turns out to be no such things. Those who decide that bitcoin prices have peaked, or who feel that prices are so high that they cannot afford to buy, will turn to these substitute commodities.

      Once its demonstrated that the only thing that causes the price to rise i.e. an artificially constrained market no longer exists, and there are “no bigger fools” left to buy, the price will collapse. Its rather like the market for illicit drugs. If drugs were legalised, the supposed scarcity would disappear, and the price would tumble.

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